AIA Group Limited Annual Report 2022

Plain-text annual report

AIA GROUP LIMITED 友邦保險控股有限公司 STOCK CODE 1299 INVESTING IN A HEALTHY ASIA ANNUAL REPORT 2022 A 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 2 2 AIA.COM OUR PURPOSE IS TO HELP PEOPLE LIVE HEALTHIER, LONGER, BETTER LIVES. 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 – wholly-owned branches and subsidiaries in Mainland China, Hong Kong SAR(1), Thailand, Singapore, Malaysia, Australia, Cambodia, Indonesia, Myanmar, New Zealand, the Philippines, South Korea, Sri Lanka, Taiwan (China), Vietnam, Brunei and Macau SAR(2), and a 49 per cent joint venture in India. 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, AIA serves the holders of more than 41 million individual policies and over 17 million participating members of group insurance schemes. The business that is now AIA was first established in Shanghai more than a century ago in 1919. It is a market leader in Asia (ex-Japan) based on life insurance premiums and holds leading positions across the majority of its markets. It had total assets of US$303 billion as of 31 December 2022. AIA Group Limited is listed on the Main Board of The Stock Exchange of Hong Kong Limited under the stock code “1299” with American Depositary Receipts (Level 1) traded on the over-the-counter market (ticker symbol: “AAGIY”). Notes: (1) Hong Kong SAR refers to the Hong Kong Special Administrative Region. (2) Macau SAR refers to the Macau Special Administrative Region. (3) Explanations of certain terms and abbreviations used in this report are set forth in the Glossary. AIA AT-A-GLANCE THE LARGEST LISTED COMPANY ON THE HONG KONG STOCK EXCHANGE which is incorporated and headquartered in Hong Kong(1) Present in 18 MARKETS AND 100% FOCUSED ON ASIA THE LARGEST LIFE INSURER IN THE WORLD by market capitalisation(1) NO.1 WORLDWIDE FOR MDRT REGISTERED MEMBERS The only multinational company to top the table for EIGHT CONSECUTIVE YEARS Note: (1) As at 31 December 2022. Serving the holders of more than 41 MILLION individual policies and over 17 MILLION participating members of group insurance schemes RANKED TOP 10 in Fortune’s 2022 “Change the World” list Provides protection with total sum assured of over US$2 TRILLION to people across Asia “DIGITAL INSURER OF THE YEAR” by InsuranceAsia News for two years Benefits and claims of US$16 BILLION in 2022 “ENTERPRISE ARCHITECTURE AWARD” by Forrester’s 2022 Asia Pacific Technology Awards 003 ANNUAL REPORT 2022CONTENTS OVERVIEW 014 Financial Highlights 016 Chairman’s Statement 019 Group Chief Executive and President’s Report FINANCIAL AND OPERATING REVIEW 026 Group Chief Financial Officer’s Review 052 Business Review 067 Risk Management 073 Regulatory and International Developments 074 Our People CORPORATE GOVERNANCE 079 Statement of Directors’ Responsibilities 080 Board of Directors 088 Executive Committee 093 Report of the Directors 106 Corporate Governance Report 122 Remuneration Report FINANCIAL STATEMENTS 141 Independent Auditor’s Report 149 Consolidated Income Statement 150 Consolidated Statement of Comprehensive Income 151 Consolidated Statement of Financial Position 153 Consolidated Statement of Changes in Equity 155 Consolidated Statement of Cash Flows 157 Notes to the Consolidated Financial Statements and Material Accounting Policy Information 264 Independent Auditor’s Report on the Supplementary Embedded Value Information 268 Supplementary Embedded Value Information ADDITIONAL INFORMATION Information for Shareholders 295 298 Corporate Information 299 Glossary 004 AIA GROUP LIMITED20 22 HIGHLIGHTS 005 ANNUAL REPORT 20222022 HIGHLIGHTS AIA LEADS THE INDUSTRY WITH OUR UNRIVALLED DISTRIBUTION Local markets establish bancassurance partnerships AIA Vietnam and Vietnam Prosperity Joint Stock Bank extended their exclusive bancassurance agreement for another four years, AIA Cambodia signed a five-year bancassurance partnership with Prince Bank, and Tata AIA Life announced a bancassurance partnership with City Union Bank. AIA expands our presence in Mainland China and completes our investment in China Post Life AIA China opened a new branch in Hubei and received regulatory approval to prepare a new branch in Henan. AIA also completed our 24.99 per cent equity investment in China Post Life Insurance Co., Ltd. (China Post Life), which increased AIA’s exposure to the growth opportunities in the Chinese life insurance market. AIA named #1 MDRT company for eight consecutive years AIA had the largest number of Million Dollar Round Table (MDRT) members for an unprecedented eight consecutive years, testament to the high quality of our agency force and Premier Agency model. AIA launches a US$10.0 billion share buy-back programme AIA launched a three-year, US$10.0 billion share buy-back programme, enhancing shareholder returns while retaining the financial strength to invest in significant growth opportunities. 006 AIA GROUP LIMITEDAIA EXPANDS HEALTH OFFERING ACROSS ASIA AIA establishes Amplify Health, a pan-Asian Health InsurTech business with Discovery Limited AIA launched Amplify Health, which will deploy health technology assets, proprietary data analytics and extensive health expertise to transform how individuals, corporates, payors and providers experience and manage health insurance and healthcare delivery. AIA acquires Blue Cross and deepens The Bank of East Asia partnership AIA acquired Blue Cross (Asia-Pacific) Insurance Limited (Blue Cross) and Blue Care JV (BVI) Holdings Limited from The Bank of East Asia, Limited (BEA). AIA and BEA extended the scope of their existing exclusive bancassurance partnership to include personal lines general insurance products. AIA acquires MediCard in the Philippines The acquisition of MediCard Philippines, Inc. (MediCard), a leading health maintenance organisation, brings new products, customer segments and distribution capabilities, increasing AIA’s exposure to the Philippines’ large and fast-growing health insurance market. MediCard provides significant opportunities for value creation through the deployment of AIA’s new Health InsurTech solutions from Amplify Health. 007 ANNUAL REPORT 2022 2022 HIGHLIGHTS AIA ONE BILLION IS OUR BOLD AMBITION TO ENGAGE ONE BILLION PEOPLE TO LIVE HEALTHIER, LONGER, BETTER LIVES BY 2030 Through AIA One Billion, we are reaching far beyond our immediate customer base to improve the health and wellness of individuals and help create a more sustainable future in Asia. In 2022, we brought our Purpose to life further through these creative community initiatives to meaningfully contribute to this ambition. 008 AIA GROUP LIMITEDAIA Healthiest Schools support young people AIA launched the AIA Healthiest Schools programme, which encourages healthy living habits among students aged five to 16 by promoting healthy eating, active lifestyles, mental well-being, as well as health and sustainability in schools in four pilot markets – Australia, Hong Kong, Thailand, and Vietnam. AIA celebrates 10 years of supporting our communities with Tottenham Hotspur AIA’s partnership with Tottenham Hotspur has been a powerful vehicle to deepen engagement with AIA customers and communities across the region. Our highly popular football clinics have benefitted 80,000 children with inspiration and advice on living an active and healthy life. AIA also welcomed Son Heung Min and Cho So Hyun as AIA Ambassadors. AIA Voices engage and inspire communities across Asia AIA launched AIA Voices, a platform for thought leaders to educate, motivate and inspire people to make positive behavioural changes on their health and wellness journey. AIA grants a second round of scholarship awards to 100 university students in Hong Kong AIA granted scholarship awards to 100 university students in Hong Kong as part of our US$100 million scholarship pledge. AIA also donated HK$40 million to support Hong Kong during the pandemic this year, demonstrating our continued commitment to the local community. 009 ANNUAL REPORT 2022AIA LAUNCHES OUR INTEGRATED HEALTH STRATEGY TO MAKE HEALTHCARE MORE ACCESSIBLE, AFFORDABLE, AND EFFECTIVE 010 AIA GROUP LIMITEDAsia is the fastest growing healthcare market, with long-term structural forces driving huge demand. Unmatched economic expansion is creating unprecedented levels of wealth for a growing and ageing population. However, while Asia is becoming wealthier, it is not getting healthier. Millions are missing out on necessary medical treatment due to limited access to healthcare and health insurance resources. This is the right time for AIA to play a leading role in making healthcare more accessible, affordable and effective for our communities. Our Integrated Health Strategy is a bold new vision that goes beyond fragmented partnerships and ecosystems to deliver simpler customer journeys, including how people buy health insurance and navigate the healthcare system. This strategy brings together the unique strengths of AIA to build on our substantial competitive advantages, significantly enhance our core business and capture new opportunities for additional growth. 011 ANNUAL REPORT 2022THREE PILLARS OF AIA’S INTEGRATED HEALTH STRATEGY Personalised Health Insurance AIA aims to be the leading provider of personalised health insurance advice and innovative solutions that provide enhanced coverage for customers and greater value. AIA China’s Retirement Ecosystem 2.0 is enhanced with home-based Retirement Services, Medical Care and Assistance for customers at the “early elderly age” AIA Hong Kong’s Health Journey Guardian offers customers comprehensive protection for prevention, prediction, diagnosis, treatment and recovery AIA Malaysia’s Total Health Solution enables customers to Live Well, Protect Well and Get Well Integration with Outpatient Clinics AIA can help deliver better health outcomes at lower costs through strategic partnerships with outpatient clinics and direct better healthcare journeys. POWERED BY Health Technology, Digital and Analytics Our vision for Amplify Health is to be a leading digital health technology and integrated solutions business, transforming how individuals, corporates, payors and providers experience and manage health insurance and healthcare delivery, improving the health and wellness outcomes of patients and communities across Asia. 012 AIA GROUP LIMITEDAdvanced Healthcare Administration and Management AIA will provide more effective care management programmes and simpler healthcare journeys for our customers. 2.6 million members across in 11 markets and our wellness programme in Mainland China Personal Case Management in 12 markets Telemedicine in 10 markets Regional Health Passport in 9 markets 013 Health Technology, Digital and Analytics ANNUAL REPORT 2022OVERVIEW 2022 RESULTS AT-A-GLANCE VALUE OF NEW BUSINESS(1)(7) ANNUALISED NEW PREMIUMS(2)(7) US$ MILLIONS US$ MILLIONS 6,510 6,585 5,647 5,407 5,219 4,154 3,955 3,366 3,092 2,765 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 OPERATING PROFIT AFTER TAX(3)(8) TOTAL WEIGHTED PREMIUM INCOME(4) US$ MILLIONS US$ MILLIONS 34,002 35,408 36,859 36,176 30,543 5,689 5,942 5,298 6,409 6,370 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 75,001 71,202 67,185 63,905 EV EQUITY(5) US$ MILLIONS 80,000 70,000 60,000 56,203 50,000 40,000 30,000 20,000 10,000 0 TOTAL ASSETS AND TOTAL LIABILITIES(8) US$ BILLIONS 340 326 284 262 303 279 264 230 229 190 350 300 250 200 150 100 50 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 TOTAL ASSETS TOTAL LIABILITIES 014 AIA GROUP LIMITEDOVERVIEW 2022 BREAKDOWN BY MARKET SEGMENT VALUE OF NEW BUSINESS(1)(6) ANNUALISED NEW PREMIUMS(2) 13% 27% 9% 10% 17% 24% 26% 24% 8% 10% 12% 20% OPERATING PROFIT AFTER TAX(3) TOTAL WEIGHTED PREMIUM INCOME(4) 13% 22% 6% 12% 12% 35% 20% 21% 7% 10% 11% 31% MAINLAND CHINA HONG KONG THAILAND SINGAPORE MALAYSIA OTHER MARKETS Notes: (1) Value of new business (VONB) is the present value, measured at the point of sale, of projected after-tax statutory profits emerging in the future from new business sold in the period less the cost of holding the required capital in excess of regulatory reserves to support this business. (2) 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. (3) Operating profit after tax (OPAT) is shown after non-controlling interests. (4) Total weighted premium income (TWPI) consists of 100 per cent of renewal premiums, 100 per cent of first year premiums and 10 per cent of single premiums, before reinsurance ceded. (5) Embedded value (EV) is an actuarially determined estimate of the economic value of a life insurance business based on a particular set of assumptions as to future experience, excluding any economic value attributable to future new business. EV Equity is the total of embedded value, goodwill and other intangible assets, after allowing for taxes. (6) Based on local statutory basis, before unallocated Group Office expenses and deduction of the amount attributable to non- controlling interests, VONB by segment includes pension business. (7) From 2019 onwards, ANP and VONB for Other Markets include the results from our 49 per cent shareholding in Tata AIA Life Insurance Company Limited (Tata AIA Life). ANP and VONB for 2018 have not been restated and do not include any contribution from Tata AIA Life. ANP and VONB do not include any contribution from our 24.99 per cent shareholding in China Post Life Insurance Co., Ltd. (China Post Life). VONB for the Group from 2019 onwards excludes the VONB attributable to non-controlling interests. VONB for 2018 have not been restated and are reported before deducting the amount attributable to non-controlling interests, as previously disclosed. The IFRS results of Tata AIA Life and China Post Life are accounted for using the equity method. The results of Tata AIA Life and China Post Life are accounted for on a one-quarter-lag basis in AIA’s consolidated results. The results of China Post Life starting from the completion of the investment on 11 January 2022 are accounted for in AIA’s consolidated results. For clarity, TWPI does not include any contribution from Tata AIA Life and China Post Life. (8) From 2019 onwards, the financial information is presented after the change in AIA’s IFRS accounting treatment for the recognition and measurement of insurance contract liabilities of other participating business with distinct portfolios. The financial information for 2018 is presented before the above-mentioned changes. 015 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCHAIRMAN’S STATEMENT AIA is an exceptional company and I am extremely proud of the strength and resilience of our business during a challenging operating environment in 2022. Our long history in Asia, through many different market cycles, has provided us with a trusted reputation of supporting our customers when they need us the most. As Asia rapidly emerges from the pandemic, AIA’s Purpose of helping people live Healthier, Longer, Better Lives has never been more relevant. Mr. Edmund Sze-Wing Tse Independent Non-executive Chairman 016 AIA GROUP LIMITEDOVERVIEWAIA is the largest pan-Asian life and health insurer and we are uniquely positioned to make an enormous positive difference by materially contributing to the economic and social development of the region. Over our long history, we have been a trusted partner to our customers and our high-quality advice and products bring peace of mind, as well as much-needed financial protection to millions of people in Asia. Our substantial competitive advantages built over decades keep us uniquely positioned to capture the large and fast- growing opportunities in life and health insurance in Asia over the long term. Our clear and ambitious strategy aligns our scale, position and influence with the powerful drivers of growth prevalent in the region and we are confident that our focused execution will deliver sustainable growth for many years to come. In 2022, we experienced an unprecedented year with extraordinary macroeconomic volatility and extensive outbreaks of the Omicron variant of COVID-19 creating a complex and challenging operating environment. Containment measures and an exponential rise in infections caused disruptions to everyday life. While face-to-face sales of our products in the first half of the year were affected, our digital capabilities allowed us to generate substantial sales over this period and, as restrictions eased, in-person sales rebounded. As normal activities resumed, our key strategic initiatives delivered strong new business momentum in the second half. Although value of new business (VONB) of US$3,092 million was lower by 5 per cent for the full year, VONB grew by 6 per cent year-on-year in the second half and all five of our largest operating segments delivered positive year-on-year growth. Underlying free surplus generation (UFSG) of US$6,039 million grew by 7 per cent per share on a comparable basis(1) and operating profit after tax (OPAT) of US$6,370 million increased by 5 per cent per share, reflecting our high- quality, recurring sources of earnings. AIA has a long-standing commitment since our historic initial public offering, to create value by delivering high- quality and sustainable sources of growth, earnings and cash for our shareholders. In March 2022, the board of Directors (Board) approved AIA’s first-ever return of capital to shareholders through a share buy-back programme to be conducted over three years of up to US$10 billion. This represents capital that is surplus to our needs, allowing for financial market stress conditions and retention of capital for strategic and financial flexibility. As of 31 December 2022, we had delivered US$3,570 million in returns to shareholders as part of this programme. The Group’s capital position and financial flexibility remained very strong in 2022. Free surplus grew to US$23,679 million at 31 December 2022 before the payment of shareholder dividends of US$2,259 million and an additional US$3,570 million return of capital to shareholders during the year from our share buy-back programme, totalling US$5,829 million. Net of these items, free surplus was US$17,850 million at 31 December 2022. EV Equity was US$77,031 million at 31 December 2022, before dividends and the share buy-back. EV Equity net of these items was US$71,202 million. Our cover ratio under the Group Local Capital Summation Method (LCSM) was also very strong at 283 per cent on the new prescribed capital requirement (PCR) basis at the end of the year. The Board has recommended a final dividend of 113.40 Hong Kong cents per share, which is an increase of 5 per cent, reflecting the resilience of our financial performance and the Board’s continued confidence in the future prospects of the Group. This brings the total dividend for 2022 to 153.68 Hong Kong cents per share, up by 5.3 per cent. The Board continues to follow AIA’s established prudent, sustainable and progressive dividend policy, allowing for future growth opportunities and the financial flexibility of the Group. 017 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCHAIRMAN’S STATEMENT All of AIA’s non-executive directors are independent and together, the Board is united in upholding the highest standards of corporate governance. It is my pleasure to work alongside highly distinguished Board members who contribute extensive and diverse leadership experience from the public and private sectors. We firmly believe that strong governance, supported by a sound risk management framework, is fundamental to ensuring the sustainability of our organisation. AIA’s Operating Philosophy of “Doing the Right Thing, in the Right Way, with the Right People… and the Right Results will come” is the bedrock of AIA’s culture and is essential to successfully managing risk in an increasingly complex operating environment. Our Purpose also underscores our responsibility to help safeguard a better future for the societies in which we operate by addressing material Environmental, Social and Governance (ESG) issues. I am pleased that, once again, our efforts have gained us positive recognition. In 2022, Sustainalytics, a global leader in ESG and Corporate Governance research and ratings, ranked AIA in the top 10th percentile of the insurance industry in its ESG Risk Rating assessment. We have been “ESG Industry Top Rated” as well as “ESG Regional Top Rated” by Sustainalytics for two years in a row. I am also delighted that AIA has been included in the 2023 Bloomberg Gender-Equality Index (GEI), making us one of only five Hong Kong-headquartered companies to be included globally. I would like to thank Yuan Siong, our senior leadership team and all of our people for their dedication and tireless efforts in managing our business through the prolonged uncertainties over the last three years. Without them our sustainable success would not be possible. As our markets rebound from the pandemic, I am confident that AIA is ideally positioned to capture the enormous opportunities ahead of us by continuing to serve our customers and communities to the best of our abilities. The strong drivers of demand and major demographic trends in the region will continue to generate an increasing need for our products. Our substantial competitive advantages and ambitious strategy build on these powerful structural drivers of growth, and the long-term prospects for AIA are truly exceptional. Finally, AIA’s strong track record of delivering sustainable value for all our stakeholders would not have been possible without the enduring trust of our customers and shareholders. On behalf of the entire Board, I am deeply grateful for your ongoing support. Edmund Sze-Wing Tse Independent Non-executive Chairman 10 March 2023 Notes: (1) Growth on a comparable basis for UFSG per share excludes the effects on the growth rate of the early adoption of the Hong Kong Risk-based Capital (HKRBC) regime from 1 January 2022 and the release of additional resilience margins held by the Group at 1 January 2022 under the previous Hong Kong Insurance Ordinance (HKIO) basis. For clarity, the reported figures for UFSG are unadjusted as a result. Growth rates are shown on constant exchange rates as management believes this provides a clearer picture of the year-on-year performance of the underlying business. 018 AIA GROUP LIMITEDOVERVIEWOVERVIEW GROUP CHIEF EXECUTIVE AND PRESIDENT’S REPORT AIA has delivered a robust performance in 2022 with strong new business momentum growing in the second half of the year, higher free surplus and increased capital returns to shareholders. Our results demonstrate the breadth and diversity of our high-quality portfolio of businesses as well as the structural growth drivers underpinning the enormous need for life and health protection across our markets. Our significant investments in reinforcing AIA’s unique strengths ensure that the Group is exceptionally well-positioned to meet the immediate as well as evolving demands of our customers and to benefit from the tremendous opportunities as Asia rapidly opens up for further growth. Mr. Lee Yuan Siong Group Chief Executive and President 019 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGROUP CHIEF EXECUTIVE AND PRESIDENT’S REPORT AIA has been protecting people for life, securing financial futures into retirement, and improving the well-being of families for more than a century. This has earned us a reputation that is synonymous with trust, resilience and doing the right thing through many market cycles. Our unrelenting focus on building AIA’s substantial competitive advantages has enabled us to significantly enhance our operations and capture new opportunities for additional growth across each of our 18 markets. The macroeconomic and operating environment since early 2020 has been unprecedented. During this time, we have steadfastly delivered on our key strategic priorities, reinforced our unique strengths and successfully navigated the wide-ranging effects of the COVID-19 pandemic as well as its aftermath. Our resilient business performance is a direct consequence of our high-quality diversified portfolio of growth businesses, incomparable distribution platform, innovative products tailored to local market conditions, financial strength and proven management team. I am deeply proud of our employees, agents and partners who have shown unwavering professionalism in supporting our customers and communities during these extraordinary times. In 2022, we paid US$16 billion in claims and benefits and, by helping our customers cope with the challenges and uncertainties they encounter, we provided much-needed support for communities. Across the region, there is an undeniable and growing need for personalised life and health insurance products, value-added services and high-quality advice. This immense potential for our business is fuelled by the rapid increases in affluence, healthcare expenditure and shifting population demographics. The pandemic has accelerated many of these structural trends and higher expectations of quality of life is top of mind for millions of Asians. I firmly believe that the prospects for AIA’s business remain as clear and as strong as ever. I have full confidence that through the focused execution of our growth strategy and our unmatched financial flexibility, we will continue to create and deliver long-term sustainable value for all of our stakeholders. 2022 FINANCIAL PERFORMANCE HIGHLIGHTS From the beginning of 2022, outbreaks of the Omicron variant of COVID-19 affected all of our markets with a sudden and exponential surge in infections and the reintroduction of containment measures impacting our communities, severely dampening consumer demand and reducing distributor activity in the first half of the year. In Mainland China, our largest growth market, pandemic restrictions were in place for most of 2022 and there was a rapid increase in COVID-19 infections towards the end of the year. The Group delivered a robust value of new business (VONB) performance in 2022, with 6 per cent year-on-year growth in the second half as the effects of the initial Omicron wave subsided. While VONB of US$3,092 million was lower by 5 per cent for the full year, our key strategic initiatives delivered strong new business momentum in the second half of the year. All five of our largest operating segments delivered positive year-on-year growth in the second half and we achieved double-digit growth in our combined ASEAN business and Tata AIA Life in India. AIA’s balance sheet strength is a direct result of our profitable growth strategy underpinned by consistent financial discipline. The Group’s very strong financial position is an important differentiator and a substantial competitive advantage, particularly during times of considerable capital market volatility. AIA has significant opportunities to invest capital in superior profitable growth that generates increased shareholder value. We are able to move forward with confidence, financing organic new business and value-enhancing inorganic opportunities, while delivering attractive shareholder returns. Last March, we began AIA’s first-ever share buy-back programme of up to US$10 billion over three years and, as of 31 December 2022, we had repurchased 366 million shares, delivering US$3,570 million in additional returns to shareholders. 020 AIA GROUP LIMITEDOVERVIEWUnderlying free surplus generation (UFSG) of US$6,039 million grew by 7 per cent per share on a comparable basis(1). EV Equity was US$77,031 million at 31 December 2022, before the payment of shareholder dividends of US$2,259 million and an additional US$3,570 million return of capital to shareholders during the year from our share buy-back programme, totalling US$5,829 million. EV Equity net of these items was US$71,202 million. Our growing in-force portfolio and the proactive management of our high-quality, recurring sources of earnings underpinned operating profit after tax (OPAT) of US$6,370 million, an increase of 5 per cent per share. The Group’s capital position remained very strong with free surplus growing to US$23,679 million before dividends and the share buy-back programme. Net of these items, free surplus was US$17,850 million at 31 December 2022. As at 31 December 2022, the Group Local Capital Summation Method (LCSM) cover ratio(2) remained very strong at 283 per cent on the new prescribed capital requirement (PCR) basis and 552 per cent on the minimum capital requirement (MCR) basis previously disclosed. The Board has recommended a final dividend of 113.40 Hong Kong cents per share which brings the total dividend for 2022 to 153.68 Hong Kong cents per share, an increase of 5.3 per cent compared with 2021. This follows AIA’s established prudent, sustainable and progressive dividend policy, allowing for future growth opportunities and the financial flexibility of the Group. Our resilient financial results in an unprecedented market environment demonstrate the strengths of our robust operating model, which is built on differentiated distribution, personalised and valuable propositions, and backed by world-class technology and digital platforms to deliver outstanding customer service. Since July 2020, we have been transforming AIA’s significant competitive advantages to fully leverage the powerful structural drivers of growth across our markets and ensure we remain well-positioned for future success. TRANSFORMING OUR COMPETITIVE ADVANTAGES At the heart of our growth strategy is world-class Technology, Digital and Analytics, supporting increased distributor productivity, streamlined operations and enhanced customer experience while creating access to new growth opportunities. We are ahead of global financial services benchmarks with more than 86 per cent of our information technology infrastructure hosted in the public cloud. Since we announced our new strategy in 2020, our technology capacity has doubled while delivering cost efficiencies compared with our legacy infrastructure platform. We delivered an additional 111 high-impact use cases in 2022 as we industrialise and deepen our usage of responsible artificial intelligence and analytics across the Group. The number of leads generated through our digital tools increased by 30 per cent compared with 2021 and the enhanced quality of these targeted leads improved sales lead conversion rates, generating more than US$500 million in annualised new premiums from our agency and bancassurance channels. Our Unrivalled Distribution remains a distinctive competitive advantage for the Group, offering customers professional, high-quality advice and products that are personalised to their needs. Although face-to-face new business activities were affected at the start of the year by the Omicron outbreak, agency new business sales momentum improved from the second quarter and VONB grew by 8 per cent in the second half of the year. Increased adoption of our full range of digital agency tools has ensured the resilience of our proprietary agency model with total number of agents exceeding pre-pandemic levels at the end of 2019. AIA China became the Million Dollar Round Table (MDRT) company with the most members globally, followed by AIA Thailand and AIA Hong Kong in second and third place respectively. Overall, AIA was the number one MDRT multinational company in the world for a record eighth consecutive year, proving the effectiveness of our differentiated high-quality Premier Agency strategy. 021 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGROUP CHIEF EXECUTIVE AND PRESIDENT’S REPORT Our strategic partnerships with leading banks delivered a 10 per cent increase in VONB, driven by growth from Public Bank Berhad (Public Bank) in Malaysia, PT Bank Central Asia Tbk (BCA) in Indonesia, The Bank of East Asia, Limited (BEA) in Hong Kong and Mainland China, ASB Bank Limited in New Zealand and across all key domestic partnerships in India. Our successful digitally-led model builds on our strong track record of converting in-branch referrals by leveraging customer analytics, digital marketing platforms and social media to increase leads and increase productivity for our insurance specialists. Our next-generation partnerships with technology companies offer lifestyle-related digital insurance propositions to customers with unmet needs and uses new analytical models to identify suitable customers for referral to our distribution channels for more comprehensive advice and product solutions. Last year, we welcomed 15 additional digital platform partners and acquired more than one million customers, the majority of which were new to AIA. We believe that providing simplified journeys with faster turnaround times will deliver a Leading Customer Experience and a range of business benefits including improved customer satisfaction and sustainable profitability. End-to-end straight-through-processing (STP) is crucial to achieving this and, as of December 2022, we had reached 70 per cent STP across the Group, up 12 pps from the previous year. Our re-designed claims processes have resulted in faster and more cashless settlements with 63 per cent of claims settled on the same day as submission and 93 per cent of claims paid digitally across the Group. Our investments in back-office operations, technology and artificial intelligence have driven greater automation and more personalised service, resulting in better customer outcomes across our markets. Through our Compelling Propositions we aim to create shared economic value by tying our financial success to community success. We support our customers by helping them save more effectively to meet their financial goals at different life stages, rewarding them for taking actions that positively impact their well-being, and assisting them to access the right medical treatment when needed. The AIA Vitality programme continues to deliver positive impacts on health outcomes to increasing numbers of customers, including a launch in India in 2022. We now have 2.6 million members across AIA Vitality and our wellness programme in Mainland China. With annual healthcare expenditure in our markets on track to exceed US$4 trillion in 2030 and much of the burden falling to individuals, this is an opportune time to transform health insurance and healthcare in the region. Our new Integrated Health Strategy, announced in August, reinforces the many benefits of our core life insurance business and makes health insurance and health care management more accessible, more affordable and more effective. As the leading life and health insurer in Asia, we are in an advantaged position to build on our key competitive strengths to deliver on our Purpose of helping people live Healthier, Longer, Better Lives. INVESTING IN ADDITIONAL GROWTH OPPORTUNITIES Our financial discipline over time has also ensured that we retain the flexibility to invest capital in inorganic growth opportunities that increase our scale and diversity in the world’s most attractive region for life and health insurance. Amplify Health, our new Health InsurTech business, is the engine that powers our Integrated Health Strategy. Our new company offers a broad suite of services through a full health technology stack, along with the associated intellectual property, data sets and expertise, developed over the last three decades by Discovery Limited, our joint venture partner. Amplify Health materially accelerates our capability build in health and creates a new and sustainable competitive advantage as AIA is uniquely positioned to deliver truly personalised health insurance with fully integrated and end-to-end care for our customers. In March, we extended the scope of our distribution partnership with BEA following our acquisition of Blue Cross (Asia-Pacific) Insurance Limited, a leading health insurer, and Blue Care JV (BVI) Holdings Limited, a health services provider with a medical network in Hong Kong. This transaction advances our health strategy in Hong Kong and deepens our distribution partnership with BEA, bringing new product expertise to support all of AIA’s distribution channels in Hong Kong and the Greater Bay Area. 022 AIA GROUP LIMITEDOVERVIEWOur focus on bringing comprehensive, affordable and quality healthcare to customers was the driving force behind the acquisition of MediCard Philippines, Inc. (MediCard), a leading Health Maintenance Organisation with an extensive medical service network of over 1,000 partner hospitals and clinics across major cities. MediCard provides health insurance and healthcare services to more than 920,000 members across corporate and individual plans in the Philippines and brings new products, customer segments and distribution capabilities to AIA. The completion of our 24.99 per cent equity investment in China Post Life Insurance Co., Ltd. (China Post Life) enables the Group to access significant upside from additional distribution channels and customer segments that are highly complementary to AIA China’s strategy. China Post Life brings financial protection to the mass and emerging mass-affluent segments and is the leading bank-affiliated life insurer in Mainland China. A joint technical assistance advisory committee with dedicated support from AIA Group Office, together with committed business transformation from China Post Life, has achieved a very strong performance in 2022. Since our announcement, China Post Life’s VONB has grown by a multiple of 3.8 times from 2020. This has been driven by a strategic shift towards sales of longer-term savings and protection products, which have significantly improved VONB margin, as well as enhancements to distribution productivity. AIA China has also begun sales through Postal Savings Bank of China Co., Ltd., as we deepen our cooperation to bring compelling propositions to more customers. We continue to execute on AIA China’s expansion strategy, capturing new growth opportunities available only to AIA, as we replicate our high-quality differentiated Premier Agency in our new geographies and deepen our presence within our existing footprint. Following our successful launch in Hubei province, we were delighted to receive approval from the China Banking and Insurance Regulatory Commission (CBIRC) to begin preparations for operations in Henan, the third most populous province with close to 100 million residents. We were also granted approval by the CBIRC to upgrade our operations in Tianjin and Shijiazhuang and have expanded our presence through additional sales offices. OUR PEOPLE AIA’s strong culture of empowerment with accountability is a reflection of our people and a product of the decisions and actions each of us takes every day. We have been transforming AIA into a simpler, faster, more connected organisation by reducing organisational layers and implementing cross-functional agile operating models to drive better business outcomes. Attracting technology, digital and analytics talent is crucial to securing the execution of our strategic priorities and the overall number of employees with these skill sets has increased significantly, up by 63 per cent since we began our transformation in July 2020. Our new ways of working enable us to innovate at pace while enhancing our business capabilities and operational resilience. Employee engagement levels for the Group grew to a record high in 2022, and against a backdrop of an unprecedented operating environment, AIA placed in the 94th percentile of Gallup’s global finance and insurance industry benchmark. We have further cemented our status as an employer of choice by ranking in the top quartile for the sixth consecutive year, and in the top 10th percentile for the second year running. AIA takes great pride in fostering an inclusive and diverse workplace that believes in always doing better. We were delighted to be recognised for our highly engaged workforce and performance-oriented culture as one of only three Asia-based companies out of the 41 global recipients of the Gallup Exceptional Workplace Award. ENVIRONMENTAL, SOCIAL AND GOVERNANCE The multi-generational nature of our business places sustainability at the forefront of how we operate, and AIA has a vital role to play in addressing material ESG issues in our societies. We are committed to achieving net-zero greenhouse gas emissions by 2050 and are using the latest climate science to set ambitious emissions reduction targets that are expected to be validated by the Science Based Targets initiative (SBTi). 023 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGROUP CHIEF EXECUTIVE AND PRESIDENT’S REPORT The sustainable deployment of our investment portfolio is a vital enabler of our ambitions and our complete divestment from directly-managed listed equity and fixed income exposures to coal mining and coal-fired power businesses is a source of tremendous personal pride. Our global ESG leadership is well recognised and, by sustaining the delivery of our Purpose, we can use our scale and influence as the largest pan-Asian life and health insurer to meaningfully contribute to the economic and social development of the region. OUTLOOK Global economic growth slowed in 2022, as the combined effect of supply chain constraints and demand-led inflation proved to be more persistent than expected in developed countries, prompting central banks to accelerate the pace of monetary policy normalisation through rate hikes and quantitative tightening. The knock-on effects have been felt in reduced living standards, higher borrowing costs and substantial falls in major asset classes globally. External shocks such as the ongoing conflict in Ukraine have the potential to magnify volatility in global capital markets. Managing inflation remains a key priority for economic policymakers in the West, fuelling uncertainty around the likelihood and depth of any recession in the United States, in particular. In Asia, fiscal easing policies were generally more restrained than in other parts of the world and economies have been comparatively more resilient. Consumer spending has been supported by very low rates of unemployment and greater use of excess savings accumulated during the pandemic. As a result, demand for services increased strongly, particularly from tourism, after three years of social distancing and travel restrictions. Mainland China’s reopening at the end of 2022 provides a platform for greater economic stability and can help GDP growth return to its potential in 2023. Household consumption is expected to rebound as lower risk aversion and greater certainty reduce high levels of cash savings, becoming an important driver of recovery alongside the natural rebound from increased economic activity following reopening. In Hong Kong, the opening of the border with Mainland China and the rest of the world will reaffirm its status as a vibrant international financial centre and its unique role in connecting East and West. As the effects of the pandemic recede across the region, we expect to see a continued strong recovery in activity levels and consumer demand. AIA operates in the most attractive markets in the world for life and health insurance. Our resilient set of financial results in 2022 and new business growth momentum in the second half of the year reflect our substantial competitive advantages, the breadth and diversity of our markets, our financial strength and the quality of our people. The long- term prospects for AIA’s business remain exceptional, powered by the structural drivers of rising wealth, low insurance penetration levels and limited social welfare coverage across Asia. I am confident that AIA is uniquely positioned to capture the enormous long-term opportunities in the Asian life and health insurance market and deliver long-term sustainable value for all our stakeholders. Lee Yuan Siong Group Chief Executive and President 10 March 2023 Notes: (1) Growth on a comparable basis for UFSG per share excludes the effects on the growth rate of the early adoption of the Hong Kong Risk-based Capital (HKRBC) regime from 1 January 2022 and the release of additional resilience margins held by the Group at 1 January 2022 under the previous Hong Kong Insurance Ordinance (HKIO) basis. For clarity, the reported figures for UFSG are unadjusted as a result. (2) The Group LCSM cover ratio definition changed from: (i) the ratio of group available capital to the group minimum capital requirement (GMCR) at 31 December 2021, to (ii) the ratio of the group available capital to the group prescribed capital requirement (GPCR) from 1 January 2022 onwards. Growth rates are shown on constant exchange rates as management believes this provides a clearer picture of the year-on-year performance of the underlying business. 024 AIA GROUP LIMITEDOVERVIEWFINANCIAL AND OPERATING REVIEW 026 Group Chief Financial Officer’s Review 052 Business Review 067 Risk Management 073 Regulatory and International Developments 074 Our People 025 ANNUAL REPORT 2022GROUP CHIEF FINANCIAL OFFICER’S REVIEW AIA has delivered a resilient financial performance in 2022. Strong VONB growth momentum returned in the second half of the year. Our capital position remained very strong against the backdrop of an operating environment affected by the emergence of Omicron and volatile capital markets, and our free surplus grew while delivering increased dividends and capital returns to shareholders. AIA’s unique business model and competitive advantages enable us to capture the immense growth opportunities ahead as our markets rebound from the effects of the pandemic. Growth rates and commentaries are provided on a constant exchange rate (CER) basis. Mr. Garth Jones Group Chief Financial Officer 026 AIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWSUMMARY AND KEY FINANCIAL HIGHLIGHTS The Group delivered a robust VONB performance in 2022, as the Omicron outbreak affected consumer demand and distributor activity across our markets in the first half of the year. As the effects of the initial wave subsided, our strategic initiatives delivered strong new business momentum into the second half. As a result, while VONB of US$3,092 million was lower by 5 per cent for the full year, in the second half VONB grew by 6 per cent, all five of our largest operating segments delivered positive year-on-year growth, and we achieved double-digit growth in our combined ASEAN business and Tata AIA Life in India. EV grew by 5 per cent to US$74,694 million and EV Equity grew by 6 per cent to US$77,031 million before the payment of shareholder dividends of US$2,259 million and an additional US$3,570 million return of capital to shareholders during the year from our share buy-back programme. EV operating profit was US$6,845 million, including US$243 million of positive EV operating variances. Non-operating investment return variances were negative US$4,793 million in the first half following a significant fall in major global asset markets as previously reported. Investment variances reduced significantly in the second half to negative US$599 million. The effects of foreign exchange rate movements reduced EV by US$2,264 million and were relatively unchanged from the first half, following the exceptional strength in the US dollar reporting currency compared with our local markets. After total shareholder dividends and share buy-back of US$5,829 million, EV was US$68,865 million at 31 December 2022. OPAT of US$6,370 million grew by 5 per cent per share. All reported segments delivered OPAT growth in 2022 except Thailand. In contrast to our other markets, many customers were treated for COVID-19 in private hospitals during the outbreak of the initial Omicron wave in Thailand, as reported in the first half. As infections subsided, OPAT for Thailand returned to positive growth in the second half. Growth in our overall in-force portfolio remains the primary driver of higher OPAT, as successive cohorts of new business add to our in-force business and translate into higher earnings over time. Operating return on shareholders’ allocated equity (operating ROE) increased to 13.2 per cent, compared with 12.8 per cent in 2021. Operating margin remained strong and increased to 17.7 per cent reflecting our high-quality sources of earnings and the proactive management of our growing in-force portfolio of business. Shareholders’ allocated equity was US$50,634 million, before the payment of shareholder dividends of US$2,259 million and share buy-back of US$3,570 million. Shareholders’ allocated equity was US$44,805 million at 31 December 2022 after capital returns to shareholders of US$5,829 million in total. The execution of AIA’s profitable growth strategy since IPO has delivered a substantial increase in free surplus and, as a result, we launched a US$10 billion share buy-back programme in March 2022. The share buy-back represents capital accumulated over time that is surplus to our needs, allowing for capital market stress conditions and retention of capital for strategic and financial flexibility. Our capital management framework enhances shareholder returns while retaining the financial strength that allows AIA to continue investing capital in the significant growth opportunities available to us. Over the first ten months of our share buy-back programme, we repurchased 366 million shares for an aggregate value of US$3,570 million as at 31 December 2022. The programme to date has reduced the outstanding share count by 3 per cent. 027 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONThe Group’s financial position remained very strong with growth in free surplus to US$23,679 million, before a deduction of US$5,829 million for shareholder dividends and share buy-back. Free surplus was US$17,850 million at 31 December 2022 after capital returns to shareholders, compared with US$17,025 million at 31 December 2021. Underlying free surplus generation (UFSG) was US$6,039 million, an increase of 7 per cent per share on a comparable basis(1). The increase was driven by the continued growth of the in-force portfolio, partly offset by a lower positive claims experience compared with 2021. Our very strong credit ratings and stable outlook have been affirmed as unchanged by our rating agencies. The Group’s Local Capital Summation Method (LCSM) cover ratio(2) was very strong at 283 per cent on the new prescribed capital requirement (PCR) basis. The effect of the share buy-back programme was to reduce the LCSM cover ratio by 13 pps over the year and therefore the ratio was 296 per cent before the return of capital to shareholders. This compares with 291 per cent at 31 December 2021 on a pro forma basis. The Group’s 2022 annual results have been calculated and reported before the adoption of International Financial Reporting Standards (IFRS) 9 and 17 for the consolidated financial statements that will take effect from 1 January 2023. As previously reported, the adoption of these accounting standards has no effect on the underlying economics of our business and therefore we expect no material changes to the Group’s VONB, EV, solvency levels, capital position, UFSG or cash generation and dividend policy. IFRS OPAT and IFRS shareholders’ allocated equity will remain the Group’s key IFRS financial performance metrics following the adoption of the new standards. The preparation of the 2022 comparatives under IFRS 9 and IFRS 17 are progressing as planned. After the adoption of IFRS 17, OPAT for 2022 is expected to be within 5 per cent of OPAT under the current IFRS 4 basis. Under IFRS 17, shareholders’ allocated equity was US$51 billion at 1 January 2022, a reduction of 2 per cent compared to IFRS 4, and is expected to exceed the IFRS 4 value at 31 December 2022. The transition to IFRS 9 had an immaterial effect on the Group’s financial position. The Board of Directors (Board) has recommended a final dividend of 113.40 Hong Kong cents per share, subject to shareholders’ approval at the Company’s forthcoming AGM. This brings the total dividend for 2022 to 153.68 Hong Kong cents per share, an increase of 5.3 per cent compared with the total dividend for 2021. This follows AIA’s established prudent, sustainable and progressive dividend policy, allowing for future growth opportunities and the financial flexibility of the Group. We remain confident in the growth opportunities for AIA’s businesses across Asia, allowing us to continue to focus on delivering profitable new business growth, leveraging our competitive advantages and financial strength to invest capital where we see attractive opportunities, while maintaining our financial discipline. Notes: (1) Growth on a comparable basis for UFSG throughout the Financial and Operating Review excludes the effects on the growth rate of the early adoption of the Hong Kong Risk-based Capital (HKRBC) regime from 1 January 2022 and the release of resilience margins held by the Group at 1 January 2022 under the previous Hong Kong Insurance Ordinance (HKIO) basis. For clarity, the reported figures for UFSG are unadjusted. (2) The Group LCSM cover ratio definition changed from (i) the ratio of the group available capital to the group minimum capital requirement (GMCR) at 31 December 2021, to (ii) the ratio of the group available capital to the group prescribed capital requirement (GPCR) from 1 January 2022 onwards. 028 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWNEW BUSINESS PERFORMANCE VONB, ANP and Margin by Segment US$ millions, unless otherwise stated VONB Mainland China Hong Kong Thailand Singapore Malaysia Other Markets Subtotal Adjustment to reflect consolidated reserving and capital requirements After-tax value of unallocated Group Office expenses Total before non-controlling interests 2022 VONB Margin 69.5% 69.5% 89.1% 65.7% 69.9% 30.2% 916 787 585 349 308 420 3,365 61.5% 2021 VONB Margin VONB Change YoY CER YoY AER ANP ANP VONB 1,319 1,078 655 531 440 1,384 5,407 1,108 78.9% 1,404 (15)% (17)% 756 609 356 283 511 64.0% 90.0% 64.7% 57.3% 35.9% 1,106 677 549 491 4% 5% 1% 15% 4% (4)% (2)% 9% 1,420 (12)% (18)% 3,623 63.2% 5,647 (4)% (7)% (52) n/m n/m (57) n/m n/m n/m n/m (192) n/m n/m (167) n/m n/m n/m n/m Non-controlling interests (29) n/m n/m (33) n/m n/m Total 3,092 57.0% 5,407 3,366 59.3% 5,647 3,121 57.0% 5,407 3,399 59.3% 5,647 (5)% n/m (5)% (8)% n/m (8)% Six months ended 31 December 2022 Six months ended 31 December 2021 VONB Change VONB VONB Margin ANP VONB 353 464 325 188 147 213 73.0% 69.6% 93.9% 65.5% 73.1% 31.3% 484 635 344 287 201 678 370 443 297 180 126 258 VONB Margin 73.3% 69.6% 86.5% 66.3% 52.6% 40.7% ANP 505 601 344 270 238 629 1,690 63.4% 2,629 1,674 63.6% 2,587 YoY CER 3% 5% 19% 7% 26% (8)% 7% YoY AER (5)% 5% 9% 4% 17% (17)% 1% (27) n/m n/m (26) n/m n/m n/m n/m (93) n/m n/m (79) n/m n/m n/m n/m US$ millions, unless otherwise stated Mainland China Hong Kong Thailand Singapore Malaysia Other Markets Subtotal Adjustment to reflect consolidated reserving and capital requirements After-tax value of unallocated Group Office expenses Total before non-controlling interests Non-controlling interests (14) n/m n/m (17) n/m n/m Total 1,556 58.8% 2,629 1,552 59.6% 2,587 1,570 58.8% 2,629 1,569 59.6% 2,587 6% n/m 6% – n/m – 029 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONThe Group delivered a robust VONB performance in 2022 with 6 per cent VONB growth in the second half of the year. While VONB of US$3,092 million was lower by 5 per cent for the full year due to the effects of the initial Omicron wave in the first half, our strategic initiatives delivered strong new business momentum into the second half. All five of our largest operating segments delivered positive year-on-year growth in the second half and we achieved double-digit growth in our combined ASEAN business and Tata AIA Life in India. Annualised new premiums (ANP) also grew by 8 per cent in the second half of the year to end the year flat at US$5,407 million. VONB margin on the full year basis reduced by 2.4 pps to 57.0 per cent, driven mainly by a more balanced mix between protection-focused products and savings-oriented products for AIA China compared with 2021. For clarity, VONB for 2022 has reflected both the HKRBC and China Risk-Oriented Solvency System phase II (C-ROSS II) statutory reserving and capital bases; the effects on VONB were immaterial. AIA China returned to positive growth in the second half of 2022 with VONB up by 3 per cent. VONB in the first half was lower compared with the record result in 2021, as our business was impacted by pandemic containment measures and full year VONB reduced by 15 per cent. We have seen new business momentum recover and return to positive growth in the first two months of 2023. AIA Hong Kong achieved 4 per cent VONB growth in 2022, supported by growth from our market-leading agency force and a strong performance from partnership distribution, in particular through the intermediated channels and our exclusive partnership with The Bank of East Asia, Limited (BEA). VONB from sales to Mainland Chinese visitors tripled in 2022 and accounted for just over 10 per cent of total VONB for the year. AIA Thailand delivered 5 per cent growth in VONB for the full year, supported by 19 per cent growth in the second half of 2022. We saw higher sales activity levels in both agency and bancassurance channels as new business momentum returned in the second half. Our agency remained the market leader in 2022 and we achieved an excellent increase in number of new recruits, contributing to an increase in the number of active agents compared to 2021. AIA Singapore delivered higher VONB in 2022 as 7 per cent growth in the second half offset performance in the first half. Agency channel remained the largest contributor to VONB with both an increase in the number of active agents and productivity improvements in the second half. Our partnership channel achieved a strong performance in 2022. AIA Malaysia achieved 15 per cent VONB growth in 2022, with both agency and partnership channels delivering double-digit growth. We continued to work closely with Public Bank Berhad (Public Bank) to further uplift the activity and productivity of our insurance specialists through the implementation of enhanced digital tools. Our Other Markets segment recorded a reduction in VONB in 2022 as strong double-digit growth in India, New Zealand, the Philippines, Sri Lanka and Taiwan (China) in the second half was offset by a decline in Australia, South Korea and Vietnam. Further details are included in the Business Review section of this report. 030 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWEV EQUITY EV MOVEMENT EV grew by 5 per cent to US$74,694 million, before the return of capital to shareholders through dividends and share buy-back. The early adoption of the new HKRBC regime and the release of resilience margins increased EV by US$2,379 million and US$885 million respectively, as previously reported in our Interim Report 2022. EV operating profit of US$6,845 million reflected lower VONB of US$3,092 million and expected return on EV of US$3,869 million compared with 2021. The reduction in expected return on EV was from a lower unwind on the value of in-force business from the early adoption of the HKRBC regime which accelerated the recognition of future profits into free surplus as previously disclosed, a lower starting EV for the second half following negative market movements in the first half of the year and an increase in capitalised unallocated expenses. Operating return on EV (operating ROEV) was 9.4 per cent. Overall operating experience was better than assumed, delivering US$243 million of positive EV operating variances. Cumulative operating variances have now added US$3.9 billion to EV since our IPO in 2010, demonstrating our consistent strategic focus on writing high-quality business over many years. In 2022, global capital markets experienced a significant fall in asset prices from rapidly rising interest rates, lower equity markets and widening corporate bond spreads that mostly affected the first half of the year. Investment return variances were negative US$4,793 million in the first half as previously reported. Investment return variances reduced significantly in the second half to negative US$599 million. Changes to economic assumptions at the end of 2022 following the significant rise in interest rates over the year reduced EV by US$300 million overall. Higher long-term investment return assumptions increased EV by US$1.5 billion, offset by a corresponding increase in risk discount rates which reduced EV by US$1.8 billion. The effects of foreign exchange rate movements were relatively unchanged from the first half and reduced EV by US$2,264 million, following the exceptional strength of our US dollar reporting currency relative to our local markets. EV was US$68,865 million at 31 December 2022 after shareholders dividends and share buy-back of US$5,829 million in total. 031 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONAn analysis of the movement in EV is shown as follows: US$ millions, unless otherwise stated Opening EV Purchase price(1) Acquired EV(2) Effect of acquisition HKRBC early adoption Release of resilience margins HKRBC early adoption and release of resilience margins Value of new business Expected return on EV Operating experience variances Operating assumption changes Finance costs EV operating profit EV before non-operating items Investment return variances Effect of changes in economic assumptions Other non-operating variances EV non-operating items Total EV profit Other capital movements Effect of changes in exchange rates EV before dividends and share buy-back Dividends Share buy-back Closing EV Closing EV per share (US dollars) ANW 33,302 (283) 83 (200) 8,407 2,168 10,575 (159) 4,838 513 (331) (359) 4,502 48,179 (5,893) (15) (1,530) (7,438) 7,639 (12) (1,149) 39,580 (2,259) (3,570) 33,751 2022 VIF EV 39,685 72,987 – – – (6,028) (1,283) (7,311) 3,251 (969) (214) 275 – 2,343 34,717 501 (285) 1,296 1,512 (3,456) – (1,115) 35,114 – – 35,114 (283) 83 (200) 2,379 885 3,264 3,092 3,869 299 (56) (359) 6,845 82,896 (5,392) (300) (234) (5,926) 4,183 (12) (2,264) 74,694 (2,259) (3,570) 68,865 5.87 032 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWUS$ millions, unless otherwise stated Opening EV Purchase price(1) Acquired EV(2) Effect of acquisition BEA Upfront Payment(3) Value of new business Expected return on EV Operating experience variances Operating assumption changes Finance costs EV operating profit EV before non-operating items Investment return variances Effect of changes in economic assumptions Other non-operating variances EV non-operating items Total EV profit Other capital movements Effect of changes in exchange rates EV before dividends Dividends Closing EV Closing EV per share (US dollars) EV Equity US$ millions, unless otherwise stated EV Goodwill and other intangible assets(4) EV Equity Number of ordinary shares (millions) EV Equity per share (US dollars) ANW 28,503 (397) 266 (131) (258) (810) 5,156 626 64 (309) 4,727 32,841 1,636 (26) 1,163 2,773 7,500 9 (174) 35,449 (2,147) 33,302 2021 VIF EV 36,744 65,247 – 254 254 – 4,176 (754) (175) (78) – 3,169 40,167 (343) 460 37 154 3,323 – (636) 39,685 – 39,685 (397) 520 123 (258) 3,366 4,402 451 (14) (309) 7,896 73,008 1,293 434 1,200 2,927 10,823 9 (810) 75,134 (2,147) 72,987 6.03 As at 31 December 2022 As at 31 December 2021 68,865 2,337 71,202 11,734 6.07 72,987 2,014 75,001 12,097 6.20 Notes: (1) Purchase price of Blue Cross as per note 14 to the consolidated financial statements in Annual Report 2022. Purchase price of AIA Everest as per note 5 to the consolidated financial statements in Annual Report 2021. (2) Acquired EV from the acquisition of Blue Cross in 2022. Acquired EV from the acquisition of AIA Everest in 2021. (3) Refers to the consideration for the strategic bancassurance partnership with BEA as previously announced in 2021. (4) Goodwill and other intangible assets are consistent with the figures in the IFRS consolidated financial statements and are shown net of: tax, amounts attributable to participating funds, and non-controlling interests. 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) 2022 6,845 11,929 57.38 2021 7,896 12,066 65.44 YoY CER (10)% n/a (9)% YoY AER (13)% n/a (12)% 033 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION EV Operating Earnings Per Share – Diluted EV operating profit (US$ millions) Weighted average number of ordinary shares on diluted basis (millions)(1) Diluted EV operating earnings per share (US cents)(1) 2022 6,845 11,938 57.34 2021 7,896 12,087 65.33 YoY CER YoY AER (10)% (13)% n/a (9)% n/a (12)% Note: (1) Diluted EV operating earnings per share includes the dilutive effects, if any, of the awards under various share-based compensation plans as described in note 39 to the consolidated financial statements. EV AND VONB SENSITIVITIES Sensitivities for EV and VONB to changes in equity price and interest rate movements, including management actions, are shown below. The interest rate sensitivities apply a 50 basis points movement in current bond yield curves, long-term investment return assumptions and risk discount rates, including the corresponding effect on asset values. EV sensitivities to interest rates at 31 December 2022 increased compared with 31 December 2021. This was due to the effect of the sensitivities on the additional free surplus released from the early adoption of the HKRBC regime as previously disclosed, and the reduced sensitivity of our business units outside of Hong Kong resulting from a higher starting level of bond yields within the central value following the increases seen over 2022. Overall, EV sensitivities to interest rates remained small and VONB sensitivities remained stable compared with 2021. The direction of sensitivities to interest rates vary by market. US$ millions, unless otherwise stated Central value Effect of equity price changes 10 per cent increase in equity prices 10 per cent decrease in equity prices Effect of interest rate changes 50 basis points increase in interest rates 50 basis points decrease in interest rates US$ millions, unless otherwise stated Central value Effect of interest rate changes 50 basis points increase in interest rates 50 basis points decrease in interest rates As at 31 December 2022 As at 31 December 2021 EV % Change EV % Change 68,865 1,817 (1,821) (1,246) 1,347 2.6% (2.6)% (1.8)% 2.0% 72,987 1,878 (1,871) (330) 279 2.6% (2.6)% (0.5)% 0.4% 2022 2021 VONB % Change VONB % Change 3,092 64 (81) 2.1% (2.6)% 3,366 74 (108) 2.2% (3.2)% Please refer to Section 3 of the Supplementary Embedded Value Information for additional information. 034 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWIFRS PROFIT OPAT(1) BY SEGMENT US$ millions, unless otherwise stated Mainland China Hong Kong Thailand Singapore Malaysia Other Markets Group Corporate Centre Total US$ millions, unless otherwise stated OPAT Weighted average number of ordinary shares (millions) Basic OPAT per share (US cents) Weighted average number of ordinary shares on diluted basis (millions)(2) Diluted OPAT per share (US cents)(2) 2022 1,425 2,226 782 742 393 804 (2) 6,370 2022 6,370 11,929 53.40 11,938 53.36 2021 1,371 2,143 960 723 392 784 36 6,409 2021 6,409 12,066 53.12 12,087 53.02 YoY CER 8% 4% YoY AER 4% 4% (10)% (19)% 6% 6% 11% n/m 3% YoY CER 3% n/a 5% n/a 5% 3% – 3% n/m (1)% YoY AER (1)% n/a 1% n/a 1% Notes: (1) Attributable to shareholders of the Company only, excluding non-controlling interests. (2) Diluted OPAT per share includes the dilutive effects, if any, of the awards under various share-based compensation plans as described in note 39 to the consolidated financial statements. OPAT of US$6,370 million grew by 5 per cent per share. All reported segments delivered OPAT growth in 2022 except Thailand. In contrast to our other markets, many customers were treated for COVID-19 in private hospitals during the outbreak of the initial Omicron wave in Thailand, as reported in the first half. As infections subsided, OPAT for Thailand returned to positive growth in the second half. Growth in our overall in-force portfolio remains the primary driver of higher OPAT, as successive cohorts of new business add to our in-force business and translate into higher earnings over time. Operating ROE increased to 13.2 per cent, compared with 12.8 per cent in 2021. Our operating margin remained strong and increased to 17.7 per cent reflecting our high-quality sources of earnings and the proactive management of our growing in-force portfolio of business. Further details are included in the Business Review section of this report. 035 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONTWPI by Segment US$ millions, unless otherwise stated Mainland China Hong Kong Thailand Singapore Malaysia Other Markets Total 2022 7,592 11,237 4,166 3,577 2,464 7,140 2021 6,999 11,904 4,428 3,433 2,479 7,616 36,176 36,859 YoY CER 12% (6)% 3% 7% 6% 2% 2% YoY AER 8% (6)% (6)% 4% (1)% (6)% (2)% TWPI increased by 2 per cent to US$36,176 million compared with 2021. In Hong Kong, TWPI was lower as a cohort of long-term participating policies reached the end of their premium payment terms, while continuing to remain in-force and generate OPAT. All other reported segments delivered positive TWPI growth in 2022 on a constant exchange rate basis. Total recurring premiums accounted for over 90 per cent of premiums received. IFRS Operating Profit Investment Return US$ millions, unless otherwise stated Interest income Expected long-term investment return for equities and real estate Total 2022 7,621 3,560 11,181 2021 7,536 3,095 10,631 YoY CER 5% 18% 9% YoY AER 1% 15% 5% Operating profit investment return increased by 9 per cent to US$11,181 million compared with 2021, primarily driven by higher opening balances of equities and real estate assets. Operating Expenses US$ millions, unless otherwise stated Operating expenses 2022 3,251 2021 3,031 YoY CER 13% YoY AER 7% Operating expenses grew by 13 per cent to US$3,251 million and the expense ratio was 9.0 per cent compared with 8.2 per cent in 2021. Base salaries accounted for 4 per cent of the increase in operating expenses. Additional projects and investments to accelerate the Group’s step change in the use of technology, digital and analytics as previously reported were the main components of the remaining increase compared with 2021. 036 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEW IFRS NON-OPERATING MOVEMENT AND NET PROFIT(1) In 2022, global capital markets experienced a significant reduction in asset prices from rapidly rising interest rates, lower equity markets and widening corporate bond spreads compared with 2021. AIA’s IFRS 4 net profit definition includes mark-to-market movements from equity and property investments. While OPAT was higher compared with 2021, net profit was affected by negative short-term movements in these asset classes of US$2,314 million compared with long-term assumptions. The Group uses derivative financial instruments for risk management purposes. While we aim to hedge underlying interest rate exposures on an economic basis, hedge accounting is not applied, resulting in an accounting mismatch within IFRS net profit. Under IFRS 4, mark-to-market movements on derivative financial instruments are reflected in net profit but these are not fully offset by the corresponding change in the value of the liabilities. The adoption of IFRS 17 will eliminate this non-economic accounting mismatch that is created between assets and liabilities in the Group’s consolidated financial statements under IFRS 4. Non-operating movements on derivative financial instruments for participating business was negative US$2,003 million in 2022 as shown below. For clarity, this figure would have been zero under IFRS 17. Including this effect, net profit will be at least US$2 billion higher than net profit under IFRS 4. Other non-operating investment return and other items of negative US$1,618 million was mainly from movements in debt securities measured at fair value through profit or loss from increased bond yields and disposals of available for sale debt securities. US$ millions, unless otherwise stated OPAT Short-term fluctuations in investment return related to equities and real estate, net of tax(2) Reclassification of revaluation gains for property held for own use, net of tax(2) Corporate transaction related costs, net of tax Implementation costs of new accounting standards, net of tax Non-operating movements on derivative financial 2022 6,370 2021 6,409 (2,314) (276) (45) (63) (45) (66) (49) (43) instruments for participating business, net of tax(3) (2,003) 207 YoY CER 3% n/m n/m n/m n/m n/m YoY AER (1)% n/m n/m n/m n/m n/m Other non-operating investment return and other items, net of tax Net profit (1,618) 282 1,245 7,427 n/m (96)% n/m (96)% Notes: (1) Attributable to shareholders of the Company only, excluding non-controlling interests. (2) Short-term fluctuations in investment return include the revaluation gains for property held for own use. This amount is then reclassified from net profit to other comprehensive income to conform to IFRS measurement and presentation. (3) Participating business refers to the participating funds and other participating business with distinct portfolios. 037 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION US$ millions, unless otherwise stated Net profit Weighted average number of ordinary shares (millions) Basic earnings per share (US cents) Weighted average number of ordinary shares on diluted basis (millions)(1) Diluted earnings per share (US cents)(1) 2022 282 11,929 2.36 11,938 2.36 2021 7,427 12,066 61.55 12,087 61.45 YoY CER (96)% n/a (96)% n/a (96)% YoY AER (96)% n/a (96)% n/a (96)% Note: (1) Diluted earnings per share includes the dilutive effects, if any, of the awards under various share-based compensation plans as described in note 39 to the consolidated financial statements. MOVEMENT IN SHAREHOLDERS’ ALLOCATED EQUITY Shareholders’ allocated equity is shown before fair value reserve as management 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 on available for sale debt securities. US$ millions, unless otherwise stated Opening shareholders’ allocated equity Net profit Dividends Share buy-back Foreign currency translation adjustments Purchase of shares held by employee share-based trusts Revaluation gains on property held for own use Other capital movements Total movement in shareholders’ allocated equity Closing shareholders’ allocated equity Closing shareholders’ allocated equity per share (US dollars) Average shareholders’ allocated equity 2022 52,060 282 (2,259) (3,570) (1,745) (103) 38 102 (7,255) 44,805 3.82 48,433 2021 48,030 7,427 (2,147) – (1,301) (106) 42 115 4,030 52,060 4.30 50,045 Shareholders’ allocated equity was US$50,634 million, before the payment of shareholder dividends of US$2,259 million and US$3,570 million additional return of capital through the share buy-back programme. This compared with US$52,060 million at 31 December 2021. While we delivered OPAT growth in 2022, this positive contribution to shareholders’ allocated equity was offset by IFRS non-operating movements driven by short-term movements in capital markets and other non-operating items. After deducting total shareholder dividends and share buy-back of US$5,829 million, shareholders’ allocated equity was US$44,805 million at 31 December 2022. Sensitivities to foreign exchange rate, interest rate and equity price movements are included in note 37 to the consolidated financial statements. 038 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWNote: (1) Before the reclassification for disposal group held for sale as described in note 45 to the consolidated financial statements. IFRS BALANCE SHEET Consolidated Statement of Financial Position US$ 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 on assets Dividends Share buy-back Foreign currency translation adjustments Purchase of shares held by employee share-based trusts Revaluation gains on property held for own use Other capital movements Total movement in shareholders’ equity Closing shareholders’ equity Number of ordinary shares (millions) Closing shareholders’ equity per share (US dollars) As at 31 December 2022 As at 31 December 2021 Change AER 239,485 281,876 4,600 8,969 30,046 19,948 4,716 4,989 28,708 19,585 (15)% (2)% 80% 5% 2% 303,048 339,874 (11)% 230,684 251,283 11,206 22,608 9,588 18,069 264,498 278,940 38,550 454 38,096 44,805 60,934 467 60,467 52,060 (8)% 17% 25% (5)% (37)% (3)% (37)% (14)% 2021 63,200 7,427 (6,763) (2,147) – (1,301) (106) 42 115 2022 60,467 282 (15,116) (2,259) (3,570) (1,745) (103) 38 102 (22,371) (2,733) 38,096 11,734 3.25 60,467 12,097 5.00 039 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Total Investments US$ millions, unless otherwise stated As at 31 December 2022 Percentage of total As at 31 December 2021 Percentage of total Total policyholder and shareholder 215,962 85% 253,585 86% Total unit-linked contracts and consolidated investment funds Total investments 39,370 255,332 15% 100% 40,059 293,644 14% 100% Unit-Linked Contracts and Consolidated Investment Funds US$ millions, unless otherwise stated Unit-linked contracts and consolidated investment funds Debt securities Loans and deposits Equity investments(1) Cash and cash equivalents Derivative financial instruments Total unit-linked contracts and consolidated investment funds As at 31 December 2022 Percentage of total As at 31 December 2021 Percentage of total 6,402 312 31,292 1,293 71 16% 1% 80% 3% – 6,660 365 31,909 1,076 49 17% 1% 80% 2% – 39,370 100% 40,059 100% Note: (1) Includes equity shares, interests in investment funds and exchangeable loan notes. 040 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEW Policyholder and Shareholder Investments US$ millions, unless otherwise stated Participating funds and other participating business with distinct portfolios(1) Government bonds Other government and government agency bonds Corporate bonds and structured securities Loans and deposits Fixed income investments Equity investments(2) Investment property and property held for own use Cash and cash equivalents Derivative financial instruments As at 31 December 2022 Percentage of total As at 31 December 2021 Percentage of total 12,086 10,078 42,892 2,600 67,656 22,635 1,100 2,018 233 5% 5% 20% 1% 31% 10% 1% 1% – 11,092 11,372 55,697 2,699 80,860 29,185 1,081 1,317 1,190 Subtotal participating funds and other participating business with distinct portfolios 93,642 43% 113,633 Other policyholder and shareholder Government bonds Other government and government agency bonds Corporate bonds and structured securities Loans and deposits Fixed income investments Equity investments(2) Investment property and property held for own use Cash and cash equivalents Derivative financial instruments Subtotal other policyholder and shareholder Total policyholder and shareholder 42,175 17,360 34,950 5,732 100,217 10,341 5,778 5,658 326 122,320 215,962 19% 8% 16% 3% 46% 5% 3% 3% – 57% 100% 44,901 19,345 51,013 6,247 121,506 9,923 5,698 2,596 229 139,952 253,585 4% 5% 22% 1% 32% 12% – 1% – 45% 18% 8% 20% 2% 48% 4% 2% 1% – 55% 100% Notes: (1) 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, representing Hong Kong participating business, are supported by segregated investment assets and explicit provisions for future surplus distribution, although the division of surplus between policyholders and shareholders is not defined in regulation. (2) Includes equity shares, interests in investment funds and exchangeable loan notes. 041 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION ASSETS Total assets decreased by US$36,826 million to US$303,048 million at 31 December 2022 as positive net investment cash inflows were offset by negative fair value movements on debt securities due to a significant increase in government bond yields, widening of corporate bond spreads, and a fall in equity markets. Fixed income investments, including debt securities, loans and term deposits held in respect of policyholders and shareholders, totalled US$167,873 million at 31 December 2022 compared with US$202,366 million at 31 December 2021. Government bonds and other government and government agency bonds decreased to US$81,699 million from US$86,710 million due to a significant increase in government bond yields and represented 49 per cent of fixed income investments at 31 December 2022, compared with 43 per cent at 31 December 2021. Corporate bonds and structured securities reduced to US$77,842 million from US$106,710 million accounting for 46 per cent of fixed income investments at 31 December 2022, compared with 53 per cent at 31 December 2021 following a significant increase in government bond yields and widening of corporate bond spreads. The average credit rating of the fixed income portfolio excluding government bonds remained stable at A- compared with the position at 31 December 2021. The corporate bond portfolio is well diversified with over 1,900 issuers and an average holding size of US$40 million. At 31 December 2022, 2 per cent of the total bond portfolio was rated below investment grade or not rated, representing approximately US$3 billion in value. Approximately US$360 million of bonds, representing 0.2 per cent of our total bond portfolio, were downgraded to below investment grade in 2022 and there were no material impairments in the year, reflecting AIA’s overall high-quality investment portfolio. Equity investments held in respect of policyholders and shareholders totalled US$32,976 million at 31 December 2022, compared with US$39,108 million at 31 December 2021. The decrease was mainly due to negative mark-to-market movements offsetting new investments during the year. In the second half of the year, the Group invested in GLP Capital Partners Limited with AIA’s shareholders’ interest of US$1.8 billion at 31 December 2022 as part of the Group’s investment strategy in private market opportunities. Cash and cash equivalents increased by US$3,980 million to US$8,969 million at 31 December 2022 compared with US$4,989 million at 31 December 2021. Other assets were broadly stable at US$19,948 million at 31 December 2022 compared with US$19,585 million at 31 December 2021. 042 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWLIABILITIES Total liabilities reduced to US$264,498 million at 31 December 2022 from US$278,940 million at 31 December 2021. Insurance and investment contract liabilities reduced to US$230,684 million at 31 December 2022 compared with US$251,283 million at 31 December 2021 in line with the negative mark-to-market movements in equity assets backing unit-linked and participating policies. Borrowings increased to US$11,206 million at 31 December 2022, due to net proceeds of the issuance and redemption of medium-term notes and securities totalling US$1,653 million. The leverage ratio, which is defined as total borrowings expressed as a percentage of the sum of total borrowings and total equity, was 22.5 per cent at 31 December 2022, compared with 13.6 per cent at 31 December 2021. The increase has been largely driven by the reduction in total equity as shown in the following section. On transition to IFRS 17, the leverage ratio will be defined as total borrowings expressed as a percentage of the sum of total borrowings, total equity and contractual service margin net of reinsurance and net of taxes. On this revised basis, the leverage ratio at 1 January 2022 was 8.6 per cent, down from 13.6 per cent under IFRS 4 and is expected to reduce by at least 5 pps at 31 December 2022 compared to IFRS 4. Details of commitments and contingencies are included in note 42 to the consolidated financial statements. EQUITY Total equity attributable to shareholders includes a fair value reserve of negative US$6,709 million, which mainly reflects unrealised market movements on debt securities held as available for sale. Under IFRS 4, falls in bond asset values are not fully offset by falls in insurance contract liabilities, as the liabilities are determined based on long-term investment return assumptions locked in at the point of sale. This creates an accounting mismatch that leads to volatility in reported total equity. The adoption of IFRS 9 and IFRS 17 which will take effect from 1 January 2023 will resolve a large part of the non-economic accounting mismatches that are created between assets and liabilities in the Group’s consolidated financial statements under IFRS 4. Shareholders’ allocated equity is shown before fair value reserve as management 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 on available for sale debt securities. Shareholders’ allocated equity was US$44,805 million at 31 December 2022. In 2022, the significant increase in both government bond yields and corporate bond spreads led to a reduction in fair value reserve of US$15,116 million. Total equity attributable to shareholders was US$38,096 million at 31 December 2022 after total shareholder dividends of US$2,259 million and the US$3,570 million additional return of capital through the share buy-back programme. On transition to IFRS 17, shareholders’ allocated equity and shareholders’ equity will be US$51 billion and US$56 billion, a reduction of 2 per cent and 7 per cent respectively compared to IFRS 4. Shareholders’ allocated equity and shareholders’ equity at 31 December 2022 are expected to be higher under IFRS 17 compared to IFRS 4. The transition from IAS 39 to IFRS 9 had an immaterial effect on the Group’s financial position. 043 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCAPITAL FREE SURPLUS The Group’s free surplus is the excess of adjusted net worth over required capital, including consolidated reserving and capital requirements, adjusted for certain assets not eligible for regulatory capital purposes. Free surplus enables the Group to invest in organic new business growth, take full advantage of inorganic growth opportunities and absorb the effects of capital market stress conditions. The Group’s financial position remained very strong with free surplus increasing to US$23,679 million before total shareholder dividends and share buy-back of US$5,829 million. As free surplus is the assets held in excess of statutory liabilities and capital requirements, lower bond values from rising interest rates are not offset by a corresponding reduction in statutory liabilities and capital requirements. The overall effect from investment return variances and other items was a reduction in free surplus of US$5,093 million, reflecting higher bond yields and lower equity markets. Free surplus was US$17,850 million at 31 December 2022 after capital returns to shareholders. The following table summarises the change in free surplus: US$ millions, unless otherwise stated Opening free surplus Effect of acquisitions(1) BEA Upfront Payment(2) Investment in China Post Life Release of resilience margins HKRBC early adoption UFSG Free surplus used to fund new business Unallocated Group Office expenses Finance costs and other capital movements Free surplus before investment return variances, dividends and share buy-back Investment return variances and other items Free surplus before dividends and share buy-back Dividends Share buy-back Closing free surplus 2022 17,025 (200) – – 3,400 4,403 6,039 (1,274) (250) (371) 28,772 (5,093) 23,679 (2,259) (3,570) 17,850 2021 13,473 (312) (258) (1,860) – – 6,451 (1,712) (273) (300) 15,209 3,963 19,172 (2,147) – 17,025 Notes: (1) Purchase price of Blue Cross of US$283 million as per note 14 to the consolidated financial statements in Annual Report 2022, less acquired free surplus of US$83 million. Purchase price of AIA Everest of US$397 million as per note 5 to the consolidated financial statements in Annual Report 2021, less acquired free surplus of US$85 million. (2) Refers to the consideration for the strategic bancassurance partnership with BEA as previously announced in 2021. 044 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEW UNDERLYING FREE SURPLUS GENERATION (UFSG) UFSG is a financial operating metric that measures the expected amount of free surplus generated from in-force business over the year before investment in new business, unallocated Group Office expenses, finance costs, investment return variances and other non-operating items. UFSG was US$6,039 million, an increase of 7 per cent per share on a comparable basis, before the effects of the early adoption of the HKRBC regime and the release of resilience margins held by the Group under the previous HKIO basis. These increased free surplus by US$4,403 million and US$3,400 million respectively, as reported in our Interim Report 2022. The accelerated recognition of future free surplus upon early adoption of the HKRBC regime correspondingly reduced UFSG by US$468 million in 2022. The increase in UFSG on a comparable basis was driven by the continued growth of the in-force portfolio, partly offset by a lower positive claims experience compared with 2021. Free surplus invested in writing new business of US$1,274 million decreased by 22 per cent, mainly as a result of the greater capital efficiency of new products sold in Hong Kong under the HKRBC regime. Underlying Free Surplus Generation US$ millions, unless otherwise stated 2022 2021 UFSG on a comparable basis before the effects of HKRBC early adoption and Per share basis YoY CER YoY AER YoY CER YoY AER release of resilience margins 6,507 6,451 6% 1% 7% 2% HKRBC early adoption and release of resilience margins UFSG (468) 6,039 – 6,451 n/m (2)% n/m (6)% n/m (1)% n/m (5)% Underlying Free Surplus Generation Per Share US$ millions, unless otherwise stated UFSG Weighted average number of ordinary shares (millions) Basic UFSG per share (US cents) Weighted average number of ordinary shares on diluted basis (millions) Diluted UFSG per share (US cents) 2022 6,039 11,929 50.62 11,938 50.59 2021 6,451 12,066 53.46 12,087 53.37 YoY CER (2)% n/a (1)% n/a (1)% YoY AER (6)% n/a (5)% n/a (5)% 045 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION GROUP LCSM SOLVENCY POSITION The group-wide supervision (GWS) Capital Rules set out the capital requirements and overall solvency position for the Group under the GWS framework. These requirements are based on a “summation approach” and are referred to as the Local Capital Summation Method (LCSM). Under the LCSM, the group available capital and group required capital are calculated as the sum of the available capital and required capital for each entity within the Group according to the respective local regulatory requirements, subject to any variation considered necessary by the Hong Kong Insurance Authority (HKIA). Prior to 1 January 2022, the Group LCSM surplus and cover ratio were based on minimum capital requirements (MCR basis). The group minimum capital requirement (GMCR) is the sum of the minimum capital requirement of each entity within the Group. The Group LCSM surplus was defined as the excess of the group available capital over the GMCR. The Group LCSM cover ratio was calculated as the ratio of the group available capital to the GMCR. Applying the changes in disclosure requirements from the HKIA, the Group LCSM surplus and the Group LCSM cover ratio are now based on prescribed capital requirements (PCR basis). The group prescribed capital requirement (GPCR) is the sum of the prescribed capital requirement of each entity within the Group, and represents the level below which the HKIA may intervene on grounds of capital adequacy. The Group LCSM surplus is now defined as the excess of the group available capital over the GPCR and the Group LCSM cover ratio is calculated as the ratio of the group available capital to the GPCR. The use of GPCR in these revised definitions is more relevant for shareholders when assessing the capital position of the Group and brings the LCSM capital requirements more in line with the capital requirements currently used within the EV. The Group available capital increased from US$67,611 million at 31 December 2021 to US$70,698 million at 31 December 2022. The positive effects from the early adoption of the HKRBC regime, the release of resilience margins held by the Group and the adoption of C-ROSS II were partially offset by the effects of movements in capital markets and capital returns to shareholders. The GMCR decreased from US$16,948 million at 31 December 2021 to US$12,810 million at 31 December 2022 mainly due to the adoption of C-ROSS II during the year. 046 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWGROUP LCSM COVER RATIO On the new PCR basis as at 31 December 2021, the pro forma Group LCSM cover ratio was 291 per cent compared with 399 per cent on the MCR basis reflecting higher capital requirements under the new PCR basis. On the new PCR basis as at 31 December 2022, the Group LCSM cover ratio remained very strong at 283 per cent despite significant capital market volatility and the effect of the share buy-back which reduced the ratio by 13 pps. The table shows a summary of the Group LCSM solvency position as at 31 December 2022. US$ millions, unless otherwise stated Group LCSM cover ratio (PCR basis)(1) Group LCSM cover ratio (MCR basis)(1) Group available capital Tier 1 capital(2) Other Than Tier 1 capital Group prescribed capital requirement (GPCR) Group minimum capital requirement (GMCR) Group LCSM surplus (PCR basis)(3) Group LCSM surplus (MCR basis)(3) Senior notes approved as contributing to group available capital(4) As at 31 December 2022 As at 31 December 2021 283% 552% 70,698 45,508 25,190 24,989 12,810 45,709 n/a 5,653 291% 399% 67,611 n/a n/a n/a 16,948 n/a 50,663 5,820 Notes: (1) The Group LCSM cover ratio definition changed from (i) the ratio of the group available capital to the GMCR at 31 December 2021 (MCR basis), to (ii) the ratio of the group available capital to the GPCR from 1 January 2022 onwards (PCR basis). The Group LCSM cover ratio (PCR basis) as at 31 December 2021 is shown on a pro forma basis. The Group LCSM cover ratio (MCR basis) is included in the table for reference. (2) Group Tier 1 capital is maintained in excess of GMCR. Group Tier 1 capital to GMCR ratio was 355 per cent at 31 December 2022. (3) The Group LCSM surplus definition changed from group available capital less GMCR at 31 December 2021 to group available capital less GPCR from 1 January 2022 onwards. (4) The amounts shown represent the carrying value of medium-term notes and securities contributing to group available capital. These are counted as Other Than Tier 1 capital under the GWS Capital Rules. (5) The Group LCSM cover ratio (PCR basis) and Group Tier 1 capital to GMCR ratio refer to eligible group capital resources coverage ratio and tier 1 group capital coverage ratio as defined in D.S/10 of Guideline on Group Supervision (GL32) respectively. At 31 December 2022, the group available capital includes the following items, which are not included within Group Tier 1 capital: (i) US$3,726 million(1) of subordinated securities. Subordinated securities with a fixed maturity receive full capital credit up to the date that is 5 years prior to the date of maturity, with the capital credit then reducing at the rate of 20 per cent per annum until maturity. Perpetual subordinated securities receive full capital credit unless they are redeemed; and (ii) US$5,653 million(1) of senior notes issued before designation that have been approved by the HKIA as capital. Prior to maturity, the approved senior notes receive full capital credit until 14 May 2031, after which the capital credit reduces at the rate of 20 per cent per annum until 14 May 2036. Note: (1) The amounts represent the carrying value of medium-term notes and securities contributing to group available capital. These are counted as Other Than Tier 1 capital under the GWS Capital Rules. 047 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION GROUP LCSM COVER RATIO SENSITIVITIES Group LCSM cover ratio sensitivities arising from changes to the central assumptions from equity price and interest rate movements and applied consistently with those in EV, are shown below. Interest rate sensitivities apply a 50 basis points movement in current bond yield curves and the corresponding movement in discount rates applied to the calculation of liabilities. The amount of eligible debt capital is equal to the carrying value and is unchanged in the sensitivity calculations. 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 As at 31 December 2022 283% 4 pps (5) pps (6) pps 5 pps RECONCILIATION BETWEEN GROUP LCSM SURPLUS AND FREE SURPLUS AIA considers free surplus on consolidated basis a more representative view of the capital position of the Group from a shareholder perspective. The table below shows a reconciliation between the Group LCSM surplus and free surplus on consolidated basis. The main reason for the movements in reconciliation adjustments compared with the prior year were the move from using the MCR basis to the PCR basis and the effects of early adoption of the HKRBC regime and introduction of C-ROSS II regime. US$ millions, unless otherwise stated Group LCSM surplus(1) Adjustments for: Eligible Other Than Tier 1 debt capital Different capital requirements under EV for AIA China(2) Reflecting shareholders’ view of capital(3) Free surplus on a business unit basis Adjustment to reflect consolidated reserving and capital requirements Free surplus on consolidated basis As at 31 December 2022 As at 31 December 2021 45,709 50,663 (9,379) (5,622) (7,353) 23,355 (5,505) 17,850 (9,588) (7,733) (9,902) 23,440 (6,415) 17,025 Notes: (1) Group LCSM surplus definition changed from group available capital less GMCR at 31 December 2021 to group available capital less GPCR from 1 January 2022 onwards. (2) Adjustment from C-ROSS solvency basis to China Association of Actuaries (CAA) EV basis in line with local requirements. (3) Reflects change from GPCR to EV required capital and the removal of participating fund surplus as at 31 December 2022. Reflects change from GMCR to EV required capital and the removal of participating fund surplus as at 31 December 2021. 048 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEW LOCAL SOLVENCY REQUIREMENTS 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 2022. The changes in local solvency requirements are summarised as follows: Hong Kong The HKIA is in the process of developing amendments to the HKIO to cater for the new HKRBC regime with an expected effective date of 1 January 2024. In a letter dated 8 April 2022, the HKIA approved the request to early adopt the HKRBC regime for AIA International, our principal operating entity in Hong Kong, with an effective date of 1 January 2022. The effects of early adoption are shown throughout this report where relevant. For clarity, the other operating entities in Hong Kong, including AIA Co. and AIA Everest, did not request to early adopt the HKRBC regime. These entities remain subject to the current HKIO basis and will only adopt the HKRBC regime when the regulation becomes effective. Mainland China On 30 December 2021, the China Banking and Insurance Regulatory Commission issued updates, referred to as C-ROSS II, to the existing solvency regime effective from the first quarter of 2022. The impacts were not significant and were reflected in the financial metrics in this report where applicable. South Korea The Financial Supervisory Service (FSS) has announced that the new capital adequacy framework (Korean Insurance Capital Standard (K-ICS)) for Korean insurers will be effective from 1 January 2023. K-ICS is expected to have a positive effect on EV and free surplus but has not been reflected in the financial metrics as at 31 December 2022 in this report. HOLDING COMPANY FINANCIAL RESOURCES At 31 December 2022, holding company financial resources increased to US$16,497 million, before total shareholder dividends of US$2,259 million and the US$3,570 million additional return of capital through the share buy-back programme. Net capital flows to the holding company of US$1,862 million included US$4,341 million of capital flows from subsidiaries offset by US$2,479 million of corporate activity including acquisitions. Capital flows from subsidiaries included US$1,436 million from a one-off remittance of excess surplus held in AIA Co. to the holding company. Net proceeds of the issuance and redemption of medium-term notes and securities totalled US$1,653 million. Investment income and mark-to-market movements caused a US$780 million reduction in holding company financial resources, mainly due to fair value movements on debt securities from increased bond yields and a fall in equity markets. After capital returns to shareholders of US$5,829 million, holding company financial resources was US$10,668 million at 31 December 2022. 049 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONThe movements in holding company financial resources are summarised as follows: US$ millions, unless otherwise stated Opening holding company financial resources Capital flows from subsidiaries Corporate activity including acquisitions Net capital flows to holding company Increase in borrowings(1) Decrease in intercompany loans receivable Interest payments on borrowings(1) Investment income, mark-to-market movements in debt securities and others Closing holding company financial resources before dividends and share buy-back Dividends Share buy-back Closing holding company financial resources Assets recoverable and liabilities repayable within 12 months as follows: US$ millions, unless otherwise stated Loans to/amounts due from subsidiaries(2) Medium-term notes and securities(3) Net other assets and other liabilities 2022 13,136 4,341 (2,479) 1,862 1,653 985 (359) (780) 16,497 (2,259) (3,570) 10,668 2021 12,388 3,976 (1,860) 2,116 1,077 – (322) 24 15,283 (2,147) – 13,136 As at 31 December 2022 As at 31 December 2021 57 (600) (69) 103 (167) (46) Notes: (1) Borrowings principally include medium-term notes and securities, other intercompany loans, and amounts outstanding, if any, from the Company’s US$2,290 million unsecured committed credit facilities. (2) As at 31 December 2022, loans to/amounts due from subsidiaries was US$886 million (2021: US$1,917 million). US$57 million was recoverable within the 12 months after the year ended 31 December 2022 (2021: US$103 million). (3) As at 31 December 2022, medium-term notes and securities placed to the market was US$11,206 million (2021: US$9,588 million). US$500 million was repayable within the 12 months after the year ended 31 December 2022 (2021: US$167 million). Details of the medium-term notes and securities placed to the market are included in note 29 to the consolidated financial statements. 050 GROUP CHIEF FINANCIAL OFFICER’S REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWGLOBAL MEDIUM-TERM NOTE AND SECURITIES PROGRAMME Under our Global Medium-term Note (GMTN) and Securities Programme, the Company issued two unlisted Hong Kong dollar-denominated fixed rate medium-term notes and one listed fixed rate medium-term notes. On 29 March 2022, the Company issued unlisted Hong Kong dollar-denominated fixed rate medium-term notes, which consisted of HK$6,500 million of 1.99-year notes at an annual rate of 2.25 per cent. The US dollar-equivalent issued was approximately US$830 million. On 24 October 2022, the Company issued unlisted Hong Kong dollar-denominated fixed rate medium-term notes, which consisted of HK$1,200 million of 2.99-year notes at an annual rate of 5.04 per cent. The US dollar-equivalent issued was approximately US$153 million. On 25 October 2022, the Company issued listed fixed rate medium-term notes, which consisted of US$850 million of 5-year notes at an annual rate of 5.625 per cent. At 31 December 2022, the aggregate carrying amount of the debt issued to the market under the GMTN and Securities Programme was US$11,206 million compared with US$9,588 million at 31 December 2021. CREDIT RATINGS At 31 December 2022, AIA Co. had 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 S&P Global Ratings. At 31 December 2022, the Company had issuer credit ratings of A1 (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 S&P Global Ratings. DIVIDENDS The Board has recommended a final dividend of 113.40 Hong Kong cents per share, subject to shareholders’ approval at the Company’s forthcoming AGM. This brings the total dividend for 2022 to 153.68 Hong Kong cents per share, an increase of 5.3 per cent compared with the total dividend for 2021. This follows AIA’s established prudent, sustainable and progressive dividend policy, allowing for future growth opportunities and the financial flexibility of the Group. SHARE BUY-BACK PROGRAMME The Group announced in March 2022 a share buy-back programme of up to US$10 billion over a period of three years. As at 31 December 2022, 366 million shares have been repurchased for an aggregate value of US$3,570 million. Of those shares, 319 million shares were cancelled in 2022, and the remaining 47 million shares have subsequently been cancelled. 051 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS REVIEW SUMMARY AND KEY BUSINESS HIGHLIGHTS AIA delivered 6 per cent VONB growth in the second half of 2022. While VONB was 5 per cent lower for the full year, the continued execution of our strategic priorities supported the strong return of new business momentum as the effects of the initial Omicron wave eased in the second half. Our results highlight the breadth and diversity of our markets, our high-quality distribution channels and our comprehensive product range to meet the evolving needs of our customers across the region. DISTRIBUTION Our agency channel delivered 8 per cent VONB growth in the second half of 2022, demonstrating our continued commitment to enhancing the quality of our professional agency distribution. The initial outbreak of Omicron restricted in person meetings in the first half of the year, leading to a decline in VONB of 4 per cent for the full year. Our differentiated Premier Agency strategy helped drive double-digit growth in the number of agency leaders and new recruits along with an increase in new recruits’ productivity. AIA was once again the number one Million Dollar Round Table (MDRT) multinational company in the world, marking our eighth consecutive year of achieving the largest number of registered members worldwide. VONB for our partnership channel grew by 2 per cent in 2022. Our long-term strategic partnerships with leading banks remain a key competitive advantage for AIA, and delivered 10 per cent VONB growth in 2022. VONB from our direct telemarketing channel in South Korea was affected by an industry-wide regulatory change implemented at the start of the year, as previously highlighted. Our intermediated channels, including IFAs and brokers, delivered positive VONB growth in 2022, with very strong performances in Hong Kong and Taiwan (China). In India, partnership distribution delivered excellent VONB growth, driven by our partnership with six leading banks as well as close collaboration with our brokers. GEOGRAPHICAL MARKETS AIA China returned to positive growth in the second half of 2022 with VONB up by 3 per cent. VONB in the first half was lower compared with the record result in 2021, as our business was impacted by pandemic containment measures and full year VONB reduced by 15 per cent. We have seen new business momentum recover and return to positive growth in the first two months of 2023. AIA Hong Kong achieved 4 per cent VONB growth in 2022, supported by growth from our market-leading agency force and a strong performance from partnership distribution, in particular through the intermediated channels and our exclusive partnership with The Bank of East Asia, Limited (BEA). VONB from sales to Mainland Chinese visitors tripled in 2022 and accounted for just over 10 per cent of total VONB for the year. AIA Thailand delivered 5 per cent growth in VONB for the full year, supported by 19 per cent growth in the second half of 2022. We saw higher sales activity levels in both agency and bancassurance channels as new business momentum returned in the second half. Our agency remained the market leader in 2022 and we achieved an excellent increase in number of new recruits, contributing to an increase in the number of active agents compared to 2021. AIA Singapore delivered higher VONB in 2022 as 7 per cent growth in the second half offset performance in the first half. Agency channel remained the largest contributor to VONB with both an increase in the number of active agents and productivity improvements in the second half. Our partnership channel achieved a strong performance in 2022. AIA Malaysia achieved 15 per cent VONB growth in 2022, with both agency and partnership channels delivering double-digit growth. We continued to work closely with Public Bank Berhad (Public Bank) to further uplift the activity and productivity of our insurance specialists through the implementation of enhanced digital tools. Our Other Markets segment recorded a reduction in VONB in 2022 as strong double-digit growth in India, New Zealand, the Philippines, Sri Lanka and Taiwan (China) in the second half was offset by a decline in Australia, South Korea and Vietnam. 052 AIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWUNRIVALLED DISTRIBUTION AGENCY US$ millions, unless otherwise stated VONB VONB margin ANP 2022 2,659 73.2% 3,632 2021 2,875 74.3% 3,872 YoY CER (4)% (1.1)pps (3)% YoY AER (8)% (1.1)pps (6)% 1H 2022 YoY CER (15)% (5.4)pps (8)% 2H 2022 YoY CER 8% 3.7pps 3% AIA’s unparalleled, proprietary Premier Agency is a core competitive advantage and holds market-leading positions across the region. Our professional agency sits at the heart of our relationship with our customers, enabling us to meet the diverse and rapidly growing needs of millions of people across Asia through personalised advice and service. The quality and scale of our agency platform has enabled AIA to deliver a resilient performance in 2022 with 8 per cent VONB growth in the second half of the year. While VONB of US$2,659 million was lower by 4 per cent for the full year due to the effects of the initial Omicron wave, our agency business delivered strong momentum in the second half with the majority of our markets achieving positive year-on-year growth. In particular, our businesses in India and ASEAN markets both delivered double-digit VONB increases compared with the second half of 2021. Overall, agency accounted for 80 per cent of the Group’s total VONB in 2022. The professionalism and resilience of our agents has ensured that our Premier Agency is well-positioned to capture the immense growth opportunities ahead as our markets rebound from the effects of the pandemic. Next-generation agency leaders are critical to the successful execution of our Premier Agency strategy to ensure high-quality recruitment, training and management as we prioritise growth in professional agents across our markets. In 2022, our agency leadership programmes successfully generated 11 per cent growth in the number of leaders compared with 2021. Quality recruitment remains a key strategic priority for AIA. Growth in agency leaders helped generate an increase in new recruits by 13 per cent in 2022 along with a strong growth in their productivity. We continued to support our agency force with new and enhanced digital tools that cover agency recruitment and onboarding, activity management and new leads generation. In 2022, over 80 per cent of new agents were onboarded through iRecruit, our digital recruitment platform. Overall, the total number of agents were up compared with 2021 and finished the year above the pre-pandemic levels as at the end of 2019. In 2022, AIA was once again the number one MDRT multinational company in the world, marking our eighth consecutive year of achieving the largest number of registered members worldwide. AIA China became the MDRT company with the most members globally, followed by AIA Thailand and AIA Hong Kong. Our continued leadership in MDRT demonstrates the effectiveness of our differentiated Premier Agency strategy. 053 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONPARTNERSHIPS US$ millions, unless otherwise stated VONB VONB margin ANP 2022 668 37.8% 1,771 2021 697 39.2% 1,775 YoY CER 2% (1.4)pps 6% YoY AER (4)% (1.4)pps 0% 1H 2022 YoY CER 0% 1.8pps (4)% 2H 2022 YoY CER 4% (5.5)pps 19% AIA’s partnership business extends our market reach and broadens our access to hundreds of millions of potential customers across the region. We continue to strengthen our collaboration with our long-term strategic partners through providing personalised solutions and advice for their customers, while continuing to expand our high quality network. Our partnership business contributes a growing source of new business for AIA. In 2022, our partnership channel delivered positive VONB growth, including a strong performance from bancassurance. Partnership distribution accounted for 20 per cent of the Group’s total VONB. BANCASSURANCE, INTERMEDIATED CHANNELS AND DIRECT MARKETING Our long-term strategic partnerships with leading banks are a key competitive advantage for AIA. Bancassurance VONB grew by 10 per cent in 2022, from growth in Public Bank in Malaysia, PT Bank Central Asia Tbk (BCA) in Indonesia and ASB Bank Limited (ASB) in New Zealand. BEA in Hong Kong and Mainland China delivered excellent VONB growth and is a material contributor to our overall bancassurance results in 2022. AIA China also began sales through Postal Savings Bank of China Co., Ltd. in the second quarter of 2022. Our successful bancassurance model has achieved a strong track record of new business from in-branch referrals through bank relationship managers to insurance specialists. Our digitally-led approach complements this model with data-driven marketing and analytical models for targeting of in-branch customers and provides broader access to previously untapped online and credit card customers. This has supported increased productivity for our insurance specialists, particularly in Malaysia and the Philippines. As digital banking continues to evolve, we offer our customers more choice of how to purchase from fully online to face-to-face advice. Our intermediated channels, including IFAs and brokers, delivered positive VONB growth in 2022, with very strong performances in Hong Kong and Taiwan (China). VONB from our direct telemarketing channel in South Korea was affected by an industry-wide regulatory change implemented at the start of the year, as previously highlighted. In India, Tata AIA Life Insurance Company Limited (Tata AIA Life) has partnerships with six leading banks that together have more than 150 million existing customers. We have continued to transform the customer onboarding experience and expand our protection product offerings, supporting an increased share of wallet with our bank and other partners, leading to excellent VONB growth compared with 2021. Our partnership with PolicyBazaar has increased sales by 3 times compared with the previous year. DIGITAL PLATFORMS AIA’s next-generation partnerships with technology companies bring access to hundreds of millions of users and new customer segments. Our engagements through these platforms use digital insurance propositions and new analytical models to identify suitable customers for referral to our distribution channels for more comprehensive advice and product solutions. In 2022, we brought in over one million customers via these platforms and continued to expand our digital propositions and partnerships to address the various lifestyle needs of consumers across the region. 054 BUSINESS REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWGEOGRAPHICAL MARKET HIGHLIGHTS MAINLAND CHINA AIA China US$ millions, unless otherwise stated VONB VONB margin ANP TWPI OPAT 2022 916 69.5% 1,319 7,592 1,425 2021 1,108 78.9% 1,404 6,999 1,371 YoY CER (15)% (9.6)pps (4)% 12% 8% YoY AER (17)% (9.4)pps (6)% 8% 4% 1H 2022 YoY CER (24)% (14.8)pps (7)% 14% 4% 2H 2022 YoY CER 3% (0.1)pps 3% 10% 12% AIA China’s high-quality professional agency force and differentiated business model delivered a return to positive growth in the second half of 2022, with VONB up by 3 per cent. VONB in the first half of 2022 was lower compared with the record result in 2021, as most of our geographies were subject to stringent pandemic movement restrictions, leading to a reduction in full year VONB of 15 per cent to US$916 million. Our remote digital capabilities enabled our agents to continue generating new business over this period and, as restrictions eased, in person sales rebounded. VONB in the second half recovered strongly and delivered double-digit year-on-year growth to the end of November, before a rapid wave of COVID-19 infections disrupted new business sales in December. Following the reopening of Mainland China, we have seen new business momentum recover and returned to positive VONB growth in the first two months of 2023. Full year OPAT of US$1,425 million increased by 8 per cent, with 12 per cent growth in the second half, from our growing in-force portfolio and favourable claims experience. AIA China’s Premier Agency remains a clear competitive advantage and ensures we are in a very strong position to capture the increased demand for high-quality products and services backed by professional advice. We have continued to focus on our Premier Agency strategy during the pandemic, which has translated to a broadly stable level of total agents as of December 2022 compared to the pre-pandemic level. AIA China was named the number one MDRT company in the world for the first time ever in July 2022, demonstrating our commitment to growing AIA’s professional agency distribution through quality recruitment, best-in-class training and advanced leadership development programmes. We continue to launch new customer propositions with integrated value-added services that are tailored to evolving consumer needs. In November, we successfully launched an innovative critical illness product, Ru Yi You Xiang. Traditional protection products remained the largest contributor to VONB for AIA China in 2022. As we broaden our long-term savings propositions and further upgrade our retirement concierge services, we have continued to deepen our share of wallet from existing customers. We have continued to broaden our distribution reach in the bancassurance channel. In 2022, we began sales through Postal Savings Bank of China Co., Ltd., as well as delivered growth through our exclusive partnership with BEA. We will continue to deepen cooperation with our strategic bancassurance partners to bring our compelling propositions to more potential customers. Mainland China offers significant potential for AIA as we deepen our presence within existing regions and replicate our scalable model in new provinces. We are expanding our geographical footprint and successfully launched our operations in Wuhan, Hubei. In 2022, we were granted approval by the regulator to upgrade our operations in Tianjin and Shijiazhuang. We are also at an advanced stage in establishing our new branch operation in Zhengzhou, Henan, after receiving regulatory approval to begin preparations, which will give us access to the third most populous province in Mainland China with close to 100 million people. China Post Life In January, we completed our 24.99 per cent equity investment in China Post Life Insurance Co., Ltd. (China Post Life), the leading bank-affiliated life insurer in Mainland China. VONB in 2022 was 3.8 times the previously disclosed 2020 full-year result. For clarity, AIA China’s reported results and the above table do not include any contribution from China Post Life. AIA’s investment in China Post Life enables us to capture the significant value available from additional distribution channels and customer segments that are highly complementary to AIA China’s strategy. 055 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONHONG KONG US$ millions, unless otherwise stated VONB VONB margin ANP TWPI OPAT 2022 787 69.5% 1,078 11,237 2,226 2021 756 64.0% 1,106 11,904 2,143 YoY CER 4% 5.5pps (3)% (6)% 4% YoY AER 4% 5.5pps (3)% (6)% 4% 1H 2022 YoY CER 3% 11.8pps (12)% (6)% 7% 2H 2022 YoY CER 5% 0.0pps 6% (5)% 1% AIA Hong Kong recorded 4 per cent growth in VONB in 2022 to US$787 million with increases from both agency and partnership distribution channels. ANP was lower by 3 per cent, with stronger growth in the second half of 6 per cent. VONB margin improved by 5.5 pps compared to 2021, driven by enhanced profitability of our participating products. VONB from sales to Mainland Chinese visitors tripled in 2022, accounting for just over 10 per cent of VONB for the year, and strong momentum has continued into the first two months of 2023. AIA’s Premier Agency is the clear market leader in Hong Kong and outperformed the industry in the first nine months of 2022, based on latest available data. Agency saw positive year-on-year VONB growth in the second half of the year. Our Hong Kong business also delivered strong double-digit VONB growth from our partnership channel in 2022, driven by very strong performances in the IFA and broker channels and our exclusive partnership with BEA. OPAT increased by 4 per cent from growth in our in-force portfolio, with lower growth in the second half due to reduced operating investment returns from lower asset values and unfavourable claims experience. THAILAND US$ millions, unless otherwise stated VONB VONB margin ANP TWPI OPAT 2022 585 89.1% 655 4,166 782 2021 609 90.0% 677 4,428 960 YoY CER 5% (0.9)pps 6% 3% (10)% YoY AER (4)% (0.9)pps (3)% (6)% (19)% 1H 2022 YoY CER (9)% (9.8)pps 2% 4% (22)% 2H 2022 YoY CER 19% 7.4pps 10% 2% 2% AIA Thailand delivered 5 per cent growth in VONB for the full year to US$585 million, supported by 19 per cent growth in the second half of 2022. Full year ANP growth of 6 per cent was supported by continued growth in unit-linked sales where AIA remains the market leader. VONB margin remained stable at 89.1 per cent. In agency, we delivered positive VONB growth in 2022, driven by a very strong performance in the second half of the year. We continued to accelerate the use of powerful digital tools which supported an improvement in the productivity of our agents. Quality recruitment remains a key priority and we saw an excellent year-on-year increase in the number of new recruits. Our agency force remained the market leader in 2022 and total number of active agents increased compared to 2021. We have the highest number of MDRT members in Thailand. We continued to drive an increase in the productivity of insurance specialists in our strategic partnership with Bangkok Bank Public Company Limited. OPAT reduced by 10 per cent, primarily due to higher medical claims from customers seeking treatment for COVID-19 in private hospitals in the first half of the year, as previously reported. As the initial Omicron wave subsided, OPAT returned to growth in the second half of 2022, driven by improvements in lapse experience and higher investment returns. COVID-19 related medical claims also reduced compared with the first half. 056 BUSINESS REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWSINGAPORE US$ millions, unless otherwise stated VONB VONB margin ANP TWPI OPAT 2022 349 65.7% 531 3,577 742 2021 356 64.7% 549 3,433 723 YoY CER 1% 0.8pps (1)% 7% 6% YoY AER (2)% 1.0pps (3)% 4% 3% 1H 2022 YoY CER (6)% 2.7pps (11)% 7% 13% 2H 2022 YoY CER 7% (1.1)pps 9% 7% 1% AIA Singapore delivered 7 per cent VONB growth in the second half of the year following the lifting of pandemic-related restrictions that affected the first half. Overall VONB was up by 1 per cent over the full year to US$349 million, ANP reduced slightly to US$531 million and VONB margin remained strong at 65.7 per cent. Our Premier Agency strategy delivered growth in the number of active agents and productivity improvements in the second half of the year compared with the same period in 2021. We continued to enhance our digital tools to support our agents, with our social media integrated leads management platform offering a powerful way to generate new customer leads. This remained an important contributor to new business sales in Singapore. Our partnership channel recorded a strong performance in 2022, as Citibank, N.A.’s performance benefited from improved new business sales processes and easing of border controls. OPAT increased by 6 per cent in 2022, driven by growth in our in-force portfolio, increased operating investment returns and favourable claims experience in the first half. Growth in the second half was moderated by increased medical claims compared with the same period last year. MALAYSIA US$ millions, unless otherwise stated VONB VONB margin ANP TWPI OPAT 2022 308 69.9% 440 2,464 393 2021 283 57.3% 491 2,479 392 YoY CER 15% 12.4pps (5)% 6% 6% YoY AER 9% 12.6pps (10)% (1)% 0% 1H 2022 YoY CER 7% 5.4pps (2)% 8% 8% 2H 2022 YoY CER 26% 20.3pps (9)% 3% 4% AIA Malaysia achieved strong VONB growth of 15 per cent in 2022 to US$308 million, with year-on-year growth of 26 per cent in the second half of the year. VONB margin improved by 12.4 pps to 69.9 per cent supported by a higher mix of protection products. Agency delivered double-digit growth in VONB as we continued to focus on the increased adoption of our digital tools. Our partnership channel also delivered strong VONB growth as we worked closely with Public Bank to increase the activity and productivity of our insurance specialists through enhanced digital tools with a structured leads referral process. Full year OPAT grew by 6 per cent from an increase in our in-force portfolio and positive claims experience in the first half, although second half growth was lower when compared with the exceptionally favourable medical claims experience over the same period in 2021. 057 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONOTHER MARKETS US$ millions, unless otherwise stated VONB VONB margin ANP TWPI OPAT 2022 420 30.2% 1,384 7,140 804 2021 511 35.9% 1,420 7,616 784 YoY CER (12)% (5.6)pps 5% 2% 11% YoY AER (18)% (5.7)pps (3)% (6)% 3% 1H 2022 YoY CER (15)% (3.1)pps (6)% 3% 4% 2H 2022 YoY CER (8)% (9.3)pps 19% 1% 18% Overview VONB for our Other Markets segment reduced by 12 per cent in 2022 to US$420 million as strong double-digit growth in India, New Zealand, the Philippines, Sri Lanka and Taiwan (China) in the second half was offset by a decline in Australia, South Korea and Vietnam. ANP recovered strongly in the second half, increasing by 19 per cent as the effects of the initial Omicron wave eased across our markets leading to an overall increase of 5 per cent in the full year. VONB margin increased by 2.2 pps compared to the first half of 2022. OPAT recovered strongly in the second half and grew by 11 per cent for full year 2022. The increase was mainly due to positive claims experience in the second half compared with higher levels of mortality claims in 2021, as previously disclosed. Geographical Market Highlights Australia: AIA Australia’s OPAT grew strongly in 2022 from improved claims experience and higher operating investment returns. VONB was lower as sales through our retail IFA channel reduced significantly leading to an increase in acquisition expense overruns. Cambodia: AIA Cambodia continued to execute our multi-channel distribution strategy, delivering double-digit ANP growth in 2022. Our focus on quality recruitment and training has delivered growth in the number of active agents as well as their productivity. India: Tata AIA Life achieved excellent VONB growth across all distribution channels and is ranked the third largest private life insurer in India, based on individual weighted new business premiums, as at end of December 2022. Our differentiated Premier Agency grew very strongly and we deepened our geographical reach by continuing to expand the number of digitally-enabled branches. We delivered very strong growth from our broker channel as well as in bancassurance, where we have further enhanced our digital tools to drive productivity management. We have continued to expand our suite of protection propositions and maintained our position as the number one private insurer in the retail protection market in 2022. Indonesia: AIA Indonesia’s VONB was impacted by Omicron in the first half of 2022, which led to a small decline in VONB for the full year despite a sequential improvement in the second half. Our strategic bancassurance partnership with BCA delivered positive VONB growth for 2022, driven by increased sales of protection products. Myanmar: AIA Myanmar delivered excellent ANP growth in 2022. We have continued to build a strong foundation for our business in this market and grew the number of active agents as well as expanded our bank branch coverage over the year. New Zealand: AIA New Zealand delivered strong double-digit VONB growth in the second half of 2022, offsetting the reduction in the first half to deliver positive VONB growth for the full year. Our strategic partnership with ASB delivered excellent VONB growth, supported by an increase in the number of insurance specialists as well as higher productivity. 058 BUSINESS REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWPhilippines: AIA Philippines delivered positive VONB growth for the full year, with double-digit VONB growth in the second half. Both agency and our partnership with Bank of Philippine Islands (BPI) saw a sequential improvement in VONB growth in the second half. Our focus on quality recruitment delivered excellent growth in number of new recruits as well as increased productivity. South Korea: AIA Korea was affected by an industry-wide regulatory change implemented at the start of 2022 that impacted the recruitment of sales representatives for our direct telemarketing channel, as previously highlighted. Our bancassurance business delivered excellent VONB growth as we continued to enhance our product offerings. Sri Lanka: AIA Sri Lanka delivered double-digit VONB growth in 2022 across all distribution channels. We continued to support our agency force and insurance specialists to drive improvements in productivity compared with last year. Taiwan (China): AIA Taiwan delivered very strong double-digit VONB growth in 2022, driven by excellent performances from both our intermediated and direct marketing channels. Vietnam: AIA Vietnam’s VONB declined in 2022 as our agency channel was impacted by the disruption due to COVID-19 infections in the first half of the year. Double-digit ANP growth in the second half of 2022 was more than offset by lower VONB margin due to higher expenses. We have continued to support our agents by driving adoption of our powerful digital tools, with the majority of our agents now onboarded through our digital recruitment and training platforms. 059 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONTECHNOLOGY, DIGITAL AND ANALYTICS AIA’s ongoing investment in technology, digital and analytics (TDA) is a key enabler of our strategic priorities, supporting increased productivity and enhanced customer experience while creating access to new growth opportunities. Our shift to a scalable and efficient world-class technology infrastructure has accelerated the deployment of our digital tools, contributing to a year-on-year improvement of 12 pps in end-to-end straight-through processing (STP) to 70 per cent in December 2022 for the Group. We believe that providing simplified customer journeys with faster turnaround times will lead to better outcomes, including improved customer satisfaction, retention and profitability. AIA’s increased use of artificial intelligence (AI) and analytics is delivering significant benefits to our customers, distributors and partners. We generated nearly 30 per cent more leads through our digital tools in 2022 compared to 2021, while at the same time enhancing the quality of leads provided to both our agency and bancassurance channels to improve sales conversion rates. Our TDA transformation has been recognised externally through numerous awards, including: the IDC Future Enterprise Awards 2022 Thailand – Best in Future of Customer Experience for AIA Thailand; InsuranceAsia News – Digital Insurer of the Year in 2022 for the Group; and Forrester’s 2022 Asia Pacific Technology Awards – Enterprise Architecture Award for the Group. WORLD-CLASS TECHNOLOGY AIA’s adoption of cloud technology continued to outpace the financial services and insurance industry averages globally. By the end of 2022, 86 per cent of our information technology infrastructure was hosted in the public cloud, compared with 39 per cent in December 2020. We are making excellent progress towards our ambition of 90 per cent cloud adoption. Our utilisation of cloud technology provides the foundational capability for TDA initiatives at increased scale, doubling the Group’s technology capacity while delivering cost efficiency compared with our legacy infrastructure platform. DIGITAL ENABLEMENT We continued to enhance our agency digital tools in 2022, implementing more than 180 new features and improvements which support increased interactions and greater customer insights. In 2022, 76 per cent of AIA’s active agents were using our proprietary social media integrated leads management platform to share marketing content with prospective customers. By leveraging this platform, our agents delivered more than US$280 million of ANP from digitally-generated customer sales leads in 2022. In-app ratings for our agency digital tools averaged 4.7 out of 5 from more than 950,000 responses. Working closely with our bancassurance partners, we have deployed digital and data-driven solutions that enhance their ability to engage with customers, offering greater choice of completing sales journeys digitally, assisted remotely or face-to-face. Digital and analytics generated over 4.6 million sales leads for our strategic bank partners in 2022, enabling us to reach previously untapped customers. Across the Group’s customer apps and portals, more than 15 million existing and prospective customers are engaging with us digitally, benefiting from high-quality digital experience. AIA service app’s average app store ratings were 4.0 or higher across seven markets in December 2022. 060 BUSINESS REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWWe are changing the way we engage with existing and prospective customers through the introduction of innovative, market-leading super apps. These elevate the digital experience through an expanded and integrated range of new services, including self-service and claim capabilities, enabled by a broad ecosystem of partners, in addition to AIA Vitality. We launched the first of our super apps, AIA+, in Mainland China at the end of 2021. AIA+ has increased customer repurchase rates of additional products to three times the level when compared with customers who do not use the super app. We launched our second AIA+ super app in Thailand in October 2022 with plans for further launches in 2023. ANALYTICS POWERING EVERYTHING WE DO We continue to deepen and industrialise our use of AI and analytics across the Group with a total of 235 high-impact use cases implemented since the launch of our TDA strategy, including 111 deployed in 2022. Analytics power every part of our agency value chain, with AI-assisted recruitment now deployed in six markets. In 2022, 80 per cent of our new agents in Hong Kong were recruited through AI-driven agent aptitude tests and interviews. Propensity models help us identify high-potential agency leader candidates from within our agency force and accelerate their development. The use of intelligent behavioural nudges drives enhanced agent activity and automatic matching of customers to the most suitable agents, leading to increases in the conversion of sales leads. Data-driven pre-approved offers simplify the underwriting process and significantly enhance the purchasing experience for customers while intelligent product recommendations drive higher repurchase rates of additional products. For example, these initiatives supported a 40 per cent increase in conversion rates of our existing customer marketing campaigns in Singapore. AIA’s Responsible Use of Artificial Intelligence Standard was introduced in 2021 to set out our principles for developing and implementing AI in both internally developed or externally sourced solutions to safeguard the use of AI in our businesses. This ensures that our AI applications put humans at the centre of our decision-making with effective oversight and controls that adhere to regulatory requirements including data privacy and protection principles across all our markets, so that AIA stays at the forefront of responsible use of AI in Asia. CYBERSECURITY In 2022, AIA maintained International Organization for Standardization (ISO) 27001 certification covering identity access management, cybersecurity and cloud security operations. An independent assessment of our cybersecurity maturity against the standards of the United States’ National Institute of Standards and Technology (NIST) also demonstrated that we remain well positioned among our insurance peers. We will continue to invest in information technology safeguards, including in the areas of cloud security, cyber defence automation and zero trust security, to ensure sufficient and robust operational controls which meet our information security objectives. 061 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCOMPELLING PROPOSITIONS AIA’s compelling propositions are designed to link our financial success to the health and well-being of our customers and to deliver our Purpose of helping people live Healthier, Longer, Better Lives. Our products are designed with deep customer insights gained from our proprietary customer segmentation models. These insights are supplemented with quantitative and qualitative research, including customer panels which enable us to identify and react to emerging customer trends. As a result, we can better tailor products for our existing customers and identify greater opportunities to reach new customers and segments. A critical component in the success of our tailored, relevant and compelling propositions is our unrivalled and high-quality distribution network. We are supporting our distributors with enhanced tools and training, enabling them to identify customer needs more effectively and advise on the best solutions in more engaging ways. Customers form a trusted advisory relationship with our Premier Agents and the professional sales teams of our distribution partners; this is a critical success factor underpinning our long track record of delivery. Our aim is to reward our customers for taking actions that positively impact their health and well-being, help them access the most appropriate medical treatment, and support them in saving more effectively to meet their financial needs through different life stages. Additional value-added services such as our wellness programmes, AIA Vitality and our wellness programme in AIA China, and our range of Stewardship funds directly address customer needs and further differentiate AIA’s propositions in the market. HEALTH AND WELLNESS The pandemic has raised awareness of the need for medical insurance and broader health coverage, which makes it the right time for AIA to develop solutions that make healthcare more accessible, more affordable and more effective for our customers. By 2030, annual healthcare expenditure is expected to exceed US$4 trillion across AIA’s markets. With high out-of-pocket spend, much of these costs will fall to individuals, driving the tremendous need for AIA’s insurance propositions and services. AIA is a leading private health insurer in the region with the scale, reach, and unique capabilities to make a difference. AIA’s Integrated Health Strategy, introduced in 2022, goes beyond fragmented partnerships and ecosystems to deliver simpler customer journeys including how people buy health insurance and navigate the healthcare system. Our personalised health insurance solutions replace standardised benefits with innovative solutions to cater to customers’ individual requirements based on their life stage or specific healthcare needs, providing simple and affordable protection products. AIA’s Integrated Health Strategy is powered by Amplify Health, our joint venture with Discovery Limited which was launched in February 2022. By collaborating with our local businesses, Amplify Health is critical to AIA in delivering personalised propositions through its broad range of data-driven Health InsurTech assets, processes and analytics. In 2022, we completed the acquisition of Blue Cross (Asia-Pacific) Insurance Limited and Blue Care JV (BVI) Holdings Limited in Hong Kong, and also announced the acquisition of MediCard Philippines, Inc. in the Philippines. These acquisitions will enhance and broaden our health and wellness solutions in these two markets with significant growth opportunities. 062 BUSINESS REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWOur strategy significantly enhances our core business and health insurance becomes more accessible, more affordable and more effective for our customers. Our Premier Agents and partners will benefit from a broader product suite, access to new customer segments and increased interactions. For AIA, this means more engaged customers, more productive distribution, more protection sales and sustainable growth. INTEGRATED SOLUTIONS TO MEET CUSTOMER NEEDS Our long-term savings solutions combine our investment capabilities with tailored protection to help customers save for their long-term goals while protecting against uncertain events. AIA’s Stewardship funds hosted on our Regional Funds Platform provide access for our customers with unit-linked products to a diversified risk-based portfolio of assets managed by top global fund managers, some of which are unavailable to retail investors. AIA oversees both asset allocation and fund manager performance with the aim of delivering superior long-term returns for customers. Currently available in six markets, our three key global Stewardship funds (US dollar) have achieved first quartile peer group performance in the fourth quarter of 2022 and are above benchmark since they were launched in 2019. AIA Singapore’s range of goal-based propositions combine AIA’s Stewardship funds with insurance coverage to ensure our customers can meet their goals, such as funding education, retirement planning and legacy planning. Leveraging the Stewardship funds, we launched a new retirement solution that offers a long-term capital guarantee at an affordable cost in 2022. AIA China further expanded its range of retirement propositions, which are designed to address comprehensive retirement needs including healthcare, driving significant growth in number of pre-retirement customers through the bundling of medical coverages with long-term savings plans. Through our Family Insurance Consulting service application and data-driven integrated customer platform, One Experience, agents can provide targeted and tailored recommendations based on the customer’s individual needs for long-term savings and protection. AIA Vitality embodies our concept of shared-value insurance, supporting and rewarding customers to stay healthy while enhancing their policy through premium discounts or additional benefits. Over 2022 we launched the programme in India and added more than 40 new integrated products across the 10 existing AIA Vitality markets. More than 60 per cent of our new customers in 2022 added AIA Vitality to their policies when given the option to do so and we now have 2.6 million members of AIA Vitality and our wellness programme in Mainland China. AIA Malaysia’s Total Health and Total Wealth solutions are leading examples of integrating solutions to meet customer needs, combining both AIA Vitality and Stewardship funds. With over 40 per cent VONB growth from AIA Vitality integrated products in 2022 as well as higher customer and agent engagement in AIA Vitality in Malaysia, the success is already significant. 063 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONLEADING CUSTOMER EXPERIENCE Delivering seamless omnichannel customer experience with best-in-class engagement is an important strategic priority for AIA. We believe that personalised experience and simplified customer journeys will create a range of customer and business benefits, including significant improvements in customer satisfaction, sales leads generation and conversion, as well as productivity gains for our distribution. TRANSFORMING CUSTOMER JOURNEYS In 2022, we are on track to achieve our ambition of 90 per cent end-to-end STP across our buy, service and claims customer journeys. In December 2022, AIA’s end-to-end STP reached 70 per cent, up 12 pps from a year ago. In our end-to-end new business processes, we are simplifying underwriting rules and eliminating unnecessary requirements from customers, supported by AI-decision-making capabilities. In Mainland China, 75 per cent of new business applications were underwritten automatically by our AI-powered systems. In Hong Kong, our simplified medical underwriting and enhanced interactive Point of Sale (iPoS) have supported an increase of 11 pps in STP rates. Our enhanced agent and customer self-servicing capabilities have driven digital servicing submissions to 85 per cent of all submissions for the Group in December 2022. Overall service STP has reached 79 per cent across the Group with eight markets achieving service STP rates of 70 per cent or higher. AIA’s re-designed claims processes resulted in faster and more cashless settlements. In December 2022, 63 per cent of claims were settled within same day and 93 per cent of claims payments were digital across the Group. Our initiatives to increase adoption of digital platforms have resulted in digital e-submission rates increasing to 87 per cent and overall electronic communications with customers increasing to 92 per cent across our buy, service and claims processes. With higher levels of online self-service and many routine tasks handled by chatbots, we are redeploying our call centre staff to higher-value customer engagement. Supported by our investments in customer relationship management (CRM) tools, we now have 13 markets achieving first contact resolution rates of 90 per cent or higher, without the need for additional follow-ups. All of these initiatives have resulted in our Net Promoter Score (NPS) increasing significantly. AIA was acknowledged as top three in nine markets in our latest customer relationship surveys. With all markets deploying real-time customer surveys for key moments of truth when customers form an impression of our brand and products, we are tracking an overall Customer Satisfaction Score (CSAT) for call centres of 96 per cent. 064 BUSINESS REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWLEVERAGING OUR TRUSTED RELATIONSHIP WITH CUSTOMERS Across the Group, our existing customers are a significant source of additional new business. Our advanced digital platforms and customer analytics are driving greater understanding of existing customer needs and their coverage gaps while enabling us to develop more personalised and needs-based marketing strategies. We analyse the drivers of our successful marketing campaigns in our local markets and then deploy them more widely across the Group. In 2022, a total of 45 of these thematic customer campaigns were expanded to Mainland China, Hong Kong, Thailand, Singapore and Malaysia, delivering more than US$690 million VONB. Our customer engagement initiatives delivered strong outcomes in improving cross-selling and increasing conversion rates. In Mainland China, our customer super app, AIA+, generated twice the number of new digital leads compared with 2021. The cross-sell rate of the registered customers on AIA+ were three times higher compared with non-registered customers. Through a digital engagement programme that targeted long-term customers with significant protection needs, AIA Malaysia achieved three times the conversion rate and more than two times the VONB compared with other outreach campaigns that employed less effective targeting strategies. 065 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONORGANISATION OF THE FUTURE AIA’s strong track record of performance has been achieved through our unique culture of empowerment with accountability. We started our journey to transform AIA into a simpler, faster, more connected organisation in the second half of 2020 to support the delivery of our strategic priorities. In 2022, several of our local markets introduced new organisational designs which have reduced the number of organisational layers by around 30 per cent, putting people closer to the decision-making process, leading to better outcomes and a more empowered organisation. We continued to implement cross-functional agile operating models and, in seven of our markets, we have set up agile teams to work on some of our most important strategic priorities. These new ways of working are helping us to realise value more rapidly, focus on customer needs and innovate at pace. Our investment in developing technology, digital and analytics capabilities has resulted in an increase of 63 per cent in our overall number of employees with these skill sets between 1 July 2020 and 31 December 2022. This material and ongoing investment marks a step-change in our capabilities and underpins our ability to execute our overall growth strategy. BUILDING A FUTURE READY WORKFORCE In 2022, we launched several new programmes to foster new capabilities in core lines of business and upskill employees. This includes our new AIA Agile Academy which builds internal capabilities to drive business transformation and AIA Analytics Academy which builds data analytics and business analysis capabilities across the organisation. Digital content and delivery methods play an important role in shaping a culture of continuous learning at AIA. All of our business units provide their employees with access to the AIA Learning Hub, an online platform which provides access to thousands of digital learning courses. AIA AS AN EMPLOYER OF CHOICE Employee engagement remains a top priority for AIA as we progress through the journey of transforming our organisation. We regularly monitor employee engagement levels to ensure that AIA is an employer of choice across our markets. In 2022, 97 per cent of our employees responded to our annual Gallup engagement survey and the Group’s employee engagement scores improved further to place AIA in the 94th percentile of Gallup’s global finance and insurance industry benchmark. We are proud that our employee engagement levels place us in the top quartile of this benchmark for the sixth consecutive year, and in the top 10th percentile for the second year running. In 2022, we also received the Gallup Exceptional Workplace Award, an accolade that celebrates companies that have a highly-engaged workforce and a performance-oriented culture. Additional details about our people-related strategies and initiatives supporting our Organisation of the Future are covered in the Our People section on page 74. Notes: (1) Growth rates and commentaries are provided on a constant exchange rate (CER) basis. (2) Throughout the Distribution section, VONB and VONB margin by distribution channel are based on local statutory reserving and capital requirements and exclude pension business. (3) AIA China’s financial results do not include any contribution from our 24.99 per cent shareholding in China Post Life Insurance Co., Ltd. (China Post Life). (4) ASEAN markets include the combined results of Thailand, Singapore, Malaysia, Vietnam, Indonesia, the Philippines, Cambodia, Myanmar and Brunei. (5) ANP and VONB for Other Markets include the results from our 49 per cent shareholding in Tata AIA Life Insurance Company Limited (Tata AIA Life). ANP and VONB do not include any contribution from our 24.99 per cent shareholding in China Post Life. The IFRS results of Tata AIA Life and China Post Life are accounted for using the equity method in Other Markets and Group Corporate Centre, respectively. For clarity, TWPI does not include any contribution from Tata AIA Life and China Post Life. (6) The results of Tata AIA Life are reported on a one-quarter-lag basis. The results of Tata AIA Life are accounted for using the twelve-month period ended 30 September 2022 and the twelve-month period ended 30 September 2021 in AIA’s consolidated results for the twelve-month period ended 31 December 2022 and the twelve-month period ended 31 December 2021, respectively. (7) Overall number of employees includes full-time and part-time employees as well as employees on contract, and excludes interns, agents of the Group and employees of our joint venture, Tata AIA Life, and employees of our associate, China Post Life. 066 BUSINESS REVIEWAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWFINANCIAL AND OPERATING REVIEW 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 supports safeguarding their interests and our ability to meet policyholders’ reasonable expectations. 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 reviews its risk management policy annually and in 2022, an updated RMF was approved by the Board. While there are no changes to the risk management approach, some updates were made for simplicity and clarity. The Group’s RMF consists of the following key components: • Risk Governance; • Risk Culture; • Risk Strategy and Appetite; • Risk Management Process; and • Risk Reporting, Systems and Tools. RISK 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 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 the Risk Owners and 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. The First Line is also responsible for operating an effective control environment, including mitigation of risks through implementation of controls. 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. 067 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONThe Second Line consists of the Group Chief Risk Officer (CRO), business unit CROs, and the Risk & Compliance function. This group ensures that the RMF remains appropriate and effective with respect to the risk profile and operations of the Group. This group is independent of, but works closely with, the First Line to ensure that risks are being managed appropriately within Risk Tolerances of the Group and the relevant business unit. Whilst the First Line is empowered with decision-making authority, the Second Line is responsible for overseeing First Line activities and ensuring that decisions are subject to an appropriate level of governance, as well as ensuring that the Group adheres to its own high standards. The 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 the RMF, including 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. RISK 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. 068 RISK MANAGEMENTAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWOperational 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 Risk 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. 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 generally consists of business unit management and is responsible for managing risks associated with their businesses. The Risk & Compliance function makes up our Second Line and is headed by the Group 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 or Regional CROs, and a secondary reporting line to the business unit 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 business unit Executive Committees. 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... and the Right Results will come”. RISK STRATEGY AND APPETITE Risk Strategy describes the types of risks, and how and to what extent they are taken in order to pursue the Group’s strategic and business objectives. The Group Risk Appetite Framework (RAF) establishes the quantum and nature of risks the Group is prepared to take to achieve its strategic and business objectives. 1. The Risk Appetite Statement (RAS) is an overarching statement on the enterprise’s attitude to risk; 2. Risk Principles and Risk Tolerances are qualitative statements and quantitative metrics that expand and validate the RAS; and 3. Risk Limits are used to manage specific risks. RISK APPETITE STATEMENT 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 for a pan-Asian life and health insurance group.” 069 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK PRINCIPLES AND RISK TOLERANCES 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.” Further granular risk limits, measures, indicators and tolerances are used to monitor and control specific risk types. RISK LANDSCAPE The Group maintains a detailed risk taxonomy to ensure all risks are identified and systematically managed. These risks are categorised in accordance with the risk landscape shown below. Operating Risks Financial Risks Liability Risks Operational Risk Business Risk Structural Risk Investment Risk Insurance Risk Conduct Risk Strategic Risk Property Risk* Mortality Risk Execution, Delivery & Process Management Risk Business Environment Equity Risk* External Event Risk Lapse Risk Credit Default Risk* Financial Crime Risk Expense Risk Credit Spread Risk* Disability / Morbidity Risk Pandemic & Catastrophe Risk Reinsurance Counterparty Risk Fraud Risk People Risk Data Risk Technology Risk Legal & Compliance Risk FX Risk Investment Counterparty Risk Interest Rate Risk Liquidity Risk * Risks may be structural, if the assets are used to back policyholder liabilities, or investment, if related to shareholder positions. l a p i c n i r P s k s i R s k s i R g n i y l r e d n U 070 RISK MANAGEMENTAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEW Principal Risk Definition Operational Risk Business Risk Structural Risk Investment Risk Insurance Risk The risk arising from internal processes, personnel and systems or from external events which may result in a direct or indirect business impact. This includes potential legal or regulatory sanctions, financial loss, or loss of reputation the Group may suffer as a result of a failure (or perceived failure) to comply with applicable laws, regulations or industry standards. The risk of loss, lower than anticipated or forgone business profits arising from greater- than-expected business expenses or a reduced revenue base. This may arise due to internal factors such as the business strategy, or from implications of the wider business environment over the planning horizon. The risk arising from changes in price, or volatility, of assets relative to the value of the liabilities. This includes the sensitivity of the balance sheet to market movements, such as foreign exchange and interest rates, as well as the ability to meet financial obligations, such as claims, debt servicing and dividends, when due. The risk of adverse market movements in assets, as well as indirect exposure through default of a counterparty, leading to a reduction in surplus. The risk of adverse movements in the value or trend of insurance liabilities arising from the biometric risks underwritten by the Group. The risk may manifest gradually over time or more suddenly from shocks or extreme events. Insurance risk includes changes to actuarial assumptions regarding future experience for these risks. RISK MANAGEMENT PROCESS The Group has a robust process that provides sufficient information, capability and tools to manage its key risks. Risks which the Group proactively accepts are identified, quantified and managed to support the creation of long- term value. RISK IDENTIFICATION AND ASSESSMENT 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. The Group’s Risk Landscape enables a consistent identification and classification of existing and emerging risks inherent in business activities. Quantification of risk is important in establishing the level of exposure and in determining the appropriate management actions within the Group’s Risk Tolerances. Specific approaches to quantifying risk are applied depending upon the nature of the risk, including regular capital assessments, and stress and scenario testing. MANAGEMENT AND RESPONSE Executives working in the First Line are responsible for the execution of appropriate actions and other risk mitigation strategies to transfer, mitigate or eliminate risks considered outside of Risk Tolerances. They are also responsible for the timely escalation of material risk developments. 071 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK MONITORING Risks are evaluated against approved Risk Tolerances and Risk Limits to ensure implications for both the current and forward-looking risk profile are understood and appropriately considered in decision-making. RISK CONTROLS Risks which the Group seeks to mitigate are managed through an effective internal controls system to maintain exposures within an acceptable residual level. The Operational Risk and Control Framework (ORCF) has been designed to ensure that the Group operates in accordance with the expectations of stakeholders. A primary component of the ORCF is the Risk and Control Assessment (RCA), which is a regular evaluation of the business’ operational risks and control effectiveness to ensure that information and perspectives on the internal control environment are appropriately considered. RISK REPORTING, SYSTEMS AND TOOLS Risk reporting represents the internal and external Risk and Compliance reporting processes which support an ongoing evaluation of the Group’s Risk Profile. Information is gathered from underlying systems and provided to the Board, respective Risk Committees and other executive management to inform key decision-making, such as via the annual Own Risk and Solvency Assessment (ORSA) report. EXECUTION OF THE RMF The Group has embedded its RMF into key business processes and decision-making, with the following priority areas: • Product lifecycle and approval: in evaluating the launch, revision and ongoing management of insurance products, the Group considers the potential financial and operational risks involved; • Strategic planning: the Group undertakes an annual planning process to develop and set its strategy and corporate objectives. The Risk & Compliance function assesses the impact of potential strategies on the Group’s risk profile and ensures that the strategies selected are in line with its Risk Appetite; • Investment management: whilst the Group seeks to realise positive returns, we carefully manage risks arising from our asset portfolio to ensure AIA maintains the financial flexibility needed to fund new business growth opportunities, support its planned dividend policy, pay claims and withstand capital market (or other) stress conditions; • Structural management: the timing and value of assets are matched with corresponding liabilities to ensure sufficient resources are available to meet liabilities as they fall due. Our asset allocation strategy is driven by the liability matching approach, which seeks to ensure that structural risks are managed carefully; and • Internal control: to ensure potential operational and compliance risk exposures arising from day-to-day business activities are subject to appropriate control and management within Risk Tolerances, the Group has embedded a robust approach to internal control as part of its ORCF. 072 RISK MANAGEMENTAIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWFINANCIAL AND OPERATING REVIEW REGULATORY AND INTERNATIONAL DEVELOPMENTS GROUP-WIDE SUPERVISION The Company was designated a “designated insurance holding company” under the HKIA’s group-wide supervision (GWS) framework on 14 May 2021. The GWS framework was developed to align with international standards and practices to supervise Hong Kong-domiciled Internationally Active Insurance Groups (IAIGs) and is reflective of the requirements of ComFrame, the Common Framework for the Supervision of IAIGs. Under the GWS framework, the HKIA has established group capital adequacy requirements, requirements for a group internal economic capital assessment (GIECA), for a group own risk and solvency assessment (ORSA), for a group recovery plan and for a group-wide risk and governance framework and controls. The HKIA also has direct regulatory powers over the Company including powers to approve a shareholder controller, a chief executive, a director and a key person in control function to hold a specified position, and powers to intervene, inspect and investigate. COMFRAME AND INSURANCE CAPITAL STANDARD Since 2019, the International Association of Insurance Supervisors (IAIS) has applied ComFrame. Pursuant to ComFrame, IAIGs are identified as insurance groups that meet minimum requirements with regard to the size and geographical footprint of their operations. The Group has accordingly been designated an IAIG. In 2020 the IAIS began the first of two phases in the development and implementation of the Insurance Capital Standard (ICS). Under the first phase, a “Reference ICS” is being assessed during a five-year Monitoring Period for reporting privately to group-wide supervisors. It is proposed that the second phase, beginning in 2025, will include implementation of the ICS as a group prescribed capital requirement. The IAIS is also collecting data on the “aggregation method” (AM), an alternative proposed by US regulators, that would define group solvency by referencing the local regimes to which a group is subject. The IAIS will make a determination by the end of the Monitoring Period whether the AM can be considered to produce “comparable outcomes” to the Reference ICS and therefore be used in its place. BEPS 2.0 AIA continues to closely monitor developments in respect of the tax policy work led by the Organisation for Economic Co-operation and Development (OECD) on the “Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy”, a phase of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project that is commonly referred to as “BEPS 2.0”, and constructively engages with governments and the OECD. In 2021, the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) published draft model rules to give effect to Pillar Two of BEPS 2.0, which imposes a global minimum effective tax rate on large multinational enterprise groups. The Inclusive Framework originally agreed that participating jurisdictions should enact these rules into law in 2022, with the majority of the rules to be effective from 2023. On 22 February 2023, it was announced in the Hong Kong Budget that Hong Kong will defer the application of Pillar Two, and also the introduction of a domestic minimum top-up tax, to start from 2025 onwards. This announcement follows similar deferrals in other jurisdictions (e.g., the European Union, the United Kingdom, South Korea and Switzerland, which have deferred until 2024, and Singapore, which has also deferred until 2025) and recognises the fact that the original target timeframe of 2023 would have been very difficult and costly for large multinational enterprise groups to comply with. Based on currently available information, BEPS 2.0 will apply to AIA from 2024 onwards and is likely to adversely impact AIA’s effective tax rate, however a number of material areas remain unclear. 073 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONOUR PEOPLE At AIA, we firmly believe our greatest asset is our people(1). They span multiple geographies and communities, and make up the culture of our business, delivering on our Purpose to help millions of people across Asia to live Healthier, Longer, Better Lives. Nurturing our culture, building leaders and workforce capability, and supporting and developing our people so that they can achieve their potential are key organisational and people priorities for AIA. Our organisation and people strategy enables us to attract, retain and develop outstanding people, making AIA an employer of choice across our markets. NURTURING OUR CULTURE With our unparalleled history of operations in Asia and as the region emerges from the challenges of the global pandemic, we are mindful that our culture brings us together and sets us apart from our competitors. Our people matter, and we have built an inclusive and engaging environment to support our employees and provide a foundation that helps them thrive, both professionally and personally. At AIA, we are guided by our Operating Philosophy of “Doing the Right Thing, in the Right Way, with the Right People… and the Right Results will come”. By acting with our deep-rooted Leadership Essentials of Clarity, Courage and Humanity, we demand and champion a better way. Our Purpose of helping millions of people live Healthier, Longer, Better Lives guides the decisions and actions that our people make every day and inspires us to support and protect the well-being of those we serve. Our operating model of empowerment within a framework, together with the principles that underpin our culture, create an engaging environment for our employees to deliver on our people proposition of Believe in Better. EMPLOYEE ENGAGEMENT Offering a collaborative and inclusive workplace that prioritises employee engagement is a key priority. At AIA, everyone is expected to act like an owner, to have a voice, to take decisions and make an impact. We monitor levels of engagement across our business units and functions each year through the Gallup Q12 employee engagement survey. This exercise provides meaningful inputs that enable us to continue building on our strong levels of engagement through the development of targeted and impactful strategies. In 2022, 97 per cent of our people responded to the survey and the Group’s employee engagement scores placed AIA at the 94th percentile of Gallup’s global finance and insurance industry benchmark. We are proud that our employee engagement levels are in the top quartile of this benchmark for the sixth consecutive year, and in the top 10th percentile for the second consecutive year. We are also proud to have received the Gallup Exceptional Workplace Award this year, in recognition of our highly engaged workforce and performance-oriented culture. BUILDING FUTURE LEADERS Our leaders play a key role in strengthening our culture and sustaining employee engagement. AIA is committed to developing strong internal leadership capability, with a succession pipeline that drives personal growth for our people, shapes our organisation, and ultimately supports sustainable business growth. LEADERSHIP DEVELOPMENT We provide leading talent development programmes through the AIA Leadership Centre (ALC), our world-class learning facility in Bangkok, Thailand, both in person and virtually. The ALC collaborates with world-renowned business schools and consulting firms to deliver customised programmes focused on AIA’s strategic priorities to our senior leaders, top agency leaders and key partner executives. 074 AIA GROUP LIMITEDFINANCIAL AND OPERATING REVIEWWe continue to strengthen our approach to leadership development and, consequently, our talent pipeline through our four signature programmes. These programmes develop our leaders at different stages of their careers from experienced, seasoned leaders to new managers. Our “SPARK” and “Leading Across Boundaries” programmes support the development of future senior leaders in our business units and senior Group Office leadership roles. We also support the development of existing and aspiring senior leaders through our “Voyage” and “ASPIRE” programmes. SUCCESSION AND ORGANISATION PLANNING Our annual Group Organisation and People Review process identifies different talent segments to enable leaders to plan for the succession of all key leadership roles. The success of our targeted approach to talent development and succession planning is evidenced by the many examples of internal key leadership role appointments across the Group. We also continue to enrich our leadership pipeline by attracting top leadership talent from different backgrounds, with the skills needed to shape and drive our future organisation. BUILDING A FUTURE READY WORKFORCE Building workforce capability and developing our people so they can achieve their potential is a key focus for AIA. We continue to invest in attracting talent and incubating capabilities in core business lines, strengthening our approach to capability building and designing new training programmes to reskill and upskill employees. Between 1 July 2020 and 31 December 2022, we invested in technology, digital and analytics capabilities, resulting in an increase of 63 per cent(2) in our overall number of employees with these skill sets. This material and ongoing investment marks a step-change in our capabilities and underpins our ability to execute our overall growth strategy. LEARNING AND DEVELOPMENT Our learning culture actively supports people in their current roles, while providing a platform for growth and development within AIA. Our focus on learning is a key part of our ambition to ensure our people can upskill, reskill, work more flexibly and adapt to the changing world of work. We take a holistic approach to learning and development that includes knowledge and skills accumulated from on-the-job experiences, mobility, collaborative projects, structured virtual lessons and digital self-learning, supported by mentoring and coaching. We believe that career mobility and assignments in different business units or functions provide our employees with new opportunities. These assignments serve as platforms to learn new skills and help develop the individual’s AIA network. To ensure that we continue to develop talent for the future, we continuously research the skills and knowledge requirements of our industry and review feedback from our employees, to design the programmes that address these needs. In addition, our people are required to regularly complete mandatory training on a range of technical, governance and conduct-related topics. We have launched, and are in the process of designing, additional programmes to incubate new talent capabilities and upskill employees in core lines of business across the Group including: • The AIA Analytics Academy which focuses on building data analytics and business analysis capability across all levels in AIA. The “Converge” learning journey is a bespoke 10-month reskilling programme with apprenticeship opportunities for employees. We also upskill senior leaders with a stronger understanding of the power of analytics through the “Analytics for Leaders” programme. Notes: (1) As at 31 December 2022, AIA had a total of 25,405 employees, which includes full-time and part-time employees on permanent and fixed-term contracts, and excludes interns, agents of the Group, employees of our joint venture Tata AIA Life, and employees of our associate China Post Life. (2) Includes full-time and part-time employees on permanent and fixed-term contracts, and excludes interns, agents of the Group, employees of our joint venture Tata AIA Life, and employees of our associate China Post Life. 075 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION• The AIA Agile Academy which currently provides two reskilling programmes, the “Agile Practitioner” and the “Agile Team Lead”, to help AIA build internal capability to drive business transformation. • The AIA Distribution Leadership Programme which provides a platform for our most senior distribution leaders to further develop their distribution skill sets. Digital content and delivery methods play an important role in shaping a culture of continuous learning at AIA. All our business units provide employees with access to the AIA Learning Hub, an online platform which provides access to thousands of digital learning courses. EMPLOYEE COACHING AND INTERNSHIPS Our leadership programmes include a module on employee coaching and we encourage our employees to expand their networks, seek guidance and foster communication across different departments and seniorities. Across our business units, we also offer development opportunities for internships. Our programmes provide interns with first-hand experience of what a career at AIA is like and an opportunity to learn critical skills in a fast-moving and customer-focused environment. These programmes also enable us to identify future talent for our business. RECOGNISING AND REWARDING OUR PEOPLE AIA is committed to supporting our employees in their ongoing performance development as well as providing fair and equitable performance evaluation to recognise their contribution and achievement of results. Our performance management framework encourages robust dialogues on individual and team progress throughout the year. Our people managers assess performance impact and behaviours of their teams and recommend development activities that will assist with their professional development and growth. We focus on What employees have accomplished and, just as importantly, How they achieved their goals. We also aim to reward all employees competitively and fairly, irrespective of gender, ethnicity, age, disability or other non-performance related factors to attract, engage and retain our diverse talent. We believe that our existing reward programmes are well-received by employees for their clarity, transparency and market alignment. In addition, our Employee Share Purchase Plan provides our employees with an opportunity to purchase AIA shares and receive matching shares over time during their employment with us. EMBEDDING OUR PURPOSE The health and well-being of our people and their families is a key priority for the Group. Our Group-wide benefits and workforce well-being programmes help our employees and their families live Healthier, Longer, Better Lives. We encourage employees to stay active, understand their health profile and take steps to safeguard their well-being. We provide our employees with access to WorkWell with AIA, a holistic employee well-being offering for our corporate customers, designed to support the physical, mental, social and financial health of employees through a range of initiatives, employee benefits and tools. Internally we call this WellBeing@AIA, and the programme is tailored to the needs of each business unit, which may include well-being learning sessions, on-site and virtual health activities. SUPPORTING A DIVERSE AND INCLUSIVE CULTURE AIA’s diversity, which encompasses talented people from a range of backgrounds, is one of our strengths. We foster an inclusive workplace that fully embraces and celebrates differences, and encourages open, constructive dialogues. Across our markets, we actively encourage and seek out diverse perspectives because we believe that this results in greater innovation, better decision-making, increased adaptability and improved problem solving. 076 AIA GROUP LIMITEDOUR PEOPLEFINANCIAL AND OPERATING REVIEWAs part of their onboarding, all employees joining AIA are required to complete training on AIA’s Code of Conduct, which includes our approach to inclusion and non-discrimination. In addition, we have an anti-harassment policy and e-learning module on unconscious bias and anti-harassment for all employees, outlining expected workplace conduct and professionalism, including channels for escalation. In line with our Code of Conduct, AIA has zero tolerance for harassment, or discrimination in any form, including on the basis of race, colour, religion, gender, nationality, age, disability, military service, marital status or sexual orientation. We aim to create an inclusive workplace for all and are proud to be an employer of choice for women across the region. Women represented 58 per cent of our employee population(3) and 42 per cent of our senior leaders across the Group as at 31 December 2022. AIA was also recently included in the 2023 Bloomberg Gender-Equality Index, demonstrating our commitment to a diverse and inclusive workplace. We recognise the importance of understanding different generational needs when shaping policies and practices and also aim to create an inclusive workplace for all age groups. As at 31 December 2022, 68 per cent of our employees were Gen Y and Gen Z(4). We continue to facilitate professional and personal development and support an inclusive and engaging workplace through local employee-led and executive-sponsored networks to bring people together. We held numerous initiatives at Group level and across our markets this year to elevate employee awareness about diversity, equity and inclusion. In multiple markets, colleagues were invited to come together to support the LGBTQ community and allies during Pride Month. The diversity of cultural and national backgrounds of our employees enriches AIA’s social fabric with over 75 nationalities represented across AIA as at 31 December 2022. AIA also values diverse perspectives for effective governance and decision-making. At a senior level, having diverse perspectives on our Board through the range of nationalities and backgrounds represented reflects our different communities and improves our governance and decision-making processes. RECOGNISED AS AN EMPLOYER OF CHOICE In 2022, our continued focus on our people has resulted in several local and global accolades, including: • AIA received the “Gallup Exceptional Workplace Award” from Gallup. • AIA China was awarded the “Top Employer China” by Top Employers Institute. • AIA Hong Kong was recognised in “Best Companies to Work for in Asia” by HR Asia. • AIA Malaysia was the insurance sector winner in “Malaysia’s 100 Leading Graduate Employers” awards by GTI Media and “Champion” for 5 consecutive years in the insurance sector of “Graduate’s Choice Award” by Talentbank. • AIA Singapore was recognised as one of “Singapore’s 100 Leading Graduate Employers” by GTI Media. • AIA Thailand was certified as a “Best Place to Work” by Best Places to Work. • AIA Vietnam was certified as a “Great Place To Work” by Great Place to Work. • AIA Vietnam, AIA Taiwan and AIA Cambodia were awarded “Best Companies to Work for in Asia” by HR Asia. • AIA Sri Lanka was recognised in “Best Workplaces in Sri Lanka” and “Best Workplaces for Women in Sri Lanka” by Great Place to Work. Additional details about our People and Culture initiatives are contained in our Environmental, Social and Governance Report 2022 which can be found on www.aia.com. Notes: (3) Includes full-time and part-time employees on permanent and fixed-term contracts, and excludes interns, agents of the Group, employees of our joint venture Tata AIA Life, and employees of our associate China Post Life. (4) Gen Y is defined as the generation born between 1981 and 1996 and Gen Z is defined as the generation born from 1997 onwards. 077 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCORPORATE GOVERNANCE 079 Statement of Directors’ Responsibilities 080 Board of Directors 088 Executive Committee 093 Report of the Directors 106 Corporate Governance Report 122 Remuneration Report 078 AIA GROUP LIMITEDCORPORATE GOVERNANCE 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 judgements and estimates that are reasonable and prudent; • state whether the consolidated financial statements have been prepared in accordance with HKFRS and IFRS; and • prepare the consolidated 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 as set out on pages 93 to 121 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 HKFRS and IFRS, 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. Under the group-wide supervision (GWS) framework by the Hong Kong Insurance Authority, AIA is expected to have in place a corporate governance framework which provides for the sound and prudent management and oversight of the Group’s businesses including in regard to the protection of the interests of policyholders of the insurers within the Group. As such, the Board strives to oversee the implementation of the corporate culture, business objectives and strategies for achieving those objectives, in line with the long-term interests and viability of the Group. The Board is required, among other requirements, to ensure there is an appropriate number and mix of individuals with sufficient knowledge and experience commensurate with its governance structure. Under the GWS framework, the Board provides oversight in respect of the design and implementation of risk management and internal controls across the Group. This includes having a framework to take effective measures to deter, prevent, detect, report and remedy non-compliance with relevant legal and regulatory requirements and fraud in insurance. The Group has also adopted a remuneration policy which does not induce excessive or inappropriate risk taking. In summary, the Board exercises independent judgement and objectivity in its decision-making, taking due account of the interests of the Group and its policyholders. 079 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBOARD OF DIRECTORS MR. JOHN BARRIE HARRISON MS. SUN JIE (JANE) DR. NARONGCHAI AKRASANEE MR. JACK CHAK-KWONG SO MR. EDMUND SZE-WING TSE MR. LEE YUAN SIONG 080 AIA GROUP LIMITEDCORPORATE GOVERNANCEMR. CHUNG-KONG CHOW MS. SWEE-LIAN TEO PROFESSOR LAWRENCE JUEN-YEE LAU MR. CESAR VELASQUEZ PURISIMA MR. GEORGE YONG-BOON YEO 081 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT NON-EXECUTIVE CHAIRMAN AND INDEPENDENT NON-EXECUTIVE DIRECTOR Mr. Edmund Sze-Wing TSE Aged 85, 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 the period for over 60 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 AIA Philippines Life and General Insurance Company Inc. (formerly known as 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), a director of Bridge Holdings Company Limited (formerly known as PineBridge Investments Limited) and the non-executive Chairman of PineBridge Investments Asia Limited. Mr. Tse is also a member of the membership committee and a fellow of the Hong Kong Academy of Finance. He served as 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. LEE Yuan Siong Aged 57, is an Executive Director and the Group Chief Executive and President of the Company, having been appointed on 1 June 2020. Mr. Lee is also a member of the Risk Committee of the Company. He joined the Group in March 2020 and has more than 30 years of experience in the insurance sector. He is a director of various companies within the Group including acting as Chairman and Chief Executive Officer of AIA Co. Prior to his current role, Mr. Lee was an executive director of Ping An Insurance (Group) Company of China, Ltd. from June 2013 and served as the company’s co-CEO and Chief Insurance Business Officer. Before joining Ping An, Mr. Lee held a number of senior leadership positions with Prudential plc of the United Kingdom, including President of CITIC-Prudential Life Insurance Company Limited, a life insurance joint venture in Mainland China. He also has significant experience across a number of Asian markets including Hong Kong SAR, India, Indonesia, Taiwan (China), Thailand and Vietnam. Mr. Lee began his career at the Monetary Authority of Singapore. He has been a Director and appointed as Vice Chairman of The Geneva Association since November 2021. He has also been a member of the Hong Kong Academy of Finance since 2020. He holds a Master of Philosophy (Finance) degree from the University of Cambridge and is a Fellow of the Society of Actuaries (US). 082 AIA GROUP LIMITEDCORPORATE GOVERNANCEBOARD OF DIRECTORSINDEPENDENT NON-EXECUTIVE DIRECTORS Mr. Jack Chak-Kwong SO Aged 77, is an Independent Non-executive Director of the Company. He was appointed as 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 a member of the Audit Committee, the Nomination Committee and the Remuneration 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. Mr. So was previously an independent senior advisor to Credit Suisse, Greater China from January 2008 to October 2022, a non-official member of the Chief Executive’s Council of Advisers on Innovation and Strategic Development from March 2018 to June 2022 and 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 72, is an Independent Non-executive Director of the Company, having been appointed on 28 September 2010. He is also a member of the Nomination Committee and the Risk Committee of the Company. Mr. Chow was appointed as the Chairman of the Advisory Committee on Admission of Quality Migrants and Professionals of the HKSAR from 1 July 2016, a non-official member of the Human Resources Planning Commission of the HKSAR Government from 1 April 2018, a member of the InnoHK Steering Committee from 4 February 2019 and the Chairman of the Urban Renewal Authority Board from 1 May 2019. He is also an independent non-executive representative of EYG Global Governance Council. Mr. Chow was knighted in the United Kingdom for his contribution to industry in 2000 and was awarded the Gold Bauhinia Star and the Grand Bauhinia Medal by the HKSAR Government in 2015 and 2021, respectively. Mr. Chow was also a non-official member of the Executive Council of the HKSAR from 2012 to 2022, a member of the Financial Leaders Forum set up by the HKSAR Government from 2017 to 2022, 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. 083 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONMr. John Barrie HARRISON Aged 66, is an Independent Non-executive Director of the Company, having been appointed on 1 July 2011. He is also a member of the Audit Committee, the Nomination Committee and the Risk Committee of the Company. He also acts as a Board Representative at the ESG Committee, a management 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 was appointed an Honorary Court Member of The Hong Kong University of Science and Technology with effect from 20 September 2016. Mr. Harrison was an independent non-executive director of Grosvenor Asia Pacific Limited from 2017 to 2022; an independent non-executive director of BW Group Limited from 2010 to 2020 and the Vice Chairman of BW LPG Limited from 2013 to 2020. 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 2012 to May 2015, he was also a member of the Asian Advisory Committee of AustralianSuper Pty Ltd. 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. 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 68, is an Independent Non-executive Director of the Company, having been appointed on 2 November 2012. He is also the Chairman of the Remuneration Committee and a member of the Audit Committee and the Nomination Committee of the Company. Mr. Yeo is an independent director of Pinduoduo Inc. (listed on the Nasdaq Global Select Market) and an independent non-executive director of Creative Technology Ltd (listed on the Singapore Exchange). He has been a member of Global Advisory Board of Mitsubishi UFJ Financial Group, Inc. since July 2019. 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 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. He was a member of the Vatican Council for the Economy from 2014 to 2020 and a member of the International Advisory Committee of Mitsubishi Corporation from 2014 to 2022. Mr. Yeo was previously the Chairman, an executive director and a senior advisor of Kerry Logistics Network Limited (listed on the Hong Kong Stock Exchange) from 2012 to 2019, from 2013 to 2019, and from 2019 to 2021 respectively. He was also a director of Kerry Holdings Limited from 2016 to 2019; a senior advisor of Kerry Group Limited from 2019 to 2021; as well as a director of New Yangon Development Company Limited from 2017 to 2021. During 2013 to 2014, Mr. Yeo was a member of the Pontifical Commission for Reference on the Economic-Administrative Structure of the Holy See. During 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. During 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. 084 AIA GROUP LIMITEDCORPORATE GOVERNANCEBOARD OF DIRECTORSProfessor Lawrence Juen-Yee LAU Aged 78, 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 (listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange; and previously listed on the New York Stock Exchange) and Semiconductor Manufacturing International Corporation (listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange; and previously listed on the New York Stock Exchange). He is also an independent non-executive director of 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 Currency Board Sub-committee of the Exchange Fund Advisory Committee of the HKSAR, a non-official member of Candidate Eligibility Review Committee of the HKSAR and a non-official member of the board of directors of Hong Kong Investment Corporation Limited. In addition, he serves as a Fellow of the Hong Kong Academy of Finance; a Director of the Chiang Ching-Kuo Foundation for International Scholarly Exchange, Taipei; and the C.V. Starr Distinguished Fellow of China Development Research Foundation, Beijing since 2019. He was formerly a member of the Exchange Fund Advisory Committee of the HKSAR, Chairman of its Governance Sub-committee and a member of its Investment Sub-committee until 2019; a Vice Chairman of China Center for International Economic Exchanges, Beijing until 2021; a member and Chairman of the Prize Recommendation Committee of the LUI Che Woo Prize Limited, from 2015 to 2021; as well as a member of the Hong Kong Trade Development Council Belt and Road & Greater Bay Area Committee, from 2019 to 2021. He was appointed a Justice of the Peace by the HKSAR Government in 2007 and awarded the Gold Bauhinia Star by the HKSAR Government in 2011. From 2004 to 2010, Professor Lau served as Vice-Chancellor (President) of CUHK. From 2009 to 2012, he served as a Non-official Member of the Executive Council of the HKSAR. He was appointed Chairman of CIC International (Hong Kong) Co., Limited, a wholly-owned subsidiary of China Investment Corporation, in November 2010 and retired from the position in September 2014. He was a member of the 11th and 12th National Committees of the Chinese People’s Political Consultative Conference from 2008 to 2012 and from 2013 to 2018 respectively, a Vice-Chairman of the Sub-committee of Population, Resources and Environment, from 2010 to 2013, and a Vice-Chairman of the Sub-committee of Economics from 2013 to 2018. From 2014 to 2020, he was an independent non-executive director of Hysan Development Company Limited (listed on the Hong Kong Stock Exchange). 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. 085 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONMs. Swee-Lian TEO Aged 63, is an Independent Non-executive Director of the Company, having been appointed on 14 August 2015. She is also the Chairman of the Risk Committee and a member of the Nomination Committee of the Company. She also acts as a Board Representative at the ESG Committee, a management 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 the Chairman of the board, non-executive independent director and the Chairman of the Nominating and Remuneration Committee of CapitaLand Integrated Commercial Trust Management Limited (listed on the Singapore Exchange) and a non-executive director 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. and Clifford Capital Holdings Pte. Ltd. Ms. Teo has over 27 years of experience with the 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 77, 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 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. 086 AIA GROUP LIMITEDCORPORATE GOVERNANCEBOARD OF DIRECTORSMr. Cesar Velasquez PURISIMA Aged 62, is an Independent Non-executive Director of the Company, having been appointed on 1 September 2017. He is also the Chairman of the Audit Committee and a member of the Nomination Committee and the Risk Committee of the Company. Mr. Purisima currently serves as an independent director of Bank of the Philippine Islands (BPI), Ayala Corporation, Ayala Land, Inc., Universal Robina Corporation and Jollibee Foods Corporation, all of which are listed on The Philippine Stock Exchange. He is also an independent director of BPI Capital Corporation, a wholly owned subsidiary of BPI, a founding partner of Ikhlas Capital Singapore Pte. Ltd., a member of the Global Advisory Council of Sumitomo Mitsui Banking Corporation, and a member of Singapore Management University’s International Advisory Council in the Republic of the Philippines (the Philippines). He also serves on the board of trustees of the International School of Manila. He is an Asia Fellow at the Milken Institute, a global, non-profit, non-partisan think tank. Mr. Purisima served in the government of the Philippines as Secretary of Finance from July 2010 to June 2016 and as Secretary 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 the 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 has served on the board of trustees of the World Wildlife Fund – Philippines and De La Salle University until October 2022 and December 2022 respectively. 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. Ms. SUN Jie (Jane) Aged 54, is an Independent Non-executive Director of the Company, having been appointed on 1 June 2021. She is also a member of the Audit Committee, the Nomination Committee and the Remuneration Committee of the Company. Ms. Sun is the Chief Executive Officer and a member of the board of directors of Trip.com (listed on the Hong Kong Stock Exchange and the Nasdaq Global Select Market), one of the leading global travel services companies that operates the sub-brands Trip.com, Ctrip, Skyscanner and Qunar. She is also a director of Tripadvisor, Inc. and MakeMyTrip, both listed on the Nasdaq Global Select Market. Ms. Sun was previously an independent director of iQIYI, Inc. (listed on the Nasdaq Global Select Market) and TAL Education Group (listed on the New York Stock Exchange). Ms. Sun has extensive experience in operating and managing online businesses, mergers and acquisitions, and financial reporting and operations. Ms. Sun was named one of Fortune’s Top 50 Most Powerful Women in Business for four consecutive years from 2017 to 2020. In 2019, she was named in the Forbes World’s Most Powerful Women List and awarded the Asia Game Changer Award by Asia Society. She was also named one of Emergent 25 Asia’s Latest Star Businesswomen in 2018, and one of the Most Influential and Outstanding Businesswomen in China in 2017 by Forbes. Ms. Sun received her Bachelor’s degree from the business school of the University of Florida with high honors. She also obtained a LLM degree from Peking University Law School. She is a member of the American Institute of Certified Public Accountants. 087 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONEXECUTIVE COMMITTEE DR. MARK KONYN MS. CARA ANG MR. MITCHELL NEW MR. LEO GREPIN MR. JACKY CHAN MR. LEE YUAN SIONG 088 AIA GROUP LIMITEDCORPORATE GOVERNANCEMR. GARTH JONES MR. TAN HAK LEH MR. STUART A. SPENCER MS. JAYNE PLUNKETT MR. BISWA MISRA 089 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONMr. LEE Yuan Siong Mr. Lee’s biography is set out above. Mr. Garth Brian JONES Aged 60, 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 also responsible for the Group’s business operating in India. He is a director of various companies within the Group, including Tata AIA Life, 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 his 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 and Faculty of Actuaries. Mr. Jones is also a member of the IFRS Advisory Council of the IASB. Mr. Wing-Shing CHAN (Jacky) Aged 59, is the Regional Chief Executive and Group Chief Distribution Officer responsible for the Group’s businesses operating in Mainland China, Hong Kong SAR, Macau SAR, South Korea, Taiwan (China), as well as the Group’s agency distribution, partnership distribution, corporate solutions and digital platform partnerships. 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 35 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). Mr. TAN Hak Leh Aged 57, is the Regional Chief Executive responsible for the Group’s businesses operating in Thailand, Singapore, Brunei, Malaysia, Cambodia, Myanmar, Vietnam and Sri Lanka. He is a director of various companies within the Group. Mr. Tan was Chief Executive Officer of AIA’s operation in Thailand from 2016 to 2019, Group Chief Risk Officer in 2015 and Chief Executive Officer of AIA’s operation in Singapore from 2011 to 2015. Prior to joining the Group, Mr. Tan was Chief Executive Officer of Great Eastern Life, Singapore. Prior to joining Great Eastern Life, Mr. Tan was Director of the Insurance Department of the MAS. Mr. Tan has played an active role in the life insurance industry since 2005. His appointments include: President of the Life Insurance Association (LIA), Singapore from 2010 to 2013, Vice Chair of Singapore College of Insurance from 2011 to 2013 and Vice President of Thailand Life Assurance Association from 2017 to 2018. He was also a board member of Financial Industry Disputes Resolution Centre Ltd from 2008 to 2015. 090 AIA GROUP LIMITEDCORPORATE GOVERNANCEEXECUTIVE COMMITTEEMr. Leo Michel GREPIN Aged 47, is the Regional Chief Executive and Group Chief Strategy Officer responsible for the Group’s businesses operating in Australia, New Zealand, Indonesia and the Philippines as well as leading the Group’s Strategy and Corporate Development functions. Mr. Grepin joined the Group in January 2022. Prior to joining the Group, Mr. Grepin was President of Sun Life, Asia. Before joining Sun Life, he was at Bridgewater Associates, a global hedge fund, where he led the team managing portfolio construction and trade generation. He also spent 15 years at McKinsey & Company and led the global client service teams serving several multinational insurers and asset managers as Senior Partner. Mr. Grepin has a Master of Science in Aeronautics and Astronautics from the Massachusetts Institute of Technology and a Bachelor of Engineering in Mechanical Engineering (Hons) from McGill University. Mr. Mitchell David NEW Aged 59, is the Group General Counsel responsible for providing leadership to legal and corporate governance functions within Group Office and the country operations. He also has executive responsibility for the Group’s ESG Programme, including acting as Chairman of the Group’s ESG Committee. He has previously also acted as Group Chief Risk Officer. He is a director of various companies within the Group including AIA International, AIA Reinsurance Limited, as well as the Group’s operating subsidiaries in Singapore, Vietnam, Indonesia and the Philippines. He joined the Group in April 2011. Prior to joining the Group, Mr. New occupied various senior roles with Manulife Financial, including Senior Vice President and Chief Legal Officer for Asia and Japan, based in Hong Kong and Senior Vice President and General Counsel to Manulife’s Canadian division. He also practised law with Fasken Martineau in Canada where he is a qualified barrister and solicitor and member of the Law Society of Upper Canada. He 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. Dr. Mark KONYN Aged 61, is the Group Chief Investment Officer responsible for providing oversight of 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 and AIA Investment Management HK 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. Pek-San ANG (Cara) Aged 54, 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. 091 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONMr. Biswa Prakash MISRA Aged 45, is the Group Chief Technology and Life Operations Officer responsible for providing leadership to the Group’s technology, digital and analytics areas as well as Group Operations and Operations Shared Services. 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 Anthony SPENCER Aged 57, is the Group Chief Marketing Officer and oversees customer engagement, propositions, branding, AIA Vitality, communications, sponsorships, events, and marketing digitalisation – as well as AIA’s Integrated Health Strategy, supporting AIA’s ambition to make healthcare more accessible, more affordable and more effective for its customers. He is a director of various companies within the Group and serves as Chairman of Amplify Health Asia Pte. Limited, AIA’s Health InsurTech business in partnership with Discovery Limited. Mr. Spencer occupied numerous leadership roles at AIG and AIA from 1996 to 2009, in the United States, Latin America and in Asia where he served as global President of Accident & Health Worldwide for the AIG Life Companies. Mr. Spencer re-joined AIA in May 2017 from Zurich Insurance Group, where he was CEO, General Insurance, Asia Pacific. Mr. Spencer started his career in New York at American Express Travel Related Services in Marketing. He is an alumnus of the Harvard Business School, The Fletcher School of Law and Diplomacy and Brandeis University. Ms. Jayne Lynn PLUNKETT Aged 53, is the Group Chief Risk Officer responsible for the Group’s risk and compliance functions. She is a director of various companies within the Group, including Tata AIA Life, AIA Singapore Private Limited and AIA Philippines Life and General Insurance Company Inc. (formerly known as The Philippine American Life and General Insurance (PHILAM LIFE) Company). Ms. Plunkett joined AIA in November 2019 from Swiss Re, where she was most recently Chief Executive Officer Reinsurance Asia, Regional President Asia and member of the Group Executive Committee. During her time with Swiss Re, she held several senior positions, including Head of Casualty Underwriting for Asia and Division Head Casualty Reinsurance. Prior to that, she was with GE Insurance Solutions. Ms. Plunkett holds a Bachelor of Science in Business Administration from Drake University. She is a Fellow of the Casualty Actuarial Society (FCAS) and a member of the American Academy of Actuaries (MAAA). 092 AIA GROUP LIMITEDCORPORATE GOVERNANCEEXECUTIVE COMMITTEECORPORATE GOVERNANCE REPORT OF THE DIRECTORS The Board is pleased to present this report and the audited consolidated financial statements of the Company for the year ended 31 December 2022. PRINCIPAL ACTIVITIES The Group is a life insurance based financial services provider operating in 18 markets throughout Asia. The Group’s principal activity is the life insurance business. In that context, the Group, through its various operating entities, provides individual life insurance, individual accident and health insurance and savings plans throughout Asia. The Group also distributes related investment and other financial services products to its customers and is active in the provision of group insurance and pension schemes in a number of its markets. Details of the activities and other particulars of the Company’s principal subsidiaries are set out in note 43 to the consolidated financial statements. RESULTS The results of the Group for the year ended 31 December 2022 and the state of the Group’s affairs at that date are set out in the consolidated financial statements on pages 149 to 263 of this Annual Report. BUSINESS REVIEW The review of the business of the Group for the year ended 31 December 2022, 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 Group Chief Executive and President’s Report (pages 19 to 24), Group Chief Financial Officer’s Review (pages 26 to 51), Business Review (pages 52 to 66), Risk Management (pages 67 to 72) and Our People (pages 74 to 77) sections in this Annual Report, and note 42 and note 44 to the consolidated financial statements. 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 has voiced its support for the Paris Agreement by becoming a signatory to the Task Force on Climate-related Financial Disclosures (TCFD) in 2018. We continue to take initiatives to understand the risks posed to our insurance and investment operations from climate change, and continue to report against the TCFD recommendations in the Group’s Environmental, Social and Governance (ESG) Report 2022. The Group became a signatory to the Principles for Sustainable Insurance in 2021 (Principles), a global sustainability framework under the United Nations Environment Programme Finance Initiative. The Principles are designed to address material ESG risks and opportunities and underpin one of the largest collaborative initiatives between the United Nations and the global insurance industry. We monitor our operational impact. In 2021, the Group announced its commitment to achieve net-zero greenhouse gas (GHG) emissions by 2050. AIA has also committed to the Science Based Targets initiative (SBTi), a global body enabling businesses to set ambitious emissions reduction targets in line with the latest climate science. AIA’s Science Based Targets (SBT) will be in line with the latest climate science necessary to meet the goals of the Paris Agreement. These five-to-ten-year targets will be reviewed every five years. We are currently working towards baselining our operational and investment emissions to submit to the SBTi by December 2023. The Group Environmental Procedures provide guidance and outline initiatives to reduce our environmental footprint. 093 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONAIA also continues to monitor environmental regulation and opportunities in the area of green finance, and engages with companies in the Group’s investment portfolio on ESG issues. With respect to ESG for the investment function, ESG considerations have been structurally embedded through our Investment Standards on ESG, research process, and proxy voting. An internal ESG scoring methodology has also been devised for assessing third-party investment managers and third-party managed funds. The Group also achieved the complete divestment of directly-managed listed equity and fixed income exposure to coal mining and coal-fired power businesses in 2021, seven years ahead of schedule. Customer privacy and data protection are of paramount importance to the Group. In 2022, AIA continued to maintain ISO 27001 certification for our identity access management cybersecurity and cloud security controls. 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. The Company has also entered into insurance policies which cover, among others, information security risks. People are at the heart of our business, and this means ensuring that we adhere to the high standards of quality and customer service expected by our customers. Helping our customers improve their health requires that we better understand their needs. To that end, we conduct research to understand the needs of various customer segments and forge strategic partnerships in order to customise our products and services. During the fourth and fifth wave of the COVID-19 pandemic, we continued to prioritise the needs of our customers, supporting them with extended coverage, digital health solutions, expanded virtual healthcare access and solutions that address mental well-being. AIA’s Supplier Code of Conduct outlines how we consider and integrate sustainability issues within our supply chain management process. As a Group, we work with suppliers that demonstrate best practice. Dedicated due diligence processes form a part of our existing supply chain management and monitoring system. This includes requesting information on employment and environmental practices from selected material suppliers through our supplier registration process. We have also committed to assess our Tier 1 suppliers on their ESG performance this year. To understand more about our progress on ESG initiatives, please refer to our ESG Report 2022, which has been published on the websites of both the Hong Kong Exchanges and Clearing Limited and the Company. 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, market conduct, investment management, financial reporting and distribution. The Group dedicates substantial resources and appropriate personnel to support compliance with relevant laws and regulations. AIA has monitored during the year ended 31 December 2022 the Group’s compliance 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 consolidated financial statements. Please see the Corporate Governance Report for a discussion on the Company’s 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 2022 are set out in note 44 to the consolidated financial statements. 094 AIA GROUP LIMITEDCORPORATE GOVERNANCEREPORT OF THE DIRECTORSDIVIDENDS An interim dividend of 40.28 Hong Kong cents per share for the six-month period ended 30 June 2022 (2021: 38.00 Hong Kong cents per share) was paid on 29 September 2022. The Board has recommended an increase of 5 per cent in the payment of a final dividend to 113.40 Hong Kong cents per share for the year ended 31 December 2022 (2021: 108.00 Hong Kong cents per share), consistent with AIA’s established prudent, sustainable and progressive dividend policy. Under the respective trust deeds of the Company’s restricted share unit schemes, employee share purchase plans and agency share purchase plans, Shares are held in trust by the trustee of each of these schemes or plans. These Shares are held against the future entitlements of scheme/plan participants. Provided the Shares 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 13 September 2022 (being the record date of the 2022 interim dividend), the trustee held 73,759,701 Shares under the Company’s restricted share unit schemes, employee share purchase plans and agency share purchase plans. The amount of interim dividend payments waived was approximately US$1.49 million. Pursuant to the relevant trust deeds, the trustee will waive the right to final dividend payment if it is declared. Subject to Shareholders’ approval at the AGM to be held by the Company, the final dividend will be payable on Friday, 9 June 2023 to Shareholders whose names appear on the register of members of the Company at the close of business on Wednesday, 24 May 2023, being the record date for determining the entitlements to the final dividend. DIRECTORS The Directors of the Company during the year 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. LEE Yuan Siong (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 Professor Lawrence Juen-Yee LAU Ms. Swee-Lian TEO Dr. Narongchai AKRASANEE Mr. Cesar Velasquez PURISIMA Ms. SUN Jie (Jane) In accordance with Article 100 of the Company’s Articles of Association, Mr. Edmund Sze-Wing Tse, Mr. Jack Chak- Kwong So and Professor Lawrence Juen-Yee Lau will retire from office by rotation and, being eligible, offer themselves for re-election at the AGM. 095 ANNUAL REPORT 2022OVERVIEWFINANCIAL 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 Directors Mr. LEE Yuan Siong Details of Changes • His three-year term Group Chief Executive and President service contract with the Company has expired in February 2023 and renewed with an open-ended term Mr. Jack Chak-Kwong SO • Ceased to be an independent senior advisor to Credit Suisse, Greater China with effect from 28 October 2022 Mr. George Yong-Boon YEO • Ceased to be a member of the International Advisory Committee of Mitsubishi Corporation with effect from 1 August 2022 Professor Lawrence Juen-Yee LAU • Ceased to be the vice chairman of Our Hong Kong Foundation with effect from 3 October 2022 • Appointed as a non-official member of the board of directors of Hong Kong Investment Corporation Limited with effect from 15 February 2023 Mr. Cesar Velasquez PURISIMA • Ceased to be a member of the board of trustees of the World Wildlife Fund – Philippines with effect from 28 October 2022 • Ceased to be a member of the board of trustees of De La Salle University with effect from 13 December 2022 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 year under review and up to the date of this report are kept at the Company’s registered office and available for inspection by the Shareholders during business hours. 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. 096 AIA GROUP LIMITEDCORPORATE GOVERNANCEREPORT OF THE DIRECTORSDIRECTORS’ AND THE CHIEF EXECUTIVE’S INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES As at 31 December 2022, 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: Name of Directors Mr. LEE Yuan Siong Mr. Edmund Sze-Wing TSE Number of Shares or underlying Shares Long Position (L) 951,973(L) 2,589,789(L) 2,321,918(L) 1,901(L) (2) (3) (4) (5) 3,330,400(L) 230,000(L) (2) (2) Percentage of the total number of Class Shares in issue (1) Capacity Ordinary Ordinary <0.01 0.02 0.01 <0.01 0.02 <0.01 Beneficial owner Beneficial owner Beneficial owner Beneficial owner Beneficial owner Interest of controlled corporation(6) Mr. Jack Chak-Kwong SO 130,000(L)(2) Ordinary < 0.01 Interest of controlled Mr. Chung-Kong CHOW 126,000(L)(2) Ordinary Mr. John Barrie HARRISON 80,000(L)(2) Ordinary Mr. George Yong-Boon YEO 50,000(L)(2) Ordinary Professor Lawrence Juen-Yee LAU 250,000(L)(2) Ordinary Notes: (1) Based on 11,780,868,713 Shares in issue as at 31 December 2022. (2) The interests were in the Shares. < 0.01 < 0.01 < 0.01 < 0.01 corporation(7) Beneficial owner Interests held jointly with another person(8) Beneficial owner Interest of spouse(9) (3) The interests were in RSUs granted to Mr. Lee Yuan Siong under the restricted share unit schemes adopted by the Company from time to time, of which 1,153,153 RSUs were awarded compensation for unvested long-term incentives and deferred payments that Mr. Lee Yuan Siong forfeited on leaving his prior employment as also disclosed in the Company’s announcement dated 22 November 2019. (4) The interests were in SOs granted to Mr. Lee Yuan Siong under the share option schemes adopted by the Company from time to time. (5) The interests were in matching RSPUs granted under the employee share purchase plans adopted by the Company from time to time. (6) The 230,000 Shares were held by Edmund & Peggy Tse Foundation Limited, one-third interest of which is beneficially held by Mr. Edmund Sze-Wing Tse. (7) The 130,000 Shares were held by Cyber Project Developments Limited, a company beneficially wholly owned by Mr. Jack Chak-Kwong So. (8) The 80,000 Shares were jointly held by Mr. John Barrie Harrison and his spouse, Ms. Rona Irene Harrison, as beneficial owners. (9) The 250,000 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 2022, neither the Directors 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. 097 ANNUAL REPORT 2022OVERVIEWFINANCIAL 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 2022, 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 as recorded in the register required to be kept under Section 336 of the SFO: Name of Shareholders The Bank of New York Mellon Corporation JPMorgan Chase & Co. Number of Shares or underlying Shares (Note 1) Long Position(L) Short Position(S) Lending Pool(P) 1,199,818,058(L) 342,695,292(S) 799,982,215(P) 1,029,333,365(L) 24,237,913(S) 661,124,544(P) Class Ordinary Ordinary The Capital Group Companies, Inc. 844,813,989(L) Ordinary BlackRock, Inc. Citigroup Inc. Brown Brothers Harriman & Co. 706,094,186(L) 350,400(S) Ordinary 664,334,527(L) 15,955,632(S) 644,349,603(P) 605,177,810(L) 597,387,808(P) 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) 10.18 2.90 6.79 8.73 0.20 5.61 7.17 5.99 <0.01 5.63 0.13 5.46 5.13 5.07 Capacity Note 3 Note 4 Interest of controlled corporations Interest of controlled corporations Note 5 Note 6 Long Position Short Position Physically settled listed derivatives Cash settled listed derivatives Physically settled unlisted derivatives Cash settled unlisted derivatives Physically settled listed derivatives Cash settled listed derivatives Physically settled unlisted derivatives Cash settled unlisted derivatives 6,116,876 – – – – – 342,695,292 – Name of Shareholder The Bank of New York Mellon Corporation JPMorgan Chase 3,682,000 39,840 112,700 7,330,174 5,245,000 2,305,480 3,208,557 1,145,912 & Co. The Capital Group Companies, Inc. BlackRock, Inc. – – Citigroup Inc. 4,711,568 Brown Brothers Harriman & Co. – – 25,193,864 – – – – – 1,298,800 489,958 3,595,229 1,282,000 – – – – – – – – – – – – 350,400 8,459,708 4,553,605 – – (2) Based on 11,780,868,713 Shares in issue as at 31 December 2022. 098 AIA GROUP LIMITEDCORPORATE GOVERNANCEREPORT OF THE DIRECTORS(3) 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 corporations 1,199,818,058 342,695,292 (4) JPMorgan Chase & Co. held the interests and short positions in the following capacities: Capacity Interest of controlled corporations Investment manager Person having a security interest in Shares Trustee Approved lending agent (5) Citigroup Inc. held the interests and short positions in the following capacities: Capacity Interest of controlled corporations Approved lending agent Number of Shares or underlying Shares (Long Position) 22,181,728 340,372,828 4,369,364 1,284,901 661,124,544 Number of Shares or underlying Shares (Long Position) 19,984,924 644,349,603 (6) Brown Brothers Harriman & Co. held the interests and short positions in the following capacities: Capacity Investment manager Approved lending agent Number of Shares or underlying Shares (Long Position) 7,790,002 597,387,808 Number of Shares or underlying Shares (Short Position) 24,237,913 – – – – Number of Shares or underlying Shares (Short Position) 15,955,632 – Number of Shares or underlying Shares (Short Position) – – Save as disclosed above, as at 31 December 2022, 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 as recorded in the register required to be kept under Section 336 of the SFO. 099 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONDIRECTORS’ RIGHTS TO ACQUIRE SHARES OR DEBENTURES Under the service contract in the role of Executive Director and Group Chief Executive and President with the Company, Mr. Lee Yuan Siong was entitled to an annual discretionary earned incentive award, which includes payment in the form of Shares. Details of the incentive awards of Mr. Lee Yuan Siong are set out in the Remuneration Report in this Annual 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 2022 or at any time during the year under review. RESERVES As at 31 December 2022, the aggregate amount of reserves available for distribution to Shareholders, as calculated under the provisions of Part 6 of the Hong Kong Companies Ordinance, was US$6,990 million (31 December 2021: US$9,519 million). CHARITABLE DONATIONS Charitable donations made by the Group during the year ended 31 December 2022 amounted to approximately US$11.8 million (2021: US$9.4 million). MAJOR CUSTOMERS AND SUPPLIERS During the year ended 31 December 2022, 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 year ended 31 December 2022 are set out in note 34 to the consolidated financial statements. 100 AIA GROUP LIMITEDCORPORATE GOVERNANCEREPORT OF THE DIRECTORSDEBENTURES ISSUED Details of the debentures issued during the year ended 31 December 2022 are set out in notes 29 and 37 to the consolidated financial statements. EQUITY-LINKED AGREEMENTS During the year ended 31 December 2022, 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 2022, save for the outstanding awards made to employees and agents under the 2010 SO Scheme, the 2020 SO Scheme, the 2010 RSU Scheme, the 2020 RSU Scheme, the 2011 ESPP, the 2020 ESPP, the 2012 ASPP and the 2021 ASPP, each described below and in the Remuneration Report and note 39 to the consolidated financial statements. The purpose of these share incentive schemes of the Company is to align senior employees with the Group’s long-term strategic goals and ambitions and stakeholders’ interests, as well as to provide employees and agents with a share investment opportunity with matching share grants to facilitate and encourage long-term share ownership. SHARE OPTION SCHEME The Company adopted the 2010 SO Scheme on 28 September 2010 for a term of 10 years from the date of adoption. It sought and obtained the approval from the Shareholders at its annual general meeting held on 29 May 2020 (2020 AGM) for the termination of the 2010 SO Scheme and the adoption of a new share option scheme (2020 SO Scheme), effective from 29 May 2020 (2020 SO Scheme Adoption Date). The 2020 SO Scheme is also effective for a period of 10 years from the 2020 SO Scheme Adoption Date. The maximum number of Shares in respect of which SOs may be granted under the 2020 SO Scheme, together with all SOs to be granted under any other share option scheme(s) of the Company (that is, the 2010 SO Scheme) and/or its subsidiaries, will be such amount so that the aggregate number of Shares underlying the 2020 SO Scheme and any such other share option scheme(s) (excluding SOs that have lapsed in accordance with the rules of the 2020 SO Scheme and any other schemes) will not exceed 2.5 per cent of the number of Shares in issue as of the 2020 SO Scheme Adoption Date, being 302,264,978 Shares. 4,368,678 SOs had been granted under the 2020 SO Scheme since its adoption till 31 December 2022. No consideration is payable for the SOs granted under the SO Schemes upon acceptance by the grantees, who may subscribe for the Shares upon exercise of the SOs at the price set out in the relevant grant letter. During the year ended 31 December 2022, the Company awarded 2,519,456 SOs under the 2020 SO Scheme, while 1,895,760 SOs were exercised under the 2010 SO Scheme and the Company issued 1,895,760 new Shares accordingly. The proceeds received amounted to approximately US$9.78 million. Further information, including a summary of the terms, of the 2020 SO Scheme is set out in the Remuneration Report and note 39 to the consolidated financial statements. 101 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRESTRICTED SHARE UNIT SCHEME The 2010 RSU Scheme adopted by the Company on 28 September 2010 with a term of 10 years from the date of adoption was terminated with effect from 31 July 2020. The Company adopted the 2020 RSU Scheme on 1 August 2020 (2020 RSU Scheme Adoption Date) in place of and under substantially the same terms as the 2010 RSU Scheme. The 2020 RSU Scheme is also effective for a period of 10 years from the 2020 RSU Scheme Adoption Date. No award under the 2020 RSU Scheme (RSU Award) shall be granted pursuant to the 2020 RSU Scheme if as a result of such grant (assumed accepted), the aggregate number of Shares and Share equivalents underlying all grants made during the 10-year period commencing on the 2020 RSU Scheme Adoption Date pursuant to the 2020 RSU Scheme (excluding RSU Awards that have lapsed or been cancelled) and any other restricted share unit scheme of the Company (that is, the 2010 RSU Scheme) will exceed in total 2.5 per cent of the number of Shares in issue on the reference date (that is, 29 May 2020), being 302,264,978 Shares (or such number of Shares as shall result from a sub-division or a consolidation of such 302,264,978 Shares from time to time). The RSU Awards granted pursuant to the 2020 RSU Scheme may be satisfied through the issuance of new Shares or the on-market purchase of Shares by the scheme trustee upon vesting. The Company shall rely on any general mandate or specific mandate obtained from the Shareholders at any general meetings of the Company in accordance with the Listing Rules to issue and allot Shares underlying any RSU Awards to the grantees as and when the RSU Awards vest. No consideration shall be payable by the grantees on acceptance or vesting of any RSU Award. During the year ended 31 December 2022, the Company awarded 12,535,139 restricted share units under the 2020 RSU Scheme. No new Shares have been issued upon vesting of the awards under both the 2010 RSU Scheme and the 2020 RSU Scheme since their adoption. Further information, including a summary of the terms, of the 2020 RSU Scheme is set out in the Remuneration Report and note 39 to the consolidated financial statements. EMPLOYEE SHARE PURCHASE PLAN The 2011 ESPP adopted by the Company on 25 July 2011 with a term of 10 years from the date of adoption was terminated with effect from 31 October 2020. The 2020 ESPP, with substantially the same terms as the 2011 ESPP, was adopted by the Company on 1 August 2020 (2020 ESPP Adoption Date). The 2020 ESPP is also effective for a period of 10 years from the 2020 ESPP Adoption Date. Under the 2020 ESPP, eligible employees of the Group may elect to purchase the Shares and, through the grant of matching RSPUs, receive one matching Share for every two Shares purchased and held until the end of the vesting period, which is usually of a 3-year duration. Each eligible employee’s participation level is capped at the lower of 10 per cent of the base salary or HK$12,500 (or local currency equivalent) per calendar month. The matching Shares can either be awarded through the issuance of new Shares by the Company or the on-market purchase of Shares by the plan trustee. 102 AIA GROUP LIMITEDCORPORATE GOVERNANCEREPORT OF THE DIRECTORSThe aggregate number of Shares which can be issued by the Company pursuant to the 2020 ESPP and any other employee share purchase plan (that is, the 2011 ESPP) shall not exceed 2.5 per cent of the number of Shares in issue as at 29 May 2020. During the year ended 31 December 2022, no matching RSPUs were granted and 1,113,355 matching RSPUs vested under the 2011 ESPP, while 1,912,225 matching RSPUs were granted and 44,338 matching RSPUs vested under the 2020 ESPP. No new Shares have been issued upon vesting of the matching RSPUs under both the 2011 ESPP and the 2020 ESPP since their adoption. Further information, including a summary of the terms, of the 2020 ESPP is set out in the Remuneration Report and note 39 to the consolidated financial statements. AGENCY SHARE PURCHASE PLAN The 2012 ASPP, adopted by the Company on 23 February 2012 with a term of 10 years from the date of adoption, was terminated with effect from 31 March 2021. The 2021 ASPP was adopted by the Company on 1 February 2021 (2021 ASPP Adoption Date) and has substantially the same terms as the 2012 ASPP. The 2021 ASPP is also effective for a period of 10 years from the 2021 ASPP Adoption Date. Under the 2021 ASPP, certain agents and agency leaders of the Group are selected to participate in the plan and may elect to purchase the 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 RSSUs. Each eligible agent’s participation level is capped at HK$12,500 (or local currency equivalent) per calendar month. The matching Shares are awarded through the issuance of new Shares by the Company. The aggregate number of new Shares which may be issued under the 2021 ASPP during the 10-year period shall not exceed 2.5 per cent of the number of Shares in issue as at 29 May 2020. Since the 2021 ASPP Adoption Date and up till 31 December 2022, no new Shares were issued under the 2021 ASPP. During the year ended 31 December 2022, no matching RSSUs were granted, 1,119,763 matching RSSUs vested, and 1,119,763 new Shares (Awarded Shares) were issued for RSSUs vested pursuant to the 2012 ASPP. During the same period, 1,030,886 matching RSSUs were granted, no matching RSSUs were vested, and no new Shares were issued accordingly pursuant to the 2021 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 Shares on the date of vesting of the Awarded Shares (that is, 29 April 2022) was HK$77.75. The proceeds received amounted to approximately US$1.12 million which were used to fund the administration expenses of the 2012 ASPP and as general working capital of the Company. Further information, including a summary of the terms, of the 2021 ASPP is set out in note 39 to the consolidated financial statements. 103 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNON-EXEMPT CONNECTED TRANSACTIONS During the year ended 31 December 2022, 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 year ended 31 December 2022 in the ordinary course of business are set out in note 41 to the consolidated financial statements. Such related party transactions are all exempt connected transactions under Chapter 14A of the Listing Rules. PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES During the year ended 31 December 2022, the Company bought back a total of 366,267,400 Shares on the Hong Kong Stock Exchange with the aggregate consideration paid (before expenses) amounting to approximately HK$27,908 million (equivalent to approximately US$3,562 million). All the Shares bought back were subsequently cancelled. As at 31 December 2022, the total number of Shares in issue was 11,780,868,713. Particulars of the Shares bought back are as follows: Price paid per Share Aggregate consideration Number of Shares bought back (Average) (HK$) (Highest) (HK$) (Lowest) (HK$) (before expenses) (HK$ million) 16,832,000 36,729,800 38,567,600 40,362,600 31,212,600 9,244,600 52,689,400 49,374,400 44,137,200 47,117,200 366,267,400 81.63 79.74 76.41 80.61 83.14 77.05 70.94 64.89 71.88 84.52 76.20 84.20 84.40 81.30 85.60 86.30 79.25 75.30 70.45 78.20 88.85 78.40 74.10 71.60 76.65 78.70 74.85 64.10 57.30 59.80 79.35 1,374 2,929 2,947 3,254 2,595 712 3,738 3,204 3,172 3,983 27,908 Month March 2022 April 2022 May 2022 June 2022 July 2022 August 2022 September 2022 October 2022 November 2022 December 2022 Total In addition, the Company had also purchased 9,933,820 Shares under the 2020 RSU Scheme and the 2020 ESPP for a total consideration of approximately HK$804.67 million (equivalent to approximately US$102.76 million) during the year ended 31 December 2022. These purchases were made by the trustees of these share incentive schemes on the Hong Kong Stock Exchange. These Shares are held on trust for the participants of relevant schemes and therefore were not cancelled. Please refer to note 39 to the consolidated financial statements for details. Save as disclosed above, during the year ended 31 December 2022, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities. 104 AIA GROUP LIMITEDCORPORATE GOVERNANCEREPORT OF THE DIRECTORSPUBLIC 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 permitted under the Listing Rules as at the date of this report. AUDITOR PricewaterhouseCoopers was re-appointed auditor of the Company in 2022. 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 10 March 2023 105 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCORPORATE 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 year ended 31 December 2022, with the exception of Code Provision C.6.3, the Company applied the principles and complied with all applicable code provisions of the Corporate Governance Code. Code Provision C.6.3 provides that the company secretary should report to the chairman of the board and/or the chief executive. The Company operates under a variant of this model whereby the Group Company Secretary reports to the Group General Counsel, who is ultimately accountable for the company secretarial function of the Company and who in turn reports directly to the Group Chief Executive. CORPORATE CULTURE AND STRATEGY The Company’s corporate culture is guided by its Operating Philosophy of “Doing the Right Thing, in the Right Way, with the Right People… and the Right Results will come”. This philosophy permeates all levels of the Group, from the Board and senior management and throughout all operating levels of the organisation. It is embedded in AIA’s Code of Conduct, which sets the framework for a culture of professionalism, ethics, respect, diversity and inclusion; all in support of helping the Company deliver on its Purpose of helping people live Healthier, Longer, Better Lives. 106 AIA GROUP LIMITEDCORPORATE GOVERNANCEBOARD 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. In these matters, the Board provides leadership to management in respect of operational issues through the Group Chief Executive and President, 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 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. During the year under review, the Board discharged its responsibilities under the Board Charter of the Company, which is available on the Company’s website at www.aia.com, and reviewed, amongst other things, the Company’s compliance with the Corporate Governance Code, including the necessary disclosures in its reports to Shareholders, the terms of the Board Charter and other governance documents, and a number of Group-wide policies. The Board also received the annual information security update and reviewed the Group’s leadership capability and succession to align with the Group’s latest strategic ambitions. 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 year ended 31 December 2022. 107 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBOARD EVALUATION The Board regularly undertakes 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 with the support of independent external consultants. During the year under review, a tailored board evaluation questionnaire was prepared to collect views and comments from Board members, the findings of which were reviewed and discussed by the Board at its meeting held in March 2023. A comprehensive range of topics was considered, including Board structure and composition, Board dynamics and interactions, Board Committees, and Board processes, with special focus in the areas which could be strengthened to further enhance the overall effectiveness of the Board and its committees. The Board evaluation has helped to identify a broader scope of topics to be further covered in Board meetings and Directors’ trainings, to facilitate greater interactions among the Board members and senior management, as well as to enhance the Board processes and governance practices. BOARD COMPOSITION 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 82 to 87 of this Annual Report. APPOINTMENT AND RE-ELECTION OF DIRECTORS The Company has put in place a formal and transparent process for the appointment of Directors. When a need is identified, the Nomination Committee engages in a robust search process to identify suitably qualified Director candidates, including the use of independent executive search firms. Prospective candidates will then be shortlisted through a comprehensive evaluation process that includes consideration of a candidate’s ability and willingness to devote sufficient time to the duties required. Following meetings with candidates by each member, the Nomination Committee will deliberate prior to recommending an appropriate candidate to the Board for approval. The focus of the Nomination Committee has always been to identify individuals best qualified to serve the interests of the Shareholders and policyholders. Within this broader mandate, the Committee also has regard to ensuring that the Board is appropriately representative of the communities that the Company serves. To promote greater transparency, the Directors’ Nomination Policy was adopted by the Board in 2019 and revised in 2022. A summary of the Policy is set out in the sub-section headed “Nomination Committee” under the “Committees of the Board” section of this report. All Directors are subject to retirement by rotation at least once every three years pursuant to the Corporate Governance Code and are subject to re-election at the general meetings of the Company in accordance with the Articles of Association of the Company. 108 AIA GROUP LIMITEDCORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTBOARD INDEPENDENCE The Company recognises that Board independence is key to good corporate governance. Ten of the eleven Board members are Independent Non-executive Directors, which far exceeds the independence requirements under the Listing Rules. The Board has put in place robust mechanisms to ensure a strong independent element on the Board, which include process to facilitate active participation and constructive discussions by Board members on matters material to the Company. The Company has also established formal and informal channels whereby Independent Non-executive Directors can provide their independent views and input in an open and candid manner, including formal and informal meeting sessions with the Board Chairman and the management. To facilitate effective discharge of their duties, Board members (including the Independent Non-executive Directors) are empowered to request further information from management and obtain, at the Company’s expense, external independent professional advice when necessary. The Board assesses the implementation and effectiveness of such Board process on an annual basis through the regular Board effectiveness reviews. Each of the four committees established by the Board (described more fully below), namely the Audit Committee, the Nomination Committee, the Remuneration Committee and the Risk Committee, is chaired by Independent Non-executive Directors. The Audit Committee, the Nomination Committee, and the Remuneration Committee comprise of Independent Non-executive Directors only, while the Risk Committee comprises of a majority of Independent Non-executive Directors. In assessing the independence of any candidate for Board membership, the Company takes into account the criteria set out in Rule 3.13 of the Listing Rules. Every Independent Non-executive Director is required to confirm in writing to the Company his/her independence upon his/her appointment as Director. He/She is also required to declare his/her past or present financial or other interests in the Group’s business, or his/her connection with any of the Company’s connected persons. In addition, he/she is also subject to ongoing obligations to notify the Board Chairman as soon as practicable of any direct conflict of interest which may arise due to his/her duties as an Independent Non-executive Director and any other duties or business interests which he/she may have and to seek the Board’s written approval before any other duties or business can be undertaken. All Directors are also required to consult with and obtain the written approval of the Board Chairman prior to accepting any other directorships of listed companies. The Nomination Committee has the responsibility to assess annually the independence of all Independent Non-executive Directors and to affirm that each satisfies the criteria of Independence as set out in Rule 3.13 of the Listing Rules. It assesses independence with regard to the full range of relevant factors concerned rather than focusing exclusively on the length of service of an individual. 109 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONWhere an Independent Non-executive Director has served on the Board for over nine years, the Nomination Committee will consider and satisfy itself that the length of his/her tenure has not affected his/her independence having regard to his/her actual contributions, continuing impartiality and ability to continue to demonstrate effective oversight of the Company’s management. At a meeting held in March 2023, the Nomination Committee affirmed that for the year ended 31 December 2022, each of the Independent Non-executive Directors of the Company continued to be independent. While Board Chairman, Mr. Tse remains a director of AIA Foundation (a subsidiary of the Company), the Company has satisfied itself that he is independent pursuant to Rule 3.13 of the Listing Rules on the basis that his directorship with AIA Foundation does not require his performance of any executive or management role or function. BOARD REFRESHMENT AND SUCCESSION Board succession is an ongoing process for the Company. There are regular reviews and discussions on succession planning, complemented by an active search when required for people presenting the right skill and diversity mix. The Nomination Committee manages Board succession in light of the Board’s overall needs. It considers prospective candidates based on merit and takes a long-term, strategic view of Board succession, considering the competencies and experience necessary for effective oversight of the Company given its current operations, strategy and ambitions for the future. It also reviews Board composition in light of the annual Board assessment results and recommends any changes as appropriate. The Nomination Committee remains focused on ensuring that the Board is composed of appropriately experienced and capable individuals who are representative of the communities in which the Group operates. To the extent that needs are identified for additions to the Board, diversity, including in regard to gender, will remain a priority. The structure, size and composition of the Board is reviewed at least annually by the Nomination Committee. This review includes consideration of the existing composition (including skills, experience, background and gender) of the Board as well as the Company’s business strategies to ensure that the Board is able to oversee all material matters relating to the Group. The Company does not have mandatory retirement ages or term limits for its directorship. 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. Senior management also provide regular updates to the Board with respect to the Group’s business activities and the progress of the Group against its business objectivies. During the year under review, there were six scheduled Board meetings, all of which were convened in accordance with the Articles of Association of the Company. 110 AIA GROUP LIMITEDCORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTThe attendance of individual Directors, either in person or through electronic means of communication, at the Board meetings, committees’ meetings and the 2022 AGM held during the year 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. LEE Yuan Siong Independent Non-executive Directors Mr. Jack Chak-Kwong SO Mr. Chung-Kong CHOW Mr. John Barrie HARRISON Mr. George Yong-Boon YEO Professor Lawrence Juen-Yee LAU Ms. Swee-Lian TEO Dr. Narongchai AKRASANEE Mr. Cesar Velasquez PURISIMA Ms. SUN Jie (Jane)(Note) Number of Meetings Attended / Number of Meetings Held Board Audit Committee Nomination Committee Remuneration Committee Risk Committee 2022 AGM 6/6 6/6 5/6 6/6 6/6 6/6 5/6 6/6 6/6 6/6 6/6 – – 5/5 – 5/5 5/5 – – 5/5 5/5 3/3 3/3 3/3 4/4 1/1 – 2/3 3/3 3/3 3/3 3/3 3/3 3/3 3/3 3/3 – 4/4 1/1 3/3 – – 3/3 – – – – 2/3 – 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 Note: Ms. Sun Jie (Jane) was appointed as a member of the Audit Committee and the Remuneration Committee on 1 June 2022. Minutes of the meetings of and resolutions in writing 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 the Directors. CHAIRMAN AND GROUP CHIEF EXECUTIVE Mr. Edmund Sze-Wing Tse, Independent Non-executive Chairman of the Company, plays the 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 and receive adequate and reliable information in a timely manner. Mr. Lee Yuan Siong, 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. Lee 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. Lee 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. 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. 111 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 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. In addition to being updated on the Group’s business, the Directors also receive regular updates on material developments to the Listing Rules and other applicable statutory requirements to ensure continuing compliance and appropriate oversight. During the year under review, the Company organised a Board Strategy Day and provided a number of briefings to the Directors on potential business opportunities, changes in major accounting standards, progress on ESG strategy and the Group’s business resilience. All Directors are encouraged to participate in continuous professional development to extend and refresh their knowledge and skills, and are required to provide their training records to the Company. The training received by the Directors during the year under review is summarised as follows: Types of Training Reading or attending briefings / seminars / conferences relevant to regulatory and governance updates Attending corporate events / 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. LEE Yuan Siong Independent Non-executive Directors Mr. Jack Chak-Kwong SO Mr. Chung-Kong CHOW Mr. John Barrie HARRISON Mr. George Yong-Boon YEO Professor Lawrence Juen-Yee LAU Ms. Swee-Lian TEO Dr. Narongchai AKRASANEE Mr. Cesar Velasquez PURISIMA Ms. SUN Jie (Jane) 112 AIA GROUP LIMITEDCORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTCOMMITTEES 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 Exchanges and Clearing Limited and the Company. In addition to the four Board committees, a number of management committees have been established including, among others, the Executive Committee, the Group Operational Risk Committee, the Group Financial Risk Committee and the ESG Committee. AUDIT COMMITTEE The Audit Committee consists of six members, all of whom are Independent Non-executive Directors. They are Mr. Purisima, who serves as chairman of the Audit Committee, Mr. Harrison, Mr. So, Mr. Yeo, Dr. Narongchai and Ms. Sun. Ms. Sun was appointed as a member of the Audit Committee on 1 June 2022. The Audit Committee is delegated with authority from the Board to oversee the Group’s financial reporting system, the internal control systems, the relationship with the external auditor of the Company, and to review the Group’s financial information. The duties performed by the Audit Committee during the year under review included overseeing the Group’s financial reporting system; reviewing internal control systems; 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 whistleblowing programme; and monitoring the adequacy of resources for and effectiveness of the internal audit function. The 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 five meetings during the year ended 31 December 2022. The attendance records of the Audit Committee members are set out on page 111 of this Annual Report. 113 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOMINATION 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, Professor Lau, Ms. Teo, Dr. Narongchai, Mr. Purisima and Ms. Sun. The Nomination Committee is delegated with authority from the Board to review the Board’s composition and diversity, formulate and implement the Directors’ Nomination Policy, make recommendations to the Board on the appointment/re-appointment of Directors and members of the Board committees, and assess the independence of the Independent Non-executive Directors annually ensuring independent views and input are available to the Board. The Nomination Committee held three meetings during the year ended 31 December 2022. The attendance records of the Nomination Committee members are set out on page 111 of this Annual Report. The duties performed by the Nomination Committee during the year under review included reviewing and making recommendations to the Board on the structure, size and composition of the Board, with due regard to 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 (including the appointment of Ms. Sun to the Audit Committee and the Remuneration Committee of the Company). To ensure ongoing transparency in respect of its deliberations, the Directors’ Nomination Policy was adopted by the Board in 2019 and revised in 2022 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 regard to the benefits of diversity as 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 any 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 qualified candidates. It may consider referrals from existing Directors, and use external advisers to facilitate the search based on 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, with the relevant procedures therefor 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 Director, the Nomination Committee will review the prior contributions of the Director, and determine whether he/she continues to meet the selection criteria set out in the Directors’ Nomination Policy. In particular, in recommending the re-election of a retiring Independent Non-executive Director who has served on the Board for more than nine years, the Nomination Committee shall take into consideration all relevant factors in assessing their continuing independence. 114 AIA GROUP LIMITEDCORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTFurthermore, the Board Diversity Policy of the Company (first adopted by the Board in 2013 and revised in 2021) ensures consideration of diversity in the Board’s composition across all measures, including in relation to race, gender, religion and national origin, as well as diversity of experience from both the private and public sectors. While the Policy does not enumerate specific targets across any specific aspect of diversity, the depth and diversity of experience represented on the Board, including experience in all of the Group’s major markets as well as a broad base of public sector and private company experience, allows the Board to bring a diversity of perspectives to the governance of the Group and its operations. The Board will review the implementation and effectiveness of the Board Diversity Policy on an annual basis. A summary of the Board Diversity Policy is set out below: • The Company understands that a Board composed of appropriately qualified members with a broad range of relevant experience, in addition to diversity in thought and background, is essential to the effective governance of its business and ensuring long-term sustainable growth; • The Company remains committed to non-discrimination in all aspects of its business, including the appointment of Board members. Consideration and selection of candidates for appointment to the Board will be based on merit which shall include a review of the 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 who 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 gender, age, ethnicity, nationality, cultural and educational background; • The Nomination Committee will (a) in reviewing 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; • 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 Board’s diversity; and • The measurable objectives on board diversity under the Board Diversity Policy include (a) to select candidates for nomination as a Director based on the Directors’ Nomination Policy with due regard to the diversity perspectives set out in the policy; (b) to maintain the Board with a majority of independent non-executive directors; and (c) to ensure that the Board be made up of members with diverse backgrounds and experience, including diversity of nationality, ethnicity and gender, with such members demonstrating appropriate knowledge, experience and understanding of the markets in which the Company operates its business. All of the measurable objectives have been achieved for each new appointment to the Board. The Company strives to create an inclusive workplace and is proud to be an employer of choice for women. The Company is committed to achieving a gender-balanced workforce with at least 40 per cent female representation overall as well as a target of at least 40 per cent women in its senior leadership positions. To continue building the Company’s pipeline of female leaders, a target of at least 45 per cent female participation in its leadership programmes by the end of 2026 has also been mandated. Further details on the progress for workforce diversity in 2022 are disclosed in the Company’s ESG Report 2022. 115 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONREMUNERATION COMMITTEE The Remuneration Committee consists of four members, all of whom are Independent Non-executive Directors. They are Mr. Yeo, who serves as chairman of the Remuneration Committee, Mr. Tse, Mr. So and Ms. Sun. Ms. Sun was appointed as a member of the Remuneration Committee on 1 June 2022. The Remuneration Committee is responsible for, amongst other things, establishing and overseeing the implementation of the Group’s remuneration policies, overseeing and approving the Company’s equity-based remuneration plans, and determining specific remuneration for the executive director, senior management and other personnel of the Company. The Remuneration Committee held three meetings during the year ended 31 December 2022. The attendance records of the Remuneration Committee members are set out on page 111 of this Annual Report. Details of the role of the Remuneration Committee, and the key activities performed by the Remuneration Committee during the year 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 seven members, six of whom are Independent Non-executive Directors, including Ms. Teo, who serves as chairman of the Risk Committee, Mr. Chow, Mr. Harrison, Professor Lau, Mr. Purisima, Mr. Tse and Mr. Lee, the sole Executive Director of the Company. The Risk Committee is delegated with authority from the Board to, amongst other things, determine the Group’s risk appetite, including the risk appetite statement, risk principles and risk tolerances, oversee and review the adequacy and effectiveness of the Risk Management Framework (RMF) of the Group, ensure that the material risks facing the Group have been identified and that the risk profile adequately represents any significant issues relating to the Group’s control environment with mitigating actions put in place, and to advise the Board on risk-related issues. The duties performed by the Risk Committee during the year under review included providing advice to the Board on the risk profile and risk management strategy of the Group; considering and reviewing disclosures in the Company’s annual report, 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 of the Group are set out in the Risk Management and Internal Control section of this report. The Risk Committee held four meetings during the year ended 31 December 2022. The attendance records of the Risk Committee members are set out on page 111 of this Annual Report. EXTERNAL 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. 116 AIA GROUP LIMITEDCORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTThe Audit Committee also reviews the non-audit services provided by the external auditor and its remuneration on a regular basis. For the year ended 31 December 2022, the total estimated remuneration payable by the Group to PricewaterhouseCoopers was US$36.8 million (2021: US$27.7 million), an analysis of which is set out below: US$ millions Audit services Non-audit services, including: Audit-related services(1) Tax services Other services Total 2022 22.7 13.7 0.3 0.1 36.8 2021 21.2 4.7 0.7 1.1 27.7 Note: (1) Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Group’s financial statements. They include, among others, due diligence services pertaining to potential business acquisitions (excluding valuation services); services related to implementation of new accounting and financial reporting guidance from regulatory authorities; and agreed-upon or expanded audit procedures related to compliance with financial, accounting or regulatory reporting matters. 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 141 to 148 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. 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 in alignment with the Group’s culture and strategy, 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. 117 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONThe Board has, through the Risk Committee and the 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, financial reporting functions, as well as those relating to the Group’s ESG performance and reporting; • 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 (including ESG 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 under review 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 conducted by an internal risk management, compliance and internal controls framework certification process performed by management (at both the Company’s and subsidiaries’ levels) and the Risk & Compliance function, supported by the Internal Audit function which confirmed the adequacy and effectiveness of internal control environment. 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 year ended 31 December 2022. The AIA Group Compliance Policy governs the Group’s compliance in areas such as whistleblowing, anti-corruption and anti-bribery, anti-fraud, as well as anti-money laundering and counter-financing of terrorism. INSIDE 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 further contains a strict prohibition on the unauthorised use of confidential or non-public information. 118 AIA GROUP LIMITEDCORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTCOMPANY 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 appropriate 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 year 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 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 key dates for Shareholders is set out on page 295 of this Annual Report. The Investor Relations function oversees the Company’s engagement with investors. The 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. Investors’ 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 which is reviewed on an annual basis to ensure its effectiveness. The Shareholders’ Communication Policy sets out, among other things, the Company’s means of communication with the Shareholders with the aim of ensuring that both individual and institutional Shareholders are given timely access to accurate, clear and balanced information to enable them to exercise their rights in an informed manner and to engage actively with the Company. It also sets out the Company’s contact details to enable Shareholders to provide their comments or direct their questions to the Company. During the year ended 31 December 2022, the Board has reviewed the implementation of the Shareholders’ Communication Policy. Having considered the active engagement by the Company with the Shareholders via the different means in accordance with the Policy, the Board is satisfied that the Shareholders’ Communication Policy continues to be effective. The Shareholders’ Communication Policy is available on the Company’s website (www.aia.com). 119 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2022 ANNUAL GENERAL MEETING The 2022 annual general meeting (2022 AGM) of the Company was held at the Grand Ballroom 3&5, Level B, Hong Kong Ocean Park Marriott Hotel, 180 Wong Chuk Hang Road, Aberdeen, Hong Kong on 19 May 2022. The Chairman and all other members of the Board at that time, together with the Group’s senior management and external auditor, attended the 2022 AGM, either in person or through electronic means of communication. The poll voting results are available on the websites of both the Company and the Hong Kong Exchanges and Clearing Limited. The matters resolved at the 2022 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 31 December 2021; • Declaration of a final dividend of 108.00 Hong Kong cents per share for the year ended 31 December 2021; • By way of separate ordinary resolutions, the re-election of Ms. Sun, Mr. Yeo, Ms. Teo and Dr. Narongchai 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, not exceeding 10 per cent of the aggregate number of Shares in issue on the date of the 2022 AGM, and the discount for any Shares to be issued not exceeding 10 per cent to the benchmarked price; and • General mandate to Directors to cause the Company to buy back Shares, not exceeding 10 per cent of the aggregate number of Shares in issue on the date of the 2022 AGM. The forthcoming annual general meeting of the Company will be held on Thursday, 18 May 2023. Further details will be set out in the Company’s circular to be issued to the Shareholders for the AGM. SHAREHOLDERS’ RIGHTS GENERAL MEETING Shareholder(s) representing at least 5 per cent of the total voting rights of all the Shareholders 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) should make reference to the provisions under Sections 566 to 568 of the Hong Kong Companies Ordinance for calling a general meeting. MOVING A RESOLUTION AT AN ANNUAL GENERAL MEETING Shareholder(s) 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) representing at least 2.5 per cent of the total voting rights of all the Shareholders 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 who have a right to vote on the resolution at the annual general meeting to which the request relates. 120 AIA GROUP LIMITEDCORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTSuch 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) 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 Exchanges and Clearing Limited. During the year under review, there has been no change to the Articles of Association of the Company. By Order of the Board Nicole Pao Company Secretary 10 March 2023 121 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONREMUNERATION REPORT STATEMENT OF THE CHAIRMAN OF THE REMUNERATION COMMITTEE On behalf of the Remuneration Committee, I am pleased to present the Report on Remuneration for Directors and Key Management Personnel for the year ended 31 December 2022. The Remuneration Committee oversees the Group’s remuneration framework and its application across AIA ensuring that our policies and practices are rewarding our employees for their contribution and for value creation to our stakeholders. AIA’s remuneration approach across the Group and in particular for our senior executives strives for a balance between rewarding for impact and behaviours demonstrated and positioning compensation competitively to attract and retain our talents. Remuneration is aligned to the Group’s strategy whilst taking into account our business priorities, AIA’s risk management framework as well as applicable regulatory landscape, relevant market practices and the interests of our stakeholders. Similar to previous years, the Remuneration Committee worked closely with its independent advisor to ensure that AIA’s remuneration framework remains compliant and adheres to the principles of good corporate governance whilst considering applicable remuneration trends in our key markets and globally. In-depth analyses were conducted with regard to (1) the remuneration trends of comparable companies in the industry, (2) the growing emphasis on Environmental, Social, and Governance matters and (3) the high inflationary pressures on remuneration and governance practices across the globe. A review of the Group’s Long-term Incentive Plan was conducted to ensure that the framework supports the Group’s value proposition and is aligned with market practices. With the changes to the Hong Kong Stock Exchange Listing Rules relating to equity schemes coming into effect, the equity schemes will be assessed to ensure necessary changes are implemented to comply with the new requirements whilst continuing to be aligned with stakeholders’ interests. The overall remuneration framework for senior executives and employees remains unchanged in 2022 and will continue to apply in 2023 focusing on encouraging behaviours, which create a positive impact and sustainable value for all our stakeholders in alignment with our risk management framework. The Remuneration Committee continues to monitor the Group’s remuneration framework, in particular considering the dynamic environment whilst taking into consideration the evolving regulatory landscape and the Group’s strategy and corporate and risk culture. The emphasis of a balanced approach between risk and rewards, providing for competitive remuneration with robust safeguards in place continues to be our key focus to ensure AIA can attract, motivate and retain the talent required to deliver on the Group’s strategy. The Remuneration Committee remains confident that the Group’s remuneration framework is well aligned and continues to support our Group’s values and strategic priorities in the long run. George Yong-Boon Yeo Chairman, Remuneration Committee 10 March 2023 122 AIA GROUP LIMITEDCORPORATE GOVERNANCEREMUNERATION GOVERNANCE ROLE OF THE REMUNERATION COMMITTEE The Remuneration Committee is responsible for establishing and overseeing the implementation of the Group’s overall remuneration policies, overseeing and approving the Company’s equity-based remuneration plans, and determining specific remuneration for all directors, the Group Chief Executive and President, Key Management Personnel (the members of the Group Executive Committee who, by the nature and accountabilities of their respective positions, participate directly in the development, implementation, monitoring and reporting of the overall business strategy of the Group) and the Key Persons in Control Functions. As part of its duties, the Remuneration Committee is responsible for establishing a formal and transparent procedure in developing and approving such remuneration. 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, relevant risk policies and the application of performance-based incentives. The Remuneration Committee is responsible for reviewing and assessing the remuneration framework and relevant policies to ensure that they align with the strategy and the interests of the Company’s stakeholders. Working closely with other relevant Committees, such as the Risk Committee, the impact of the remuneration framework and relevant remuneration policies is assessed to ensure excessive risk taking is not encouraged. The Remuneration Committee also oversees the design and operation of the Company’s equity-linked and other Group incentive schemes, recommending equity-based employee grants for approval by the Board as well as reviewing and, where appropriate, amending the terms of the schemes. 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 as it deems necessary. The full Terms of Reference for the Remuneration Committee can be accessed at www.aia.com. MEMBERS AND MEETINGS As of 31 December 2022, the Remuneration Committee consisted of four Independent Non-executive Directors, being Mr. George Yong-Boon Yeo, who is the Chairman of the Remuneration Committee, Mr. Edmund Sze-Wing Tse, Mr. Jack Chak-Kwong So and Ms. Sun Jie (Jane). Ms. Sun Jie (Jane) was appointed as a member of the Remuneration Committee on 1 June 2022. The Remuneration Committee held three meetings during the year ended 31 December 2022. The attendance records of the Remuneration Committee members are set out on page 111 of this Annual Report. 123 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONKEY ACTIVITIES OF THE REMUNERATION COMMITTEE The Remuneration Committee performed the following key activities in 2022. Area Summary of activities Remuneration decisions for the Group Chief Executive and President and Key Management Personnel • Reviewed and approved the 2022 remuneration for the Group Chief Executive and President and the Key Management Personnel at the start of the year • Recommended the 2022 long-term incentive grant for the Group Chief Executive and President for approval by the Independent Non-executive Directors of the Board • Reviewed and approved terms and arrangements for the departed Group Executive Committee member • Reviewed and approved the new contractual arrangement for the Group Chief Executive and President • Reviewed the executive benchmarking results ahead of the 2022/23 annual review cycle Design and operation of the Group’s incentive schemes • Reviewed the achievement of relevant performance levels and approved the 2021 short-term incentive plan awards and the vesting of the 2019 long-term incentive grants for all plan participants including the Group Chief Executive and President and the Key Management Personnel Remuneration governance and disclosure • Reviewed and approved grants under the long-term incentive plan, including share option (SO) grants and performance-vesting restricted share unit (RSU) grants for the 2022 to 2024 performance period • Approved a one-off 2022 grant in the form of time-vesting RSUs under the RSU Scheme rules, granted to selected individuals. No one-off 2022 grant was made to the Group Chief Executive and President • Reviewed and approved the performance measures and targets for the 2023 short- term incentive plan, and the 2023 long-term incentive plan for the 2023 to 2025 performance period • Reviewed and approved the Group’s long-term incentive plan for greater alignment with the Group’s value proposition • Reviewed and approved the 2021 Remuneration Report • Reviewed and assessed the Group’s remuneration framework to ensure alignment with stakeholders’ interests, including appropriate safeguards, and provided the Risk Committee with a report of this review • Reviewed the regulatory and corporate governance environment impacting executive remuneration practices and governance in the Group’s key markets, including Hong Kong and Mainland China • Reviewed the emerging remuneration trends for AIA’s international insurance peer companies and for the Asia Pacific and other regions, especially with respect to the Environmental, Social and Governance and global inflationary trends In conducting its business, the Remuneration Committee is advised by an independent advisor appointed by the Remuneration Committee, who provides independent advice for any remuneration topics requested by the Remuneration Committee, including reviewing the remuneration framework and executive remuneration terms and arrangements. 124 AIA GROUP LIMITEDREMUNERATION REPORTCORPORATE GOVERNANCEREMUNERATION AND RISK The Remuneration Committee regularly reviews and as necessary amends the remuneration framework and oversees its implementation in view of effective risk management, and regulatory requirements of relevant jurisdictions. A report of remuneration and risk matters is to be provided annually by the Remuneration Committee and shared with the Risk Committee. This report contains an assessment of AIA’s remuneration framework including the incentive framework, remuneration governance practices, and the key topics discussed and approved by the Remuneration Committee over the course of the year. This ensures a robust dialogue concerning risk issues between the two Committees. The Group Risk Management function evaluated the 2022 remuneration framework and concluded that it does not encourage inappropriate risk taking behaviours. Control functions are actively involved in monitoring the operational implementation of AIA’s policies and practices and ensuring compliance across the Group. If applicable, relevant control functions are consulted in establishing the remuneration framework and, as required, when defining remuneration policies and rules, in order to ensure that the remuneration framework complies with legal and regulatory requirements across the Group and does not encourage excessive risk taking behaviours. Group Risk Management and Group Legal are consulted to define the criteria to identify the Key Persons in Control Functions and Material Risk Takers on a regular basis. AIA’s remuneration framework contains multiple design and policy safeguards in place to adhere to prudent risk taking and to not encourage excessive risk taking behaviours. These safeguards include guidelines on employment and remuneration terms and conditions for the most senior positions including a consistent, centrally managed framework for contractual agreements and a robust remuneration benchmarking approach conducted by an independent advisor. Additional safeguards include clear incentive funding and vesting frameworks aligned with Board approved performance targets, short-term incentive awards and long-term incentive vesting levels approved by the Remuneration Committee with target and maximum pay opportunities aligned with market practices, malus and clawback provisions as part of the incentive framework and share ownership guidelines for the Group Chief Executive and President. In addition, a robust Group-wide performance management framework is applied, assessing employees’ and executives’ contributions and behaviours based on individual goals established at the beginning of the year. This ensures that reward outcomes reflect both results achieved and behaviours demonstrated balancing the financial and non-financial aspects. For 2022 onwards, senior control function employees’ short-term incentive awards are fully aligned to Group Office results to avoid potential conflict of interests and to ensure their independence. 125 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONREMUNERATION FRAMEWORK REMUNERATION POLICY AIA is committed to responsible remuneration practices to attract, motivate and retain employees at all levels across the Group. Our remuneration programmes aim to reward all individuals competitively and fairly, irrespective of gender, ethnicity, age, disability or other non-performance related factors, based on principles of impact and contribution balanced against sound risk management. AIA’s performance and rewards approach supports the achievement of AIA’s business strategy, which includes rewarding for the achievement of strategic objectives by taking into consideration the Group’s capital position and long-term performance whilst not inducing excessive risk taking behaviours or violation of applicable laws, guidelines or regulations. Our remuneration policy serves to support the above objectives through appropriate governance, design, implementation and monitoring of AIA’s remuneration and risk management framework. This framework applies across the Group and is implemented consistently across our business units, subject to local rules and regulations as necessary and appropriate for the Group. REMUNERATION ELEMENTS The table below summarises the Company’s remuneration elements and their application to the Group Chief Executive and President and the Key Management Personnel for the year ended 31 December 2022. Element Base salary This is the fixed portion provided as a cash element of remuneration Short-term incentives These are delivered in the form of a discretionary, performance-based cash award to incentivise, recognise and reward achievement of business objectives, individual contribution and behaviours Basis of determination Notes on practices The Remuneration Committee reviews base salaries annually against AIA’s international insurance peers and wider market levels. Base salary increases, where applicable, typically take effect from 1 March. Short-term incentive awards are based on the achievement of the Group’s pre-defined financial performance targets as well as individual contribution and behaviours. As such, both financial and non-financial performance measures are taken into consideration. Base salary is determined with reference to the size and nature of the role, geographical location, and scope and relevant individual experience, whilst also considering competitive market positioning and internal equity to attract and retain employees with required capabilities to achieve the Group’s business objectives. The fixed portion of remuneration should be set appropriately to not induce any excessive risk taking behaviour by leveraging the variable component. Across the Group, short-term incentives are discretionary and intended to incentivise the achievement of annual business plans. Short-term incentive awards recognise both business and individual performances, taking into consideration an individual’s contribution and behaviours. Short-term incentive target opportunities are determined with reference to the individual’s roles and responsibilities and the market competitiveness of variable and total compensation. 126 AIA GROUP LIMITEDREMUNERATION REPORTCORPORATE GOVERNANCEElement Basis of determination Notes on practices Long-term incentives These are delivered in the form of RSUs and SOs to align the long-term interests of executives with those of shareholders, and to reward and motivate participants who have made important contributions to the Group’s success or are expected to play a significant role in the future Benefits and allowances These include benefits that may be required by regulations and / or in line with local market practices, and contribute to the value of total rewards Employee share purchase plan (ESPP) This benefit provides employees with a share investment opportunity with matching share grants to facilitate and encourage long-term AIA share ownership Across the Group, long-term incentives are discretionary and intended to align key talent and senior employees with the Group’s long-term strategic goals and ambitions and shareholders’ interests. Long-term incentives promote risk awareness, encourage engagement to operate in a sustainable manner and are designed to motivate, retain and support wealth creation. Long-term incentive grants are usually made in the form of RSUs and / or SOs for senior employees and are subject to a three-year vesting period. RSUs are subject to pre-defined performance vesting requirements. Long-term incentive grant values are determined with reference to roles and responsibilities as well as the individual’s performance and future potential whilst also considering the market competitiveness of variable and total compensation opportunities. The benefits programme and allowances are designed to ensure market competitiveness of the overall rewards and are fully compliant with local regulations. Long-term incentive grants are discretionary and participation is determined annually. For the Group Chief Executive and President and Key Management Personnel, grants are made in the form of RSUs and SOs to deliver a balanced mix of ownership and incentives, as well as reward executives for sustainable performance. Such grants generally vest after a three-year period and are settled in AIA shares, with RSUs subject to pre-defined performance vesting requirements resulting in a significant portion of senior executives’ variable remuneration being deferred in the form of long-term incentives. The Group Chief Executive and President and Key Management Personnel participate in retirement schemes and receive welfare related benefits, for example, medical and life insurance. Except where prohibited by local regulations, ESPP is open to all employees who have completed probation and is subject to a maximum contribution indicated as a percentage of base salary or the plan’s maximum dollar limit. Participants receive matching shares for the Company’s shares they have purchased and held for three years, subject to an investment limit approved by the Remuneration Committee. Matching shares vest after three years. Further details on the operation of our short-term and long-term incentives, along with the ESPP, are provided on the following pages. VARIABLE REMUNERATION Variable remuneration opportunities are designed to motivate employees to deliver on key short-term and long-term objectives and are aligned with the interests of the stakeholders of AIA, including those of long-term shareholders. Depending on business and individual performance and behaviours, such incentives may result in award levels above or below target, reflecting superior performance and behaviours, and performance and behaviours below expectations, respectively. AIA’s short-term and long-term incentive plans are described below. 127 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSHORT-TERM INCENTIVE PLAN Short-term incentives are discretionary and intended to incentivise participants for the achievement of annual business plans and key objectives linked to financial, operational and individual performance over the relevant financial year. Individual performance is measured based on the achievements of individual goals focusing on results and behaviours, including a balance of financial and non-financial measures. 2022 short-term incentive plan performance levels, including 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 year ended 31 December 2022. Performance Measures And Weightings For 2022, the performance measures used in the short-term incentive plan were as follows: VONB UFSG OPAT 60% WEIGHTING 15% WEIGHTING 25% WEIGHTING Value of new business (VONB) is an estimate of the economic value of one year’s sales as published by the Company Underlying free surplus generation (UFSG) is the free surplus generated by the business excluding the free surplus invested in new business, investment return variances and other items Operating profit after tax (OPAT) is the IFRS operating profit after tax 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 For business units, performance measures and weightings may vary from the illustration above and include a weighting for strategic initiatives. The total value of short-term incentive awards that will be paid to Mr. Lee Yuan Siong (Group Chief Executive and President) and the Key Management Personnel for the year ended 31 December 2022 is US$8,770,473. The short-term incentive amounts for the year ended 31 December 2022 are included in note 40 to the consolidated financial statements as “Bonuses” for Mr. Lee Yuan Siong, and as part of the “Salaries and other short-term employee benefits” for the Key Management Personnel. LONG-TERM INCENTIVE PLAN The purpose of long-term incentives is intended to align senior employees with the Group’s long-term strategic goals and ambitions and stakeholders’ interests. Long-term incentives promote risk awareness, encourage engagement to operate in a sustainable manner and are designed to motivate, retain and support long-term wealth creation when shareholder value is increased. Long-term incentives are reserved for the most senior positions in the Group that have significant impact on the sustainable financial results and the overall risk profile of the Group. Other individuals may be considered for long- term incentives, for example on the basis of market competitiveness due to their skills and areas of expertise. Long-term incentive grants are determined on an annual basis with reference to an individual’s overall variable remuneration, total remuneration competitiveness, role and responsibilities, as well as performance and potential. 128 AIA GROUP LIMITEDREMUNERATION REPORTCORPORATE GOVERNANCELong-term incentive grants are delivered in the form of performance-vesting RSUs and time-vesting SOs for a balanced mix of incentives and ownership. The grants generally settle in shares and vest after a three-year period and, in the case of the RSUs, when performance conditions are met. As applicable to other remuneration payments, long-term incentive vesting is subject to the Remuneration Committee’s approval and the long-term incentive schemes are reviewed regularly to ensure their design, process, structure and governance work together to balance incentives and risk. For time-vesting SOs, these are made to drive long-term focus and shareholder value creation with no performance conditions attached. The value of the SOs is linked to the future share price of the Company, which in turn depends on the performance of the Company. Together, performance-vesting RSUs and time-vesting SOs support attraction, motivation and retention of key talents. The 2010 RSU Scheme and the 2010 SO Scheme both adopted by the Company on 28 September 2010 were terminated with effect from 31 July 2020 and 29 May 2020, respectively and no further grants may be made under these schemes although outstanding grants will continue to vest based on their original terms. The 2020 RSU Scheme and the 2020 SO Scheme, with substantially the same terms as the 2010 RSU Scheme and the 2010 SO Scheme, respectively, were adopted by the Company on 1 August 2020 (2020 RSU Scheme Adoption Date) and 29 May 2020 (2020 SO Scheme Adoption Date), respectively. Both the 2020 RSU Scheme and the 2020 SO Scheme are effective for a period of 10 years from the respective date of adoption. Summaries of the 2020 RSU Scheme, the 2020 SO Scheme, the 2020 ESPP and the 2021 ASPP are set out below and in note 39 to the consolidated financial statements. RESTRICTED SHARE UNIT SCHEMES The 2020 RSU Scheme was adopted on 1 August 2020 and has a remaining life of approximately seven years. The purpose of the 2020 RSU Scheme is to align the participants’ interests with those of the Group through ownership of the shares of the Company (Shares) and/or the increase in value of the Shares. Under the RSU Scheme, the Company may grant RSUs (RSU Awards) to employees, directors (excluding independent non-executive directors) or officers of any member of the Group. The aggregate number of Shares available for issue underlying the RSU Awards granted under the 2020 RSU Scheme (and the 2010 RSU Scheme) during the scheme period is limited to 2.5 per cent of the numbler of Shares in issue on the reference date (RSU Reference Date, i.e. 29 May 2020), being 302,264,978 Shares (or such number of Shares as shall result from a sub-division or a consolidation of such 302,264,978 Shares from time to time), representing 2.59 per cent of the number of Shares in issue as at the date of this report. No consideration shall be payable by the participant on acceptance or vesting of any RSU Award granted under the 2020 RSU Scheme and there is no limit on the maximum entitlement of each participant under the Scheme. The vesting of an RSU Award is conditional upon the participant remaining in employment with the Group at the time of vesting of such RSU Award. The period between the date of the acceptance and the date of the vesting of the RSU Awards shall not be shorter than six months and the usual vesting period for the RSU Awards granted under the 2020 RSU Scheme is three years. 129 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Consistent with prior years, the vesting of performance-vesting RSUs is contingent on service requirements and the extent of achievement of the three-year performance targets for the following three performance measures: VONB EV EQUITY 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 Equity attributable to shareholders of the Company on the embedded value basis (EV Equity) is the total of embedded value, goodwill and other intangible assets 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 Relative total shareholder return (TSR) is the compound annual return from the ownership of a share over a period of time measured by calculating the change in the share price and the gross value of dividends received (and reinvested) during that period. AIA’s TSR is compared with the TSR of the peer companies* over the performance period * TSR peer companies for the performance-vesting RSUs granted 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. The performance-vesting RSUs are tested against pre-defined performance targets at the end of a three-year performance period. Achievement of each performance measure (with each measure having an equal weighting) will independently determine the vesting of one-third of the target number of RSU grants. • Threshold performance levels (for TSR, the 25th percentile of peer companies’ performance) are required for any RSUs to vest. • At target performance levels (for TSR, the median of peer companies’ performance), 100 per cent of the target number of RSUs will vest. • At maximum performance levels (for TSR, the 75th percentile or above of peer companies’ performance), 200 per cent of the target number of RSUs will vest. During the year ended 31 December 2022, the Company granted 12,535,139 RSUs under the 2020 RSU Scheme. The 2022 performance-vesting RSU grants will be assessed over a three-year period from 1 January 2022 to 31 December 2024 taking into consideration the performance measures described above. During the year ended 31 December 2022, 5,178,037 RSUs vested under the 2010 RSU Scheme, while 734,802 vested under the 2020 RSU Scheme. Having assessed the pre-determined performance targets for the VONB, EV Equity and relative TSR measures over the three-year period from 1 January 2019 to 31 December 2021, the Remuneration Committee approved the vesting of the RSU Awards granted in 2019 at 111.22 per cent of target. Since the 2020 RSU Scheme Adoption Date and up to 31 December 2022, a cumulative total of 11,955,041 RSUs vested under the 2010 RSU Scheme and the 2020 RSU Scheme, underlying Shares of which represent 0.099 per cent of the number of Shares in issue as at the RSU Reference Date. During the same period, no new Shares have been issued upon vesting of the RSU Awards under the 2010 RSU Scheme and the 2020 RSU Scheme. As at 31 December 2022, there were a total of 29,603,948 RSUs outstanding under the 2010 RSU Scheme and the 2020 RSU Scheme, representing 0.251 per cent of the number of Shares in issue as at 31 December 2022. 130 AIA GROUP LIMITEDREMUNERATION REPORTCORPORATE GOVERNANCE n/a n/a n/a Weighted average closing price of Shares immediately before the dates on which RSUs vested (HK$) RSU Movements During the Year Ended 31 December 2022 The table below summarises the movements in RSUs under the 2010 RSU Scheme and the 2020 RSU Scheme during the year ended 31 December 2022. Date of grant (day / month / year) (1) Date of vesting (day / month / year) (2) RSUs outstanding as at 1 January 2022 RSUs granted during the year ended 31 December 2022 RSUs vested during the year ended 31 December 2022 RSUs cancelled / lapsed / reclassified during the year ended 31 December 2022 RSUs outstanding as at 31 December 2022 (18) Weighted average closing price of Shares immediately before the dates on which RSUs vested (HK$) Group Chief Executive and President Mr. LEE Yuan Siong 2010 RSU Scheme 13/3/2020 25/3/2020 2020 RSU Scheme 24/3/2021 17/3/2022 See Note (3) 1,468,714 – (315,561) – 1,153,153 88.00 25/3/2023 (4) 420,426 24/3/2024 (4) 429,546 – – – – 420,426 – – 429,546 17/3/2025 (5) – 586,664 – – 586,664 All eligible employees and participants Five highest-paid individuals Other eligible employees and participants(6) Date of grant (day / month / year) (1) Date of vesting (day / month / year) (2) RSUs outstanding as at 1 January 2022 RSUs granted during the year ended 31 December 2022 RSUs vested during the year ended 31 December 2022 RSUs cancelled / lapsed / reclassified during the year ended 31 December 2022 RSUs outstanding as at 31 December 2022 (18) 2010 RSU Scheme 27/3/2019 27/3/2022 (4) 347,076 – (193,010) (154,066) 30/12/2019 30/12/2022 (7) 395,826 – (395,826) See Note (3) 1,468,714 – (315,561) – – 80.20 81.35 1,153,153 88.00 – – 25/3/2023 (4) 781,828 – (59,983) (59,983) 661,862 77.60 24/3/2022 (8) 36,203 – (36,203) – – 83.25 24/3/2024 (4) 820,034 – (70,504) (70,504) 679,026 77.60 See note (9) – 141,441 (47,147) – 94,294 73.50 17/3/2025 (5) – 2,086,592 (91,998) (91,998) 1,902,596 77.60 17/3/2025 (10) – 33,355 (11,464) – 21,891 77.60 27/3/2022 (4) 7,503,402 – (4,101,659) (3,401,743) 1/5/2022 (4) 43,662 – (24,282) (19,380) 30/12/2019 30/12/2022 (7) 49,482 – (49,482) – – – – 80.20 77.75 85.10 25/3/2023 (4) 8,806,127 – (38,234) (603,778) 8,164,115 75.03 10/6/2023 (4) 31,142 – – – 31,142 n/a 24/3/2022 (8) 426,023 – (420,546) (5,477) – 83.24 24/3/2024 (4) 7,393,861 – (14,566) (550,876) 6,828,419 73.47 24/3/2024 (11) 24/3/2022 (8) 2/6/2024 (4) 2/6/2024 (12) 77,480 – – 40,223 – (40,223) 82,624 – 4,484 – – – (15,014) – – – 77,480 n/a – 83.25 67,610 4,484 51,994 58,773 n/a n/a n/a n/a – – – – 30/9/2021 30/9/2024 (4) 51,994 – 17/12/2021 17/12/2024 (13) 58,773 – 13/3/2020 25/3/2020 2020 RSU Scheme 24/3/2021 24/3/2021 14/3/2022 17/3/2022 17/3/2022 2010 RSU Scheme 27/3/2019 15/5/2019 25/3/2020 10/6/2020 2020 RSU Scheme 24/3/2021 24/3/2021 24/3/2021 30/3/2021 2/6/2021 2/6/2021 17/3/2022 17/3/2022 28/3/2022 19/5/2022 19/5/2022 15/9/2022 2010 RSU Scheme 2020 RSU Scheme Total 17/3/2025 (5) 17/3/2025 (10) 17/3/2025 (14) 17/3/2025 (15) 19/5/2025 (16) 15/9/2025 (17) – – – – – – 10,135,148 (2,151) (464,491) 9,668,506 70.14 60,449 12,030 9,002 20,374 36,748 – – – – – – – – – – 60,449 12,030 9,002 20,374 36,748 n/a n/a n/a n/a n/a 19,427,259 – (5,178,037) (4,238,950) 10,010,272 80.73 8,991,699 12,535,139 (734,802) (1,198,360) 19,593,676 81.05 28,418,958 12,535,139 (5,912,839) (5,437,310) 29,603,948 80.77 Grand Total 131 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNotes: (1) The measurement dates (i.e., the dates used to determine the value of the grants for accounting purposes) for grants made during the year ended 31 December 2019 were determined to be 27 March 2019, 15 May 2019 and 30 December 2019. The measurement dates for grants made during the year ended 31 December 2020 were determined to be 13 March 2020, 25 March 2020 and 10 June 2020. The measurement dates for grants made during the year ended 31 December 2021 were determined to be 24 March 2021, 30 March 2021, 2 June 2021, 30 September 2021 and 17 December 2021. The measurement dates for grants made during the year ended 31 December 2022 were determined to be 14 March 2022, 17 March 2022, 28 March 2022, 19 May 2022 and 15 September 2022. These measurement dates were determined in accordance with IFRS 2. (2) The date of vesting is subject to applicable dealing restrictions. (3) Reference is made to the Company’s announcement dated 22 November 2019. These RSUs relate to the awarded compensation for unvested long- term incentives and deferred payments that Mr. Lee Yuan Siong forfeited on leaving his prior employment. The vesting of these RSUs is service-based only (i.e., there are no further performance conditions attached except for continued employment). The first three tranches of 315,561 RSUs each had vested on 13 September 2020, 21 February 2021 and 21 February 2022 respectively. Subject to continued employment, the remaining tranches of 315,561 RSUs each are scheduled to vest on 21 February 2023 and 21 February 2024 respectively and 522,031 RSUs are scheduled to vest on 21 February 2025. (4) The vesting of these RSUs is subject to service requirements and the achievement of performance measures shown on page 130 of this Annual Report. (5) The closing price of the Shares immediately before the date on which RSUs were granted was HK$75.00. The fair value of the RSUs at the date of grant was determined to be HK$64.11. The vesting of these RSUs is subject to service requirements and the achievement of performance measures shown on page 130 of this Annual Report. (6) Includes the RSUs of the retired Group Chief Executive and President, Mr. Ng Keng Hooi, that were outstanding as at 1 January 2022. (7) The vesting of these RSUs is service-based only (i.e., there are no further performance conditions attached except for continued employment). Subject to continued employment, all RSUs vested on 30 December 2022. (8) The vesting of these RSUs is service-based only (i.e., there are no further performance conditions attached except for continued employment). All RSUs vested on 24 March 2022. (9) The closing price of the Shares immediately before the date on which RSUs were granted was HK$77.25. The vesting of these RSUs is service-based only (i.e., there are no further performance conditions attached except for continued employment). The first traches of 47,147 RSUs had vested on 14 September 2022 (fair value was determined to be HK$76.89). Subject to continued employment, the remaining two tranches of 47,147 RSUs each are scheduled to vest on 14 March 2023 (fair value was determined to be HK$76.24) and 14 March 2024 (fair value was determined to be HK$74.96) respectively. (10) The closing price of the Shares immediately before the date on which RSUs were granted was HK$75.00. The fair value of the RSUs at the date of grant was determined to be HK$75.88. The vesting of these RSUs is service-based only (i.e., there are no further performance conditions attached except for continued employment). Subject to continued employment, all RSUs will vest on 17 March 2025. (11) The vesting of these RSUs is service-based only (i.e., there are no further performance conditions attached except for continued employment). Subject to continued employment, all RSUs will vest on 24 March 2024. (12) The vesting of these RSUs is service-based only (i.e., there are no further performance conditions attached except for continued employment). Subject to continued employment, all RSUs will vest on 2 June 2024. (13) The vesting of these RSUs is service-based only (i.e., there are no further performance conditions attached except for continued employment). Subject to continued employment, all RSUs will vest on 17 December 2024. (14) The closing price of the Shares immediately before the date on which RSUs were granted was HK$80.20. The fair value of the RSUs at the date of grant was determined to be HK$63.35. The vesting of these RSUs is subject to service requirements and the achievement of performance measures shown on page 130 of this Annual Report. (15) The closing price of the Shares immediately before the date on which RSUs were granted was HK$78.10. The fair value of the RSUs at the date of grant was determined to be HK$66.29. The vesting of these RSUs is subject to service requirements and the achievement of performance measures shown on page 130 of this Annual Report. (16) The closing price of the Shares immediately before the date on which RSUs were granted was HK$78.10. The fair value of the RSUs at the date of grant was determined to be HK$66.15. The vesting of these RSUs is subject to service requirements and the achievement of performance measures shown on page 130 of this Annual Report. (17) The closing price of the Shares immediately before the date on which RSUs were granted was HK$71.50. The fair value of the RSUs at the date of grant was determined to be HK$55.80. The vesting of these RSUs is subject to service requirements and the achievement of performance measures shown on page 130 of this Annual Report. (18) Includes RSUs outstanding as at 31 December 2022 that, in accordance with the 2010 RSU Scheme rules and 2020 RSU Scheme rules, will lapse on or before the respective vesting date. No consideration shall be payable by the participant on acceptance of any RSU Award granted. 132 AIA GROUP LIMITEDREMUNERATION REPORTCORPORATE GOVERNANCESHARE OPTION SCHEMES The 2020 SO Scheme was adopted on 29 May 2020 and has a remaining life of approximately seven years. The purpose of the SO Scheme is to align the participants’ interests with those of the Group through ownership of Shares and/or the increase in value of Shares. Under the 2020 SO Scheme, the Company may grant SOs to employees, directors (excluding independent non-executive directors) or officers of any member of the Group. The aggregate number of Shares available for issue upon exercise of all SOs granted by the Company (excluding SOs that have lapsed) pursuant to the 2020 SO Scheme and any other share option scheme of the Company (i.e., the 2010 SO Scheme) must not exceed 2.5 per cent of the number of Shares in issue on the adoption date of the 2020 SO Scheme, being 302,264,978 shares (representing 2.59 per cent of the number of Shares in issue as at the date of this report). The maximum number of Shares underlying the SOs that may be granted to any participant in any 12-month period is 0.25 per cent (or 0.1 per cent for a substantial shareholder of the Company) of the number of Shares in issue as at the date of the relevant grant. No SOs have been granted to substantial shareholders or in excess of the individual limit pursuant to the SO Schemes since their adoption. No consideration is payable by the participant on acceptance of any SO granted under the 2020 SO Scheme. Each SO entitles the participant to subscribe for one ordinary share of the Company. The exercise price of SOs is the higher of (i) the closing price of the Shares on the date of grant and (ii) the average closing price of the Shares for the five business days immediately preceding the date of grant. The minimum holding period of an SO is six months from date of acceptance and an SO shall have a maximum life of 10 years from grant. The SOs are generally exercisable three years after the date of grant and remain exercisable for another seven years. During the year ended 31 December 2022, the Company granted 2,519,456 SOs under the 2020 SO Scheme and 1,895,760 new Shares were issued upon exercise of the SOs granted under the 2010 SO Scheme. As at 31 December 2022, there are a total of 23,973,304 SOs outstanding under the 2010 SO Scheme and the 2020 SO Scheme, representing 0.023 per cent of the number of Shares in issue as at 31 December 2022. Since the 2020 SO Scheme Adoption Date and up to 31 December 2022, a cumulative total of 7,107,674 new Shares were issued under the 2010 SO Scheme, representing approximately 0.059 per cent of the number of Shares in issue as at the 2020 SO Scheme Adoption Date. During the same period, no new Shares were issued under the 2020 SO Scheme. As at the date of this report, the total number of Shares which are available for issue underlying the SOs granted under the 2020 SO Scheme and 2010 SO Scheme is 295,033,671 Shares, representing approximately 2.53 per cent of the number of Shares in issue. There are 273,693,293 and 271,184,000 SOs available for grant under the scheme mandate of the 2020 SO Scheme as at 1 January 2022 and 31 December 2022, respectively. 133 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSO Movements During the Year Ended 31 December 2022 The table below summarises the movements in SOs under the 2010 SO Scheme and the 2020 SO Scheme during the year ended 31 December 2022. Group Chief Executive and President and other eligible employees and participants Date of grant (day / month / year) (2) Period during which SOs are exercisable (day / month / year) SOs outstanding as at 1 January 2022 SOs granted during the year ended 31 December 2022 SOs vested during the year ended 31 December 2022 Group Chief Executive and President Mr. LEE Yuan Siong Other eligible employees and participants (1) 2010 SO Scheme 25/3/2020 25/3/2023 - 24/3/2030 (3) 1,197,133 2020 SO Scheme 24/3/2021 24/3/2024 - 23/3/2031 (4) 464,526 – – 17/3/2022 17/3/2025 - 16/3/2032 (5) – 660,259 2010 SO Scheme 15/3/2012 15/3/2015 - 14/3/2022 (6) 11/3/2013 11/3/2016 - 10/3/2023 (7) 5/3/2014 5/3/2017 - 4/3/2024 (8) 237,858 515,473 808,536 12/3/2015 12/3/2018 - 11/3/2025 (9) 1,499,612 9/3/2016 9/3/2019 - 8/3/2026 (10) 1,820,181 10/3/2017 10/3/2020 - 9/3/2027 (11) 3,604,194 31/7/2017 1/6/2020 - 30/7/2027 (12) 830,436 15/3/2018 15/3/2021 - 14/3/2028 (13) 3,771,706 27/3/2019 27/3/2022 - 26/3/2029 (14) 3,347,437 15/5/2019 1/5/2022 - 14/5/2029 (15) 82,221 25/3/2020 25/3/2023 - 24/3/2030 (3) 3,805,191 2020 SO Scheme 24/3/2021 24/3/2024 - 23/3/2031 (4) 1,375,267 – – – – – – – – – – – – 17/3/2022 17/3/2025 - 16/3/2032 (5) – 1,859,197 – – – – – – – – – – – 3,300,258 82,221 341,592 152,491 207,077 SOs cancelled / lapsed / reclassified during the year ended 31 December 2022 SOs exercised during the year ended 31 December 2022 SOs outstanding as at 31 December 2022 (16) Exercise price (HK$) Weighted average closing price of Shares immediately before the dates on which SOs were exercised (HK$) – 68.10 1,197,133 n/a – – – – – – – – – – – – – – (10,163) – – – – (237,858) (478,207) (459,621) (413,243) (182,234) – – (45,213) (47,179) – (32,205) – – 97.33 79.85 28.40 34.35 37.56 47.73 41.90 50.30 61.55 67.15 76.38 78.70 68.10 97.33 79.85 464,526 660,259 – 37,266 348,915 1,086,369 1,637,947 3,604,194 830,436 3,726,493 3,300,258 82,221 3,772,986 1,365,104 1,859,197 (1,895,760) 19,624,218 n/a n/a 78.86 67.80 84.33 86.23 83.66 n/a n/a 79.75 79.75 n/a 79.75 n/a n/a 79.52 n/a 79.52 Grand Total 2010 SO Scheme 2020 SO Scheme Total 21,519,978 – 3,724,071 1,839,793 2,519,456 359,568 (10,163) – 4,349,086 23,359,771 2,519,456 4,083,639 (10,163) (1,895,760) 23,973,304 Notes: (1) Includes SOs of the retired Group Chief Executive and Presidents, Mr. Mark Edward Tucker and Mr. Ng Keng Hooi, that were outstanding as at 1 January 2022. (2) The measurement date (i.e., the date used to determine the value of the grants for accounting purposes) for grants made during the year ended 30 November 2012 was determined to be 15 March 2012. The measurement date for grants made during the year ended 30 November 2013 was determined to be 11 March 2013. The measurement date for grants made during the year ended 30 November 2014 was determined to be 5 March 2014. The measurement date for grants made during the year ended 30 November 2015 was determined to be 12 March 2015. The measurement date for grants made during the year ended 30 November 2016 was determined to be 9 March 2016. The measurement dates for grants made during the year ended 30 November 2017 were determined to be 10 March 2017 and 31 July 2017. The measurement date for grants made during the thirteen months ended 31 December 2018 was determined to be 15 March 2018. The measurement dates for grants made during the year ended 31 December 2019 were determined to be 27 March 2019 and 15 May 2019. The measurement date for grant made during the year ended 31 December 2020 was determined to be 25 March 2020. The measurement date for grants made during the year ended 31 December 2021 was determined to be 24 March 2021. The measurement date for grants made during the year ended 31 December 2022 was determined to be 17 March 2022. These measurement dates were determined in accordance with IFRS 2. (3) The vesting of SOs is service-based only. Subject to continued employment, all SOs will vest on 25 March 2023. (4) The vesting of SOs is service-based only. Subject to continued employment, all SOs will vest on 24 March 2024. (5) The closing price of the Shares immediately before the date on which SOs were granted was HK$75.00. The fair value of the SOs at the date of grant was determined to be HK$21.00. The vesting of SOs is service-based only. Subject to continued employment, all SOs will vest on 17 March 2025. (6) The vesting of SOs is service-based only. All SOs vested on 15 March 2015. (7) The vesting of SOs is service-based only. All SOs vested on 11 March 2016. (8) The vesting of SOs is service-based only. All SOs vested on 5 March 2017. (9) The vesting of SOs is service-based only. All SOs vested on 12 March 2018. (10) The vesting of SOs is service-based only. All SOs vested on 9 March 2019. 134 AIA GROUP LIMITEDREMUNERATION REPORTCORPORATE GOVERNANCE (11) The vesting of SOs is service-based only. All SOs vested on 10 March 2020. (12) The vesting of SOs is service-based only. All SOs vested on 1 June 2020. (13) The vesting of SOs is service-based only. All SOs vested on 15 March 2021. (14) The vesting of SOs is service-based only. All SOs vested on 27 March 2022. (15) The vesting of SOs is service-based only. All SOs vested on 1 May 2022. (16) Includes SOs outstanding as at 31 December 2022 that, in accordance with the 2010 SO Scheme rules and 2020 SO Scheme rules, will lapse on or before the end of the respective periods during which the SOs are exercisable. EMPLOYEE SHARE PURCHASE PLANS The 2011 ESPP and the 2020 ESPP (together, ESPPs) are designed to facilitate and encourage long-term AIA share ownership by employees to strengthen employees’ sense of belonging and encourage retention. Under the ESPPs, the Company may grant restricted stock purchase units (RSPUs) to the participants (being permanent employees of the Group) to match their Share purchases. The 2011 ESPP, adopted by the Company on 25 July 2011 with a term of 10 years from the date of adoption, was terminated with effect from 31 October 2020. Upon the termination of the 2011 ESPP, no further RSPUs can be granted thereunder. However, the 2011 ESPP shall remain in full force and effect for all RSPUs granted prior to its termination, and the vesting of such RSPUs shall be subject to and made in accordance with the terms on which they were granted under the 2011 ESPP. The 2020 ESPP, with substantially the same terms as the 2011 ESPP, was adopted by the Company on 1 August 2020 (2020 ESPP Adoption Date). It is effective for a period of 10 years from the 2020 ESPP Adoption Date and has a remaining life of approximately seven years. Under the 2020 ESPP, eligible employees of the Group may elect to purchase Shares and, through the grant of matching RSPUs, receive one matching Share for every two Shares purchased that are held until the vesting of the matching RSPUs, which is usually three years from the first day of Share purchase in a plan year. Each eligible employee’s participation level is capped at the lower of 10 per cent of the monthly base salary or HK$12,500 (or local currency equivalent) per calendar month. The matching Shares can either be awarded through the issuance of new Shares or the purchases of existing Shares on market by the plan trustee. The Company shall not issue any new Shares for the purpose of the vesting of the RSPUs if this would result in the aggregate number of Shares issued pursuant to the ESPPs during the 10-year period commencing on the 2020 ESPP Adoption Date, exceeding 2.5 per cent of the number of Shares in issue as at 29 May 2020, being 302,264,978 Shares (or such number of Shares as shall result from a sub-division or a consolidation of such 302,264,978 Shares from time to time), representing 2.59 per cent of the number of Shares in issue as at the date of this report). As at 31 December 2022, there were a total of 3,279,679 RSPUs outstanding under the 2011 ESPP and the 2020 ESPP, representing 0.028 per cent of the number of Shares in issue as at 31 December 2022. Since the 2020 ESPP Adoption Date, no new Shares were issued for RSPUs. No performance targets and clawback provisions are attached to RSPUs under the ESPPs as the primary purpose of the ESPPs is to strengthen employees’ sense of belonging and engagement by holding an equity stake in the Company. 135 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONDuring the year ended 31 December 2022, no matching RSPUs were granted, 1,113,355 matching RSPUs vested and no new Shares were issued under the 2011 ESPP. During the same period, 1,912,225 matching RSPUs were granted, 44,338 matching RSPUs vested and no new Shares were issued under the 2020 ESPP. Since the 2020 ESPP Adoption Date and up to 31 December 2022, a cumulative total of 3,298,512 matching RSPUs vested under the ESPPs and no new Shares were issued under either the 2011 ESPP or the 2020 ESPP. The table below summarises the movements in RSPUs under the 2011 ESPP and the 2020 ESPP during the year ended 31 December 2022. RSPUs outstanding as at 1 January 2022 459 936 RSPUs granted during the year ended 31 December 2022 (3) 965 RSPUs vested during the year ended 31 December 2022 (459) ESPP 2011 ESPP (1) 2020 ESPP (2) RSPUs outstanding as at 1 January 2022 2,771 3,746 1,218,536 1,691,589 1,221,307 1,695,335 2,916,642 RSPUs granted during the year ended 31 December 2022 (3) – 3,203 – 1,909,022 RSPUs vested during the year ended 31 December 2022 (2,771) (1,245) (1,110,584) (43,093) – (1,113,355) 1,912,225 1,912,225 (44,338) (1,157,693) ESPP 2011 ESPP (1) 2020 ESPP (2) 2011 ESPP (1) 2020 ESPP (2) 2011 ESPP 2020 ESPP Total RSPUs cancelled / lapsed / reclassified during the year ended 31 December 2022 – – RSPUs cancelled / lapsed / reclassified during the year ended 31 December 2022 – – (107,952) (283,543) (107,952) (283,543) (391,495) Weighted average closing price of Shares immediately before the dates on which RSPUs vested (HK$) 75.70 – Weighted average closing price of Shares immediately before the dates on which RSPUs vested (HK$) 76.23 77.60 75.73 76.51 75.73 76.54 75.77 RSPUs outstanding as at 31 December 2022 (4) – 1,901 RSPUs outstanding as at 31 December 2022 (4) – 5,704 – 3,273,975 – 3,279,679 3,279,679 Group Chief Executive and President Mr. LEE Yuan Siong Five highest-paid individuals Other eligible employees and participants Grand Total Notes: (1) The 2011 ESPP includes 2019 ESPP plan year with monthly purchase on every 15th of the month (or, if such day is not a business day, the next succeeding business day) from November 2019 to October 2020, and date of vesting on 15 November 2022. (2) The 2020 ESPP includes a) 2020 ESPP plan year with monthly purchase on every 15th of the month (or, if such day is not a business day, the next succeeding business day) from November 2020 to October 2021, and date of vesting on 16 November 2023; b) 2021 ESPP plan year with monthly purchase on every 15th of the month (or, if such day is not a business day, the next succeeding business day) from November 2021 to October 2022, and date of vesting on 15 November 2024; c) 2022 ESPP plan year with monthly purchase on every 15th of the month (or, if such day is not a business day, the next succeeding business day) from November 2022 to October 2023, and date of vesting on 15 November 2025. (3) RSPUs were purchased and granted every 15th of the month, (or, if such day is not a business day, the next succeeding business day). For details of closing price of Shares immediately before the dates on which RSPUs were granted, please refer to share price on www.aia.com. For the fair value, they were determined to be HK$68.88 on 17 January 2022, HK$68.08 on 15 February 2022, HK$68.26 on 15 March 2022, HK$68.12 on 19 April 2022, HK$68.59 on 16 May 2022, HK$68.23 on 15 June 2022, HK$66.41 on 15 July 2022, HK$64.10 on 15 August 2022, HK$62.33 on 15 September 2022, HK$73.51 on 17 October 2022, HK$77.05 on 15 November 2022 and HK$78.86 on 15 December 2022. (4) No consideration is payable by participants on the grant of RSPUs. For further information on the ESPPs, please refer to note 39 to the consolidated financial statements. The number of Shares that may be issued in respect of share options and awards granted under all schemes during the year ended 31 December 2022 divided by the weighted average number of Shares in issue for the year ended 31 December 2022 is 0.0298 per cent. 136 AIA GROUP LIMITEDREMUNERATION REPORTCORPORATE GOVERNANCE DIRECTORS AND KEY MANAGEMENT PERSONNEL EMOLUMENTS KEY MANAGEMENT PERSONNEL The total remuneration cost charged to the consolidated income statement for the Key Management Personnel during year ended 31 December 2022 was US$46,690,944. Details of remuneration provided during the year ended 31 December 2022 are included in note 40 to the consolidated financial statements. EXECUTIVE DIRECTOR Mr. Lee Yuan Siong received remuneration exclusively for his role as Group Chief Executive and President and received no separate fees for his role as a Board Director or for acting as a director of any subsidiary companies. The table below provides details of annualised target level of remuneration, excluding benefits and allowances, for the Group Chief Executive and President. US$ thousands Base Salary (2) Target short-term incentive Target long-term incentive Total Annualised Target Pay Opportunity Annualised Target Pay Opportunity (1) 2022 Mr. Lee Yuan Siong 2021 Mr. Lee Yuan Siong 1,140 2,350 4,400 7,890 1,111 2,200 3,960 7,271 Notes: (1) The target remuneration levels shown in the table above represent the annualised amount for each of them excluding benefits and allowances. Mr. Lee Yuan Siong also received an annualised housing allowance of HK$3,000,000 for each of the years 2021 and 2022. (2) Mr. Lee Yuan Siong’s base salary represents the annualised amount as of 1 March (being the annual review salary effective date) for each of the years 2021 and 2022. Base salaries are paid in Hong Kong Dollars and 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 year ended 31 December 2022 in relation to the Group Chief Executive and President are included in note 40 to the consolidated financial statements. During the year ended 31 December 2022, the Remuneration Committee reviewed and approved the contractual arrangement for the Group Chief Executive and President, Mr. Lee Yuan Siong. Starting from the first quarter of 2023, Mr. Lee will be employed under an open-ended contract. NON-EXECUTIVE DIRECTORS Remuneration for the Non-executive Directors was paid during the year ended 31 December 2022 and included fees for their services provided to the Board Committees. All remuneration of the 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 year ended 31 December 2022 are included in note 40 to the consolidated financial statements. Board Chairman The Board Chairman Basic Fees, inclusive of Board Membership fee, was US$750,000 per annum for the year ended 31 December 2022. 137 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNon-executive Directors Board Membership fees for the Non-executive Directors were US$220,000 per annum effective 1 January 2022, which is similar to market rates provided by our global insurance peers. Additional annual fees for Committee Membership and Chair positions are also provided to the Non-executive Directors as follows: Audit Committee Nomination Committee Remuneration Committee Risk Committee Chair US$75,000 US$30,000 US$65,000 US$65,000 Member US$50,000 US$20,000 US$40,000 US$40,000 Non-executive Directors who have also acted as representatives of the Board to attend the ESG Committee, being a management committee of the Company, are provided with an additional annual fee of US$20,000. ADDITIONAL DISCLOSURES AGENCY SHARE PURCHASE PLANS The 2012 ASPP and the 2021 ASPP (together, ASPPs) are designed to facilitate and encourage long-term AIA share ownership by selected agency leaders and agents of the Group. Under the ASPPs, the Company may grant restricted stock subscription units (RSSUs) to the participants to match their Share purchases. The 2012 ASPP, adopted by the Company on 23 February 2012, was terminated with effect from 31 March 2021. Upon the termination of the 2012 ASPP, no further RSSUs can be granted thereunder. However, the 2012 ASPP shall remain in full force and effect for all RSSUs granted prior to its termination, and the vesting of such RSSUs shall be subject to the terms on which they were granted under the 2012 ASPP. The 2021 ASPP, with substantially the same terms as the 2012 ASPP, was adopted by the Company on 1 February 2021 (2021 ASPP Adoption Date). It is effective for a period of 10 years from the 2021 ASPP Adoption Date and has a remaining life of approximately eight years. Under the 2021 ASPP, the participants may elect to purchase the Shares and, through the grant of matching RSSUs, receive one matching Share for every two Shares purchased that are held until the vesting of the matching RSSUs, which usually takes place three years from the first day of Share purchase in a plan year. Each eligible agent’s participation level is capped at HK$12,500 (or local currency equivalent) per calendar month. The participants have to pay, no later than 15 business days after the vesting date, a subscription price of US$1.00 each for all the vested matching RSSUs, following which the Company will issue new Shares to Computershare Hong Kong Trustees Limited (being the plan trustee) to be allocated to the participants. 138 AIA GROUP LIMITEDREMUNERATION REPORTCORPORATE GOVERNANCEThe Company shall not issue any new Shares for the purpose of the vesting of the RSSUs if this would result in the aggregate number of Shares issued pursuant to the ASPPs during the 10-year period commencing on the 2021 ASPP Adoption Date, exceeds 2.5 per cent of the number of Shares as at 29 May 2020, being 302,264,978 Shares (or such number of Shares as shall result from a sub-division or a consolidation of such 302,264,978 Shares from time to time), representing 2.59 per cent of the number of Shares in issue as at the date of this report). 298,271,404 and 297,341,560 RSSUs are available for grant under the mandate of the 2021 ASPP as at 1 January 2022 and 31 December 2022, respectively. As at 31 December 2022, there were a total of 2,611,300 RSSUs outstanding under the 2012 ASPP and the 2021 ASPP, representing 0.022 per cent of the number of Shares in issue as at 31 December 2022. No performance targets and clawback provisions are attached to RSSUs under the ASPPs as the primary purpose of the ASPP is to strengthen the agents sense of belonging and engagement by holding an equity stake in the Company. During the year ended 31 December 2022, no matching RSSUs were granted, 1,119,763 matching RSSUs vested and 1,119,763 new Shares were issued under the 2012 ASPP. During the same period, 1,030,885 matching RSSUs were granted, no matching RSSUs vested and no new Shares were issued under the 2021 ASPP. Since the 2021 ASPP Adoption Date and up to 31 December 2022, a cumulative total of 2,312,118 matching RSSUs vested under the ASPPs and 2,312,118 new Shares were issued under either the 2012 ASPP or the 2021 ASPP. The table below summarises the movements in RSSUs under 2012 ASPP and 2021 ASPP during the year ended 31 December 2022 for the eligible participants. RSSUs outstanding as at 1 January 2022 2,177,338 623,881 2,801,219 RSSUs granted during the year ended 31 December 2022 (3) RSSUs vested during the year ended 31 December 2022 – (1,119,763) 1,030,885 1,030,885 – (1,119,763) ASPP 2012 ASPP (1) 2021 ASPP (2) Total RSSUs cancelled / lapsed / reclassified during the year ended 31 December 2022 (52,337) (48,705) (101,042) RSSUs outstanding as at 31 December 2022 1,005,238 1,606,062 2,611,300 Weighted average closing price of Shares immediately before the dates on which RSSUs vested (HK$) 77.90 n/a 77.90 Eligible participants Notes: (1) The 2012 ASPP includes a) 2019 ASPP plan year with monthly purchase on every 27th of the month, (or, if such day is not a business day, the next succeeding business day) from April 2019 to March 2020, and date of vesting on 29 April 2022; b) 2020 ASPP plan year with monthly purchase on every 27th of the month (or, if such day is not a business day, the next succeeding business day) from April 2020 to March 2021, and date of vesting on 27 April 2023. (2) The 2021 ASPP includes a) 2021 ASPP plan year with monthly purchase on every 27th of the month (or, if such day is not a business day, the next succeeding business day) from May 2021 to April 2022, and date of vesting on 27 May 2024; b) 2022 ASPP plan year with monthly purchase on every 27th of the month (or, if such day is not a business day, the next succeeding business day) from May 2022 to April 2023, and date of vesting on 27 May 2025. (3) The allocation date of the RSSUs is on every 27th of the month, (or, if such day is not a business day, the next succeeding business day). For details of closing price of Shares immediately before the dates on which RSSUs were allocated to the participants, please refer to the share price on www.aia.com. The fair value of the RSSUs granted during the year was measured to be HK$58.32 on 28 March 2022, being the last date of the enrolment period of the 2022 ASPP, under IFRS 2 Share-based Payment. Further details of the methodology and assumptions used to calculate the fair value of the RSSUs granted under IFRS 2 Share-based Payment is disclosed in note 39 to the consolidated financial statements. (4) The subscription price of RSSUs is US$1.00 per share. For further information on the ASPPs, please refer to note 39 to the consolidated financial statements. 139 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION25. 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 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. Disposal group held for sale 46. Statement of financial position of the Company 47. Statement of changes in equity of the Company 264 Independent Auditor’s Report on the Supplementary Embedded Value Information 268 Supplementary Embedded Value Information FINANCIAL STATEMENTS 141 Independent Auditor’s Report 149 Consolidated Income Statement 150 Consolidated Statement of Comprehensive Income 151 Consolidated Statement of Financial Position 153 Consolidated Statement of Changes in Equity 155 Consolidated Statement of Cash Flows 157 Notes to the Consolidated Financial Statements and Material Accounting Policy Information 1. Corporate information 2. Material accounting policy information 3. Critical accounting estimates and judgements 4. Exchange rates 5. Premiums and fee income 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 ventures 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 24. Impairment of financial assets 140 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”), which are set out on pages 149 to 263, comprise: • • • • • • the consolidated statement of financial position as at 31 December 2022; the consolidated income statement for the year then ended; the consolidated statement of comprehensive income for the year then ended; the consolidated statement of changes in equity for the year then ended; the consolidated statement of cash flows for the year then ended; and the notes to the consolidated financial statements, including material accounting policy information. 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 2022, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and 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. 141 ANNUAL REPORT 2022FINANCIAL STATEMENTSINDEPENDENT AUDITOR’S REPORTOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONKey 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 2.3 for related accounting policies, Note 3 for critical accounting estimates and judgements, Note 26, Note 28 and Note 2.1(c) for the result of the combined effect of the adoption of IFRS 9 and IFRS 17 as at 1 January 2022. As at 31 December 2022, the Group has insurance contract liabilities of US$220,713 million. We tested how management made the estimate and performed audit procedures including the following: • We understood the valuation methodologies used, identified changes in methodologies from previous valuation and assessed the impact of material reasonableness and 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. • We assessed the reasonableness of the key assumptions including those for mortality, morbidity, persistency, expense, investment return and valuation interest rates as well as the provision for adverse deviation. Our assessment of the assumptions included: o Obtaining an understanding of, and testing, the controls in place to determine the assumptions; o Examining the approach used by management to derive the assumptions by applying our industry knowledge and experience; involves liabilities The Director’s valuation of these insurance contract significant judgement about uncertain future outcomes, including mortality, morbidity, persistency, expense, investment return, valuation interest rates and provision for adverse deviation, as well as complex valuation methodologies. Therefore, these liabilities are subject to significant estimation uncertainty and the associated is considered significant. inherent risk policies with The liabilities for traditional participating life assurance 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 adjusted for adverse deviation. These assumptions remain locked in thereafter, subject to meeting a liability adequacy test which compares the liabilities with a valuation on current best estimate assumptions. 142 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 liabilities for unearned 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, we have focused on those insurance contracts where the assumptions are reassessed at each reporting date as well as how assumptions are set at policy inception dates. We have, in relation to valuation methodologies used, focused on changes in methodologies from the previous valuation as well as methodologies applied to material new product types (as applicable). o Challenging the key assumptions used by management against past experience, market observable data (as applicable) and our experience of market practice. • 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. 143 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT AUDITOR’S REPORTKey Audit Matters (continued) Key audit matter How our audit addressed the key audit matter a) Valuation of insurance contract liabilities (continued) We performed the following procedures over the Group’s disclosures regarding the effect of the adoption of IFRS 17: • Obtained an understanding of the new accounting policies including management’s judgements in determining the approach for transition, the level of aggregation of groups of insurance contracts and the measurement of FCF to evaluate whether management had developed appropriate policies; • Obtained an understanding of the valuation methodologies and models selected deployed by management for transition and industry knowledge and applied our experience the methodologies and models are appropriate; to evaluate whether • Tested, on a sample basis, that is the models the implementation of in accordance with model documentation by obtaining an understanding of and testing the key controls in place over the set up of models including the Economic Scenario Generation (“ESG”) process and validation of models; and involved judgements • Evaluated and challenged, on a sample basis, the in the selection of assumptions in relation to the measurement of FCF and the application of the fair value approach at transition with reference to past experience and market observable data (as applicable). Based upon the work performed, we found the methodologies and assumptions used by management to prepare the relevant disclosure to be appropriate. Furthermore, the Group disclosed that the combined effect of the adoption of IFRS 9 and IFRS 17 as at 1 January 2022 (the transition date) would reduce the shareholders’ equity and shareholders’ allocated equity measured under IFRS 9 and IFRS 17 of the Group as disclosed in Note 2.1(c). in IFRS 17 is a complex accounting standard which requires considerable judgements and interpretations implementation of its transition requirements. This includes the approach to transition setting of actuarial assumptions and selection of valuation methodologies, and the models deployed in the measurement of fulfilment cash flows (“FCF”). Upon transition, the Group applied the fair value approach for certain groups of insurance contracts. This involves additional the judgements determination of the fair value of the insurance contract liabilities for these groups. estimates and in Given the complexity of the application of IFRS 17 and the significance of the information disclosed, the quantitative disclosures are subject to significant estimation uncertainty and the associated inherent risk is considered significant. As part of our audit, we focused on the significant judgements and estimates applied on the adoption of IFRS 17. 144 AIA GROUP LIMITEDFINANCIAL STATEMENTSKey Audit Matters (continued) Key audit matter b) Amortisation of DAC How our audit addressed the key audit matter Refer to the following notes in the consolidated financial statements: Note 2.3.1 for related accounting policies, Note 3.3 for critical accounting estimates and judgements, Note 10 and Note 19. As at 31 December 2022, the Group has reported DAC of US$29,743 million. We tested how management made the estimate and performed audit procedures including the following: 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. policies involves The amortisation of DAC for universal life and greater unit-linked 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 are revised regularly and significant judgement is exercised in making appropriate estimates of gross profits. Therefore, the determination of amortisation of DAC for these contracts are subject to significant estimation uncertainty and the associated is considered significant. inherent risk As part of our audit we have focused on DAC life and unit-linked related to universal policies where are reassessed at each reporting date. assumptions the and policy accounting • 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. 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. 145 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT AUDITOR’S REPORTOther Information The Directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor’s report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do 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 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, 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. Other Matter The Group has prepared Supplementary Embedded Value Information as at and for the year ended 31 December 2022 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 10 March 2023. 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 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. 146 AIA GROUP LIMITEDFINANCIAL STATEMENTSAuditor’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. As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • 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. • 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. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. • 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. • 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. • 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. 147 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT AUDITOR’S REPORTAuditor’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, actions taken to eliminate threats or safeguards applied. 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 Ling Tung Man, Tom. PricewaterhouseCoopers Certified Public Accountants Hong Kong 10 March 2023 148 AIA GROUP LIMITEDFINANCIAL STATEMENTSUS$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 losses from associates and joint ventures Share of losses from associates and joint ventures Profit before tax Tax expense Net profit Net profit attributable to: Shareholders of AIA Group Limited Non-controlling interests EARNINGS PER SHARE (US$) Basic Diluted Notes Year ended 31 December 2022 Year ended 31 December 2021 5 9 9 36,519 (2,607) 33,912 (15,156) 354 19,110 12,158 (2,194) 9,964 4,016 3,251 394 962 37,123 (2,679) 34,444 12,748 333 47,525 32,381 (2,326) 30,055 4,597 3,031 357 1,006 10 18,587 39,046 523 (32) 491 (171) 320 282 38 0.02 0.02 8,479 (11) 8,468 (991) 7,477 7,427 50 0.62 0.61 11 12 12 149 ANNUAL REPORT 2022CONSOLIDATED INCOME STATEMENTFINANCIAL STATEMENTSOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONUS$m Net profit OTHER COMPREHENSIVE INCOME Items that may be reclassified subsequently to profit or loss: Fair value losses on available for sale financial assets (net of tax of: 2022: US$1,775m; 2021: US$726m)(2) Fair value losses/(gains) on available for sale financial assets transferred to profit or loss upon disposal and impairment (net of tax of: 2022: US$(42)m; 2021: US$76m)(2) Foreign currency translation adjustments Cash flow hedges Share of other comprehensive (expense)/income from associates and joint ventures Subtotal Items that will not be reclassified subsequently to profit or loss: Revaluation gains on property held for own use (net of tax of: 2022: US$(2)m; 2021: US$1m) Effect of remeasurement of net liability of defined benefit schemes (net of tax of: 2022: US$(6)m; 2021: US$(4)m) Subtotal Total other comprehensive expense Total comprehensive expense Total comprehensive expense attributable to: Shareholders of AIA Group Limited Non-controlling interests Year ended 31 December 2022 Year ended 31 December 2021 320 7,477 (15,625) (4,509) 725 (1,564) (1) (435) (2,329) (1,304) (1) 43 (16,900) (8,100) 36 25 61 43 25 68 (16,839) (16,519) (8,032) (555) (16,517) (2) (571) 16 Notes: (1) Where applicable, amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. (2) Gross of tax, policyholders’ participation and other shadow accounting related movements, US$29,630m (2021: US$7,755m) relates to the fair value losses on available for sale financial assets and US$767m relates to the fair value losses (2021: US$2,405m relates to the fair value gains) on available for sale financial assets transferred to profit or loss upon disposal and impairment during the year. 150 AIA GROUP LIMITEDCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFINANCIAL STATEMENTS US$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 shares Interests in investment funds and exchangeable loan notes Derivative financial instruments Deferred tax assets Current tax recoverable Other assets Cash and cash equivalents Assets in disposal group held for sale Total assets LIABILITIES Insurance contract liabilities Investment contract liabilities Borrowings Obligations under repurchase agreements Derivative financial instruments Provisions Deferred tax liabilities Current tax liabilities Other liabilities Liabilities in disposal group held for sale Total liabilities Notes 14 15 16 17 18, 45 19 20, 22, 45 21, 45 11, 45 23, 45 25, 45 45 26, 45 27, 45 29 30 21, 45 32 11, 45 33, 45 45 As at 31 December 2022 As at 31 December 2021 3,277 2,092 2,844 4,600 5,122 2,914 679 2,744 4,716 4,991 30,046 28,708 8,593 9,311 129,281 161,087 35,794 23,378 38,577 568 38,993 30,822 40,195 1,468 236,191 281,876 141 117 6,217 8,020 4,381 50 120 8,087 4,989 – 303,048 339,874 219,570 7,077 11,206 1,748 8,638 160 3,563 464 7,838 4,234 239,423 11,860 9,588 1,588 1,392 194 5,982 389 8,524 – 264,498 278,940 151 ANNUAL REPORT 2022CONSOLIDATED STATEMENT OF FINANCIAL POSITIONFINANCIAL STATEMENTSOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION US$m EQUITY Share capital Employee share-based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Property revaluation reserve Others Amounts reflected in other comprehensive income Total equity attributable to: Shareholders of AIA Group Limited Non-controlling interests Total equity Total liabilities and equity Approved and authorised for issue by the Board of Directors on 10 March 2023. Notes As at 31 December 2022 As at 31 December 2021 34 34 34 34 34 34 35 14,171 (290) (11,812) 44,437 (6,709) (2,813) 1,107 5 (8,410) 38,096 454 38,550 303,048 14,160 (225) (11,841) 49,984 8,407 (1,068) 1,069 (19) 8,389 60,467 467 60,934 339,874 Lee Yuan Siong Director Edmund Sze-Wing Tse Director 152 AIA GROUP LIMITEDFINANCIAL STATEMENTSNote Share capital Employee share- based trusts Other reserves Retained earnings Other comprehensive income Fair value reserve Foreign currency translation reserve Property revaluation reserve Non- controlling interests Others Total equity US$m Balance at 1 January 2022 14,160 (225) (11,841) 49,984 8,407 (1,068) 1,069 (19) 467 60,934 Net profit Fair value losses on available for sale financial assets(2) Fair value losses on available for sale financial assets transferred to profit or loss upon disposal and impairment(2) Foreign currency translation adjustments Cash flow hedges Share of other comprehensive (expense)/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/ (expense) for the year Dividends Share buy-back 13 Shares issued under share option scheme and agency share purchase plan Increase in non-controlling interests Acquisition of non-controlling interests Share-based compensation Purchase of shares held by employee share-based trusts Transfer of vested shares from employee share-based trusts – – – – – – – – – – – 11 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (13) – 80 (103) – 38 (38) 282 – – (15,605) – – – (1,544) – 725 – – (236) (201) – – – – – – – – – – 282 (15,116) (1,745) (2,259) (3,570) – – – – – – – – – – – – – – – – – – – – – – – – – – – 2 36 – 38 – – – – – – – – Balance at 31 December 2022 14,171 (290) (11,812) 44,437 (6,709) (2,813) 1,107 – – – – (1) – – 25 24 – – – – – – – – 5 38 320 (20) (15,625) – 725 (20) (1,564) – – – – (1) (435) 36 25 (2) (16,519) (20) (2,279) – – 13 (4) – – – (3,570) 11 – (4) 80 (103) – 454 38,550 Notes: (1) Where applicable, amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. (2) Gross of tax, policyholders’ participation and other shadow accounting related movements, US$29,630m relates to the fair value losses on available for sale financial assets and US$767m relates to the fair value losses on available for sale financial assets transferred to profit or loss upon disposal and impairment during the year ended 31 December 2022. 153 ANNUAL REPORT 2022CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFINANCIAL STATEMENTSOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Note Share capital Employee share- based trusts Other reserves Retained earnings Other comprehensive income Fair value reserve Foreign currency translation reserve Property revaluation reserve Non- controlling interests Others Total equity US$m Balance at 1 January 2021 14,155 (155) (11,891) 44,704 15,170 233 1,027 (43) Net profit Fair value losses on available for sale financial assets(2) Fair value gains on available for sale financial assets transferred to profit or loss upon disposal(2) Foreign currency translation adjustments Cash flow hedges Share of other comprehensive income/(expense) 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 year Dividends 13 Shares issued under share option scheme and agency share purchase plan Capital contribution 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 – – – – – – – – – – 5 – – – – – – – – – – – – – – – – – (106) – – – – – – – – – – – – 86 – 36 (36) 7,427 – – (4,490) (2,329) – – – – – – – – – – – (1,289) – 56 (12) – – – – 7,427 (6,763) (1,301) (2,147) – – – – – – – – – – – – – – – – – – – – – – (1) 43 – 42 – – – – – – – – – – (1) – – 25 24 – – – – – – 468 50 63,668 7,477 (19) (4,509) – (2,329) (15) (1,304) – – – – (1) 43 43 25 16 (555) (28) (2,175) – 11 – – – 5 11 86 (106) – Balance at 31 December 2021 14,160 (225) (11,841) 49,984 8,407 (1,068) 1,069 (19) 467 60,934 Notes: (1) Where applicable, amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. (2) Gross of tax, policyholders’ participation and other shadow accounting related movements, US$7,755m relates to the fair value losses on available for sale financial assets and US$2,405m relates to the fair value gains on available for sale financial assets transferred to profit or loss upon disposal during the year ended 31 December 2021. 154 AIA GROUP LIMITEDFINANCIAL STATEMENTS US$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 agreements Other non-cash operating items, including investment income and the effect of exchange rate changes on certain operating items Year ended 31 December 2022 Year ended 31 December 2021 Notes 491 8,468 14,024 (22,637) 30 (4,252) 186 17,953 (102) (8,440) (7,434) 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 Distribution or dividend from an associate Payments for increase in interest of joint ventures Prepayment for investment in an associate Proceeds from sales of investment property and property, plant and equipment 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 Issuances of medium-term notes and securities Redemption of medium-term notes Proceeds from other borrowings Repayment of other borrowings Capital contribution from non-controlling interests Payments for lease liabilities(1) Interest paid on medium-term notes and securities Dividends paid during the year Share buy-back 14 15 23 16, 17 16, 17 29 29 29 29 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/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the financial year Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of the financial year Note: (1) The total cash outflow for leases for the year ended 31 December 2022 was US$170m (2021: US$176m). 7,381 1,204 (47) (680) 9,867 (386) 1 (11) – 7 (157) (271) (817) 1,818 (165) 1,364 (1,364) – (168) (330) (2,279) (3,570) (103) 11 7,410 1,129 (47) (831) 3,909 (640) – (27) (1,865) 5 (238) (16) (2,781) 2,079 (1,002) 1,959 (1,959) 11 (170) (303) (2,175) – (106) 5 (4,786) (1,661) 4,264 4,695 (193) 8,766 (533) 5,393 (165) 4,695 155 ANNUAL REPORT 2022CONSOLIDATED STATEMENT OF CASH FLOWSFINANCIAL STATEMENTSOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Cash and cash equivalents in the above consolidated statement of cash flows can be further analysed as follows: US$m Notes As at 31 December 2022 As at 31 December 2021 Cash and cash equivalents in the consolidated statement of financial position 25, 45 Bank overdrafts Cash and cash equivalents in the consolidated statement of cash flows 8,969 (203) 8,766 4,989 (294) 4,695 156 AIA GROUP LIMITEDFINANCIAL STATEMENTS 1. CORPORATE INFORMATION AIA Group Limited (the “Company”) was established as a company with limited liability incorporated in Hong Kong on 24 August 2009. The address of its registered office is 35/F, AIA Central, No. 1 Connaught Road Central, Hong Kong. AIA Group Limited is listed on the Main Board of The Stock Exchange of Hong Kong Limited under the stock code “1299” with American Depositary Receipts (Level 1) being traded on the over-the-counter market (ticker symbol: “AAGIY”). AIA Group Limited and its subsidiaries (collectively “AIA” or the “Group”) is a life insurance based financial services provider operating in 18 markets. 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. MATERIAL ACCOUNTING POLICY INFORMATION 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 10 March 2023. 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. The presentation currency of the Company and the Group is the US dollar. The consolidated financial statements are presented in millions of US dollar (US$m) unless otherwise stated. The accounting policies adopted are consistent with those of the previous financial year, except as described as follows. The following relevant new amendments to standards have been adopted for the first time for the financial year ended 31 December 2022 and have no material impact to the Group: • Amendments to IAS 16, Property, Plant and Equipment: Proceeds before Intended Use; • Amendments to IAS 37, Onerous Contracts – Cost of Fulfilling a Contract; • Amendment to IAS 41, Taxation in Fair Value Measurements; • Amendments to IFRS 3, Reference to the Conceptual Framework; and • Amendment to IFRS 16, Covid-19-Related Rent Concessions beyond 30 June 2021. 157 ANNUAL REPORT 2022NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATIONFINANCIAL STATEMENTSOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.1 Basis of preparation and statement of compliance (continued) With effect from 2023, the Group will apply IFRS 9 and IFRS 17. These standards will have a material impact on the consolidated financial statements. Further information on these standards is given below: (a) IFRS 9, Financial Instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 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 are effective for financial periods beginning on or after 1 January 2019), but the Group has elected to apply the temporary exemption described further below: • 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 (FVTPL) or in other comprehensive income (FVOCI) and those measured at amortised cost. These supersede IAS 39’s categories of held to maturity investments, loans and receivables, available for sale financial assets and financial assets measured at FVTPL. 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. An option is also available at initial recognition to irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. In addition, an expected credit loss (ECL) model replaces the incurred loss impairment model under IAS 39. The ECL model requires an ongoing measurement of credit risk associated with a financial asset and therefore recognises credit losses earlier than under IAS 39. The new impairment model applies to financial assets measured at amortised cost and debt securities at FVOCI. 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. • 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 (known as the “deferral approach”) 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, 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. On 25 June 2020, the IASB issued the amendments to IFRS 4 and IFRS 17, the effective date of IFRS 17 will be deferred to annual reporting periods beginning on or after 1 January 2023, and that the exemption currently in place for some insurers, including the Group, regarding the adoption of IFRS 9 will be extended to enable the implementation of both IFRS 9 and IFRS 17 at the same time. On 9 December 2021, the IASB issued the amendment of IFRS 17 relating to the presentation of comparative information of financial assets on initial adoption of IFRS 17. The amendment adds a transition option that permits an entity to apply an optional classification overlay in the comparative period(s) presented on initial adoption of IFRS 17. The overlay allows all financial assets to be classified, on an instrument-by-instrument basis, in the comparative period(s) in a way that aligns with how the entity expects those assets to be classified on initial adoption of IFRS 9. 158 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.1 Basis of preparation and statement of compliance (continued) (a) IFRS 9, Financial Instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 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 are effective for financial periods beginning on or after 1 January 2019), but the Group has elected to apply the temporary exemption described further below: (continued) The Group performed an initial eligibility assessment and met the IFRS 9 requirements for the deferral approach, and accordingly has decided to apply IFRS 9 to annual reporting periods beginning 1 January 2023. Subsequent to the initial eligibility assessment, there has been no change in the Group’s activities that requires a reassessment of the eligibility test. Further details on the eligibility assessment are contained in the consolidated financial statements in the Group’s Annual Report 2019. Additional information on financial assets in relation to the election of the deferral approach is illustrated per below: Financial assets of the Group are separated into the following two groups: (i) financial assets with contractual terms that give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI) in accordance with IFRS 9 and are not held for trading or managed on fair value basis; and (ii) all financial assets other than those specified in (i). The following tables show the fair value and change in fair value of these two groups of financial assets: Fair value as at 31 December 2022 Change in fair value for the year ended 31 December 2022 Financial assets that met SPPI criteria and not held for trading or managed on fair value basis Financial assets that met SPPI criteria and not held for trading or managed on fair value basis Others Total Others Total US$m Debt securities 159,861 6,082 165,943 (32,154) (729) (32,883) Other financial assets 15,064(1) 58,407(2) 73,471 95 (19,560) (19,465) Total(3) 174,925 64,489 239,414 (32,059) (20,289) (52,348) Fair value as at 31 December 2021 Change in fair value for the year ended 31 December 2021 Financial assets that met SPPI criteria and not held for trading or managed on fair value basis Financial assets that met SPPI criteria and not held for trading or managed on fair value basis Others Total Others Total US$m Debt securities 189,353 10,727 200,080 (8,485) (230) (8,715) Other financial assets 14,101(1) 71,370(2) 85,471 Total(3) 203,454 82,097 285,551 281 (8,204) 2,056 1,826 2,337 (6,378) Notes: (1) Balance of other financial assets qualifying as SPPI includes loans and deposits, other receivables, accrued investment income and cash and cash equivalents. (2) Balance predominantly represents equity shares, interests in investment funds and exchangeable loan notes, derivative financial instruments and cash equivalents. (3) Certain financial assets included within the consolidated financial statements, including policy loans under loans and deposits, reinsurance receivables and insurance receivables under other receivables amounting to US$6,970m (2021: US$6,384m) are not included above since they will be accounted for under IFRS 17 where its adoption is in parallel with IFRS 9. The financial assets presented above that met SPPI criteria and not held for trading or managed on fair value basis are primarily debt securities. Additional information on the credit quality analysis of these debt securities is provided in note 20. 159 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.1 Basis of preparation and statement of compliance (continued) (a) IFRS 9, Financial Instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 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 are effective for financial periods beginning on or after 1 January 2019), but the Group has elected to apply the temporary exemption described further below: (continued) • The Company is not eligible for the deferral approach in its separate financial statements since the Company did not meet the eligibility criteria for the temporary exemption. The statement of financial position and statement of changes in equity of the Company are disclosed in notes 46 and 47 of the Group’s consolidated financial statements, respectively. (b) IFRS 17, Insurance Contracts (previously IFRS 4 Phase II) will replace the current IFRS 4, Insurance Contracts. IFRS 17 has been issued but is not effective for the financial year ended 31 December 2022 and has not been early adopted: • 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. (c) The impact of initial adoption of IFRS 9 and IFRS 17 includes the following: • Changes in accounting policies resulting from the adoption of IFRS 9 shall be applied retrospectively, except that the Group has elected to restate the comparatives and apply classification overlay in the comparative period presented as permitted under IFRS 17. The classification overlay shall be applied to all financial assets that had been derecognised before 1 January 2023 based on how those assets are expected to be classified on initial adoption of IFRS 9. In applying the classification overlay to financial assets derecognised during the comparative period, the Group has applied the impairment requirements of IFRS 9. • Financial investments will be reclassified from current consolidated statement of financial position line items to the corresponding IFRS 9 classifications, which in some cases may include changes in the measurement basis (for example, from available for sale debt securities to debt securities at FVTPL). • Changes in accounting policies resulting from the adoption of IFRS 17 shall apply full retrospective approach to the extent practicable. The Group adopts both the modified retrospective approach and the fair value approach when it is impracticable to use a full retrospective approach in determining transition amounts at the IFRS 17 transition date. • Insurance contract balances will be remeasured under IFRS 17 principles, derecognising the related liabilities and previously reported balances that would not have existed if IFRS 17 had always been applied. These included among others, deferred acquisition costs for insurance contracts, insurance receivables and payables, policy loans and its accrued interest revenue and provisions that are attributable to existing insurance contracts. Under IFRS 17, these are included in the measurement of the insurance contracts. • The combined effect on the Group’s consolidated statement of financial position on transition to IFRS 9 and IFRS 17 as at 1 January 2022 is to reduce shareholders’ equity and shareholders’ allocated equity measured under IFRS 9 and IFRS 17 by 7% to US$56b and 2% to US$51b respectively. The preparation of the 2022 comparatives under IFRS 9 and IFRS 17 is progressing as planned. Determining the combined effect of the initial adoption of IFRS 9 and IFRS 17 involves the use of judgements and assumptions. This includes the approach to transition setting of actuarial assumptions and selection of valuation methodologies, and the models deployed in the measurement of fulfilment cash flows, as well as the adoption of the fair value approach for certain groups of insurance contracts. 160 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.1 Basis of preparation and statement of compliance (continued) The following relevant new amendments to standards have been issued but are not effective for the financial year ended 31 December 2022 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 amendments 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: • Amendments to IAS 8, Definition of Accounting Estimates (2023); • Amendments to IAS 12, Deferred Tax related to Assets and Liabilities arising from a Single Transaction (2023); • Amendments to IAS 1, Classification of Liabilities as Current or Non-Current (2024); • Amendments to IAS 1, Non-current Liabilities with Covenants (2024); and • Amendments to IFRS 16, Lease Liability in a Sale and Leaseback (2024). The material 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. The Company’s statement of financial position and the statement of changes in equity, as set out in notes 46 and 47 respectively, have been prepared in accordance with the Group’s accounting policies, except for the accounting policies in respect of the Company’s investments as set out in note 46 and financial instruments as set out in note 2.4.5. 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: • short-term fluctuations between expected and actual investment returns related to equities and real estate; • other investment return (including short-term fluctuations due to market factors); and • 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. 161 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.3 Insurance and investment contracts Consistent accounting policies for the measurement and recognition of insurance and investment contracts have been adopted throughout the Group, except for in a limited number of cases, the Group measures insurance contract liabilities with reference to statutory requirements in the applicable jurisdiction (see note 2.3.3). Product classification The Group classifies 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 traditional participating life 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 and the deferral of acquisition costs arising from investment contracts with DPF as it does for insurance contracts. The Group refers to such contracts as traditional participating life business. 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, IFRS 15, Revenue from Contracts with Customers, 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: • that are likely to be a significant portion of the total contractual benefits; • whose amount or timing is contractually at the discretion of the Group; and • that are contractually based on: – the performance of a specified pool of contracts or a specified type of contract; – realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or – the profit or loss of the company, fund or other entity that issues the contract. 162 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.3 Insurance and investment contracts (continued) Product classification (continued) In some jurisdictions traditional participating life 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. 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 assets where this asset segregation is supported by an explicit statutory reserve and reporting in the relevant territory. The allocation of benefit from the assets held in such other participating business with distinct portfolios is set according to the underlying bonus rule as determined by the relevant Board based on applicable regulatory requirements after considering the Appointed Actuary’s recommendation. The extent of such policyholder participation may change over time. The current policyholder participation ratio applied for recognition and measurement of the insurance contract liabilities for locations with participating funds and other participating business with distinct portfolios is set out below. Country Participating funds Mainland China Singapore Malaysia Australia Brunei Other participating business with distinct portfolios Hong Kong Current policyholder participation 70% 90% 90% 80% 80% 70% – 90% In some jurisdictions participating business is not written in a distinct fund and the Group refers to this as other participating business without distinct portfolios. 163 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.3 Insurance and investment contracts (continued) Product classification (continued) The Group’s products may be divided into the following main categories: Policy type Description of benefits payable Insurance contract liabilities(1) Investment contract liabilities Basis of accounting for 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 and other participating business with distinct portfolios that would be allocated to policyholders, assuming all performance would be declared as a dividend based upon current policyholder participation. In addition, deferred profit liabilities for limited payment contracts are recognised Traditional participating life Participating funds and other participating business with distinct portfolios 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 For participating funds, local regulations generally prescribe a minimum proportion of policyholder participation in declared dividends For other participating business with distinct portfolios, the allocation of benefit from the assets held in such distinct portfolios is set according to the underlying bonus rule as determined by the relevant Board based on applicable regulatory requirements after considering the Appointed Actuary’s recommendation. The extent of such policyholder participation may change over time Other participating business without distinct portfolios 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 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. In addition, deferred profit liabilities for limited payment contracts are recognised Not applicable, as IFRS 4 permits contracts with DPF to be accounted for as insurance contracts Non-participating life, annuities and other protection products Benefits payable are not at the discretion of the insurer Universal life 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 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) Note: (1) In a limited number of cases, the Group measures insurance contract liabilities with reference to statutory requirements in the applicable jurisdiction. In the notes to the financial statements, unit-linked contracts are presented together with pension contracts for disclosure purposes. 164 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.3 Insurance and investment contracts (continued) Product classification (continued) The basis of accounting for insurance and investment contracts is discussed in notes 2.3.1 and 2.3.2 below. 2.3.1 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. In a limited number of cases where the Group measures insurance contract liabilities with reference to statutory requirements in the applicable jurisdiction, acquisition costs deemed recoverable are included as a component of insurance contract liabilities, and are therefore deferred and amortised over the life of the corresponding policies. 165 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.3 Insurance and investment contracts (continued) 2.3.1 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: • • • • 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: • • 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. 166 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.3 Insurance and investment contracts (continued) 2.3.1 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 and other participating business with distinct portfolios 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 and the other participating business with distinct portfolios 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 policyholder participation as described in note 2.3 above. The Group accounts for other participating business without distinct portfolios 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 with DPF, 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. 2.3.2 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. When part of the fee received from a policyholder is expected to be refunded in the future, the related fee is not recognised as a revenue and a sales inducement liability is established which forms part of the investment contract liabilities. 167 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.3 Insurance and investment contracts (continued) 2.3.2 Investment contracts (continued) Investment contract fee revenue (continued) Origination and other “upfront” fees (fees that are assessed against the account balance as consideration for origination of the contract) are charged on some non-participating investment and pension contracts. Where the investment contract is recorded at amortised cost, these fees are amortised and recognised over the expected term of the policy as an adjustment to the effective yield. Where the investment contract is measured at fair value, the front-end fees that relate to the provision of investment management services are amortised and recognised as the services are provided. Deferred origination costs The costs of acquiring investment contracts with investment management services, including commissions and other incremental expenses directly related to the issue of each new contract, are deferred and amortised over the period that services are provided. Deferred origination costs are tested for recoverability at each reporting date. The costs of acquiring new investment contracts without investment management services are included as part of the effective interest rate used to calculate the amortised cost of the related investment contract liabilities. 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. 168 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.3 Insurance and investment contracts (continued) 2.3.3 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 contracts and investment contracts with DPF, 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. 169 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.3 Insurance and investment contracts (continued) 2.3.3 Insurance and investment contracts (continued) Insurance contracts (including investment contracts with DPF) liabilities measured with reference to statutory requirements In a limited number of cases, the Group measures insurance contract liabilities with reference to statutory requirements in the applicable jurisdiction. The insurance contract liabilities of those countries are predominately measured at the net present value of future receipts from and payments to policyholders. The discount rate applied reflects the current market rate. The excess of premium received over claims and expenses (the margin) is recognised over the life of the contract in a manner that reflects the pattern of service provided to the policyholder. The movement in insurance contract liabilities recognised in the profit or loss reflects the planned release of this margin. Other assessments and levies The Group is potentially subject to various periodic insurance-related assessments or guarantee fund levies. Related provisions are established where there is a present obligation (legal or constructive) as a result of a past event. Such amounts are not included in insurance or investment contract liabilities but are included under “Provisions” in the consolidated statement of financial position. 2.4 Financial instruments 2.4.1 Classification of and designation of financial instruments Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss comprise two categories: • • financial assets or liabilities designated at fair value through profit or loss upon initial recognition; and financial assets or liabilities classified as held for trading. Management designates financial assets and liabilities at fair value through profit or loss if this eliminates a measurement inconsistency or if the related assets and liabilities are actively managed on a fair value basis, including: • financial assets held to back unit-linked contracts and participating funds; • other financial assets managed on a fair value basis; consisting of the Group’s equity portfolio and investments held by the Group’s fully consolidated investment funds; and • compound instruments containing an embedded derivative, where the embedded derivative would otherwise require bifurcation. Financial assets and liabilities classified as held for trading include financial assets acquired principally for the purpose of selling them in the near future and those that form part of a portfolio of financial assets in which there is evidence of short- term profit taking, as well as derivative assets and liabilities. Dividend income from equity instruments designated at fair value through profit or loss is recognised in investment income in the consolidated income statement, generally when the security becomes ex-dividend. Interest income is recognised on an accrued basis. For all financial assets designated at fair value through profit or loss, changes in fair value are recognised in investment experience. Transaction costs in respect of financial assets and liabilities at fair value through profit or loss are expensed as they are incurred. 170 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.4 Financial instruments (continued) 2.4.1 Classification of and designation of financial instruments (continued) 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 consolidated 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 its original cost or amortised cost as appropriate. Amortised cost is determined by specific identification. Recognition of financial instruments Purchases and sales of financial instruments are recognised on the trade date, which is the date at which the Group commits to purchase or sell the assets. Derecognition and offset of financial assets Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. If the Group neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, it derecognises the financial asset if it no longer has control over the asset. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement. The extent of continuing involvement is determined by the extent to which the Group is exposed to changes in the fair value of the asset. Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Interest income from loans and receivables is recognised in investment income in the consolidated income statement using the effective interest method. 171 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.4 Financial instruments (continued) 2.4.1 Classification of and designation of financial instruments (continued) 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 Financial investments. 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 held for cash management purposes, which have maturities at acquisition of three months or less, or are convertible into known amounts of cash and subject to insignificant risk of changes in value. 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. 2.4.2 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. 2.4.3 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. 172 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.4 Financial instruments (continued) 2.4.3 Impairment of financial assets (continued) 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. 2.4.4 Derivative financial instruments Derivative financial instruments primarily include foreign exchange and interest rate contracts 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. Cash flow hedge The Group has, in a limited number of cases, designated certain derivatives as hedges of interest rate risk associated with the cash flows of highly probable forecast transactions such as forecast purchases of debt securities. To the extent these hedges are effective, the change in fair value of the derivatives designated as hedging instruments is recognised in the cash flow hedge reserve in other comprehensive income within equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in the cash flow hedge reserve are reclassified to profit or loss when the hedged item affects profit or loss. In respect of a forecast purchase of a debt security classified as available for sale, the cash flows are expected to affect profit or loss when the coupons from the purchased bonds are recognised, or on disposal of the security. The application of hedge accounting is discontinued when one of the following situations occurs: when a derivative designated as the hedging instrument expires or is sold, terminated or exercised prior to the occurrence of the forecast transaction, when the hedge is no longer highly effective or expected to be highly effective, or when the Group revokes the designation of the hedging relationship. In these situations, the cumulative gain or loss on the hedging instrument that has been recognised in other comprehensive income from the period when the hedge was effective remains separately in equity until the forecast transaction occurs. This amount is reclassified to profit or loss when the hedged item affects profit or loss. If the forecast transaction is no longer expected to occur, the entire amount is reclassified immediately to profit or loss. 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. 173 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.4 Financial instruments (continued) 2.4.5 The Company’s financial instruments Financial assets are classified as measured at amortised cost, FVOCI or FVTPL. The classification of financial assets is based on the business model under which the financial asset is managed and its contractual cash flow characteristics. A financial asset is measured at amortised cost if it meets both of the following conditions: • • it is held within a business model whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt security is measured at FVOCI if it meets both of the following conditions: • • it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. Changes in fair value of debt securities measured at FVOCI are recognised in other comprehensive income, except for those relating to expected credit losses, interest income (calculated using the effective interest method) and foreign exchange gains and losses which are recognised in profit or loss. When the investment is derecognised, the amount accumulated in other comprehensive income is recycled from equity to profit or loss. Changes in fair value of financial assets measured at FVTPL and interest are recognised in profit or loss. The Company recognises loss allowances for ECL on financial assets measured at amortised cost and debt securities measured at FVOCI, which are measured at either lifetime ECL or 12-month ECL according to a ‘three-stage’ impairment model. A financial instrument that is not credit-impaired on initial recognition is classified in ‘Stage 1’. If a significant increase in credit risk since initial recognition is identified but the financial instrument is not yet assessed as credit- impaired, the financial instrument is moved to ‘Stage 2’. If the financial instrument is credit-impaired, it is then moved to ‘Stage 3’. Financial instruments in Stages 2 and 3 have their loss allowances measured at Lifetime ECL which are the ECL that result from all possible default events over the expected life of a financial instrument. Financial instruments in Stage 1 have their loss allowances measured at 12-month ECL which are the portion of ECL that results from default events that are possible within the 12 months after the reporting date (or a shorter period if the expected life of the instrument is less than 12 months). The maximum period considered when estimating ECL is the maximum contractual period over which the Company is exposed to credit risk. 174 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. MATERIAL ACCOUNTING POLICY INFORMATION (continued) 2.4 Financial instruments (continued) 2.4.5 The Company’s financial instruments (continued) ECL are a probability-weighted estimate of credit losses and are measured as the present value of all cash shortfalls – i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to receive. At each reporting date, the Company assesses whether financial assets carried at amortised cost and debt securities at FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Loss allowance for ECL of financial assets measured at amortised cost is deducted from the gross carrying amount of the assets, while ECL of debt securities measured at FVOCI is charged to profit or loss and is recognised in other comprehensive income. The gross carrying amount of a financial asset is written off (either partially or in full) to the extent that there is no realistic prospect of recovery. This is generally the case when the Company determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Company’s procedures for recovery of amount due. 2.5 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. 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 2.3. 175 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3.2 Insurance contract liabilities (including liabilities in respect of investment contracts with DPF) The Group calculates the insurance contract liabilities for traditional life insurance using a net level premium valuation method, whereby the liability represents the present value of estimated future policy benefits to be paid, less the present value of estimated future net premiums to be collected from policyholders. This method uses best estimate assumptions at inception adjusted for a provision for the risk of adverse deviation for mortality, morbidity, expected investment yields, policyholder dividends (for other participating business without distinct portfolios), 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, morbidity, surrender and expense assumptions are based on actual experience by each geographical market, modified to allow for variations in policy form. The Group exercises significant judgement in making appropriate assumptions. For contracts with an explicit account balance, such as universal life and unit-linked contracts, insurance contract liabilities represent the accumulation value, which represents premiums received and investment returns credited to the policy less deductions for mortality and morbidity costs and expense charges. Significant judgement is exercised in making appropriate estimates of gross profits which are based on historical and anticipated future experiences, these estimates are regularly reviewed by the Group. The Group accounts for insurance contract liabilities for participating business written in participating funds and other participating business with distinct portfolios 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 and other participating business with distinct portfolios 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 policyholder participation as described in note 2.3. 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 without distinct portfolios 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. In a limited number of cases, the Group measures insurance contract liabilities with reference to statutory requirements in the applicable jurisdiction. The insurance contract liabilities of those countries are predominately measured at the net present value of future receipts from and payments to policyholders. The discount rate applied reflects the current market rate. Significant judgement is exercised in making appropriate assumptions of the cash flows. 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 2.3, 26 and 28. 176 AIA GROUP LIMITEDFINANCIAL STATEMENTS3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 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 2.3.1, 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 2.3.1, 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 2.3 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. 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 and other participating business with distinct portfolios 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 and other participating business with distinct portfolios 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 upon policyholder participation as described in note 2.3. Both of the foregoing changes are reflected in the consolidated income statement, except for those relating to other participating business with distinct portfolios which recognise a portion of an amount due to changes in fair value of available for sale financial assets and properties held for own use that are recognised in other comprehensive income. 177 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3.5 Fair value measurement (continued) 3.5.1 Fair value of financial assets (continued) 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 measurement 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. 178 AIA GROUP LIMITEDFINANCIAL STATEMENTS4. EXCHANGE RATES The Group’s principal overseas operations during the reporting period were located within Asia. The results and cash flows of these operations have been translated into US dollar at the following average rates: Mainland China Hong Kong Thailand Singapore Malaysia Assets and liabilities have been translated at the following year-end rates: Mainland China Hong Kong Thailand Singapore Malaysia Exchange rates are expressed in units of local currency per US$1. US dollar exchange rates Year ended 31 December 2022 Year ended 31 December 2021 6.73 7.83 35.02 1.38 4.40 6.45 7.77 31.97 1.34 4.14 US dollar exchange rates As at 31 December 2022 As at 31 December 2021 6.95 7.80 34.54 1.34 4.41 6.37 7.80 33.26 1.35 4.17 179 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION5. PREMIUMS AND FEE INCOME Included in premium and fee income of US$109m (2021: US$178m) is fee income for investment contracts without DPF that refers to fees charged for the provision of investment management services for investment contracts without DPF, which usually vary with the amounts being managed, and the release of deferred fee income. For the investment management service fee charged, revenue is recognised as services are provided and the fees are deducted from the customers’ account balances. Generally, a customer can cancel an investment contract without DPF at any time after contract inception, subject to a surrender charge which is not a significant component of revenue. 6. OPERATING PROFIT AFTER TAX Operating profit after tax may be reconciled to net profit as follows: US$m Year ended 31 December 2022 Year ended 31 December 2021 Note Operating profit after tax 8 6,409 6,455 Non-operating items, net of related changes in insurance and investment contract liabilities and taxes: Short-term fluctuations in investment return related to equities and real estate(1) Reclassification of revaluation gains for property held for own use(1) Corporate transaction related costs Implementation costs for new accounting standards Other non-operating investment return and other items Subtotal(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 (2,314) (273) (45) (63) (45) (3,622)(3) (6,089) 320 6,370 39 282 38 (66) (49) (43) 1,453 1,022 7,477 6,409 46 7,427 50 Notes: (1) Short-term fluctuations in investment return include the revaluation gains for property held for own use. This amount is then reclassified out of net profit to conform to IFRS measurement and presentation. (2) The amount is net of tax of US$519m (2021: US$40m). The gross amount before tax is US$(6,608)m (2021: US$982m). (3) Includes net fair value movement on derivatives (net of tax and policyholders’ participation) of US$(1,964)m. 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 assumptions used to determine expected long-term investment return are the same, in all material respects, as those used by the Group in determining its embedded value (EV) and are disclosed in the Supplementary Embedded Value Information. 180 AIA GROUP LIMITEDFINANCIAL STATEMENTS7. TOTAL WEIGHTED PREMIUM INCOME AND ANNUALISED NEW PREMIUMS For management decision-making and internal performance management purposes, the Group measures business volumes during the year using a performance measure referred to as total weighted premium income (TWPI). 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. 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$m TWPI by geography Mainland China Hong Kong Thailand Singapore Malaysia Other Markets Total First year premiums by geography Mainland China Hong Kong Thailand Singapore Malaysia Other Markets Total Single premiums by geography Mainland China Hong Kong Thailand Singapore Malaysia Other Markets Total Year ended 31 December 2022 Year ended 31 December 2021 7,592 11,237 4,166 3,577 2,464 7,140 6,999 11,904 4,428 3,433 2,479 7,616 36,176 36,859 1,259 1,355 885 613 358 363 863 771 596 374 421 988 4,341 4,505 280 1,813 203 1,272 274 892 4,734 236 3,069 538 1,419 319 960 6,541 181 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION7. TOTAL WEIGHTED PREMIUM INCOME AND ANNUALISED NEW PREMIUMS (continued) Year ended 31 December 2022 Year ended 31 December 2021 6,305 10,171 3,533 3,092 2,074 6,187 5,620 10,826 3,778 2,917 2,026 6,533 31,362 31,700 Year ended 31 December 2022 Year ended 31 December 2021 1,319 1,078 655 531 440 1,384 5,407 1,404 1,106 677 549 491 1,420 5,647 TWPI (continued) US$m Renewal premiums by geography Mainland China Hong Kong Thailand Singapore Malaysia Other Markets Total ANP US$m ANP by geography Mainland China Hong Kong Thailand Singapore Malaysia Other Markets Total 182 AIA GROUP LIMITEDFINANCIAL STATEMENTS8. SEGMENT INFORMATION The Group’s operating segments, based on the reports received by the Group’s chief operating decision-maker, considered to be the Executive Committee (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 Mainland China, Hong Kong (including Macau), Thailand, Singapore (including Brunei), Malaysia, Other Markets and Group Corporate Centre. Other Markets includes the Group’s operations in Australia, Cambodia, India, Indonesia, Myanmar, New Zealand, the Philippines, South Korea, Sri Lanka, Taiwan (China) and Vietnam. The activities of the Group Corporate Centre segment consist of the Group’s corporate functions, shared services and eliminations of intra-group transactions. 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: • ANP; • TWPI; • investment return; • operating expenses; • operating profit after tax attributable to shareholders of AIA Group Limited; • expense ratio, measured as operating expenses divided by TWPI; • operating margin, measured as operating profit after tax expressed as a percentage of TWPI; and • 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). Business volumes in respect of the Group’s five largest customers are less than 30 per cent of premiums and fee income. 183 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION8. SEGMENT INFORMATION (continued) US$m China Hong Kong Thailand Singapore Malaysia Mainland Other Markets Group Corporate Centre Total 1,319 7,592 1,078 655 531 440 11,237 4,166 3,577 2,464 7,423 1,427 8,850 12,103 4,570 16,673 3,848 1,097 4,945 3,808 1,454 5,262 2,006 554 2,560 1,384 7,140 4,956 1,286 6,242 – – 5,407 36,176 126 793 919 34,270 11,181 45,451 6,048 12,147 2,920 3,848 1,585 3,262 122 29,932 471 571 49 1,370 565 184 738 270 53 337 256 36 229 229 17 843 1,060 86 Total expenses 7,139 14,266 3,981 4,477 2,060 5,251 Share of losses from associates and joint ventures – (1) Operating profit before tax 1,711 2,406 Tax on operating profit before tax (286) (167) 1,425 2,239 – 964 (182) 782 – 785 (43) 742 – 500 (93) 407 5 996 (175) 821 Year ended 31 December 2022 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 Operating profit after tax Operating profit after tax attributable to: Shareholders of AIA Group Limited Non-controlling interests Key operating ratios: Expense ratio Operating margin Operating return on shareholders’ 1,425 2,226 – 13 782 – 742 – 393 14 804 17 (2) (5) 6,370 39 7.5% 5.0% 6.5% 7.2% 9.3% 14.8% 18.8% 19.9% 18.8% 20.7% 16.5% 11.5% allocated equity 30.6% 17.7% 11.5% 17.8% 18.4% 9.3% Operating profit before tax includes: Finance costs Depreciation and amortisation 22 108 29 107 1 23 8 29 1 24 6 94 319 32 386 417 184 28 300 394 844 (36) 39 (46) (7) 4,016 3,251 819 38,018 (32) 7,401 (992) 6,409 – – – 9.0% 17.7% 13.2% AIA GROUP LIMITEDFINANCIAL STATEMENTS8. SEGMENT INFORMATION (continued) US$m China Hong Kong Thailand Singapore Malaysia Mainland Other Markets Group Corporate Centre Total 31 December 2022 Total assets Total liabilities Total equity Shareholders’ allocated equity Total assets include: Investments in associates and joint ventures 44,541 105,413 30,943 42,584 16,983 44,198 18,386 303,048 38,472 99,606 24,814 39,207 14,768 37,235 10,396 264,498 6,069 4,617 5,807 10,196 6,129 7,011 3,377 4,143 2,215 2,162 6,963 8,477 7,990 8,199 38,550 44,805 – 1 – – – 612 1,479 2,092 Segment information may be reconciled to the consolidated income statement as shown below: Short-term fluctuations in investment return related to equities and real estate Segment information Other non-operating items(1) Consolidated income statement (4) 34,266 Net premiums, fee income and other operating revenue (18,282) (18,286) (15,156) Investment return 19,110 Total revenue – (8,055) (8,055) (5,318) (14,650) 9,964 Net insurance and investment contract benefits – 537 8,623 Other expenses (5,318) (14,113) 18,587 Total expenses – – (32) Share of losses from associates and joint ventures (2,737) (4,173) 491 Profit before tax 34,270 11,181 45,451 29,932 8,086 38,018 (32) 7,401 US$m Year ended 31 December 2022 Net premiums, fee income and other operating revenue Investment return Total revenue Net insurance and investment contract benefits Other expenses Total expenses Share of losses from associates and joint ventures Operating profit before tax Note: (1) Include unit-linked contracts. 185 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION 8. SEGMENT INFORMATION (continued) US$m China Hong Kong Thailand Singapore Malaysia Mainland Other Markets Group Corporate Centre Total Year ended 31 December 2021 ANP TWPI Net premiums, fee income and other operating revenue (net of reinsurance ceded) Investment return Total revenue Net insurance and investment contract benefits Commission and other acquisition expenses Operating expenses Finance costs and other expenses 1,404 6,999 1,106 11,904 677 4,428 549 3,433 491 2,479 1,420 7,616 – – 5,647 36,859 6,799 1,359 8,158 13,004 4,178 17,182 4,109 1,181 5,290 3,613 1,453 5,066 2,010 596 2,606 5,155 1,210 6,365 80 654 734 34,770 10,631 45,401 5,422 12,633 2,976 3,606 1,584 3,143 78 29,442 464 545 59 1,568 454 192 806 277 55 418 234 42 274 228 18 1,052 1,031 90 Total expenses 6,490 14,847 4,114 4,300 2,104 5,316 Share of losses from associates and joint ventures Operating profit before tax Tax on operating profit before tax Operating profit after tax Operating profit after tax attributable to: – 1,668 (297) 1,371 (1) 2,334 (178) 2,156 – 1,176 (216) 960 Shareholders of AIA Group Limited 1,371 2,143 Non-controlling interests – 13 960 – – 766 (43) 723 723 – – 502 (99) 403 392 11 (10) 1,039 (233) 806 784 22 Key operating ratios: Expense ratio Operating margin Operating return on 7.8% 19.6% 3.8% 18.1% 6.3% 21.7% 6.8% 21.1% 9.2% 16.3% 13.5% 10.6% shareholders’ allocated equity 30.1% 15.9% 14.7% 17.9% 18.8% 8.8% 15 262 299 654 – 80 4,597 3,031 755 37,825 (11) 7,565 (44) (1,110) 36 6,455 36 – – – – 6,409 46 8.2% 17.5% 12.8% Operating profit before tax includes: Finance costs Depreciation and amortisation 34 106 29 95 1 23 2 30 2 23 8 101 274 29 350 407 186 AIA GROUP LIMITEDFINANCIAL STATEMENTS8. SEGMENT INFORMATION (continued) US$m China Hong Kong Thailand Singapore Malaysia Mainland Other Markets Group Corporate Centre Total 31 December 2021 Total assets Total liabilities Total equity Shareholders’ allocated equity Total assets include: Investments in associates and joint ventures 41,330 127,690 34,333 46,552 17,660 51,655 20,654 339,874 35,289 108,980 26,386 41,488 15,449 41,690 9,658 278,940 6,041 4,696 18,710 14,914 7,947 6,624 5,064 4,174 2,211 2,107 9,965 8,790 10,996 60,934 10,755 52,060 – 2 – – 2 675 – 679 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 34,770 10,631 45,401 29,442 8,383 37,825 (11) 7,565 – (631) (631) (340) – (340) – (291) 7 2,748 2,755 953 608 1,561 – 1,194 Net premiums, fee income and other operating revenue 34,777 12,748 Investment return 47,525 Total revenue Net insurance and investment contract benefits 30,055 8,991 Other expenses 39,046 Total expenses Share of losses from associates and joint ventures (11) 8,468 Profit before tax US$m Year ended 31 December 2021 Net premiums, fee income and other operating revenue Investment return Total revenue Net insurance and investment contract benefits Other expenses Total expenses Share of losses from associates and joint ventures Operating profit before tax Note: (1) Include unit-linked contracts. 187 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION9. REVENUE Investment return US$m Interest income Dividend income Rental income(1) Investment income Available for sale Net realised (losses)/gains from 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 of debt securities Net (losses)/gains of equity shares, interests in investment funds and exchangeable loan notes 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 Net foreign exchange (losses)/gains Other net realised losses Investment experience Investment return Year ended 31 December 2022 Year ended 31 December 2021 7,452 1,167 161 8,780 7,344 1,150 166 8,660 (767) 2,405 (767) 2,405 (3,016) (960) (10,065) (9,495) (22,576) 70 (657) (6) (23,936) (15,156) 2,028 28 1,096 65 579 (57) 4,088 12,748 Note: (1) Represents rental income from operating lease contracts in which the Group acts as a lessor. Foreign currency movements resulted in the following (losses)/gains recognised in the consolidated income statement (other than gains and losses arising on items measured at fair value through profit or loss): US$m Foreign exchange (losses)/gains Year ended 31 December 2022 Year ended 31 December 2021 (24) 524 Other operating revenue The balance of other operating revenue largely consists of asset management fees, administrative fees and membership fees. 188 AIA GROUP LIMITEDFINANCIAL STATEMENTS10. EXPENSES US$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 Other operating expenses(1) Operating expenses Investment management expenses and others Depreciation on property held for own use Restructuring and other non-operating costs(2) Change in third-party interests in consolidated investment funds Other expenses Finance costs Total Year ended 31 December 2022 Year ended 31 December 2021 16,916 (3,633) (1,125) 12,158 (2,194) 9,964 5,229 (1,213) 4,016 1,986 250 121 894 16,194 15,750 437 32,381 (2,326) 30,055 5,687 (1,090) 4,597 1,899 268 93 771 3,251 3,031 603 33 360 (34) 962 394 18,587 621 33 338 14 1,006 357 39,046 Other operating expenses include auditors’ remuneration of US$37m (2021: US$28m), an analysis of which is set out below: US$m Audit services Non-audit services, including: Audit-related services Tax services Other services Total Year ended 31 December 2022 Year ended 31 December 2021 23 14 – – 37 21 5 1 1 28 Notes: (1) Includes payments for short-term leases of US$2m (2021: US$6m). (2) Restructuring costs represent costs related to restructuring programmes and are primarily comprised of redundancy and contract termination costs. Other non-operating costs primarily consist of corporate transaction related costs, implementation costs for new accounting standards and other items that are not expected to be recurring in nature. 189 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATIONYear ended 31 December 2022 Year ended 31 December 2021 83 166 1 250 88 180 – 268 Year ended 31 December 2022 Year ended 31 December 2021 22 337 22 13 394 34 301 8 14 357 Year ended 31 December 2022 Year ended 31 December 2021 1,633 1,548 66 128 10 149 80 121 11 139 1,986 1,899 10. EXPENSES (continued) Depreciation consists of: US$m Computer hardware, fixtures and fittings and others Right-of-use assets Property held for own use Computer hardware Total Finance costs may be analysed as: US$m Repurchase agreements Medium-term notes and securities Other loans Lease liabilities Total Employee benefit expenses consist of: US$m Wages and salaries Share-based compensation Pension costs – defined contribution plans Pension costs – defined benefit plans Other employee benefit expenses Total 190 AIA GROUP LIMITEDFINANCIAL STATEMENTS11. INCOME TAX US$m Tax charged in the consolidated income statement Current income tax – Hong Kong Profits Tax Current income tax – overseas Deferred income tax on temporary differences Total Year ended 31 December 2022 Year ended 31 December 2021 153 624 (606) 171 173 808 10 991 Corporate income tax Taxation is charged at the appropriate current rates of taxation ruling in the relevant jurisdictions of which the most significant jurisdictions are outlined below. Mainland China Hong Kong Thailand Singapore Malaysia Other Markets Year ended 31 December 2022 Year ended 31 December 2021 25% 16.5% 20% 17% 24% 25% 16.5% 20% 17% 24% 12% – 30% 12% – 30% The table above reflects the principal rate of corporate income tax as at the end of each year. The rates reflect enacted or substantively enacted corporate tax rates throughout the year in each jurisdiction. In 2022, changes in the corporate income tax rates have been enacted in Myanmar, Sri Lanka and South Korea. For Myanmar, the corporate income tax rate changed from 25 per cent to 22 per cent effective from 1 October 2021. For Sri Lanka, the corporate income tax rate changed from 24 per cent to 30 per cent effective from 1 October 2022. For South Korea, the corporate income tax rate will further change to 23.2 per cent effective from 1 January 2023. In 2021, changes in the corporate income tax rates have been enacted in the Philippines and Sri Lanka. For the Philippines, the corporate income tax rate changed from 30 per cent to 25 per cent effective from 1 July 2020. For Sri Lanka, the corporate income tax rate changed from 28 per cent to 24 per cent effective from 1 January 2020. Withholding tax on dividends In some jurisdictions where the Group operates, dividends remitted by subsidiaries to the Group are subject to withholding tax. The Group recognises deferred tax liabilities in respect of unremitted earnings of operations in jurisdictions where withholding tax charge would be incurred upon dividend distribution. 191 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION11. 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 Adjustments in respect of prior years Change in tax rate and law Others Increase in tax payable from: Life insurance tax(1) Withholding taxes Disallowed expenses Unrecognised deferred tax assets Provisions for uncertain tax positions(2) Others Total income tax expense Year ended 31 December 2022 Year ended 31 December 2021 491 89 – (134) (43) (18) – (195) 169 39 8 51 2 8 277 171 8,468 1,559 (192) (501) (2) (37) (2) (734) – 132 12 18 4 – 166 991 Notes: (1) Life insurance tax refers to the 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. (2) Provisions for uncertain tax positions relate to situations where the Group’s interpretation of the relevant law or regulation may differ from that of the tax authorities. Provisions are recognised based on management’s judgement and best estimate in relation to the probability or likelihood of different outcomes arising, which is subject to periodic re-assessment. Due to the uncertainty associated with these items, there remains a possibility that the final outcomes may differ on conclusion of the relevant tax matters at a future date. 192 AIA GROUP LIMITEDFINANCIAL STATEMENTS11. INCOME TAX (continued) The movement in net deferred tax liabilities in the year may be analysed as set out below: US$m Revaluation of financial instruments Deferred acquisition costs Insurance and investment contract liabilities Withholding taxes Provision for expenses Losses available for offset against future taxable income Life surplus(1) Others Total Net deferred tax asset/ (liability) at 1 January 2022 (1,880) (3,657) 986 (273) 139 245 (956) (536) (5,932) Credited/(charged) to other comprehensive income Acquisition of a subsidiary Credited/ (charged) to the income statement Fair value reserve(2) Foreign currency translation reserve Net deferred tax asset/ (liability) at 31 December 2022 Others – – – – – – – – – 231 (223) 193 8 (15) (32) 264 180 606 1,737 – – – – – – – 1,737 59 214 (77) 20 (8) (12) 20 (13) 203 – – – – (6) – – (1) (7) 147 (3,666) 1,102 (245) 110 201 (672) (370) (3,393) Net deferred tax asset/ (liability) at 1 January 2021 Acquisition of a subsidiary(3) Credited/ (charged) to the income statement Foreign currency translation reserve Fair value reserve(2) Net deferred tax asset/ (liability) at 31 December 2021 Others Credited/(charged) to other comprehensive income (2,473) (3,608) 304 (202) 144 249 (929) (364) (12) – 43 – – 3 – – (6,879) 34 (172) (171) 664 (84) 4 – (53) (198) (10) 779 – – – – – – – 779 (2) 122 (25) 13 (5) (7) 33 26 155 – – – – (4) – (7) – (1,880) (3,657) 986 (273) 139 245 (956) (536) (11) (5,932) US$m Revaluation of financial instruments Deferred acquisition costs Insurance and investment contract liabilities Withholding taxes Provision for expenses Losses available for offset against future taxable income Life surplus(1) Others Total Notes: (1) Life surplus relates to the temporary difference which arises where the taxable profits are based on actual distributions from the long-term fund. This primarily relates to Singapore and Malaysia. (2) Include tax credit of US$1,779m (2021: tax credit of US$703m) relates to fair value losses on available for sale financial assets and tax charge of US$42m (2021: tax credit of US$76m) relates to fair value losses or gains on available for sale financial assets transferred to profit or loss upon disposal and impairment. (3) The amount of US$34m represents a one-time adjustment in respect of the acquisition of AIA Everest. 193 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION11. INCOME TAX (continued) 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. 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$85m (2021: US$56m) 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 taxable profits will be available. The Group has not provided deferred tax liabilities of US$143m (2021: US$277m) in respect of unremitted earnings of operations in jurisdictions from which a withholding tax charge would be incurred upon distribution as the Group does not consider it probable that this portion of accumulated earnings will be remitted in the foreseeable future. The Group has unused income tax losses carried forward in Mainland China, Hong Kong, Thailand, Singapore, Malaysia, Australia, Brunei, Cambodia, Macau, Myanmar, New Zealand, the Philippines, South Korea, Sri Lanka and Taiwan (China). The tax losses in Hong Kong, Singapore, Australia and New Zealand can be carried forward indefinitely. The tax losses of remaining branches and subsidiaries are due to expire within the periods ending 2023 (Mainland China), 2025 (Macau and Myanmar), 2027 (Cambodia, the Philippines and Thailand), 2028 (Brunei and Sri Lanka), 2031 (Malaysia) and 2032 (South Korea and Taiwan (China)). 194 AIA GROUP LIMITEDFINANCIAL STATEMENTS12. EARNINGS PER SHARE Basic Basic earnings per share is calculated by dividing the net profit attributable to shareholders of AIA Group Limited by the weighted average number of ordinary shares outstanding during the year. The shares held by employee share-based trusts and shares that have been repurchased are not considered to be outstanding from the date of the purchase for the purposes of computing basic and diluted earnings per share. Net profit attributable to shareholders of AIA Group Limited (US$m) Weighted average number of ordinary shares outstanding (million) Basic earnings per share (US cents) Year ended 31 December 2022 Year ended 31 December 2021 282 11,929 2.36 7,427 12,066 61.55 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. The dilutive instruments are the share options, restricted share units, restricted stock purchase units and restricted stock subscription units granted 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$m) Weighted average number of ordinary shares outstanding (million) Adjustment for share options, restricted share units, restricted stock purchase units and restricted stock subscription units granted under share-based compensation plans (million) Weighted average number of ordinary shares for diluted earnings per share (million) Diluted earnings per share (US cents) Year ended 31 December 2022 Year ended 31 December 2021 282 11,929 9 11,938 2.36 7,427 12,066 21 12,087 61.45 At 31 December 2022, 4,431,307 share options (2021: 1,839,793) were excluded from the diluted weighted average number of ordinary shares calculation as they have no effect to the dilutive earnings per share. Operating profit after tax per share Operating profit after tax (see note 6) per share is calculated by dividing the operating profit after tax attributable to shareholders of AIA Group Limited by the weighted average number of ordinary shares outstanding during the year. The dilutive instruments are the share options, restricted share units, restricted stock purchase units and restricted stock subscription units granted to eligible directors, officers, employees and agents under various share-based compensation plans as described in note 39. Basic operating profit after tax per share (US cents) Diluted operating profit after tax per share (US cents) Year ended 31 December 2022 Year ended 31 December 2021 53.40 53.36 53.12 53.02 195 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION13. DIVIDENDS Dividends to shareholders of the Company attributable to the year: US$m Interim dividend declared and paid of 40.28 Hong Kong cents per share (2021: 38.00 Hong Kong cents per share) Final dividend proposed after the reporting date of 113.40 Hong Kong cents per share (2021: 108.00 Hong Kong cents per share)(1) Total Year ended 31 December 2022 Year ended 31 December 2021 609 1,702 2,311 589 1,671 2,260 Notes: (1) Based upon shares outstanding at 31 December 2022 and 2021 that are entitled to a dividend, other than those held by employee share-based trusts. (2) 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. The above final dividend was proposed by the Board on 10 March 2023 subject to shareholders’ approval at the AGM to be held on 18 May 2023 The proposed final dividend has not been recognised as a liability at the reporting date. Dividends to shareholders of the Company attributable to the previous financial period, approved and paid during the year: US$m Final dividend in respect of the previous financial year, approved and paid during the year of 108.00 Hong Kong cents per share (2021: 100.30 Hong Kong cents per share) Year ended 31 December 2022 Year ended 31 December 2021 1,650 1,558 196 AIA GROUP LIMITEDFINANCIAL STATEMENTS14. INTANGIBLE ASSETS US$m Cost At 1 January 2021 Additions Acquisition of a subsidiary Disposals and derecognition Foreign exchange movements At 31 December 2021 Additions Acquisition of subsidiaries Disposals Foreign exchange movements At 31 December 2022 Accumulated amortisation and impairment At 1 January 2021 Amortisation charge for the year Disposals and derecognition Foreign exchange movements At 31 December 2021 Amortisation charge for the year Disposals Impairment loss Foreign exchange movements At 31 December 2022 Net book value At 31 December 2021 At 31 December 2022 Goodwill Computer software Distribution and other rights 823 144 1 (23) (22) 923 364 3 (19) (49) 911 311 – (309) (10) 903 296 – (28) (27) 1,222 1,144 (512) (93) 20 16 (569) (121) 11 – 27 (243) (46) 86 10 (193) (46) 20 – 6 Total 3,393 455 275 (332) (111) 3,680 660 210 (47) (181) 4,322 (759) (139) 106 26 (766) (167) 31 (176) 33 (652) (213) (1,045) 354 570 710 931 2,914 3,277 1,659 – 274 – (79) 1,854 – 207 – (105) 1,956 (4) – – – (4) – – (176) – (180) 1,850 1,776 Intangible assets in this note exclude deferred acquisition and origination costs, which are separately disclosed with further details provided in note 19. The Group holds other intangible assets for its long-term use and, accordingly, the annual amortisation charge approximates to the amount expected to be recovered through consumption within 12 months after the end of the reporting period. 197 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION14. INTANGIBLE ASSETS (continued) Impairment tests for 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 at the date of acquisition. Goodwill arises primarily in respect of the Group’s insurance businesses in Malaysia of US$666m (2021: US$704m), Hong Kong of US$481m (2021: US$274m), Australia of US$406m (2021: US$609m), and New Zealand of US$153m (2021: US$164m). On 26 August 2022, the Group paid in cash a total gross consideration of HK$2,225m (approximately US$283m) and acquired 100 per cent of the voting equity of Blue Cross (Asia-Pacific) Insurance Limited (Blue Cross). A goodwill of US$207m was recognised on the excess of cash consideration paid over the net identifiable assets acquired for Blue Cross and Blue Care JV (BVI) Holdings Limited. During the year ended 31 December 2022, the Group recognised an impairment loss of US$176m primarily related to our businesses in Australia including Australian Savings and Investments (S&I) business. 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 as an actuarially determined appraisal value, based on embedded value of the business and the present value of expected future new business of the cash-generating unit (group of units). The present value of expected future new business is based on financial budgets approved by management, typically covering a three year period unless otherwise stated. These financial budgets reflect management’s best estimate of future profit based on historical experience and best estimate operating assumptions such as premium and expenses. Further, the present value of expected future new business beyond this initial three year period are extrapolated using a perpetual growth rate, which typically does not exceed the long-term expected Gross Domestic Product (GDP) growth of the geographical area in which the cash flows supporting the goodwill are generated. The key assumptions used in the embedded value calculations include risk discount rate, investment returns, mortality, morbidity, persistency, expenses and inflation. In the majority of instances these assumptions are aligned to those assumptions detailed in Section 5 of Supplementary Embedded Value Information. The present value of expected future new business is calculated based on a combination of indicators which include, among others, taking into account recent production mix, business strategy, market trends and risk associated with the future new business projections. The risk discount rates that are used in the value in use of in-force business and present value of expected future new business ranges from 7 per cent to 14 per cent (2021: 7 per cent to 16 per cent) and the perpetual growth rates for future new business cash flows of 3 per cent (2021: 3 per cent) was used, where applicable, to extrapolate the present value of expected future new business beyond the initial three year period; the rate was determined by reference to the long-term expected GDP growth of the geographical area in which the cash flows supporting the goodwill are generated. The Group may apply alternative methods to estimate the value of future new business if the described method is not appropriate under the circumstances. 198 AIA GROUP LIMITEDFINANCIAL STATEMENTS15. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES US$m Group Investments in associates Investments in joint ventures Total As at 31 December 2022 As at 31 December 2021 2,062 30 2,092 646 33 679 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. On 11 January 2022, the Group completed its investment in an associate, China Post Life Insurance Co., Ltd., through an investment of RMB12,033m (approximately US$1,860m) for a 24.99 per cent equity stake. Investments in associates and joint ventures are accounted for using the equity method of accounting. Due to timing of the information provided by China Post Life Insurance Co., Ltd. and Tata AIA Life Insurance Company Limited, these investments are reported on a one-quarter-lag-basis. Goodwill arising on associates and joint ventures is included within the carrying value of those investments. These are held for their long-term contribution to the Group’s performance, therefore all amounts are expected to be realised more than 12 months after the end of the reporting period. The Group’s interests in its principal associates and joint ventures are as follows: Place of incorporation Principal activity Type of shares held Group’s interests % As at 31 December 2022 As at 31 December 2021 China Post Life Insurance Co., Ltd. Mainland China Insurance Ordinary Tata AIA Life Insurance Company Limited India Insurance Ordinary 24.99% 49% – 49% All associates and joint ventures are unlisted. Aggregated financial information of associates and joint ventures The investments in the associates and joint ventures are measured using the equity method. The following table analyses, in aggregate, the carrying amount and share of losses and other comprehensive (expense)/income of these associates and joint ventures. US$m Carrying amount in the statement of financial position Losses from continuing operations Other comprehensive (expense)/income Total comprehensive (expense)/income Year ended 31 December 2022 Year ended 31 December 2021 2,092 (32) (435) (467) 679 (11) 43 32 199 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION16. PROPERTY, PLANT AND EQUIPMENT US$m Cost or revaluation At 1 January 2021 Additions Disposals Net transfer from investment property Increase from valuation Foreign exchange movements At 31 December 2021 Additions Acquisition of subsidiaries Disposals Net transfers from investment property Increase from valuation Foreign exchange movements At 31 December 2022 Accumulated depreciation At 1 January 2021 Depreciation charge for the year Disposals Revaluation adjustment Foreign exchange movements At 31 December 2021 Depreciation charge for the year Disposals Impairment loss Revaluation adjustment Foreign exchange movements At 31 December 2022 Net book value At 31 December 2021 At 31 December 2022 Property held for own use Computer hardware Fixtures and fittings and others 2,753 196 (94) 15 76 (47) 2,899 167 – (202) 157 53 (69) 3,005 (291) (213) 80 31 3 (390) (199) 170 – 32 25 (362) 2,509 2,643 249 28 (15) – – (8) 254 31 1 (12) – – (12) 262 (203) (27) 14 – 7 (209) (28) 9 – – 11 (217) 45 45 Total 3,622 269 (136) 15 76 (72) 3,774 239 1 (255) 157 53 (107) 3,862 (900) (301) 118 31 22 (1,030) (283) 215 (9) 32 57 620 45 (27) – – (17) 621 41 – (41) – – (26) 595 (406) (61) 24 – 12 (431) (56) 36 (9) – 21 (439) (1,018) 190 156 2,744 2,844 The Group leases various properties, computer hardware, fixtures, fittings and other small items as a lessee. These leases, except for short-term leases and leases of low-value assets, are recognised as right-of-use assets and lease liabilities at the date at which the leased assets are available for use by the Group. Right-of-use assets are presented as a component of property, plant and equipment or investment property while lease liabilities are presented as a component of other liabilities (see notes 17 and 33). The depreciation charge for right-of-use assets, by class of underlying asset, and finance cost on lease liabilities are disclosed in note 10. Assets and liabilities arising from a lease are initially measured on a present value basis. A maturity analysis of the Group’s lease liabilities is disclosed in note 37. Extension and termination options are included in a number of leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. 200 AIA GROUP LIMITEDFINANCIAL STATEMENTS16. PROPERTY, PLANT AND EQUIPMENT (continued) Right-of-use assets in relation to leases are reported within property, plant and equipment. The carrying amount of right- of-use assets, by class of underlying asset, is set out below: US$m Property held for own use Computer hardware Fixtures and fittings and others Total As at 31 December 2022 As at 31 December 2021 1,408 1,473 2 2 – 3 1,412 1,476 Additions to right-of-use assets for the year ended 31 December 2022 were US$148m (2021: US$171m). Properties held for own use and right-of-use assets with respect to the Group’s interest in leasehold land and land use rights associated with property 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. All other property, plant and equipment and right-of-use assets in relation to other leased property, plant and equipment are carried at cost less accumulated depreciation and any accumulated impairment losses. During the year, US$68m expenditure (2021: US$46m) recognised in the carrying amount of property held for own use was in the course of its construction. Increase from revaluation on property held for own use of US$85m (2021: US$107m) were taken to other comprehensive income, of which US$35m (2021: US$66m) was related to right-of-use assets. If property held for own use (excluding right-of-use assets) were stated on a historical cost basis, the carrying value would be US$375m (2021: US$357m). Similarly, stated on a historical basis the carrying value of the right-of-use assets related to the Group’s interests in leasehold land and land use rights associated with property held for own use would be US$868m (2021: US$876m). The Group holds property, plant and equipment for its long-term use and, accordingly, the annual depreciation charge approximates to the amount expected to be recovered through consumption within 12 months after the end of the reporting period. 201 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION17. INVESTMENT PROPERTY US$m Fair value At 1 January 2021 Additions and capitalised subsequent expenditures Disposals Net transfers to property, plant and equipment Fair value gains Foreign exchange movements At 31 December 2021 Additions and capitalised subsequent expenditures Disposals Net transfers to property, plant and equipment Fair value gains Foreign exchange movements At 31 December 2022 4,639 139 (4) (15) 65 (108) 4,716 68 (5) (157) 70 (92) 4,600 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. The fair values at the reporting date are 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 five 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$161m (2021: US$166m). Direct operating expenses (including repair and maintenance) on investment property that generates rental income amounted to US$33m (2021: US$32m). The Group owns investment property in the form of freehold land outside Hong Kong and leasehold land. Leasehold land which is held for long-term rental or capital appreciation or both that is not occupied by the Group is classified as investment property. They are leased out under operating leases and are initially recognised as right-of-use assets at cost, with changes in fair values in subsequent periods recognised in the consolidated income statement. The Group does not hold freehold land in Hong Kong. The future undiscounted lease payments under operating leases that the Group expects to receive in future periods may be analysed as follows: US$m Leases of investment property classified as operating leases Expiring no later than one year Expiring later than one year and no later than two years Expiring later than two years and no later than three years Expiring later than three years and no later than four years Expiring later than four years and no later than five years Expiring after five years or more Total undiscounted lease receipts As at 31 December 2022 As at 31 December 2021 124 110 56 24 16 12 342 132 97 75 28 10 17 359 202 AIA GROUP LIMITEDFINANCIAL STATEMENTS18. REINSURANCE ASSETS US$m Amounts recoverable from reinsurers Ceded insurance and investment contract liabilities Total(1) Note 26 As at 31 December 2022 As at 31 December 2021 1,270 3,872 5,142 992 3,999 4,991 Note: (1) Including US$1,929m (2021: US$1,641m) which is expected to be recovered within 12 months after the end of the reporting period. 19. DEFERRED ACQUISITION AND ORIGINATION COSTS US$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 year At beginning of financial year Deferral and amortisation of acquisition and origination costs Foreign exchange movements Impact of assumption changes Other movements At end of financial year As at 31 December 2022 As at 31 December 2021 29,743 28,385 205 355 (257) 30,046 229 387 (293) 28,708 Year ended 31 December 2022 Year ended 31 December 2021 28,708 1,116 (1,036) 97 1,161 30,046 27,915 1,142 (822) (52) 525 28,708 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. 203 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION20. FINANCIAL INVESTMENTS The following tables analyse the Group’s financial investments by type and nature. The Group manages its financial investments in two distinct categories: unit-linked investments and policyholder and shareholder investments. The investment risk in respect of unit-linked investments is generally wholly borne by our customers, and does not directly affect the profit for the year before tax. Furthermore, unit-linked contract holders are responsible for allocation of their policy values amongst investment options offered by the Group. Although profit for the year before tax is not affected by unit-linked investments, the investment return from such financial investments is included in the Group’s profit for the year before tax, as the Group has elected the fair value option for all unit-linked investments with corresponding changes in insurance and investment contract liabilities for unit-linked contracts. Policyholder and shareholder investments include all financial investments other than unit-linked investments. The investment risk in respect of policyholder and shareholder investments is partially or wholly borne by the Group. Policyholder and shareholder investments are further categorised as participating funds and other 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 securities, equity shares and interests in investment funds of participating funds. For other participating business with distinct portfolio, the Group has elected the fair value option for equity shares, interests in investment funds and the available for sale classification for the majority of debt securities. The Group’s accounting policy is to record an insurance liability for the proportion of net assets of the participating funds and other participating business with distinct portfolio that would be allocated to policyholders assuming all performance would be declared as a dividend based upon policyholder participation as at the date of the consolidated statement of financial position as described in note 2.3. As a result, the Group’s net profit before tax for the year is impacted by the proportion of investment return that would be allocated to shareholders as described above. 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 shares, interests in investment funds and exchangeable loan notes 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. 204 AIA GROUP LIMITEDFINANCIAL STATEMENTS20. FINANCIAL INVESTMENTS (continued) Debt securities In compiling the tables, external ratings have been used in accordance with the Group’s credit risk assessment framework. Where external ratings are not readily available an internal rating methodology has been adopted, if applicable. Credit risk limits are set according to the Group’s credit risk assessment framework, which define the relative risk level of a debt security. External ratings Internal ratings Reported as Standard and Poor’s and Fitch 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 Debt securities by type comprise the following: 1 2+ to 2- 3+ to 3- 4+ to 4- AAA AA A BBB 5+ and below Below investment grade Policyholder and shareholder Participating funds and other participating business with distinct portfolios Other policyholder and shareholder Consolidated investment Unit-linked funds(1) US$m FVTPL AFS FVTPL AFS Subtotal FVTPL FVTPL Total 31 December 2022 Government bonds(2) Thailand Mainland China South Korea Singapore Philippines Malaysia Indonesia Other Subtotal – 5,938 – 4,329 – 1,463 – 356 12,086 – – – – – – – – – – 12,153 12,153 17,500 23,438 5,917 1,426 1,633 806 435 5,917 5,755 1,633 2,269 636 1,402 2,460 – – – – – 201 702 903 – 70 253 690 236 90 102 42 41,272 54,261 1,483 – – – – – – – – – 12,153 23,508 6,170 6,445 1,869 2,359 738 2,502 55,744 Notes: (1) Investment funds in which the Group has interests and power to direct their relevant activities that affect the return of the funds are consolidated in the financial statements. Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (2) Government bonds include bonds issued in local or foreign currencies by the government of the country where respective business unit operates. The Group’s credit risk assessment framework does not apply credit risk limits on these government bonds, therefore credit ratings are not shown in the table. Of the total balance as at 31 December 2022, 99 per cent are rated as investment grade. 205 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION20. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Debt securities by type comprise the following: (continued) Policyholder and shareholder Participating funds and other participating business with distinct portfolios Other policyholder and shareholder Consolidated investment Unit-linked funds(1) US$m FVTPL AFS FVTPL AFS Subtotal FVTPL FVTPL Total 31 December 2022 Other government and government agency bonds(3) AAA AA A BBB Below investment grade Not rated Subtotal 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)(6) 2,547 271 490 980 3,004 1,267 636 5 – 862 16 – 184 109 – 36 11 – 6,226 2,676 5,476 2,397 245 – 9,447 4,036 9,747 3,931 277 – 210 90 146 69 5 – 257 285 54 – – – 9,914 4,411 9,947 4,000 282 – 6,463 3,615 340 17,020 27,438 520 596 28,554 8 482 339 2,488 4,138 15,519 4,301 14,783 450 – 111 5 – 9 269 759 2,229 5,065 44 14,051 33,752 125 329 15 14,654 33,863 1,472 2,362 1 21 12 13 260 557 147 234 – 771 329 5,407 1,374 35,386 463 112 60 34,883 2,621 315 9,236 33,388 522 32,676 75,822 1,223 2,338 79,383 31 83 83 58 – 13 268 – – – – – – – 80 – – 72 54 236 442 35 160 524 591 – – 146 243 607 721 54 249 46 – 38 19 – – – – – 72 67 – 192 243 645 812 121 249 1,310 2,020 103 139 2,262 28,053 37,003 2,207 92,278 159,541 3,329 3,073 165,943 Notes: (1) 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. Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (3) Other government and government agency bonds comprise other bonds issued by government and government-sponsored institutions such as national, provincial and municipal authorities; government-related entities; multilateral development banks and supranational organisations. (4) Structured securities include collateralised debt obligations, mortgage-backed securities and other asset-backed securities. (5) Debt securities of US$9,885m are restricted due to local regulatory requirements. (6) AFS debt securities with contractual terms that give rise to cash flows qualifying as SPPI in accordance with IFRS 9 amounted to US$128,864m with 98 per cent rated as investment grade. 206 AIA GROUP LIMITEDFINANCIAL STATEMENTS20. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Debt securities by type comprise the following: (continued) Policyholder and shareholder Participating funds and other participating business with distinct portfolios Other policyholder and shareholder Consolidated investment Unit-linked funds(1) US$m FVTPL AFS FVTPL AFS Subtotal FVTPL FVTPL Total 31 December 2021 Government bonds(2) Thailand Mainland China South Korea Singapore Philippines Malaysia Indonesia Other Subtotal Other government and government agency bonds(3) AAA AA A BBB Below investment grade Not rated Subtotal – 5,819 – 3,716 – 1,161 – 396 11,092 2,682 284 3,375 589 26 – – – – – – – – – – 689 1,272 1,580 852 23 – 6,956 4,416 – – – – – – 176 1,016 1,192 7 20 3 50 13 – 93 13,857 13,857 15,914 21,733 7,271 1,549 2,094 823 569 7,271 5,265 2,094 1,984 745 1,632 3,044 – 55 283 718 132 123 128 88 43,709 55,993 1,527 2,948 3,455 8,694 3,840 315 – 6,326 5,031 13,652 5,331 377 – 194 120 155 37 5 29 – – – – – – – – – 288 315 105 – – 24 13,857 21,788 7,554 5,983 2,226 2,107 873 3,132 57,520 6,808 5,466 13,912 5,368 382 53 19,252 30,717 540 732 31,989 Notes: (1) 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. Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (2) Government bonds include bonds issued in local or foreign currencies by the government of the country where respective business unit operates. The Group’s credit risk assessment framework does not apply credit risk limits on these government bonds, therefore credit ratings are not shown in the table. Of the total balance as at 31 December 2021, 98 per cent are rated as investment grade. (3) Other government and government agency bonds comprise other bonds issued by government and government-sponsored institutions such as national, provincial and municipal authorities; government-related entities; multilateral development banks and supranational organisations. 207 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION20. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Debt securities by type comprise the following: (continued) Policyholder and shareholder Participating funds and other participating business with distinct portfolios Other policyholder and shareholder Consolidated investment Unit-linked funds(1) US$m FVTPL AFS FVTPL AFS Subtotal FVTPL FVTPL Total 31 December 2021 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)(6) 11 335 4,746 4,624 400 – 633 3,218 20,235 20,988 223 – – 817 237 140 342 986 2,603 6,973 20,872 46,090 21,507 47,259 1,010 1,741 3,374 18 – 18 23 7 245 650 129 221 13 311 1,022 7,291 1,451 47,786 556 48,465 69 25 3,572 264 10,116 45,297 2,222 47,065 104,700 1,275 2,425 108,400 60 38 98 71 – 17 284 – – – – – – – 122 – – – – 256 378 20 135 596 595 1 1 202 173 694 666 1 274 95 – 9 10 – 47 1,348 2,010 161 – – – – – – – 297 173 703 676 1 321 2,171 28,448 49,713 3,885 111,374 193,420 3,503 3,157 200,080 Notes: (1) 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. 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$9,238m are restricted due to local regulatory requirements. (6) AFS debt securities with contractual terms that give rise to cash flows qualifying as SPPI in accordance with IFRS 9 amounted to US$160,465m with 98 per cent rated as investment grade. The Group’s debt securities classified at fair value through profit or loss are all designated at fair value through profit or loss. 208 AIA GROUP LIMITEDFINANCIAL STATEMENTS20. FINANCIAL INVESTMENTS (continued) Equity shares and interests in investment funds and exchangeable loan notes Equity shares, interests in investment funds and exchangeable loan notes comprise the following: Policyholder and shareholder Participating funds and other participating business with distinct portfolios Other policyholder and shareholder Unit-linked US$m FVTPL FVTPL Subtotal FVTPL Consolidated investment funds(1) FVTPL Total 31 December 2022 Equity shares Interests in investment funds and exchangeable loan notes Total 12,460 4,736 17,196 6,357 2,138 25,691 10,175 22,635 5,605 10,341 15,780 32,976 16,925 23,282 5,872 8,010 38,577 64,268 Policyholder and shareholder Participating funds and other participating business with distinct portfolios Other policyholder and shareholder Unit-linked US$m FVTPL FVTPL Subtotal FVTPL Consolidated investment funds(1) FVTPL Total 31 December 2021 Equity shares Interests in investment funds and exchangeable loan notes Total 15,718 5,096 20,814 7,258 2,750 30,822 13,467 29,185 4,827 9,923 18,294 39,108 20,605 27,863 1,296 4,046 40,195 71,017 Note: (1) Investment funds in which the Group has interests and power to direct their relevant activities that affect the return of the funds are consolidated in the financial statements. Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. 209 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION20. FINANCIAL INVESTMENTS (continued) Interests in structured entities The Group has determined that the investment funds and structured securities, such as collateralised debt obligations, mortgage-backed securities and other asset-backed securities that the Group has interests are structured entities. The Group has consolidated certain investment funds for which the Group provides guarantee on capital or rate of return to the investors and deemed to have control based on an analysis of the guidance in IFRS 10. For these investment funds, the Group has the ability to reduce the guaranteed rates of return, subject to obtaining approvals of applicable regulators. The Group has an obligation to absorb losses in the event that the returns of the funds are insufficient to cover the capital or rate of return guarantee provided to the investors. The following table summarises the Group’s interests in unconsolidated structured entities: US$m As at 31 December 2022 As at 31 December 2021 Investment funds Structured securities(1) Investment funds Structured securities(1) Available for sale debt securities Debt securities at fair value through profit or loss Interests in investment funds at fair value through profit or loss Total 1,864(2) 551(2) 37,327 39,742 1,310 952 – 2,262 2,818(2) 709(2) 40,195 43,722 1,348 823 – 2,171 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. 210 AIA GROUP LIMITEDFINANCIAL STATEMENTS20. FINANCIAL INVESTMENTS (continued) Loans and deposits Loans and deposits by type comprise the following: 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 2022 As at 31 December 2021 3,823 3,625 469 2 360 (10) 4,644 2,509 1,491 8,644 525 44 732 (13) 4,913 2,850 1,548 9,311 Certain term deposits with financial institutions and promissory notes are restricted due to local regulatory requirements or other pledge restrictions. At 31 December 2022, the restricted balance held within term deposits and promissory notes was US$381m (2021: US$1,905m). Other loans include receivables from reverse repurchase agreements (reverse repos) under which the Group does not take physical possession of securities purchased under the agreements. Reverse repos are initially recorded at the cost of the loan or collateral advanced. At 31 December 2022, the carrying value of such receivables was US$261m (2021: US$407m). At 31 December 2022, there was no material debt collateral received in respect of reverse repo. 211 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION21. DERIVATIVE FINANCIAL INSTRUMENTS The Group’s derivative exposure was as follows: US$m Notional amount Assets Liabilities Fair value 31 December 2022 Foreign exchange contracts Cross-currency swaps Forwards Foreign exchange futures Total foreign exchange contracts Interest rate contracts Interest rate swaps Other Warrants and options Forward contracts Swaps Netting Total 31 December 2021 Foreign exchange contracts Cross-currency swaps Forwards Foreign exchange futures Total foreign exchange contracts Interest rate contracts Interest rate swaps Other Warrants and options Forward contracts Swaps Netting Total 6,994 6,025 48 13,067 8,500 1,344 37,995 2,051 (48) 62,909 7,191 3,726 73 10,990 9,174 200 35,233 1,492 (73) 57,016 220 56 - 276 240 27 74 13 - (295) (86) - (381) (283) (1) (8,056) (18) - 630 (8,739) 79 72 – 151 326 2 973 16 – (401) (10) – (411) (223) (1) (754) (3) – 1,468 (1,392) The column “notional amount” in the above table refers to the pay leg of derivative transactions other than equity-index options. For certain equity-index call and put options with the 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$32m (2021: US$23m) 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. 212 AIA GROUP LIMITEDFINANCIAL STATEMENTS21. DERIVATIVE FINANCIAL INSTRUMENTS (continued) 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 provide an economic hedge to 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. 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. Swaps are OTC contractual agreements between the Group and a third party to exchange a series of cash flows based upon an index, rates or other variables applied to a notional amount. Netting adjustment The netting adjustment is related to futures contracts executed through clearing house where the settlement arrangement satisfies the netting criteria under IFRS. Collateral under derivative transactions At 31 December 2022, the Group had posted cash collateral of US$309m (2021: US$322m) and pledged debt securities with carrying value of US$9,656m (2021: US$664m) for liabilities, and held cash collateral of US$231m (2021: US$642m) and debt securities collateral with carrying value of US$55m (2021: US$21m) for assets in respect of derivative transactions. The Group did not sell or repledge the debt collateral received. These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard repurchase agreements. 213 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION22. FAIR VALUE MEASUREMENT Fair value of financial instruments The Group classifies all financial assets as either at fair value through profit or loss, or as available for sale, which are carried at fair value, or as loans and receivables, which are carried at amortised cost. Financial liabilities are classified as either at fair value through profit or loss or at amortised cost, except for investment contracts with DPF which are accounted for under IFRS 4. The following tables present the fair values of the Group’s financial assets and financial liabilities: US$m 31 December 2022 Financial investments Loans and deposits Debt securities Equity shares, interests in investment funds and exchangeable loan notes Derivative financial instruments Reinsurance receivables Other receivables Accrued investment income Cash and cash equivalents Financial assets Financial liabilities Investment contract liabilities 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 – – 8,644 8,644 8,739 36,662 129,281 64,268 630 – – – – – – – – – – – – – 1,270 3,468 1,836 8,969 165,943 165,943 64,268 64,268 630 1,270 3,468 1,836 8,969 630 1,270 3,468 1,836 8,969 101,560 129,281 24,187 255,028 255,123 Fair value through profit or loss Cost/ amortised cost Total carrying value Total fair value Notes 27 29 30 21 33 9,211 – – 8,739 865 18,815 530 11,206 1,748 – 7,046 20,530 9,741 11,206 1,748 8,739 7,911 9,741 9,837 1,748 8,739 7,911 39,345 37,976 214 AIA GROUP LIMITEDFINANCIAL STATEMENTS22. FAIR VALUE MEASUREMENT (continued) Fair value of financial instruments (continued) US$m 31 December 2021 Financial investments Loans and deposits Debt securities Equity shares, interests in investment funds and exchangeable loan notes Derivative financial instruments Reinsurance receivables Other receivables Accrued investment income Cash and cash equivalents Financial assets Financial liabilities Investment contract liabilities 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 – – 9,311 9,311 9,592 38,993 161,087 71,017 1,468 – – – – – – – – – – – – – 992 3,352 1,837 4,989 200,080 200,080 71,017 71,017 1,468 992 3,352 1,837 4,989 1,468 992 3,352 1,837 4,989 111,478 161,087 20,481 293,046 293,327 Fair value through profit or loss Cost/ amortised cost Total carrying value Total fair value Notes 27 29 30 21 33 11,023 – – 1,392 925 13,340 572 9,588 1,588 – 7,599 19,347 11,595 9,588 1,588 1,392 8,524 11,595 10,285 1,588 1,392 8,524 32,687 33,384 The carrying amount of assets included in the above tables represents the maximum credit exposure. Foreign currency exposure, including the net positions of foreign currency derivative, 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. 215 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION22. 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 year ended 31 December 2022 and 2021. 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, equity shares, interests in investment funds and exchangeable loan notes The fair values of equity shares, interests in investment funds and exchangeable loan notes 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 investments 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. 216 AIA GROUP LIMITEDFINANCIAL STATEMENTS22. 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 an 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 certain 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. Certain other properties are valued using a combination of these two methods. 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 is 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. 217 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION22. 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. Borrowings The fair values of borrowings 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 are 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: • 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. • Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset and liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Assets and liabilities measured at fair value on a recurring basis and classified as Level 2 generally include government securities issued by non-G7 countries, most investment grade corporate bonds, hedge fund investments and derivative contracts. • Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Unobservable inputs are only used to measure fair value to the extent that relevant observable inputs are not available, allowing for circumstances in which there is little, if any, market activity for the asset or liability. Assets and liabilities measured at fair value on a recurring basis and classified as Level 3 include 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. 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. 218 AIA GROUP LIMITEDFINANCIAL STATEMENTS22. FAIR VALUE MEASUREMENT (continued) Fair value hierarchy for fair value measurement on a recurring basis (continued) A summary of assets and liabilities carried at fair value on a recurring basis according to fair value hierarchy is given below: US$m Level 1 Level 2 Level 3 Total Fair value hierarchy 31 December 2022 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 shares, interests in investment funds and exchangeable loan notes 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 contracts Other liabilities Total liabilities on a recurring fair value measurement basis % of Total – – – – 1 16 – 15,102 25,396 4,915 – – 17 – – 1,235 4,600 1,235 4,600 36,996 90,413 6 1,866 37,002 92,279 26,566 6,247 1,810 1,201 609 1,488 276 240 56 1,486 139 397 6,332 5,287 3,938 – – 41 28,053 6,402 2,207 22,635 31,292 10,341 276 240 114 45,447 19.2% 165,902 70.1% 25,327 10.7% 236,676 100.0% – – – 14 – 14 0.1% 8,863 348 9,211 381 283 8,061 865 18,453 98.1% – – – – 381 283 8,075 865 348 1.8% 18,815 100.0% 219 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION22. 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 31 December 2021 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 shares, interests in investment funds and exchangeable loan notes 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 contracts Other liabilities Total liabilities on a recurring fair value measurement basis % of Total – – – – 1 15 – 23,129 30,003 6,847 – – 12 – – 1,037 4,716 1,037 4,716 49,701 109,770 12 1,604 49,713 111,374 27,564 6,645 3,588 1,000 310 1,256 151 326 979 883 – 297 5,056 1,596 1,820 – – – 28,448 6,660 3,885 29,185 31,909 9,923 151 326 991 60,007 21.6% 201,290 72.3% 17,021 6.1% 278,318 100.0% – – – 11 – 11 0.1% 10,723 300 11,023 411 223 747 925 – – – – 411 223 758 925 13,029 97.7% 300 2.2% 13,340 100.0% 220 AIA GROUP LIMITEDFINANCIAL STATEMENTS22. FAIR VALUE MEASUREMENT (continued) Fair value hierarchy for fair value measurement on a recurring basis (continued) The Group’s policy is to recognise transfers of assets and liabilities between Level 1 and Level 2 at their fair values as at the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. During the year ended 31 December 2022, the Group transferred US$103m (2021: US$184m) 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 US$28m of assets (2021: US$15m) from Level 2 to Level 1 during the year ended 31 December 2022. The Group’s Level 2 financial instruments include debt securities, equity shares and interests in investment funds, derivative financial instruments, investment contract liabilities and other liabilities. The fair values of Level 2 financial instruments are estimated using values obtained from private pricing services and brokers corroborated with internal review as necessary. When the quotes from private pricing services and brokers are not available, internal valuation techniques and inputs will be used to derive the fair value for the financial instruments. The tables below set out a summary of changes in the Group’s Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended 31 December 2022 and 2021. The tables reflect gains and losses, including gains and losses on assets and liabilities categorised as Level 3 as at 31 December 2022 and 2021. Level 3 assets and liabilities US$m Property held for own use Investment property Debt securities Equity shares, interests in investment funds and exchangeable loan notes At 1 January 2022 1,037 4,716 2,796 8,472 – – – – Derivative financial assets/ (liabilities) Investment contracts – – (300) (48) 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/from investment property Purchases Sales Settlements Transfer out of Level 3 At 31 December 2022 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 (17) 70 (54) 26 41 35 157 23 – – – (92) (157) 68 (5) – – (279) (189) – 1,908 (202) (229) (46) – 7,904 (637) (4) (15) – – – – – – – – – – – – – 1,235 4,600 3,894 15,557 41 (348) (17) 70 (87) (131) 41 – 221 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION22. FAIR VALUE MEASUREMENT (continued) Fair value hierarchy for fair value measurement on a recurring basis (continued) Level 3 assets and liabilities (continued) US$m Property held for own use Investment property Debt securities Equity shares, interests in investment funds and exchangeable loan notes Derivative financial assets/ (liabilities) At 1 January 2021 1,025 4,639 2,502 3,550 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/from investment property Purchases Sales Settlements Transfer into/out of Level 3 At 31 December 2021 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 – – (16) 65 4 (2) 26 – – – (108) (15) 139 (4) – – – 2 3 – 898 (14) (601) 6 – 644 (38) – 4,580 (264) – – 1,037 4,716 2,796 8,472 (16) 65 (43) 635 – – – – – – – – – – – Investment contracts (12,026) 7 – – – – – – 11,719(1) (300) – Note: (1) Of the total investment contract liabilities reported, US$11,719m have been valued based on quoted prices of the underlying investments hence they were classified as Level 2. Movements in investment contract liabilities at fair value are offset by movements in the underlying portfolio of matching assets. Details of the movement in investment contract liabilities are provided in note 27. Assets transferred out of Level 3 mainly relate to corporate debt instruments and equity shares and interests in investment funds of which market-observable inputs became available during the period and were used in determining the fair value. There are not any differences between the fair values on initial recognition and the amounts determined using valuation techniques since the models adopted are calibrated using initial transaction prices. 222 AIA GROUP LIMITEDFINANCIAL STATEMENTS22. FAIR VALUE MEASUREMENT (continued) Significant unobservable inputs for Level 3 fair value measurements As at 31 December 2022 and 2021, the valuation techniques and applicable unobservable inputs used to measure the Group’s Level 3 financial instruments are summarised as follows: Description Fair value at 31 December 2022 (US$m) Valuation techniques Unobservable inputs Range Debt securities 1,790 Discounted cash flows Risk adjusted discount rate 3.30% - 30.09% Description Fair value at 31 December 2021 (US$m) Valuation techniques Unobservable inputs Range Debt securities 978 Discounted cash flows Risk adjusted discount rate 3.62% – 12.99% For certain equity shares, interests in investment funds and exchangeable loan notes held by the Group, management obtains values from independent professional valuers who use valuation techniques, such as the market approach, to determine the fair value. Under the market approach, the most relevant valuation multiples based on a number of factors, such as enterprise value to sales, or enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortisation), are used to determine the fair value of the financial assets. 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 private 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 private 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 debt 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. 223 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION22. 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 2022 and 2021 is given below. Fair value hierarchy Level 1 Level 2 Level 3 Total 2,078 – 53 24 8,969 11,124 – 8,286 – 449 8,735 722 1,270 3,267 1,812 – 7,071 – 1,551 1,748 6,541 9,840 5,939 – 148 – – 8,739 1,270 3,468 1,836 8,969 6,087 24,282 530 – – 56 586 530 9,837 1,748 7,046 19,161 Fair value hierarchy Level 1 Level 2 Level 3 Total 2,332 – 61 47 4,989 7,429 – 9,390 – 545 9,935 2,892 991 3,222 1,790 – 8,895 – 895 1,588 6,987 9,470 4,368 1 69 – – 9,592 992 3,352 1,837 4,989 4,438 20,762 572 – – 67 639 572 10,285 1,588 7,599 20,044 US$m 31 December 2022 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 US$m 31 December 2021 Assets for which the fair value is disclosed Financial assets Loans and deposits Reinsurance receivables Other receivables Accrued investment income Cash and cash equivalents Total assets for which the fair value is disclosed Liabilities for which the fair value is disclosed Financial liabilities Investment contract liabilities Borrowings Obligations under repurchase agreements Other liabilities Total liabilities for which the fair value is disclosed 224 AIA GROUP LIMITEDFINANCIAL STATEMENTS23. OTHER ASSETS US$m Accrued investment income Pension scheme assets Defined benefit pension scheme surpluses Insurance receivables due from insurance and investment contract holders Prepayment for investment in an associate(1) Others(2) Total As at 31 December 2022 As at 31 December 2021 1,836 1,837 56 1,711 - 2,671 6,274 48 1,628 1,865 2,709 8,087 Notes: (1) Represents the payment for the 24.99 per cent equity stake, post investment, in China Post Life Insurance Co., Ltd. (China Post Life) in 2021. The investment was completed on 11 January 2022, upon receiving all necessary regulatory approvals. (2) Represents, among others, prepayments and investment-related receivables. 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 debt securities and loans and receivables. Available for sale debt securities No material impairment loss was recognised in respect of available for sale debt securities during the year ended 31 December 2022 and 31 December 2021. The carrying amounts of available for sale debt securities that are individually determined to be impaired at 31 December 2022 was US$21m (2021: 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 2022 was US$11m (2021: US$20m). The Group has a portfolio of residential and commercial mortgage loans which it originates. To the extent that any such loans are past their due dates specific allowance is made, together with a collective allowance, based on historical delinquency. Insurance receivables are short-term in nature and cover is not provided if consideration is not received. An ageing of accounts receivable is not provided as all amounts are due within one year and cover is cancelled if consideration is not received. 225 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION25. CASH AND CASH EQUIVALENTS US$m Cash Cash equivalents Total(1) As at 31 December 2022 As at 31 December 2021 3,367 5,602 8,969 2,868 2,121 4,989 Note: (1) US$926m (2021: US$892m) are held to back unit-linked contracts and US$367m (2021: US$184m) are held by consolidated investment funds. Cash comprises cash at bank and cash in hand. Cash equivalents comprise bank deposits and highly liquid short-term investments with maturities at acquisition of three months or less and money market funds that are convertible into known amounts of cash and subject to insignificant risk of changes in value. Accordingly, all such amounts are expected to be realised within 12 months after the end of the reporting period. 26. INSURANCE CONTRACT LIABILITIES The movements of insurance contract liabilities (including liabilities in respect of investment contracts with DPF) and ceded insurance contract liabilities (see note 18) are shown as follows: US$m Gross Reinsurance Net At 1 January 2021 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 a subsidiary Foreign exchange movements Other movements At 31 December 2021 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 Foreign exchange movements Other movements At 31 December 2022 223,071 37,599 (25,634) (2,652) 6,742 1,306 3,687 (5,126) 430 239,423 34,767 (25,758) (2,610) 7,162 (27,243) (6,308) 1,280 220,713 (3,889) (2,258) 2,088 – (37) – (1) 98 – (3,999) (2,148) 2,047 - (36) - 270 (6) 219,182 35,341 (23,546) (2,652) 6,705 1,306 3,686 (5,028) 430 235,424 32,619 (23,711) (2,610) 7,126 (27,243) (6,038) 1,274 (3,872) 216,841 226 AIA GROUP LIMITEDFINANCIAL STATEMENTS26. INSURANCE CONTRACT LIABILITIES (continued) 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 As at 31 December 2022 As at 31 December 2021 31,721 3,061 6,467 179,464 220,713 28,893 2,042 31,269 177,219 239,423 227 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION26. INSURANCE CONTRACT LIABILITIES (continued) Business description The table below summarises the key variables on which insurance and investment contract cash flows depend. Type of contract Material terms and conditions Nature of benefits and compensation for claims Factors affecting contract cash flows Key reportable segments Minimum guaranteed benefits may be enhanced based on investment experience and other considerations • Investment performance • Expenses • Mortality • Surrenders • Morbidity Mainland China, Hong Kong, Singapore, Malaysia 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 For participating funds, local regulations generally prescribe a minimum proportion of policyholder participation in declared dividends For other participating business with distinct portfolios, the allocation of benefit from the assets held in such distinct portfolios is set according to the underlying bonus rule as determined by the relevant Board based on applicable regulatory requirements after considering the Appointed Actuary’s recommendation. The extent of such policyholder participation may change over time 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 Traditional participating life Participating funds and other participating business with distinct portfolios Other participating business without distinct portfolios Traditional non-participating life Accident and health Unit-linked Universal life Minimum guaranteed benefits may be enhanced based on investment experience and other considerations 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 • Investment performance Thailand, Other Markets • Expenses • Mortality • Surrenders • Morbidity • Mortality • Morbidity • Lapses • Expenses • Mortality • Morbidity • Lapses • Expenses • Investment performance • Lapses • Expenses • Mortality • Investment performance • Crediting rates • Lapses • Expenses • Mortality All(1) All(1) All(1) All(1) Unit-linked contracts combine savings with protection, the cash value of the policy depending on the value of unitised funds Benefits are based on the value of the unitised funds and death benefits The customer pays flexible premiums subject to specified limits accumulated in an account balance which are credited with interest at a rate set by the insurer, and a death benefit which may be varied by the customer Benefits are based on the account balance and death benefit Note: (1) Other than the Group Corporate Centre segment. 228 AIA GROUP LIMITEDFINANCIAL STATEMENTS26. INSURANCE CONTRACT LIABILITIES (continued) Methodology and assumptions The most significant items to which profit for the year and shareholders’ equity are sensitive are market, insurance and lapse risks which are shown in the table below. Indirect exposure indicates that there is a second order impact. For example, whilst the profit for the year attributable to shareholders is not directly affected by investment income earned where the investment risk is borne by policyholders (for example, in respect of unit-linked contracts), there is a second-order effect through the investment management fees which the Group earns by managing such investments. The distinction between direct and indirect exposure is not intended to indicate the relative sensitivity to each of these items. Where the direct exposure is shown as being “net neutral”, this is because the exposure to market and credit risks is offset by a corresponding movement in insurance contract liabilities. Type of contract Traditional participating life Market and credit risks Direct exposure Insurance and investment contract liabilities Risks associated with related investment portfolio Indirect exposure Significant insurance and lapse risks Participating funds and other participating business with distinct portfolios • Net neutral except for the insurer’s share of participating investment performance • Net neutral except for the insurer’s share of participating investment performance • Guarantees • Guarantees Other participating business without distinct portfolios • Net neutral except for the insurer’s share of participating investment performance • Net neutral except for the insurer’s share of participating investment performance • Guarantees • Guarantees • Investment performance subject to smoothing through dividend declarations • Impact of persistency on future dividends • Mortality • Morbidity • Investment performance subject to smoothing through dividend declarations • Impact of persistency on future dividends • Mortality • Morbidity Traditional non-participating life • Guarantees • Asset-liability mismatch risk Accident and health • Asset-liability mismatch risk Pension • Net neutral • Asset-liability mismatch risk • Investment performance • Asset-liability mismatch risk • Credit risk • Investment performance • Credit risk • Asset-liability mismatch risk • Net neutral • Asset-liability mismatch risk • Not applicable • Mortality • Persistency • Morbidity • Not applicable • Morbidity • Persistency • Performance-related • Persistency investment management fees Unit-linked • Net neutral • Net neutral • Performance-related investment management fees • Persistency • Mortality Universal life • Guarantees • Asset-liability mismatch risk • Investment performance • Credit risk • Asset-liability mismatch risk • Spread between earned rate and crediting rate to policyholders • Mortality • Persistency • Withdrawals The Group is also exposed to foreign exchange rate risk in respect of its operations, and to credit spread risk, interest rate risk, credit risk and equity 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. 229 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION26. INSURANCE CONTRACT LIABILITIES (continued) Methodology and assumptions (continued) Valuation interest rates Cash flows of our traditional insurance contracts are discounted using the appropriate long-term investment return assumptions that reflect the expected underlying asset mix. In determining the long-term returns on the fixed income assets, an allowance is made for the risk of default which varies by the credit rating of the underlying asset. The Group has set the equity return and property return assumptions by reference to the long-term return on 10-year government bonds, allowing for an internal assessment of risk premia that vary by asset class and by territory. Further, an adjustment is made to the long-term investment return assumptions to provide for the risk of adverse deviation. These assumptions are determined at the policy inception date and remain locked in thereafter, unless a deficiency arises on liability adequacy testing. As at 31 December 2022 and 2021, 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: Mainland China Hong Kong Thailand Singapore Malaysia Australia New Zealand Indonesia Philippines South Korea Sri Lanka Taiwan (China) Vietnam 27. INVESTMENT CONTRACT LIABILITIES US$m At beginning of financial year Investment contract benefits Fees charged Net withdrawals and other movements Foreign exchange movements At end of financial year(1) As at 31 December 2022 As at 31 December 2021 2.75% – 7.00% 2.75% – 7.00% 3.00% – 7.50% 1.80% – 7.50% 2.14% – 9.00% 2.14% – 9.00% 2.00% – 7.00% 2.00% – 7.00% 3.00% – 5.78% 3.00% – 5.43% 3.15% – 5.11% 0.22% – 3.84% 2.50% – 6.15% 2.30% – 6.15% 3.02% – 8.61% 3.02% – 8.61% 2.20% – 9.20% 2.20% – 9.20% 2.01% – 6.50% 2.01% – 6.50% 8.78% – 14.60% 7.87% – 9.67% 1.75% – 6.50% 1.75% – 6.50% 4.44% – 11.48% 4.44% – 11.48% Year ended 31 December 2022 Year ended 31 December 2021 11,860 (1,125) (60) (375) (329) 9,971 12,881 437 (80) (1,091) (287) 11,860 Note: (1) Of investment contract liabilities, US$230m (2021:US$265m) represents deferred fee income. Movement of deferred fee income of US$35m (2021:US$47m) represents revenue recognised as a result of performance obligations satisfied during the year. 230 AIA GROUP LIMITEDFINANCIAL STATEMENTS28. EFFECT OF CHANGES IN ASSUMPTIONS AND ESTIMATES The table below sets out the sensitivities of the assumptions in respect of insurance and investment contracts with DPF to key variables. This disclosure only allows for the impact on liabilities and related assets, such as reinsurance, and deferred acquisition costs and does not allow for offsetting movements in the fair value of financial assets backing those liabilities. US$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 2022 As at 31 December 2021 94 (113) (58) (102) (82) 126 (144) (51) (89) (80) Future policy benefits for the Group’s majority 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 these 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, except for a limited number of cases where statutory requirements are adopted in the applicable jurisdiction. 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$224m increase (2021: US$21m increase) in profit. 231 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION29. BORROWINGS US$m Medium-term notes and securities Senior notes Subordinated securities Total As at 31 December 2022 As at 31 December 2021 7,480 3,726 11,206 5,820 3,768 9,588 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. 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 and securities placed to the market at 31 December 2022: Senior notes Issue date 13 March 2013(1) 11 March 2014(1) 11 March 2015(1) 16 March 2016(1) 23 May 2017(2) 6 April 2018(1) 16 January 2019 9 April 2019(1) 7 April 2020(1) 24 June 2020 29 March 2022 24 October 2022 25 October 2022(1) Subordinated securities Issue date 16 September 2020(1) 7 April 2021(1)(3)(4) 11 June 2021(1)(3)(4) 9 September 2021(1)(3)(4) 19 October 2021(1)(3)(4) Nominal amount Interest rate Tenor at issue Maturity US$500m US$500m US$750m US$750m US$500m US$500m HK$1,100m US$1,000m US$1,000m A$90m HK$6,500m HK$1,200m US$850m 3.125% 4.875% 3.200% 4.500% 4.470% 3.900% 3.680% 3.600% 3.375% 2.950% 2.250% 5.040% 5.625% 10 years 30 years 10 years 30 years 30 years 10 years 12 years 10 years 10 years 10 years 1.99 years 2.99 years 13 March 2023 11 March 2044 11 March 2025 16 March 2046 23 May 2047 6 April 2028 16 January 2031 9 April 2029 7 April 2030 24 June 2030 28 March 2024 17 October 2025 5 years 25 October 2027 Nominal amount Interest rate Tenor at issue Maturity US$1,750m US$750m SG$500m EUR750m SG$105m 3.200% 2.700% 2.900% 0.880% 3.000% 20 years 16 September 2040 Perpetual Perpetual n/a n/a 12 years 9 September 2033 30 years 19 October 2051 Notes: (1) These medium-term notes and securities are listed on The Stock Exchange of Hong Kong Limited. (2) These medium-term notes are listed on The Taipei Exchange. The Company has the right to redeem these notes at par on 23 May of each year beginning on 23 May 2022. (3) The Company has the right to redeem these securities, in whole, at par on predetermined dates as set out within the terms and conditions of the securities, subject to regulatory approval. No change in terms since issue date. (4) The coupon rate of these securities is fixed for a predetermined period as set out within the terms and conditions of the securities, and then resets to the initial spread plus a then prevailing benchmark rate if the securities have not been redeemed. The net proceeds from issuance during the year ended 31 December 2022 are used for refinancing and general corporate purposes. The Group has access to an aggregate of US$2,290m unsecured committed credit facilities, which includes a US$100m revolving credit facility expiring in 2024 and a US$2,190m credit facility expiring in 2026. The credit facilities will be used for general corporate purposes. There were no outstanding borrowings under these credit facilities as of 31 December 2022 and 2021. 232 AIA GROUP LIMITEDFINANCIAL STATEMENTS30. OBLIGATIONS UNDER REPURCHASE 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. At 31 December 2022, the obligations under repurchase agreements were US$1,748m (2021: US$1,588m). The securities sold under repurchase agreements continue to be recognised within the appropriate financial asset classification. A liability is established for the consideration received. During the term of the repurchase agreements, the Group is restricted from selling or pledging the transferred debt securities. The following table specifies the amounts included within financial investments subject to repurchase agreements which do not qualify for de-recognition at each year end: US$m Debt securities – AFS Repurchase agreements Debt securities – FVTPL Repurchase agreements Total As at 31 December 2022 As at 31 December 2021 1,810 1,511 71 1,881 92 1,603 Collateral under repurchase agreements At 31 December 2022 and 31 December 2021, there was no material collateral in respect of repurchase agreements. 233 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION31. OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES Offsetting, enforceable master netting agreements and similar agreements The following table shows the assets that are subject to offsetting, enforceable master netting agreements and similar arrangements at each year end: Gross amount of recognised financial liabilities set off in the consolidated statement of financial position Net amount of financial assets presented in the consolidated statement of financial position Gross amount of recognised financial assets Related amounts not set off in the consolidated statement of financial position Financial instruments Cash collateral received Net amount 630 261 891 – – – 630 261 891 (55) (261) (316) (231) – (231) 344 – 344 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 1,468 407 1,875 – – – 1,468 407 1,875 (21) (407) (428) (642) – (642) 805 – 805 US$m 31 December 2022 Financial assets: Derivative assets Reverse repurchase agreements Total US$m 31 December 2021 Financial assets: Derivative assets Reverse repurchase agreements Total 234 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 year end: Gross amount of recognised financial assets set off in the consolidated statement of financial position Net amount of financial liabilities presented in the consolidated statement of financial position Gross amount of recognised financial liabilities Related amounts not set off in the consolidated statement of financial position Financial instruments Cash collateral pledged Net amount 8,739 1,748 10,487 – – – 8,739 1,748 (9,656) (1,748) (309) (1,226) – – 10,487 (11,404) (309) (1,226) 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 1,392 1,588 2,980 – – – 1,392 1,588 2,980 (664) (1,588) (2,252) (322) – (322) 406 – 406 US$m 31 December 2022 Financial liabilities: Derivative liabilities Repurchase agreements Total US$m 31 December 2021 Financial liabilities: Derivative liabilities Repurchase agreements Total The Group entered into enforceable master netting agreements for derivative transactions, as well as the repurchase 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. 235 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION32. PROVISIONS US$m At 1 January 2021 Charged to the consolidated income statement Charged to other comprehensive income Exchange differences Released during the year Utilised during the year Other movements At 31 December 2021 Charged to the consolidated income statement Credited to other comprehensive income Exchange differences Released during the year Utilised during the year Other movements At 31 December 2022 Employee benefits Other 195 11 (20) (14) – (13) (1) 158 10 (21) (5) – (10) 1 133 35 24 – (1) (5) (17) – 36 – – (1) (1) (7) – 27 Total 230 35 (20) (15) (5) (30) (1) 194 10 (21) (6) (1) (17) 1 160 Other provisions Other provisions comprise provisions in respect of regulatory matters, litigation, reorganisation and restructuring. In view of the diverse nature of the matters provided for and the contingent nature of the matters to which they relate, the Group is unable to provide an accurate assessment of the term over which provisions are expected to be utilised. 33. OTHER LIABILITIES US$m Trade and other payables Lease liabilities Third-party interests in consolidated investment funds Reinsurance-related payables Total As at 31 December 2022 As at 31 December 2021 4,947 395 865 1,704 7,911 5,617 475 925 1,507 8,524 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. Reinsurance-related payables of US$379m (2021: US$427m) are expected to be settled more than 12 months after the end of the reporting period. 236 AIA GROUP LIMITEDFINANCIAL STATEMENTS34. SHARE CAPITAL AND RESERVES Share capital Ordinary shares(1), issued and fully paid At beginning of the financial year Shares issued under share option scheme and agency share purchase plan Shares cancelled after repurchase under the share buy-back programme(2) At end of the financial year, issued and fully paid Shares not yet cancelled after repurchase under the share buy-back programme(2) At end of the financial year, outstanding As at 31 December 2022 As at 31 December 2021 Million shares US$m Million shares US$m 12,097 14,160 12,095 14,155 3 (319) 11,781 11 – 2 – 5 – 14,171 12,097 14,160 (47) – – – 11,734 14,171 12,097 14,160 Notes: (1) Ordinary shares have no nominal value and there is no obligation to transfer cash or other assets to the holders of ordinary shares. (2) The Company acquired a total of 366,267,400 ordinary shares on the Hong Kong Stock Exchange with the aggregate cost amounting to approximately HK$27,969m (equivalent to approximately US$3,570m). Of these shares, 319,150,200 shares were cancelled during the year and 47,117,200 shares were in the process of share cancellation as at 31 December 2022 and were cancelled subsequent to the reporting date on 9 January 2023. The Company issued 1,895,760 shares under share option scheme (2021: 871,896 shares) and 1,119,763 shares under agency share purchase plan (2021: 1,192,355 shares) during the year ended 31 December 2022. During the year ended 31 December 2022, the employee share-based trusts purchased 9,933,820 shares (year ended 31 December 2021: 8,277,353 shares) and sold nil shares (year ended 31 December 2021: nil). These purchases were made by the relevant scheme trustees on the Hong Kong Stock Exchange (HKSE). These shares are held on trust for participants of the relevant schemes and therefore were not cancelled. During the year ended 31 December 2022, 6,884,726 shares (2021: 6,714,317 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 2022, 33,360,398 shares (2021: 30,311,301 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. Where the Group is deemed to control the trusts, they are consolidated. Those shares acquired by the trusts, to the extent not transferred to the participants upon vesting, are reported as “Employee share- based trusts” and carried at cost. 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. 237 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION35. NON-CONTROLLING INTERESTS US$m Equity shares in subsidiaries Share of earnings Share of other reserves Total As at 31 December 2022 As at 31 December 2021 89 409 (44) 454 80 391 (4) 467 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 among Group members 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. Group-wide Supervision Framework and the Local Capital Summation Method The Group supervisor is the Hong Kong Insurance Authority (HKIA) and the Group is in compliance with its group capital adequacy requirements. The Insurance (Group Capital) Rules (GWS Capital Rules) set out the capital requirements and overall solvency position for the Group under the Group-wide Supervision (GWS) framework. These requirements are based on a “summation approach” and are referred to as the Local Capital Summation Method (LCSM). Under the LCSM, the group available capital and group required capital are calculated as the sum of the available capital and required capital for each entity within the Group according to the respective local regulatory requirements, subject to any variation considered necessary by the HKIA. Prior to 1 January 2022, the Group LCSM surplus and cover ratio were based on minimum capital requirements (MCR basis). The group minimum capital requirement (GMCR) is the sum of the minimum capital requirement of each entity within the Group. The Group LCSM surplus was defined as the excess of the group available capital over the GMCR. The Group LCSM cover ratio was calculated as the ratio of the group available capital to the GMCR. Applying the changes in disclosure requirements from the HKIA, the Group LCSM surplus and the Group LCSM cover ratio are now based on prescribed capital requirements (PCR basis). The group prescribed capital requirement (GPCR) is the sum of the prescribed capital requirement of each entity within the Group, and represents the level below which the HKIA may intervene on grounds of capital adequacy. The Group LCSM surplus is now defined as the excess of the group available capital over the GPCR and the Group LCSM cover ratio is calculated as the ratio of the group available capital to the GPCR. The use of GPCR in these revised definitions is more relevant for shareholders when assessing the capital position of the Group and brings the LCSM required capital requirements more in line with the capital requirements currently used within the EV. On the new PCR basis as at 31 December 2021, the pro forma Group LCSM cover ratio was 291 per cent compared with 399 per cent on the MCR basis reflecting higher capital requirements under the new PCR basis. On the new PCR basis as at 31 December 2022, the Group LCSM cover ratio was 283 per cent. 238 AIA GROUP LIMITEDFINANCIAL STATEMENTS36. GROUP CAPITAL STRUCTURE (continued) Group-wide Supervision Framework and the Local Capital Summation Method (continued) The table shows a summary of the Group LCSM solvency position and includes the effects of early adoption of the HKRBC regime, the introduction of C-ROSS II regime and the move to the PCR basis as of 31 December 2022. US$m Group LCSM cover ratio (PCR basis)(1) Group LCSM cover ratio (MCR basis)(1) Group available capital Tier 1 capital(2) Other Than Tier 1 capital Group prescribed capital requirement (GPCR) Group minimum capital requirement (GMCR) Group LCSM surplus (PCR basis)(3) Group LCSM surplus (MCR basis)(3) Senior notes approved as contributing to group available capital(4) As at 31 December 2022 As at 31 December 2021 283% 552% 70,698 45,508 25,190 24,989 12,810 45,709 n/a 5,653 n/a 399% 67,611 n/a n/a n/a 16,948 n/a 50,663 5,820 Notes: (1) The Group LCSM cover ratio definition changed from: (i) the ratio of group available capital to the GMCR at 31 December 2021 (MCR basis), to (ii) the ratio of the group available capital to the GPCR from 1 January 2022 onwards (PCR basis). (2) Group Tier 1 capital is maintained in excess of GMCR. Group Tier 1 capital to GMCR ratio is 355 per cent at 31 December 2022. (3) The Group LCSM surplus definition changed from group available capital less GMCR at 31 December 2021 to group available capital less GPCR from 1 January 2022 onwards. (4) The amounts shown represent the carrying value of medium-term notes and securities contributing to group available capital. These are counted as Other Than Tier 1 capital under the GWS Capital Rules. At 31 December 2022, the group available capital includes the following items, which are not included within Group Tier 1 capital: (i) US$3,726m(1) of subordinated securities. Subordinated securities with a fixed maturity receive full capital credit up to the date that is 5 years prior to the date of maturity, with the capital credit then reducing at the rate of 20 per cent per annum until maturity. Perpetual subordinated securities receive full capital credit unless they are redeemed; and (ii) US$5,653m(1) of senior notes issued before designation that have been approved by the HKIA as capital. Prior to maturity, the approved senior notes receive full capital credit until 14 May 2031, after which the capital credit reduces at the rate of 20 per cent per annum until 14 May 2036. Note: (1) The amounts represent the carrying value of medium-term notes and securities contributing to group available capital. These are counted as Other Than Tier 1 capital under the GWS Capital Rules. Local Regulatory Solvency 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 Group’s principal operating companies AIA Co. and AIA International Limited (AIA International), as authorised insurers in Hong Kong, are required by the HKIA to meet the Hong Kong solvency requirements. During the year ended 31 December 2022 and 31 December 2021, these two principal operating companies were in compliance with these solvency requirements. Dividends, remittances and other payments from individual branches and subsidiaries The ability of the Company to pay dividends to shareholders and to meet other obligations depends ultimately on dividends, remittances and other payments being received from its operating branches and subsidiaries, 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 branches and subsidiaries to make payment of dividends, remittances and other 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. 239 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION37. 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, business expenses, and 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 policies lapse, on average, differently to that assumed in the pricing or reserving assumptions. 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. Lapse risk is assessed as part of the product development process and monitored through regular experience studies. Expense Expense risk is the risk of greater than expected trends in, or sudden shocks to, the amount or timing of expenses incurred by the business. 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 incidence 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. The Group manages insurance risk concentration by diversification, reinsurance and establishing retention limits. Insurance risk concentration can arise when there is concentrated exposure geographically or to one single insured life. Geographical concentration of insured individuals could increase the severity of claims from natural catastrophic events or human-made disasters. The Group’s insured populations are geographically dispersed, thereby diversifying the insurance exposure. The Group also has catastrophic reinsurance in place to cover losses due to a single catastrophic event exceeding a pre- determined level. The Group limits its exposure to large claims on any single insured by applying retention limits that vary by market and insurance benefit type to the amount of insurance coverage per insured. The exposure in excess of these limits is ceded to reinsurers. For the year ended 31 December 2022 and 2021, there were no significant insurance concentration risks. 240 AIA GROUP LIMITEDFINANCIAL STATEMENTS37. RISK MANAGEMENT (continued) Investment and financial risks Investment objectives, policies and processes The Group manages its financial investments in two distinct categories: unit-linked investments and policyholder and shareholder investments. The investment risk in respect of unit-linked investments is generally wholly borne by our customers, and does not directly affect the profit for the year before tax. 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 and directly affects the profit for the year before tax. The primary investment objectives of our policyholder and shareholder investments are generally designed to achieve optimal levels of risk-adjusted return for policyholders and shareholders over the long-term, while preserving capital, maintaining adequate solvency and liquidity levels, meeting our risk management and asset-liability management objectives and ensuring full compliance with applicable regulations and internal policies. The Group has comprehensive, integrated frameworks to ensure investments are properly authorised, monitored and managed within internal policies that address asset-liability management, financial and operational risks, whether assets are invested directly by the Group or through external investment managers. This framework consists of three elements: a strategic asset allocation framework; a tactical asset allocation process; and a combination of internal and external investment management for individual asset classes where appropriate. The Group’s investment management function is empowered with decision-making authority and complies with exposure limits as defined in Risk Standards. Asset-liability management Asset-liability management for the Group is overseen by the Group Asset-Liability Committee and by asset-liability committees in each business unit. The Group manages its asset-liability risks in a variety of ways, including the strategic asset allocation process under which the strategic asset allocation in each entity and for major different product groups is governed, defining the asset allocation with consideration of the characteristics of the liabilities and related risks, capital and other requirements on both economic and regulatory bases. The Group manages asset-liability risks predominantly on an economic basis, while also considering the effect on all applicable regulatory solvency requirements and other considerations, such as earnings. Asset-liability management actions include product pricing and product design, reviews of policyholder dividends, asset allocation, hedging using derivatives, reinsurance, and the management of discretionary policyholder benefits. The asset-liability risks for the Group are credit risk, interest rate risk, foreign exchange rate risk, and liquidity risk summarised in the later subsections. 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 defence. AIA’s credit risk management adheres 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 is determined by the investment teams. The Group’s Risk Management function manages the Group’s internal ratings framework and conducts periodic rating validations. Measuring and monitoring of credit risk is an ongoing process and is designed to enable early identification of emerging risk. 241 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Credit spread risk Credit spread movements affect both the value of assets and liabilities. Credit spread risk is in a large part, managed through the strategic asset allocation process, whereby the two drivers of spread risk – credit rating and spread duration – are managed for capital efficiency, taking into account both the economic risk and the local solvency capital considerations. 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. 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 the 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 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 2022 Financial assets Loans and deposits Other receivables Debt securities Equity shares, interests in investment funds and exchangeable loan notes Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments Total financial assets Financial liabilities Investment contract liabilities Borrowings Obligations under repurchase agreements Other liabilities Derivative financial instruments Total financial liabilities Variable interest rate Fixed interest rate Non-interest bearing Total 1,857 185 15,591 – – – 4,700 – 6,784 1 150,352 3 3,148 – 8,644 3,334 165,943 1,250 63,018 64,268 – – – – 1,270 1,836 4,269 630 1,270 1,836 8,969 630 22,333 158,387 74,174 254,894 – – 1,748 84 – – 11,206 – 400 – 1,832 11,606 9,741 – – 7,427 8,739 25,907 9,741 11,206 1,748 7,911 8,739 39,345 242 AIA GROUP LIMITEDFINANCIAL STATEMENTS 37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Exposure to interest rate risk (continued) US$m 31 December 2021 Financial assets Loans and deposits Other receivables Debt securities Equity shares, interests in investment funds and exchangeable loan notes Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments Total financial assets Financial liabilities Investment contract liabilities Borrowings Obligations under repurchase agreements Other liabilities Derivative financial instruments Total financial liabilities Variable interest rate Fixed interest rate Non-interest bearing Total 1,329 312 13,170 – – – 4,227 – 7,307 2 186,910 – – – – – 675 2,701 9,311 3,015 – 200,080 71,017 71,017 992 1,837 762 1,468 992 1,837 4,989 1,468 19,038 194,219 79,452 292,709 – – 1,588 222 – 1,810 – 9,588 – 479 – 10,067 11,595 11,595 – – 7,823 1,392 20,810 9,588 1,588 8,524 1,392 32,687 Equity risk Equity risk arises from changes in the market value of equity shares, interests in investment funds and exchangeable loan notes. Investments in equity shares, interests in investment funds and exchangeable loan notes on a long-term basis are expected to align with 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 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. 243 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION 37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Concentration risk The greatest aggregate concentration of fair value to an individual issuer (excluding all government bonds) was approximately 1 per cent (2021: less than 1 per cent) of the total equity and debt investments as at 31 December 2022. 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 policyholder participation ratios described in note 2. Information is presented to illustrate the estimated impact on profits, total equity and allocated 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, total equity and allocated 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 2022 31 December 2021 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 risk 10 per cent increase in equity prices 1,494 1,494 1,494 1,608 1,608 1,608 10 per cent decrease in equity prices (1,494) (1,494) (1,494) (1,608) (1,608) (1,608) Interest rate risk + 50 basis points shift in yield curves – 50 basis points shift in yield curves (816) 855 (6,372) 7,099 (816) 855 (1,152) (8,585) (1,152) 1,193 9,539 1,193 244 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 Asia and the translation of multiple currencies to the 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. Assets, liabilities and local regulatory and stress capital in each business unit are generally currency matched with the exception of holdings of equities and other non-fixed income assets denominated in currencies other than the functional currency. Bonds denominated in currencies other than the functional currency are largely hedged with cross-currency swaps or foreign exchange forward contracts. Foreign exchange rate net exposure US$m 31 December 2022 Equity analysed by original currency Net positions of currency derivatives Currency exposure 5% strengthening of original currency Impact on profit before tax Impact on other comprehensive income Impact on total equity 5% strengthening of the US dollar Impact on profit before tax Impact on other comprehensive income Impact on total equity United States Dollar China Renminbi Hong Kong Dollar Thai Baht Singapore Dollar Malaysian Ringgit 14,595 11,650 (6,055) – 839 325 8,540 11,650 1,164 3,905 1,996 5,901 (3,806) 3,875 69 2,433 210 2,643 201 (219) (18) 201 (219) (18) 142 346 488 (136) (352) (488) (78) 71 (7) 109 (102) 7 (4) 298 294 6 (300) (294) (17) 22 5 33 (38) (5) – 133 133 – (133) (133) US$m United States Dollar China Renminbi Hong Kong Dollar Thai Baht Singapore Dollar Malaysian Ringgit 31 December 2021 Equity analysed by original currency Net positions of currency derivatives 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 30,845 (8,610) 22,235 11,470 – 11,470 2,539 323 2,862 5,144 2,739 7,883 (5,700) 3,704 (1,996) 2,410 329 2,739 469 (487) (18) 469 (487) (18) 253 320 573 (249) (324) (573) 33 44 77 2 (79) (77) 9 385 394 (8) (386) (394) 7 (106) (99) 13 86 99 5 132 137 (5) (132) (137) 245 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Liquidity risk The liquidity principle adopted by the Group Board is “AIA will maintain sufficient liquidity to meet our expected financial commitments as they fall due” and as such AIA has defined liquidity risk as the risk of failure to meet current and future financial commitments as they fall due. This incorporates the risks arising from the timing mismatch of cash inflows and outflows in day-to-day operations, including policyholder and third-party payments, collateral requirements, as well as insufficient market liquidity of assets required for policyholder liabilities. AIA manages liquidity risk in accordance with the Group’s liquidity framework. This framework contains the standards, procedures and tools used by the Group to monitor and manage liquidity risk on a forward-looking basis in base and stressed conditions across multiple time horizons from daily to twelve months. The forward-looking management of liquidity allows early detection of trends enabling management to proactively manage liquidity with reference to the pre- defined contingency plan. The framework is comprised of four pillars: • Daily Cash Forecasting and Liquidity Adequacy Ratio; • Structural Liquidity Adequacy Ratio; • Market-based Asset Liquidity Monitoring; and • Liquidity Management and Contingency Plans. AIA supports its liquidity internally by maintaining appropriate pools of unencumbered high-quality liquid investment assets. Liquidity is further supported externally via access to committed credit facilities, use of bond repurchase markets and debt markets via the Group’s Global Medium-term Note and Securities Programme. The Group’s liquidity framework builds liquidity resiliency in all our markets while providing central oversight and the ability to take timely management action if required to ensure we meet all our financial commitments as they fall due. The maturity profile of our financial assets, financial liabilities and insurance contract liabilities are presented below which provides a supplemental long-term view on the Group’s liquidity profile. 246 AIA GROUP LIMITEDFINANCIAL STATEMENTS37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Liquidity risk (continued) US$m 31 December 2022 Financial assets (Policyholder and shareholder investments) Loans and deposits Other receivables Debt securities Equity shares, interests in investment funds and exchangeable loan notes Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments Subtotal 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 costs, and reinsurance) Borrowings Obligations under repurchase agreements Other liabilities excluding lease liabilities Lease liabilities Derivative financial instruments Subtotal Financial and insurance contract liabilities (Unit-linked contracts and consolidated investment funds) Total 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(2) 8,332 3,235 159,541 32,976 1,270 1,734 7,676 559 1,874 3,136 7,496 – 1,270 1,724 7,676 82 655 47 442 5 1,532 3,829 9 20,341 17,468 114,236 – – 2 – – – – – – – – – 163 168 146 38 – 32,976 – 8 – – 215,323 23,258 21,208 18,083 115,923 36,851 39,571 – – – – 39,571(3) 254,894 23,258 21,208 18,083 115,923 76,422 164,999 4,299 15,372 16,506 128,822 – 11,206 1,748 6,349 413 8,658 500 1,748 5,154 140 1,335 2,575(1) 2,684 4,329 1,118 – 226 249 6,972 – 133 23 82 – 123 1 269 – 713 – – 193,373 13,176 25,394 19,428 133,544 1,831 33,003 – – – – 33,003 226,376 13,176 25,394 19,428 133,544 34,834 Note: (1) Including US$1,745m which fall due after 2 years through 5 years. 247 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION 37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Liquidity risk (continued) US$m 31 December 2021 Financial assets (Policyholder and shareholder investments) Loans and deposits Other receivables Debt securities Equity shares, interests in investment funds and exchangeable loan notes Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments Subtotal 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 costs, and reinsurance) Borrowings Obligations under repurchase agreements Other liabilities excluding lease liabilities Lease liabilities Derivative financial instruments Subtotal Financial and insurance contract liabilities (Unit-linked contracts and consolidated investment funds) Total 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(2) 8,946 2,694 193,420 39,108 992 1,764 3,913 1,419 2,477 2,598 4,234 – 992 1,754 3,913 51 754 47 458 6 1,623 3,634 7 21,155 28,484 139,547 – – 2 – – – – – – – – – 1,037 97 234 36 – 39,108 – 8 – – 252,256 16,019 22,995 29,045 141,411 42,786 40,453 – – – – 40,453(3) 292,709 16,019 22,995 29,045 141,411 83,239 182,484 9,588 1,588 6,811 502 1,369 4,857 167 1,588 5,330 174 356 17,564 18,621 141,442 – 1,247(4) 2,686 4,374 1,114 – 213 303 659 – 141 24 131 – 154 1 223 – 973 – – 202,342 12,472 19,986 21,603 146,194 2,087 37,109 – – – – 239,451 12,472 19,986 21,603 146,194 37,109 39,196 Notes: (2) Financial assets with no fixed maturity are equities or receivables on demand which the Group has the choice to call. Borrowings with no fixed maturity are resettable subordinated perpetual securities issued by the Company. Other financial liabilities with no fixed maturity are payables on demand as the counterparty has a choice of when the amount is paid. (3) The total value of amounts within financial assets (Unit-linked contracts and consolidated investment funds) is included within the no fixed maturity category to facilitate comparison with the corresponding total value of amounts within financial and insurance contract liabilities (Unit- linked contracts and consolidated investment funds). Included within financial assets (Unit-linked contracts and consolidated investment funds) are debt securities of US$724m (2021: US$626m) due in one year or less, US$2,667m (2021: US$2,753m) due after 1 year through 5 years, US$1,716m (2021: US$2,019m) due after 5 years through 10 years and US$1,295m (2021: US$1,262m) due after 10 years, in accordance with the contractual terms of the financial investments. (4) Including US$748m which fall due after 2 years through 5 years. 248 AIA GROUP LIMITEDFINANCIAL STATEMENTS 37. RISK MANAGEMENT (continued) Transactions within the Group Intra-group transactions are overseen by the relevant Group Office functions to ensure adherence with the relevant Group policies. The Group Risk function oversees the processes to identify and assess material systematic intra-group transaction risks, and ensure risks assumed are within the Group’s Risk Management Framework. During the year ended 31 December 2022, material intra-group transactions are related to financing, reinsurance, service supports, insourcing and collective investment funds that provide a simple return of capital guarantee and are backed by investment grade fixed income assets. 38. EMPLOYEE BENEFITS 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. 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, Thailand, Singapore, Malaysia, Cambodia, Indonesia, the Philippines, South Korea, Sri Lanka, Taiwan (China) and Vietnam. The latest independent actuarial valuation of the plans was at 31 December 2022 and was prepared by credentialed actuaries of Towers Watson Hong Kong Limited. All the actuaries are qualified members of professional actuarial organisations to render the actuarial opinions. 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. The actuarial valuations indicate that the Group’s obligations under these defined benefit retirement plans are 56 per cent (2021: 46 per cent) covered by the plan assets held by the trustees. The fair value of plan assets as at year end at the date of valuation was US$94m (2021: US$96m). The total expenses relating to these plans recognised in the consolidated income statement was US$10m (2021: US$11m). Defined contribution plans For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans. Once the contributions have been paid, the Group, as employer, 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 employee benefit expenses. The total expense relating to these plans in the current year was US$128m (2021: US$121m). 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. 249 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION39. SHARE-BASED COMPENSATION Share-based compensation plans The Group’s share-based compensation plans are equity-settled plans. Under equity-settled share-based compensation plan, the fair value of the employee services received in exchange for the grant of shares and/or share options is recognised as an expense in profit or loss over the vesting period with a corresponding amount recorded in equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares and/or share options granted. 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 grants of share-based payment arrangements have graded vesting terms, each tranche is recognised as a separate grant, and therefore the fair value of each tranche is recognised over the applicable vesting period. 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. During the year ended 31 December 2020, the 2010 Share Option (SO) Scheme, the 2010 Restricted Share Unit (RSU) Scheme and the 2011 Employee Share Purchase Plan (ESPP) were terminated. There shall be no further grants under either of these schemes. However, these schemes shall remain in full force and effect for all grants prior to its termination, and the exercise and the vesting of these grants shall be subject to and in accordance with the terms on which they were granted under the provisions of each of these schemes, and the Listing Rules, where applicable. In the same year, the Group adopted the 2020 SO Scheme, the 2020 RSU Scheme and the 2020 ESPP Plan. During the year ended 31 December 2022 and 31 December 2021, the Group made new grants of SOs, RSUs and restricted stock purchase units (RSPUs) to certain directors, officers and employees of the Group under these schemes. On 1 February 2021, the Company adopted the new 2021 Agency Share Purchase Plan (ASPP) with an effective period of 10 years from the date of adoption. The 2012 ASPP was terminated with effect from 31 March 2021, after which time no further restricted stock subscription units (RSSUs) can be granted under such plan. The 2012 ASPP shall remain in full force and effect for all RSSUs granted prior to this termination, and the vesting of such RSSUs shall be subject to and in accordance with the terms on which they were granted under the provisions of the 2012 ASPP. During the year ended 31 December 2022 and 31 December 2021, the Group made new grants of RSSUs to eligible agents under the 2021 ASPP. RSU Schemes Under the RSU Schemes, the vesting of the granted RSUs is conditional upon the eligible participants remaining in employment with the Group during the respective vesting periods. RSU grants are vested either entirely after a specific period of time or in tranches over the vesting period during which, the eligible participants are required to remain in employment with the Group. For RSU grants that are vested in tranches, each vesting tranche is accounted for as a separate grant for the purposes of recognising the expense over the respective vesting period. For most RSUs, performance conditions are also attached which include both market and non-market conditions. RSUs subject to performance conditions are released to the participants at the end of the vesting period depending on the actual achievement of the performance conditions. During the vesting period, the participants are not entitled to dividends of the underlying shares. Except in jurisdictions where restrictions apply, the granted RSUs are expected to be settled in equity. 250 AIA GROUP LIMITEDFINANCIAL STATEMENTS39. SHARE-BASED COMPENSATION (continued) Share-based compensation plans (continued) RSU Schemes (continued) Number of shares Restricted Share Units Outstanding at beginning of financial year Granted Forfeited Vested Outstanding at end of financial year Year ended 31 December 2022 Year ended 31 December 2021 28,418,958 31,787,067 12,535,139 9,484,581 (5,437,310) (7,157,591) (5,912,839) (5,695,099) 29,603,948 28,418,958 SO Schemes The objectives of the SO Schemes 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. SO grants are vested either entirely after a specific period of time or in tranches over the vesting period approximately three to five years, during which the eligible participants are required to remain in employment with the Group. For SO grants that are vested in tranches, each vesting tranche is accounted for as a separate grant for the purposes of recognising the expense over the respective vesting periods. The granted SOs expire 10 years from the date of grant and each SO entitles the eligible participant to subscribe for one ordinary share. Subject to restrictions in the applicable laws, regulations and rules of the relevant jurisdictions, the granted SOs are expected to be settled in equity. Information about SOs outstanding and SOs exercisable by the Group’s employees and directors as at the end of the reporting period is as follows: Share options Outstanding at beginning of financial year Granted Exercised Forfeited or expired Outstanding at end of financial year Share options exercisable at end of financial year Year ended 31 December 2022 Year ended 31 December 2021 Number of share options Weighted average exercise price (HK$) Number of share options Weighted average exercise price (HK$) 23,359,771 2,519,456 (1,895,760) (10,163) 23,973,304 15,355,259 62.94 79.85 40.43 97.33 66.48 60.61 23,703,809 1,849,222 (871,896) (1,321,364) 23,359,771 13,167,380 59.53 97.33 31.27 70.77 62.94 52.72 At the respective dates on which the SOs were exercised, the weighted average share price of the Company was HK$80.70 for the year ended 31 December 2022 (2021: HK$92.01). 251 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION39. SHARE-BASED COMPENSATION (continued) Share-based compensation plans (continued) SO Schemes (continued) The range of exercise prices for the SOs outstanding as of 31 December 2022 and 2021 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 HK$76 – HK$85 Over HK$86 Outstanding at end of financial year Year ended 31 December 2022 Year ended 31 December 2021 Number of share options outstanding Weighted average remaining contractual life (years) Number of share options outstanding Weighted average remaining contractual life (years) 37,266 1,986,862 4,690,563 830,436 8,696,612 5,901,935 1,829,630 23,973,304 0.19 2.83 3.72 4.58 6.36 7.50 8.23 5.90 753,331 2,628,717 5,103,806 830,436 8,774,030 3,429,658 1,839,793 23,359,771 0.87 3.56 4.60 5.58 7.36 7.24 9.23 6.19 ESPP Under the ESPPs, eligible employees of the Group can purchase ordinary shares of the Company with qualified employee contributions and the Company will grant one matching RSPU 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 relevant vesting period, the eligible employees must hold the contribution shares purchased and remain employed by the Group in order to qualify to receive the matching shares upon the vesting of the matching RSPUs. The granted matching RSPUs are expected to be settled in equity. Under the 2011 ESPP, the level of qualified employee contribution was subject to a maximum amount equal to 8 per cent of the monthly base salary or HK$9,750 (or local currency equivalent) per month, whichever is lower. Under the 2020 ESPP, the level of qualified employee contribution is subject to a maximum amount equal to 10 per cent of the monthly base salary or HK$12,500 (or local currency equivalent) per month, whichever is lower. For the year ended 31 December 2022, eligible employees paid US$38m (2021: US$38m) to purchase 3,815,201 ordinary shares (2021: 3,172,021 ordinary shares) of the Company under the ESPPs. ASPP The structure of the ASPPs generally follows those of the ESPPs, the key difference is 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 plans, eligible agents of the Group can purchase ordinary shares of the Company with qualified agent contributions and the Company will grant one matching RSSU to them at the end of the vesting period for each two shares purchased through the qualified agent contributions (agent contribution shares). Each RSSU 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 and maintain their agent contracts with the Group in order to qualify to receive the matching shares upon the vesting of the matching RSSUs. The granted matching RSSUs are expected to be settled in equity. Under the ASPPs, the level of qualified agent contribution is subject to a maximum amount of HK$9,750 (or local currency equivalent) per month and HK$12,500 (or local currency equivalent) per month respectively. For the year ended 31 December 2022, eligible agents paid US$20m (2021: US$20m) to purchase 2,061,772 ordinary shares (2021: 1,717,835 ordinary shares) of the Company under the ASPPs. 252 AIA GROUP LIMITEDFINANCIAL STATEMENTS39. SHARE-BASED COMPENSATION (continued) Valuation methodology The Group utilises a binomial lattice model to calculate the fair value of the SO grants, involving a few significant assumptions such as the expected volatility, expected dividend yield and risk-free interest rate. The expected volatility of the Company’s shares is estimated based on an analysis of historical data since they are traded in the HKSE. The expected dividend yield is estimated based on an analysis of historical dividend relative to historical share price. The risk-free interest rate is estimated based on implied yield of the Government Bonds and Exchange Fund Notes issued by the Hong Kong Monetary Authority as at the grant date. The analysis period for expected volatility and risk-free interest rate is consistent with the expected life of the SOs, which 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 Group utilises a Monte-Carlo simulation model and/or discounted cash flow technique to calculate the fair value of the RSU, RSPU and RSSU grants, taking into account the terms and conditions upon which the grants were made. The value of expected dividends during the vesting period is estimated based on an analysis of historical dividend relative to historical share price. The estimate of market condition for performance-based RSUs is based on historical data preceding the grant date. Forfeitures prior to vesting are not allowed for in the valuation of the grants. The fair values calculated for the grants are inherently subjective due to the assumptions made and the limitations of the models utilised. Year ended 31 December 2022 Share options Restricted share units ESPP Restricted stock purchase units ASPP Restricted stock subscription units Assumptions Risk-free interest rate Volatility Dividend yield Exercise price (HK$) Share option life (in years) Expected life (in years) Weighted average fair value per option/unit at measurement date (HK$) Assumptions Risk-free interest rate Volatility Dividend yield Exercise price (HK$) Share option life (in years) Expected life (in years) Weighted average fair value per option/unit at measurement date (HK$) * Applicable to RSU with market conditions. 1.93% 1.57% – 3.55%* 0.84% – 4.27% 26% 26% – 28% n/a 1.70% 1.60% – 1.70% 1.60% – 1.70% n/a n/a n/a n/a n/a n/a 79.85 10 7.45 21.00 97.33 10 7.82 22.26 64.26 73.00 58.32 Year ended 31 December 2021 Share options Restricted share units ESPP Restricted stock purchase units ASPP Restricted stock subscription units 1.24% 0.19% – 0.27%* 0.14% – 0.83% 26% 26% n/a 1.60% 1.60% – 1.70% 1.60% – 1.70% n/a n/a n/a n/a n/a n/a 66.28 72.39 71.39 2.12% n/a 1.70% n/a n/a n/a 0.37% n/a 1.60% n/a n/a n/a The weighted average share price for SO valuation for grants made during the year ended 31 December 2022 is HK$79.85 (2021: HK$92.75). The total fair value of SO granted during the year ended 31 December 2022 is US$7m (2021: US$5m). Recognised compensation cost The total recognised compensation cost (net of expected forfeitures) related to various share-based compensation grants made by the Group for the year ended 31 December 2022 is US$80m (2021: US$86m). 253 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION40. REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL Directors’ remuneration The Executive Director receives compensation in the form of salaries, bonuses, contributions to pension schemes, long- term incentives, housing and other allowances, and benefits in kind subject to applicable laws, rules and regulations. Bonuses and long-term incentives represent the variable components in the Executive Director’s compensation and are linked to the performance of the Group and the Executive Director. Details of share-based payment schemes are described in note 39. US$ Year ended 31 December 2022 Executive Director Mr. Lee Yuan Siong(4) Total US$ Year ended 31 December 2021 Executive Director Mr. Lee Yuan Siong(4) Total Salaries, allowances and benefits in kind(1) Director’s fees Bonuses Share-based payments(2) Pension scheme contributions Other benefits Other payments(3) Total – – 1,680,096 2,820,000 5,272,695 1,680,096 2,820,000 5,272,695 67,829 67,829 – – 3,673,130 13,513,750 3,673,130 13,513,750 Salaries, allowances and benefits in kind(1) Director’s fees Share- based payments(2) Pension scheme contributions Bonuses Other benefits Other payments(3) Total – – 1,669,062 4,400,000 3,192,974 1,669,062 4,400,000 3,192,974 66,446 66,446 – – 6,377,470 15,705,952 6,377,470 15,705,952 Notes: (1) Includes non-cash benefits for housing, medical and life insurance, club and professional membership, company car and perquisites. (2) Includes amortised expenses for unvested SOs, RSUs and matching shares under ESPP based on the fair value at the respective grant dates. (3) This represents amortised expenses in relation to the awarded compensation for unvested long-term incentives and deferred payments that Mr. Lee Yuan Siong forfeited on leaving his prior employments. (4) Mr. Lee Yuan Siong 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 of the Company and receives no separate fees for his role as a director of the Company or for acting as a director of any subsidiary of the Company. 254 AIA GROUP LIMITEDFINANCIAL STATEMENTS40. REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL (continued) Directors’ remuneration (continued) The remuneration of Independent Non-executive Directors of the Company at 31 December 2022 and 2021 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 Other payments Total Year ended 31 December 2022 Independent Non-executive Directors Mr. Edmund Sze-Wing Tse 860,000 152,016 Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Professor Lawrence Juen-Yee Lau Ms. Swee-Lian Teo Dr. Narongchai Akrasanee(3) Mr. Cesar Velasquez Purisima Ms. Sun Jie (Jane) Total 330,000 280,000 350,000 355,000 280,000 325,000 390,000 355,000 292,767 – – – – – – – – – 3,817,767 152,016 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,012,016 330,000 280,000 350,000 355,000 280,000 325,000 390,000 355,000 292,767 3,969,783 255 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION40. 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 Other payments Total Year ended 31 December 2021 Independent Non-executive Directors Mr. Edmund Sze-Wing Tse Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Mr. John Barrie Harrison Mr. George Yong-Boon Yeo 685,000 268,000 228,000 287,180 253,000 Professor Lawrence Juen-Yee Lau 213,000 Ms. Swee-Lian Teo Dr. Narongchai Akrasanee(3) Mr. Cesar Velasquez Purisima Ms. Sun Jie (Jane)(4) Total 222,370 323,000 215,329 102,896 146,513 – – – – – – – – – 2,797,775 146,513 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 831,513 268,000 228,000 287,180 253,000 213,000 222,370 323,000 215,329 102,896 2,944,288 Notes: (1) Save 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) US$100,000 (2021:US$100,000) represented remuneration to Dr. Narongchai Akrasanee in respect of his services as Chairman of Advisory Board of AIA Thailand for the year ended 31 December 2022 included in his fees stated above. (4) Ms. Sun Jie (Jane) was appointed as Independent Non-executive Director of the Company on 1 June 2021. Remuneration of five highest-paid individuals The aggregate remuneration of the five highest-paid individuals employed by the Group in the year ended 31 December 2022 and 2021 is presented in the table below. US$ Salaries, allowances and benefits in kind(1) Director’s fees Bonuses Share-based payments(2) Year ended 31 December 2022 – 5,377,073 4,982,273 12,275,886 Year ended 31 December 2021 – 5,959,080 9,318,940 9,187,513 Pension scheme contributions 317,109 383,982 Other benefits Other payments(3) Total – – 6,623,926 29,576,267 6,377,470 31,226,985 Notes: (1) 2022 and 2021 benefits include housing, medical and life insurance, children’s education, club and professional membership, company car and perquisites. (2) Includes amortised expenses for unvested SOs, RSUs and matching shares under ESPP to the five highest-paid individuals based on the fair value at the respective grant dates. (3) Includes termination payments or benefits for the five highest-paid individuals and amortised expenses in relation to the awarded compensation for unvested long-term incentives and deferred payments that Mr. Lee Yuan Siong forfeited on leaving his prior employments. 256 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$ 25,000,001 to 25,500,000 26,000,001 to 26,500,000 27,500,001 to 28,000,000 28,000,001 to 28,500,000 31,000,001 to 31,500,000 31,500,001 to 32,000,000 35,000,001 to 35,500,000 41,000,001 to 41,500,000 105,500,001 to 106,000,000 122,000,001 to 122,500,000 Year ended 31 December 2022 Year ended 31 December 2021 1 – 1 – – 1 – 1 1 – – 1 – 1 1 – 1 – – 1 Key management personnel remuneration Key management personnel have been identified as the members of the Group’s Executive Committee. US$ Key management compensation and other expenses Salaries and other short-term employee benefits Post-employment benefits Share-based payments(1) Termination payments or benefits Total Year ended 31 December 2022 Year ended 31 December 2021 22,150,292 30,355,005 623,561 701,749 20,966,295 18,422,129 2,950,796 – 46,690,944 49,478,883 Note: (1) Includes amortised expenses for unvested SOs, RSUs and matching shares under ESPP to the key management personnel based on the fair value at the respective grant dates. 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 10,000,000 Year ended 31 December 2022 Year ended 31 December 2021 – – 7 2 1 1 1 – – 7 3 1 – 1 257 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION41. RELATED PARTY TRANSACTIONS Remuneration of Directors and key management personnel is disclosed in note 40. 42. COMMITMENTS AND CONTINGENCIES 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 2022 As at 31 December 2021 14,962 105 15,067 7,830 130 7,960 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, claims and taxes. The Group believes that these matters are adequately provided for in these financial statements. The Group operates in many jurisdictions across Asia and in certain of those jurisdictions, the Group’s interpretation of the relevant law or regulation may differ from that of the tax authorities, which can result in disputes arising. The Group has made provisions to cover the potential tax implications, based on management’s judgement and best estimate in relation to the probability or likelihood of the potential outcomes, which is subject to periodic re-assessment. Due to the uncertainty associated with these items, there remains a possibility that the final outcomes may differ on conclusion of the relevant tax matters at a future date. 258 AIA GROUP LIMITEDFINANCIAL STATEMENTS43. SUBSIDIARIES The following is a list of AIA’s directly and indirectly held principal operating subsidiaries which materially contribute to the net income of the Group or hold a material element of its assets and liabilities: Name of entity operation Principal activity Issued share capital interests % interests % interests % interests % Place of incorporation and As at As at 31 December 2022 31 December 2021 Group’s NCI’s Group’s NCI’s AIA Company Limited(1) Hong Kong Insurance 2,596,049,861 ordinary shares 100% AIA Australia Limited Australia Insurance AIA Bhd. Malaysia Insurance of US$11,390,584,182 issued share capital 2,125,462,500 ordinary shares of A$2,207,267,000 issued share capital 191,859,543 ordinary shares of RM810,000,000 issued share capital 100% 100% AIA Life Insurance Company Limited Mainland China Insurance Registered share capital of 100% RMB3,777,399,440 AIA Philippines Life and General Philippines Insurance 199,560,671 ordinary shares 100% Insurance Company Inc. (formerly known as The Philippine American Life and General Insurance (PHILAM LIFE) Company) of PHP10 each and 67,349,329 treasury shares - - - - - 100% 100% 100% 100% 100% - - - - - BPI AIA Life Assurance Corporation Philippines Insurance (formerly known as BPI-Philam Life Assurance (BPLAC) Corporation) 749,993,979 ordinary shares of PHP1 each and 6,000 treasury shares 51% 49% 51% 49% AIA Singapore Private Limited Singapore Insurance 1,558,021,163 ordinary shares 100% AIA Everest Life Company Limited (formerly known as BEA Life Limited)(2) Hong Kong Insurance of S$1 each 500,000,000 ordinary shares of HK$2,496,291,000 issued share capital 100% AIA International Limited Bermuda Insurance 6,500,000 ordinary shares of 100% US$1.20 each PT. AIA Financial Indonesia Insurance 1,910,844,141 ordinary shares 100% of Rp1,000 each AIA (Vietnam) Life Insurance Vietnam Insurance Contributed capital of 100% Company Limited VND8,724,420,000,000 - - - - - 100% 100% 100% 100% 100% - - - - - 100 ordinary shares of US$1 90% 10% 90% 10% each Bayshore Development Group Limited British Virgin Islands Investment holding company AIA Life Insurance Co. Ltd. South Korea Insurance AIA New Zealand Limited New Zealand Insurance 60,328,932 ordinary shares of KRW603,289,320,000 issued share capital 248,217,572 ordinary shares of NZD863,709,199 issued share capital 100% 100% AIA Reinsurance Limited Bermuda Reinsurance 250,000 common shares of 100% US$1 each Notes: (1) The Company’s subsidiary. (2) This company was acquired in 2021. (3) All of the above subsidiaries are audited by PricewaterhouseCoopers. All subsidiaries are unlisted. - - - 100% 100% 100% - - - 259 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION 44. EVENTS AFTER THE REPORTING PERIOD On 10 March 2023, a Committee appointed by the Board of Directors proposed a final dividend of 113.40 Hong Kong cents per share (2021: final dividend of 108.00 Hong Kong cents per share). 260 AIA GROUP LIMITEDFINANCIAL STATEMENTS45. DISPOSAL GROUP HELD FOR SALE On 24 February 2022, the Group announced it had entered into an agreement to sell its Australian S&I business to Resolution Life Australasia Limited. The Australian S&I business is a constituent part of the businesses that transferred to AIA Australia following the acquisition of The Colonial Mutual Life Assurance Society Limited from Commonwealth Bank of Australia. Subject to regulatory approvals, the Group expects the transaction will be completed in 2023. The assets and liabilities of the Australian S&I business have been classified as assets in disposal group held for sale and liabilities in disposal group held for sale in the Consolidated Statement of Financial Position, contributed by the Australia operating segment. At 31 December 2022, the assets and liabilities in disposal group held for sale were stated at the lower of its carrying amount and fair value less costs to sell. The assets and liabilities in disposal group held for sale are summarised below. US$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 shares Interests in investment funds and exchangeable loan notes Derivative financial instruments Deferred tax assets Current tax recoverable Other assets Cash and cash equivalents Assets in disposal group held for sale Total assets Liabilities Insurance contract liabilities Investment contract liabilities Borrowings Obligations under repurchase agreements Derivative financial instruments Provisions Deferred tax liabilities Current tax liabilities Other liabilities Liabilities in disposal group held for sale Total liabilities Notes 14 15 16 17 18 19 20, 22 21 11 23 25 26 27 29 30 21 32 11 33 As at 31 December 2022 (Excluding disposal group) Assets and liabilities in disposal group As at 31 December 2022 (Including disposal group) 3,277 2,092 2,844 4,600 5,122 30,046 8,593 129,281 35,794 23,378 38,577 568 236,191 141 117 6,217 8,020 4,381 303,048 219,570 7,077 11,206 1,748 8,638 160 3,563 464 7,838 4,234 264,498 – – – – 20 – 51 – 868 2,313 – 62 3,294 52 9 57 949 (4,381) – 1,143 2,894 – – 101 – 23 – 73 (4,234) – 3,277 2,092 2,844 4,600 5,142 30,046 8,644 129,281 36,662 25,691 38,577 630 239,485 193 126 6,274 8,969 – 303,048 220,713 9,971 11,206 1,748 8,739 160 3,586 464 7,911 – 264,498 261 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION 46. STATEMENT OF FINANCIAL POSITION OF THE COMPANY US$m Assets Investment in subsidiaries at cost(2) Financial investments: At fair value through other comprehensive income Debt securities(3) At fair value through profit or loss Debt securities Equity shares Interests in investment funds(2) Derivative financial instruments Loans to/amounts due from subsidiaries Other assets Promissory notes from subsidiaries(4) Cash and cash equivalents Total assets Liabilities Borrowings Obligations under repurchase agreements 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 2022 As at 31 December 2021 21,580 19,062 7,151 7,024 – – 2,156 1 9,308 886 40 63 1,298 33,175 11,799 – 1 109 11,909 14,171 (290) 351 6,990 44 21,266 33,175 27 126 4,359 – 11,536 1,917 49 2,510 90 35,164 10,181 1,000 – 95 11,276 14,160 (225) 309 9,519 125 23,888 35,164 Notes: (1) The financial information of the Company should be read in conjunction with the consolidated financial statements of the Group. (2) The Company’s interests in investment funds such as mutual funds and unit trusts, including funds controlled by the Group, are measured at fair value through profit or loss. Interests in other entities controlled by the Group are measured at cost, unless impaired, and presented as investment in subsidiaries at cost. Interests in investment funds include US$833m (2021: US$2,359m) comprising the combined value of debt securities held by an investment fund controlled by the Group and interests in an external fixed income fund. Fixed income fund refers to the investment fund solely investing in fixed income instruments and cash equivalents, where investors of the fund own a pro-rata share of economic interests of the fund according to the number of shares or units they own of the fund. Investment fund may use derivatives for hedging purpose. (3) Includes United States Treasury securities of US$4,914m (2021: US$1,589m) and China Government bonds of US$2,237m (2021: US$4,262m) as at 31 December 2022. (4) The promissory notes from subsidiaries are repayable on demand. Approved and authorised for issue by the Board of Directors on 10 March 2023. Lee Yuan Siong Director Edmund Sze-Wing Tse Director 262 AIA GROUP LIMITEDFINANCIAL STATEMENTS 47. STATEMENT OF CHANGES IN EQUITY OF THE COMPANY US$m Share capital Employee share-based trusts Other reserves Retained earnings Amounts reflected in other comprehensive income Total equity Balance at 1 January 2022 14,160 (225) 309 Net profit Fair value losses on debt securities at fair value through other comprehensive income Fair value losses on debt securities at fair value through other comprehensive income transferred to profit or loss on disposal Dividends Share buy-back 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 – – – – – 11 – – – Balance at 31 December 2022 14,171 – – – – – – – (103) 38 (290) – – – – – – 80 – (38) 351 9,519 3,300 125 – 23,888 3,300 – – (2,259) (3,570) – – – – (222) (222) 141 – – – – – – 141 (2,259) (3,570) 11 80 (103) – 6,990 44 21,266 US$m Share capital Employee share-based trusts Other reserves Retained earnings Amounts reflected in other comprehensive income Total equity Balance at 1 January 2021 14,155 (155) 259 Net profit Fair value losses on debt securities at fair value through other comprehensive income Fair value gains on debt securities at fair value through other comprehensive income transferred to profit or loss 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 – – – – 5 – – – Balance at 31 December 2021 14,160 – – – – – – (106) 36 (225) – – – – – 86 – (36) 309 7,360 4,306 836 – 22,455 4,306 – – (2,147) – – – – (296) (296) (415) – – – – – (415) (2,147) 5 86 (106) – 9,519 125 23,888 263 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND MATERIAL ACCOUNTING POLICY INFORMATION INDEPENDENT AUDITOR’S REPORT ON THE SUPPLEMENTARY EMBEDDED VALUE INFORMATION AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2022 TO THE BOARD OF DIRECTORS OF AIA GROUP LIMITED (incorporated in Hong Kong with limited liability) Opinion What we have audited The Supplementary Embedded Value Information (the “EV Information”) of AIA Group Limited (the “Company”) and its subsidiaries (the “Group”), which is set out on pages 268 to 294, comprises: • • the consolidated EV results as at and for the year ended 31 December 2022; the sensitivity analysis as at and for the year then ended; and • 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 2022 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. 264 AIA GROUP LIMITEDINDEPENDENT AUDITOR’S REPORT ON THE SUPPLEMENTARY EMBEDDED VALUE INFORMATIONFINANCIAL STATEMENTSOther Matter The Group has prepared a separate set of consolidated financial statements for the year ended 31 December 2022 in accordance with Hong Kong Financial Reporting Standards issued by the HKICPA and International Financial Reporting Standards issued by the International Accounting Standards Board, on which we issued a separate auditor’s report to the shareholders of the Company dated 10 March 2023. Other Information The Directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the EV Information and our auditor’s report thereon. Our opinion on the EV Information does not cover the other information and we do 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 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, 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. 265 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT AUDITOR’S REPORT ON THE SUPPLEMENTARY EMBEDDED VALUE INFORMATIONResponsibilities 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 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 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: • 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. • 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. 266 AIA GROUP LIMITEDFINANCIAL STATEMENTSAuditor’s Responsibilities for the Audit of the EV Information (continued) • Evaluate the appropriateness of the EV basis of preparation used and the reasonableness of accounting estimates and related disclosures made by the Directors. • 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. • 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, actions taken to eliminate threats or safeguards applied. The engagement partner on the audit resulting in this independent auditor’s report is Ling Tung Man, Tom. PricewaterhouseCoopers Certified Public Accountants Hong Kong 10 March 2023 267 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT 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 the 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. 268 AIA GROUP LIMITEDSUPPLEMENTARY EMBEDDED VALUE 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. AIA Group Limited (the “Company”), together with its subsidiaries (collectively the “Group”) use a traditional deterministic discounted cash flow methodology for determining its EV and value of new business (VONB) for all entities other than Tata AIA Life Insurance Company Limited (Tata AIA Life). 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. For Tata AIA Life, the Group uses the Indian Embedded Value (IEV) methodology as defined in Actuarial Practice Standard 10 issued by the Institute of Actuaries of India, consistent with local practice in India. 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, after allowing for taxes. More details on the EV results, methodology and assumptions are covered in later sections of this report. Following the announcement of the share buy-back programme reported in the Company’s Annual Report 2021, the Group has commenced the repurchase of shares over a three-year period starting from March 2022. The effects of this programme on the Group’s EV results are shown in Sections 2.6 and 2.8 of this report. On 26 August 2022, the Group paid in cash a total gross consideration of HK$2,225 million (approximately US$283 million) and acquired 100 per cent of the voting equity of Blue Cross (Asia-Pacific) Insurance Limited (Blue Cross). A goodwill of US$200 million was recognised on the excess of cash consideration paid over the net identifiable assets acquired in relation to Blue Cross. The acquisition has been reflected in the Group’s results for the year ended 31 December 2022 from the date of acquisition. See Sections 2 and 4 of this report and note 14 to the IFRS consolidated financial statements for more details of the acquisition of Blue Cross. See note 2 to the IFRS consolidated financial statements regarding the Group’s preparation for the adoption of IFRS 9 and IFRS 17, effective from 1 January 2023. Based on the Group’s latest assessment, the adoption of IFRS 9 and IFRS 17 does not have a material impact on the Group’s EV and VONB as at and for the year ended 31 December 2022. Unless otherwise stated, the growth rates provided in the commentaries are shown on a constant exchange rate (CER) basis, and the per-share information provided in the tables is based on the basic number of ordinary shares outstanding as at the specified point in time, as disclosed in the IFRS consolidated financial statements. 269 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION1. HIGHLIGHTS (continued) Summary of Key Metrics(1) (US$ millions) EV Equity EV Equity per share (US dollars) EV EV per share (US dollars) Free surplus Adjusted net worth (ANW) Value of in-force business (VIF) VONB Annualised new premiums (ANP) VONB margin EV operating profit Operating return on EV (Operating ROEV) Underlying free surplus generation (UFSG) UFSG on a comparable basis(2) As at 31 December 2022 As at 31 December 2021 Change CER Change AER 71,202 6.07 68,865 5.87 17,850 33,751 35,114 75,001 6.20 72,987 6.03 17,025 33,302 39,685 Year ended 31 December 2022 Year ended 31 December 2021 3,092 5,407 57.0% 6,845 9.4% 6,039 6,507 3,366 5,647 59.3% 7,896 12.1% 6,451 6,451 (2)% 1% (3)% – 7% 4% (5)% (2)% (6)% (3)% 5% 1% (9)% (12)% YoY CER (5)% – YoY AER (8)% (4)% (2.4) pps (2.3) pps (10)% (13)% (2.4) pps (2.7) pps (2)% 6% (6)% 1% Notes: (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. (2) The UFSG growth rate of 6 per cent represents the UFSG growth on a comparable basis before the effects of the early adoption of the HKRBC regime from 1 January 2022 and the release of resilience margins held by the Group at 1 January 2022 under the previous Hong Kong Insurance Ordinance basis. 270 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. EMBEDDED VALUE RESULTS 2.1 Embedded Value by Business Unit The EV as at 31 December 2022 is presented consistently with the segment information in the IFRS consolidated financial statements. Summary of EV by Business Unit (US$ millions) Business Unit AIA China(2) AIA Hong Kong(3) AIA Thailand AIA Singapore AIA Malaysia Other Markets Group Corporate Centre Subtotal Adjustment to reflect consolidated reserving and capital requirements(4) After-tax value of unallocated Group Office expenses Total (before non-controlling interests) Non-controlling interests Total Business Unit AIA China AIA Hong Kong AIA Thailand AIA Singapore AIA Malaysia Other Markets Group Corporate Centre Subtotal Adjustment to reflect consolidated reserving and capital requirements(4) After-tax value of unallocated Group Office expenses Total (before non-controlling interests) Non-controlling interests Total As at 31 December 2022 ANW(1) VIF before CoC 4,485 12,659 4,804 2,842 1,184 3,564 7,324 8,664 13,913 4,528 4,942 2,338 5,381 – CoC 60 984 853 575 211 1,228 – VIF after CoC 8,604 12,929 3,675 4,367 2,127 4,153 – EV 13,089 25,588 8,479 7,209 3,311 7,717 7,324 36,862 39,766 3,911 35,855 72,717 (2,758) 1,480 446 1,034 (1,724) – 34,104 (353) 33,751 (1,603) 39,643 (182) 39,461 – 4,357 (10) 4,347 (1,603) 35,286 (172) 35,114 (1,603) 69,390 (525) 68,865 As at 31 December 2021 ANW(1) VIF before CoC 4,509 8,669 4,345 3,020 1,239 4,998 10,602 37,382 8,734 20,372 4,331 4,743 2,283 5,311 – CoC 6 1,993 891 749 248 1,363 – VIF after CoC 8,728 18,379 3,440 3,994 2,035 3,948 – EV 13,237 27,048 7,785 7,014 3,274 8,946 10,602 77,906 45,774 5,250 40,524 (3,723) 1,547 1,096 451 (3,272) – 33,659 (357) 33,302 (1,103) 46,218 (198) 46,020 – 6,346 (11) 6,335 (1,103) 39,872 (187) 39,685 (1,103) 73,531 (544) 72,987 Notes: (1) ANW by Business Unit is after net capital flows between Business Units and Group Corporate Centre. (2) Includes the effects of the change in solvency regime to C-ROSS II effective from 1 January 2022. (3) Includes the effects of the early adoption of the HKRBC regime effective from 1 January 2022. (4) Adjustment reflects the consolidated reserving and capital requirements as described in Section 4.4 of this report. 271 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION2. EMBEDDED VALUE RESULTS (continued) 2.2 Reconciliation of ANW from IFRS Equity Derivation of the Consolidated ANW from IFRS Equity (US$ millions) IFRS shareholders’ allocated equity Fair value reserve 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(1) Difference between net IFRS policy liabilities and local statutory policy liabilities Mark-to-market adjustment for property, mortgage loan and other 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 2022 As at 31 December 2021 44,805 (6,709) 38,096 (30,046) 52,060 8,407 60,467 (28,708) 28,831 4,365 (1,215) (24,343) 112 (3,277) 2,692 101 36,509 (2,758) 33,751 282 (2,914) 3,423 110 37,025 (3,723) 33,302 Note: (1) Includes the effects of the early adoption of the HKRBC regime and the change in solvency regime in Mainland China to C-ROSS II effective from 1 January 2022. 2.3 Reconciliation of Free Surplus from ANW The reconciliation of free surplus from ANW for the Group is set out below: Derivation of Free Surplus from ANW (US$ millions) As at 31 December 2022 As at 31 December 2021 Business Unit Consolidated Business Unit Consolidated ANW 36,509 33,751 37,025 33,302 Adjustment for certain assets not eligible for regulatory capital purposes Less: Required capital Free surplus(1) (1,482) 11,672 23,355 (1,482) 14,419 17,850 (1,860) 11,725 23,440 (1,860) 14,417 17,025 Note: (1) The free surplus is defined as the ANW in excess of the required capital adjusted for certain assets that are not eligible for regulatory capital purposes. The free surplus on consolidated basis is further adjusted for the consolidated reserving and capital requirements. 272 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 2022 Undiscounted Discounted 22,629 20,362 19,432 16,887 184,885 264,195 18,674 11,249 7,269 4,277 8,064 49,533 As at 31 December 2021 Undiscounted Discounted 22,225 20,405 21,695 21,795 151,924 238,044 18,516 11,579 8,502 5,903 9,602 54,102 The profile of distributable earnings is shown on an undiscounted and discounted basis. The discounted value of after-tax distributable earnings of US$49,533 million (2021: US$54,102 million) plus the free surplus of US$17,850 million (2021: US$17,025 million) and the non-eligible assets excluded in the free surplus calculation of US$1,482 million (2021: US$1,860 million) as shown in Section 2.3 of this report is equal to the EV of US$68,865 million (2021: US$72,987 million) shown in Section 2.1 of this report. The emergence of future distributable earnings as at 31 December 2022 includes the effects of the early adoption of the HKRBC regime, which has accelerated future profits into free surplus. 273 ANNUAL REPORT 2022OVERVIEWFINANCIAL 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 2022 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 2022 was US$3,092 million, a decrease of US$274 million, or 5 per cent, from US$3,366 million for the year ended 31 December 2021. Summary of VONB by Business Unit (US$ millions) Business Unit AIA China(1) AIA Hong Kong(2) AIA Thailand AIA Singapore AIA Malaysia Other Markets Total before unallocated Group Office expenses and non-controlling interests (Business Unit) Adjustment to reflect consolidated reserving and capital requirements Total before unallocated Group Office expenses and non-controlling interests (Consolidated) After-tax value of unallocated Group Office Year ended 31 December 2022 Year ended 31 December 2021 VONB before CoC 977 849 627 364 327 530 VONB after CoC 916 787 585 349 308 420 VONB before CoC 1,173 806 645 369 306 611 VONB after CoC 1,108 756 609 356 283 511 CoC 65 50 36 13 23 100 CoC 61 62 42 15 19 110 3,674 309 3,365 3,910 287 3,623 (46) 6 (52) (49) 8 (57) 3,628 315 3,313 3,861 295 3,566 expenses (192) – (192) (167) – (167) Total before non-controlling interests (Consolidated) Non-controlling interests Total 3,436 (30) 3,406 315 (1) 314 3,121 (29) 3,092 3,694 (33) 3,661 295 – 295 3,399 (33) 3,366 Notes: (1) The VONB for the year ended 31 December 2022 has reflected the change in solvency regime to C-ROSS II effective from 1 January 2022. (2) The VONB for the year ended 31 December 2022 has reflected the early adoption of the HKRBC regime effective from 1 January 2022. 274 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 2022. The VONB margin and PVNBP margin are defined as VONB, gross of non-controlling interests and excluding pension business, expressed as a percentage of ANP and PVNBP, respectively. The VONB used in the margin calculation is gross of non-controlling interests and excludes pension business to be consistent with the definition of ANP and PVNBP. The Group VONB margin for the year ended 31 December 2022 was 57.0 per cent compared with 59.3 per cent for the year ended 31 December 2021. The Group PVNBP margin for the year ended 31 December 2022 was 10 per cent compared with 10 per cent for the year ended 31 December 2021. Breakdown of VONB, ANP, VONB Margin and PVNBP Margin (US$ millions) VONB after CoC ANP VONB margin PVNBP margin Year Values for 2022 Twelve months ended 31 December 2022 3,092 5,407 57.0% Values for 2021 Twelve months ended 31 December 2021 3,366 5,647 59.3% Quarter Values for 2022 Three months ended 31 March 2022 Three months ended 30 June 2022 Three months ended 30 September 2022 Three months ended 31 December 2022 Values for 2021 Three months ended 31 March 2021 Three months ended 30 June 2021 Three months ended 30 September 2021 Three months ended 31 December 2021 853 683 741 815 1,052 762 735 817 1,567 1,211 1,271 1,358 1,703 1,357 1,249 1,338 54.4% 56.2% 58.1% 59.5% 61.6% 55.7% 58.5% 60.6% 10% 10% 10% 10% 10% 10% 10% 9% 9% 10% 275 ANNUAL REPORT 2022OVERVIEWFINANCIAL 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 China(1) AIA Hong Kong(2) AIA Thailand AIA Singapore AIA Malaysia Other Markets Total before unallocated Group Office expenses (Business Unit) Adjustment to reflect consolidated reserving Year ended 31 December 2022 Year ended 31 December 2021 VONB excluding pension 916 749 585 349 307 418 VONB margin 69.5% 69.5% 89.1% 65.7% 69.9% 30.2% VONB excluding pension 1,108 708 609 356 282 509 ANP 1,319 1,078 655 531 440 1,384 ANP 1,404 1,106 677 549 491 1,420 VONB margin 78.9% 64.0% 90.0% 64.7% 57.3% 35.9% 3,324 5,407 61.5% 3,572 5,647 63.2% and capital requirements (52) – (58) – Total before unallocated Group Office expenses (Consolidated) After-tax value of unallocated Group Office expenses Total 3,272 5,407 60.5% 3,514 5,647 62.2% (192) 3,080 – 5,407 57.0% (167) 3,347 – 5,647 59.3% Notes: (1) The VONB for the year ended 31 December 2022 has reflected the change in solvency regime to C-ROSS II effective from 1 January 2022. (2) The VONB for the year ended 31 December 2022 has reflected the early adoption of the HKRBC regime effective from 1 January 2022. 276 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. EMBEDDED VALUE RESULTS (continued) 2.6 Analysis of EV Movement Analysis of Movement in EV (US$ millions) Year ended 31 December 2022 Year ended 31 December 2021 YoY AER ANW VIF EV ANW VIF EV EV Opening EV Purchase price(2) Acquired EV(3) Effect of acquisition BEA Upfront Payment(4) Release of resilience margins Impact of HKRBC early adoption VONB 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 Share buy-back Other capital movements Effect of changes in exchange rates Closing EV Opening EV per share (US dollars) Closing EV per share (US dollars) 33,302 39,685 72,987 28,503 36,744 65,247 (283) 83 (200) – 2,168 8,407 (159) 4,838 513 (331) (359) 4,502 (5,893) (15) (1,530) 7,639 (2,259) (3,570) (12) – – – – (1,283) (6,028) 3,251 (969) (214) 275 – 2,343 501 (285) 1,296 (3,456) – – – (283) 83 (200) – 885 2,379 3,092 3,869 299 (56) (359) 6,845 (5,392) (300) (234) 4,183 (2,259) (3,570) (12) (397) 266 (131) (258) – – (810) 5,156 626 64 (309) 4,727 1,636 (26) 1,163 7,500 (2,147) – 9 – 254 254 – – – 4,176 (754) (175) (78) – 3,169 (343) 460 37 (397) 520 123 (258) – – 3,366 4,402 451 (14) (309) 7,896 1,293 434 1,200 – – – (2,147) – 9 (1,149) (1,115) (2,264) (174) (636) (810) 33,751 35,114 68,865 33,302 39,685 72,987 12% n/m(1) n/m n/m n/m n/m n/m (8)% (12)% (34)% n/m 16% (13)% n/m n/m n/m 5% n/m n/m n/m (6)% 3,323 10,823 (61)% 6.03 5.87 5.39 12% 6.03 (3)% Notes: (1) Not meaningful (n/m). (2) The purchase price in 2022 refers to the consideration for acquiring Blue Cross as per note 14 to the IFRS consolidated financial statements, and the purchase price in 2021 refers to the cost of acquiring AIA Everest as per note 5 to the IFRS consolidated financial statements in the Company’s Annual Report 2021. (3) The acquired EV in 2022 is from the acquisition of Blue Cross, and the acquired EV in 2021 is from the acquisition of AIA Everest. (4) Refers to the consideration for the strategic bancassurance partnership with The Bank of East Asia, Limited (BEA). 277 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION 2. EMBEDDED VALUE RESULTS (continued) 2.6 Analysis of EV Movement (continued) The opening EV was US$72,987 million at 31 December 2021. The release of resilience margins and the effects of the early adoption of the HKRBC regime increased EV by US$3,264 million. EV operating profit was US$6,845 million (2021: US$7,896 million), reflecting VONB of US$3,092 million (2021: US$3,366 million), an expected return on EV of US$3,869 million (2021: US$4,402 million), operating experience variances and operating assumption changes which were again positive and amounted to US$243 million (2021: US$437 million), net of finance costs of US$359 million (2021: US$309 million). The VONB is calculated at the point of sale for business written during the year. The expected return on EV is the expected change in the EV over the year plus the expected return on the VONB up to 31 December 2022. 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 operating experience variances, net of tax, increased EV by US$299 million (2021: increased by US$451 million), driven by: • Expense variances of US$(27) million (2021: US$(18) million) and development costs of US$12 million (2021: US$9 million); • Mortality and morbidity claims variances of US$115 million (2021: US$221 million); and • Persistency and other variances of US$223 million (2021: US$257 million) which included persistency variances of US$73 million (2021: US$(6) million) and other variances including management actions of US$150 million (2021: US$263 million). The effect of changes in operating assumptions during the year was a decrease in EV of US$56 million (2021: a decrease in EV of US$14 million). The EV profit of US$4,183 million (2021: US$10,823 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 decreased EV by US$5,392 million (2021: an increase in EV of US$1,293 million) driven by the effect of short-term fluctuations in interest rates and equity markets, and other capital market movements, on the Group’s investment portfolio and the reserves and capital requirements compared with the expected returns. The effect of changes in economic assumptions was a decrease in EV of US$300 million (2021: an increase in EV of US$434 million). Other non-operating variances decreased EV by US$234 million (2021: increased EV by US$1,200 million) which comprised negative impacts from non-operating expenses, partly offset by positive impacts from model-related enhancements and adjustments to capital requirements on consolidation. The effect of the implementation of C-ROSS II is not material. The Group paid total shareholder dividends of US$2,259 million (2021: US$2,147 million). The capital deployed for the share buy-back programme, under which 366 million shares(1) (2021: nil) have been repurchased in the year of 2022, was US$3,570 million (2021: nil). Other capital movements decreased EV by US$12 million (2021: increased EV by US$9 million). Foreign exchange movements decreased EV by US$2,264 million (2021: decreased EV by US$810 million). The closing EV was US$68,865 million at 31 December 2022. Note: (1) Of these shares, 319 million shares were cancelled in 2022, and the remaining 47 million shares have subsequently been cancelled as per note 34 to the IFRS consolidated financial statements. 278 AIA GROUP LIMITEDFINANCIAL STATEMENTS2. EMBEDDED VALUE RESULTS (continued) 2.6 Analysis of EV Movement (continued) Operating ROEV (US$ millions) Operating return on EV (operating ROEV) is calculated as EV operating profit expressed as a percentage of the opening EV and was 9.4 per cent (2021: 12.1 per cent) for the year ended 31 December 2022. EV operating profit Opening EV Operating ROEV EV operating earnings per share (US cents)(1) Year ended 31 December 2022 Year ended 31 December 2021 6,845 72,987 9.4% 57.38 7,896 65,247 12.1% 65.44 YoY CER (10)% 13% YoY AER (13)% 12% (2.4) pps (2.7) pps (9)% (12)% Note: (1) Based on weighted average number of ordinary shares during the respective period. 2.7 EV Equity EV Equity dropped to US$71,202 million as at 31 December 2022, a decrease of 2 per cent from US$75,001 million as at 31 December 2021. Derivation of EV Equity from EV (US$ millions) EV Goodwill and other intangible assets(1) EV Equity(2) EV Equity per share (US dollars) As at 31 December 2022 As at 31 December 2021 Change CER Change AER 68,865 2,337 71,202 6.07 72,987 2,014 75,001 6.20 (3)% 22% (2)% 1% (6)% 16% (5)% (2)% Notes: (1) Consistent with the IFRS consolidated financial statements, shown net of tax, amounts attributable to participating funds and non-controlling interests. (2) Includes the EV Equity for Australian Savings and Investments (S&I) business held for sale as per note 45 to the IFRS consolidated financial statements. 279 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION2. EMBEDDED VALUE RESULTS (continued) 2.8 Free Surplus Generation Free Surplus Generation (US$ millions) Opening free surplus Effect of acquisition(1) BEA Upfront Payment(3) Investment in China Post Life Release of resilience margins Impact of HKRBC early adoption UFSG Free surplus used to fund new business Investment return variances and other items Unallocated Group Office expenses Dividends Share buy-back Finance costs and other capital movements Year ended 31 December 2022 Year ended 31 December 2021 17,025 (200) – – 3,400 4,403 6,039 (1,274) (5,093) (250) (2,259) (3,570) (371) 13,473 (312) (258) (1,860) – – 6,451 (1,712) 3,963 (273) (2,147) – (300) Closing free surplus 17,850 17,025 YoY CER 19% n/m(2) n/m n/m n/m n/m (2)% (22)% n/m (8)% 5% n/m n/m 7% YoY AER 26% n/m n/m n/m n/m n/m (6)% (26)% n/m (8)% 5% n/m n/m 5% Free surplus increased by US$825 million (2021: increased by US$3,552 million) to US$17,850 million (2021: US$17,025 million) as of 31 December 2022, after reflecting the impact of HKRBC early adoption of US$4,403 million, the impact of release of resilience margins of US$3,400 million and the impact of share buy-back of US$(3,570) million. UFSG, as defined in Section 4.8, decreased by 2 per cent, to US$6,039 million (2021: US$6,451 million). On a comparable basis(4), UFSG increased by 6 per cent. Investment in writing new business was US$1,274 million (2021: US$1,712 million). Investment return variances and other items amounted to US$(5,093) million (2021: US$3,963 million), reflecting the effect of short-term fluctuations in interest rates and equity markets, and other capital market movements, on the Group’s investment portfolio and the reserves and capital requirements compared with the expected returns and other items, including the free surplus impacts arising from other non-operating variances as described in Section 2.6. Unallocated Group Office expenses amounted to US$250 million (2021: US$273 million). Notes: (1) The effect of acquisition in 2022 refers to the consideration for acquiring Blue Cross of US$283 million as per note 14 to the IFRS consolidated financial statements, less the acquired free surplus of US$83 million. The effect of acquisition in 2021 refers to the cost of acquiring AIA Everest of US$397 million as per note 5 to the IFRS consolidated financial statements in the Company’s Annual Report 2021, less the acquired free surplus of US$85 million. (2) Not meaningful (n/m). (3) Refers to the consideration for the strategic bancassurance partnership with BEA. (4) Comparable basis refers to the growth rate of UFSG before the effects of the early adoption of the HKRBC regime from 1 January 2022 and the release of resilience margins held by the Group at 1 January 2022 under the previous Hong Kong Insurance Ordinance basis. 280 AIA GROUP LIMITEDFINANCIAL STATEMENTS3. SENSITIVITY ANALYSIS The EV as at 31 December 2022 and the VONB for the year ended 31 December 2022 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: • Risk discount rates 200 basis points per annum higher than the central assumptions; • Risk discount rates 200 basis points per annum lower than the central assumptions; • • Interest rates 50 basis points per annum higher than the central assumptions; Interest rates 50 basis points per annum lower than the central assumptions; • Equity return, property return and risk discount rates 100 basis points per annum lower than the central assumptions; • The presentation currency (as explained below) appreciated by 5 per cent; • The presentation currency depreciated by 5 per cent; • Lapse and premium discontinuance rates increased proportionally by 10 per cent (i.e. 110 per cent of the central assumptions); • Lapse and premium discontinuance rates decreased proportionally by 10 per cent (i.e. 90 per cent of the central assumptions); • Mortality/morbidity rates increased proportionally by 10 per cent (i.e. 110 per cent of the central assumptions); • Mortality/morbidity rates decreased proportionally by 10 per cent (i.e. 90 per cent of the central assumptions); • Maintenance expenses 10 per cent lower (i.e. 90 per cent of the central assumptions); and • Expense inflation set to 0 per cent. The EV as at 31 December 2022 has been further analysed for the following sensitivities: • Equity prices increased proportionally by 10 per cent (i.e. 110 per cent of the prices at 31 December 2022); and • Equity prices decreased proportionally by 10 per cent (i.e. 90 per cent of the prices at 31 December 2022). 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 2022 and the values of debt instruments and derivatives held at 31 December 2022 were changed to be consistent with the interest rate assumptions in the sensitivity analysis, while all the other assumptions were unchanged. For the equity return, property return and risk discount rates sensitivity, the projected bonus rates on participating business were changed to be consistent with the equity return assumptions and property return assumptions in the sensitivity analysis, while all the other assumptions were unchanged. As the Group operates in multiple geographical markets, 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. 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 2022 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 2022 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. 281 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION3. SENSITIVITY ANALYSIS (continued) The sensitivities chosen do not represent the boundaries of possible outcomes, but instead illustrate how certain alternative assumptions would affect the results. 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 100 bps decrease in equity and property returns and risk discount 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 100 bps decrease in equity and property returns and risk discount 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% 282 As at 31 December 2022 As at 31 December 2021 EV % Change EV % Change 68,865 72,987 (8,133) (11.8)% (9,806) (13.4)% 13,036 1,817 (1,821) (1,246) 1,347 2,047 (2,059) 2,059 (1,532) 1,693 (4,659) 4,514 862 941 18.9% 2.6% (2.6)% (1.8)% 2.0% 3.0% (3.0)% 3.0% (2.2)% 2.5% (6.8)% 6.6% 1.3% 1.4% 15,325 1,878 (1,871) (330) 279 3,876 (2,164) 2,164 (1,135) 1,280 (4,876) 4,779 865 1,047 21.0% 2.6% (2.6)% (0.5)% 0.4% 5.3% (3.0)% 3.0% (1.6)% 1.8% (6.7)% 6.5% 1.2% 1.4% Year ended 31 December 2022 Year ended 31 December 2021 VONB % Change VONB % Change 3,092 (634) (20.5)% 944 64 (81) 333 (129) 129 (191) 242 (408) 436 98 72 30.5% 2.1% (2.6)% 10.8% (4.2)% 4.2% (6.2)% 7.8% (13.2)% 14.1% 3.2% 2.3% 3,366 (739) 1,099 74 (108) 411 (140) 140 (227) 253 (437) 437 102 75 (22.0)% 32.7% 2.2% (3.2)% 12.2% (4.2)% 4.2% (6.7)% 7.5% (13.0)% 13.0% 3.0% 2.2% AIA GROUP LIMITEDFINANCIAL STATEMENTS4. METHODOLOGY 4.1 Entities Included in This Report The Group operates through a number of subsidiaries and branches. Its two main operating subsidiaries are AIA Company Limited (AIA Co.), a company incorporated in Hong Kong and a subsidiary of the Company, and AIA International Limited (AIA International), a company incorporated in Bermuda and an indirect subsidiary of the Company. Furthermore, AIA Co. has branches located in Thailand and AIA International has branches located in Hong Kong, Macau and Taiwan. The following is a list of the entities and their mapping to Business Units included in this report. • AIA Australia refers to AIA Australia Limited, a subsidiary of AIA Co.; • AIA Cambodia refers to AIA (Cambodia) Life Insurance Plc., a subsidiary of AIA International; • AIA China refers to AIA Life Insurance Company Limited, a subsidiary of AIA Co.; • AIA Hong Kong refers to the total of the following entities: – the Hong Kong and Macau branches of AIA International; – the Hong Kong business written by AIA Co.; – AIA Pensions (BVI) Limited, a subsidiary of AIA Co.; – AIA Everest Life Company Limited, a subsidiary of AIA Co. acquired from The Bank of East Asia, Limited (BEA); and – AIA Holdings (Hong Kong) Limited, a wholly-owned subsidiary of the Company and also the holding company of Blue Cross (Asia-Pacific) Insurance Limited (Blue Cross) as it acquired Blue Cross on 26 August 2022; • AIA Indonesia refers to PT. AIA Financial, a subsidiary of AIA International; • AIA Korea refers to AIA Life Insurance Co. Ltd., a subsidiary of AIA International; • AIA Malaysia refers to AIA Bhd., a subsidiary of AIA Co., and AIA PUBLIC Takaful Bhd., a 70 per cent owned subsidiary of AIA Bhd., and AIA General Berhad, a subsidiary of AIA Bhd.; • AIA Myanmar refers to AIA Myanmar Life Insurance Company Limited, a subsidiary of AIA Co.; • AIA New Zealand refers to AIA New Zealand Limited, a subsidiary of AIA Sovereign Limited, which in turn is a subsidiary of AIA International; • AIA Philippines refers to AIA Philippines Life and General Insurance Company Inc., a subsidiary of AIA Co., and its 51 per cent owned subsidiary BPI AIA Life Assurance Corporation; • AIA Singapore refers to AIA Singapore Private Limited, a subsidiary of AIA Co., and its Brunei branch; • AIA Sri Lanka refers to AIA Insurance Lanka Limited, a subsidiary of AIA Co.; • AIA Taiwan refers to the Taiwan branch of AIA International; • AIA Thailand refers to the Thailand branches of AIA Co.; • AIA Vietnam refers to AIA (Vietnam) Life Insurance Company Limited, a subsidiary of AIA International; and • Tata AIA Life refers to Tata AIA Life Insurance Company Limited, an associate 49 per cent owned by AIA International. Results are presented consistently with the segment information in the IFRS consolidated financial statements. The summary of the EV by Business Unit in this report also includes the ANW for the “Group Corporate Centre” segment, which is derived from the IFRS equity for this segment plus mark-to-market adjustments less the value of intangible assets. In the presentation of EV and VONB, the present value of withholding tax payable on future remittances from local business units is presented under the appropriate operating segment. 283 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION4. 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 for all entities other than Tata AIA Life. 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. 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 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 sale, after allowing for any acquisition expense overruns in excess of the relevant expense assumptions. 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 as per note 22 to the Group’s IFRS consolidated financial statements as at the valuation date. The VIF is the present value of projected after-tax statutory profits by Business Units 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, after allowing for taxes. 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. For Tata AIA Life, the Group uses the IEV methodology as defined in Actuarial Practice Standard 10 issued by the Institute of Actuaries of India, consistent with local practice in India. The EV and VONB reported for Tata AIA Life are reported on a one-quarter-lag basis. 284 AIA GROUP LIMITEDFINANCIAL STATEMENTS4. 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 Company’s subsidiaries, AIA Co. and AIA International, are both Hong Kong-regulated entities and 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. Since 2021, the Company is also subject to the group-wide supervision (GWS) requirements implemented by the Hong Kong Insurance Authority (HKIA). AIA operates in a number of territories as branches and subsidiaries of these entities. These regulatory 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, and are discussed in Section 4.6. 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 and group-wide regulatory requirements, and other reserving and capital requirements as determined 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. 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. 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. 285 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION4. METHODOLOGY (continued) 4.6 Capital Requirements Each of the Business Units has a regulatory requirement to hold shareholder capital in addition to the assets backing the insurance liabilities. The table below sets out the Group’s assumed level of capital requirement for each Business Unit: Business Unit Capital requirements AIA Australia AIA China(1) 100% of regulatory capital adequacy requirement 100% of required capital following the China Association of Actuaries (CAA) EV assessment guidance, updated to reflect C-ROSS II AIA Hong Kong(2) 100% of regulatory Risk-Based Capital requirement AIA Indonesia AIA Korea AIA Malaysia AIA New Zealand AIA Philippines(3) AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam Tata AIA Life 120% of regulatory Risk-Based Capital requirement 150% of regulatory Risk-Based Capital requirement 170% of regulatory Risk-Based Capital requirement 100% of regulatory capital adequacy requirement 125% of regulatory Risk-Based Capital requirement Higher of 135% of capital adequacy requirement and 80% of Tier 1 capital requirement under the regulatory Risk-Based Capital framework 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 175% of required minimum solvency margin Notes: (1) With effect from 1 January 2022, the capital requirement is updated to C-ROSS II following the update issued by the China Banking and Insurance Regulatory Commission on 30 December 2021. (2) With effect from 1 January 2022, the capital requirement for the Hong Kong branch of AIA International is updated following the HKRBC early adoption as approved by HKIA in a letter dated 8 April 2022. For clarity, AIA Everest Life Company Limited, which is a closed block of business acquired from The Bank of East Asia, Limited under AIA Co., and the Hong Kong business written by AIA Co., are still evaluated based on 150 per cent of required minimum solvency margin under existing Hong Kong Insurance Ordinance (HKIO) requirements, and the Macau branch of AIA International is subject to 150 per cent of Macau statutory requirement. (3) The capital requirement ratio is updated to 125 per cent at the year end of 31 December 2022 following the group prescribed capital requirement (GPCR) under the Local Capital Summation Method (LCSM). Capital Requirements on Consolidation The Company’s subsidiaries, AIA Company Limited (AIA Co.) and AIA International, are both subject to the HKIA reserving and capital requirements. Following the approval by HKIA to early adopt the new HKRBC regime for AIA International, starting from 1 January 2022, AIA International is subject to the capital requirement under the new HKRBC regime, while AIA Co. continues to be subject to the existing HKIO requirements. The non-Hong Kong branches of AIA Co. and AIA International hold required capital of no less than 100 per cent of the HKIO solvency margin requirement and the HKRBC capital requirement respectively. In addition, AIA International, which is incorporated in Bermuda, is subject to the Bermuda Monetary Authority (BMA) reserving and capital requirements. AIA International and its subsidiaries hold required capital of no less than 100 per cent of the BMA regulatory capital requirement. The above 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. The Company is also subject to the new GWS framework implemented by the HKIA, including group capital adequacy requirements based on the LCSM, under which the Group’s published group available capital, group minimum capital requirement (GMCR) and group prescribed capital requirement (GPCR) are calculated as the sum of the available capital, minimum capital requirements and prescribed capital requirements according to the respective regulatory requirements for each entity within the Group, subject to any variation considered necessary by the HKIA. This has not imposed any additional capital requirement to those mentioned above. 286 AIA GROUP LIMITEDFINANCIAL STATEMENTS4. METHODOLOGY (continued) 4.7 Foreign Exchange The EV as at 31 December 2022 and 31 December 2021 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 EV movement have been translated using average exchange rates for the period. Change on actual exchange rates (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 the current year constant average exchange rates, other than for EV and its components as at the end of the current year and as at the end of the prior year, which are translated using the CER as at the end of the current year. 4.8 Underlying Free Surplus Generation The free surplus is defined as the ANW in excess of the required capital after reflecting the consolidated reserving and capital requirements and the adjustment for certain assets not eligible for regulatory capital purposes. The underlying free surplus generation represents free surplus generated from the in-force business, adjusted for certain non-recurring items, and before free surplus used to fund new business, unallocated Group Office expenses, finance costs, investment return variances and other non-operating items. The underlying free surplus generation is also calculated after reflecting the consolidated reserving and capital requirements. 5. ASSUMPTIONS 5.1 Introduction This section summarises the assumptions used by the Group to determine the EV as at 31 December 2022 and the VONB for the year ended 31 December 2022 and highlights certain differences in assumptions between the EV as at 31 December 2021 and the EV as at 31 December 2022. 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, 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 long-term 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. For Tata AIA Life, the Group uses the IEV methodology as defined in Actuarial Practice Standard 10 issued by the Institute of Actuaries of India for determining its EV and VONB. This methodology uses investment returns and risk discount rates that reflect the market-derived government bond yield curve. Therefore, the risk discount rate and long-term investment returns are not provided for Tata AIA Life. 287 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION5. ASSUMPTIONS (continued) 5.2 Economic Assumptions (continued) 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 allowance for risk. The table below summarises the current market 10-year government bond yields referenced in EV calculations. Business Unit AIA Australia AIA China AIA Hong Kong(1) AIA Indonesia AIA Korea AIA Malaysia AIA New Zealand 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 2022 As at 31 December 2021 4.05 2.84 3.87 6.94 3.74 4.09 4.47 6.99 3.09 26.18 1.28 2.64 4.90 1.67 2.78 1.51 6.38 2.26 3.58 2.39 4.82 1.67 11.71 0.73 1.90 2.08 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 risk discount rates in 2022 reflect the weighted average of the risk margins of the in-force business at the start of 2022, and those of the new business written during 2022 which are determined at a product level to better reflect the market and non-market risks associated with the mix of products sold during the reporting period. In addition, the VONB results are calculated based on start-of-quarter long-term investment return assumptions consistent with the measurement at the point of sale. 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. The investment returns shown are gross of tax and investment expenses. Risk discount rates assumed in EV calculations (%) As at 31 Dec 2022 As at 30 Jun 2022 (Unaudited) 7.43 9.69 7.46 6.42 9.70 6.96 As at 31 Dec 2021 6.41 9.72 6.98 13.09 13.03 12.98 8.91 8.92 7.43 12.10 7.27 21.00 7.67 8.09 9.57 8.10 8.49 6.48 11.80 6.59 20.00 7.20 7.65 9.11 8.10 8.56 6.53 11.80 6.59 14.70 7.25 7.69 9.16 Business Unit AIA Australia AIA China AIA Hong Kong(1) AIA Indonesia AIA Korea AIA Malaysia AIA New Zealand AIA Philippines AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam Long-term investment returns assumed in EV calculations (%) 10-year government bonds Local equities As at 31 Dec 2022 As at 30 Jun 2022 (Unaudited) As at 31 Dec 2021 As at 31 Dec 2022 As at 30 Jun 2022 (Unaudited) 3.30 3.70 3.00 7.50 3.00 4.50 3.30 5.80 2.90 10.00 1.50 3.20 4.00 2.30 3.70 2.20 7.50 2.20 4.00 2.30 5.30 2.20 9.00 1.00 2.70 3.50 2.30 3.70 2.20 7.50 2.20 4.00 2.30 5.30 2.20 9.00 1.00 2.70 3.50 As at 31 Dec 2021 6.60 9.30 7.00 7.60 9.30 7.50 6.60 9.30 7.00 12.00 12.00 12.00 7.30 9.10 7.80 10.80 7.40 12.00 6.10 8.20 9.30 6.50 8.60 6.80 10.50 6.70 11.00 5.60 7.70 8.80 6.50 8.60 6.80 10.50 6.70 11.00 5.60 7.70 8.80 Note: (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. Starting from 31 Dec 2022, local equities assumption shown is that of US dollar-denominated equities. The local equities assumptions as at 30 Jun 2022 and 31 Dec 2021 shown above are those of HK dollar-denominated equities. 289 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION 5. ASSUMPTIONS (continued) 5.3 Persistency Persistency covers the assumptions required, where relevant, for policy lapse (including surrender), premium persistency, premium holidays, partial withdrawals and retirement rates for pension products. Assumptions have been developed by each of the Business Units based on their recent historical experience and expected future experience. Persistency assumptions vary by policy year and product type with different rates for regular and single premium products. Where experience for a particular product was not credible enough to allow any meaningful analysis to be performed, experience for similar products was used as a basis for future persistency experience assumptions. In the case of surrenders, the valuation assumes that current surrender value bases will continue to apply in the future. 5.4 Expenses The expense assumptions have been set based on the most recent expense analysis. The purpose of the expense analysis is to allocate 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 2022. 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. 290 AIA GROUP LIMITEDFINANCIAL STATEMENTS5. ASSUMPTIONS (continued) 5.5 Expense Inflation The expected long-term expense inflation rates used by each Business Unit are set out below: Expense Inflation Assumptions by Business Unit (%) Business Unit AIA Australia AIA China AIA Hong Kong AIA Indonesia AIA Korea AIA Malaysia AIA New Zealand AIA Philippines AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam Tata AIA Life(1) As at 31 December 2022 As at 31 December 2021 2.25 2.00 2.00 3.50 3.50 3.00 2.00 3.50 2.00 6.50 1.20 2.00 4.00 7.05 2.05 2.00 2.00 3.50 3.50 3.00 2.00 3.50 2.00 6.50 1.20 2.00 4.00 5.75 Note: (1) For Tata AIA Life, in accordance with the IEV methodology as defined in Actuarial Practice Standard 10 issued by the Institute of Actuaries of India, the inflation assumption is derived by applying a spread to the reference interest rate. Unallocated Group Office expenses are assumed to inflate by the weighted average of the Business Unit expense inflation rates. 291 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION5. ASSUMPTIONS (continued) 5.6 Mortality Assumptions have been developed by each Business Unit based on their recent historical experience 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 annuity products that are exposed to longevity risk, an allowance has been made for expected future 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 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 expectation 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. 292 AIA GROUP LIMITEDFINANCIAL STATEMENTS5. ASSUMPTIONS (continued) 5.10 Taxation The EV and VONB presented in this report are net of tax based on current taxation legislation. The projected corporate income tax payable in any year allows for the benefits arising from any tax loss carried forward where relevant. Where applicable, tax payable on investment income has been reflected in the projected investment returns. Any withholding tax payable on future remittances from local business units is also reflected under the appropriate operating segment. 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 AIA China AIA Hong Kong AIA Indonesia AIA Korea(1) AIA Malaysia AIA New Zealand AIA Philippines AIA Singapore AIA Sri Lanka(2) AIA Taiwan AIA Thailand AIA Vietnam Tata AIA Life As at 31 December 2022 As at 31 December 2021 30.0 25.0 16.5 22.0 26.5 24.0 28.0 25.0 17.0 30.0 20.0 20.0 20.0 14.6 30.0 25.0 16.5 22.0 27.5 24.0 28.0 25.0 17.0 24.0 20.0 20.0 20.0 14.6 Notes: (1) AIA Korea is subject to an assumed corporate income tax of 26.5 per cent up to fiscal year 2022, 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 change to 23.2 per cent effective from 1 January 2023. (2) During the reporting period, a change in corporate income tax rate has been enacted in Sri Lanka from 24 per cent to 30 per cent, and this was effective from 1 October 2022. 293 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION5. 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 The Financial Supervisory Service (FSS) has announced that the new capital adequacy framework (Korean Insurance Capital Standard (K-ICS)) for Korean insurers will be effective from 1 January 2023. This new K-ICS has not been applied to the Group EV reporting as of 31 December 2022. On 10 March 2023, a Committee appointed by the Board of Directors proposed a final dividend of 113.40 Hong Kong cents per share (2021: final dividend of 108.00 Hong Kong cents per share). 294 AIA GROUP LIMITEDFINANCIAL STATEMENTSANNUAL GENERAL MEETING The AGM will be held at 11:00 a.m. (Hong Kong time) on Thursday, 18 May 2023. Details of the venue and business to be transacted at the AGM are set out in the Company’s circular to be issued to the shareholders of the Company for the AGM. The register of members of the Company will be closed from Monday, 15 May 2023 to Thursday, 18 May 2023 (both days inclusive) for determining the eligibility to attend and vote at the AGM. Details of voting results at the AGM can be found on the websites of both the Hong Kong Exchanges and Clearing Limited at www.hkex.com.hk and the Company at www.aia.com on Thursday, 18 May 2023 after the AGM. FINAL DIVIDEND The Board has recommended an increase of 5 per cent in the payment of a final dividend to 113.40 Hong Kong cents per share for the year ended 31 December 2022 (2021: 108.00 Hong Kong cents per share), consistent with AIA’s established prudent, sustainable and progressive dividend policy. Subject to shareholders’ approval at the AGM, the final dividend will be payable on Friday, 9 June 2023 to shareholders whose names appear on the register of members of the Company at the close of business on Wednesday, 24 May 2023, being the record date for determining the entitlements to the final dividend. RELEVANT DATES FOR THE FINAL DIVIDEND Tuesday, 23 May 2023 Ex-dividend date Record date Payment date Wednesday, 24 May 2023 Friday, 9 June 2023 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. 295 ANNUAL REPORT 2022ADDITIONAL INFORMATIONINFORMATION FOR SHAREHOLDERSOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSHARE 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: aia.ecom@computershare.com.hk Website: www.computershare.com www.computershare.com/hk/contact (for general enquiries) ANNUAL REPORT The English and Chinese versions of this Annual Report are 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 provided above. The Company makes every effort to ensure consistency between the English and Chinese versions of this Annual Report. In the event of any inconsistency, 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 Ismar Tuzovic Rachel Poon +852 2832 1398 +852 2832 1633 +852 2832 4704 +852 2832 1777 +852 2832 4792 News Media Cecilia Ma Zecha Duke Malan Kitty Liu +852 2832 5666 +852 2832 4726 +852 2832 1742 296 AIA GROUP LIMITEDADDITIONAL INFORMATIONFORWARD-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. 297 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINFORMATION FOR SHAREHOLDERSRISK COMMITTEE Ms. Swee-Lian TEO (Chairman) Mr. Chung-Kong CHOW Mr. John Barrie HARRISON Professor Lawrence Juen-Yee LAU Mr. Cesar Velasquez PURISIMA Mr. Edmund Sze-Wing TSE Mr. LEE Yuan Siong REGISTERED OFFICE 35/F, AIA Central No. 1 Connaught Road Central Hong Kong WEBSITE www.aia.com COMPANY SECRETARY Ms. Nicole PAO AUTHORISED REPRESENTATIVES Mr. LEE Yuan Siong Ms. Nicole PAO SHARE REGISTRAR Computershare Hong Kong Investor Services Limited 17M Floor Hopewell Centre 183 Queen’s Road East, Wanchai Hong Kong PRINCIPAL BANKERS Citibank, N.A. Standard Chartered Bank The Hongkong and Shanghai Banking Corporation Limited AUDITOR PricewaterhouseCoopers Certified Public Accountant Registered Public Interest Entity Auditor BOARD OF DIRECTORS Independent Non-executive Chairman and Independent Non-executive Director Mr. Edmund Sze-Wing TSE Executive Director, Group Chief Executive and President Mr. LEE Yuan Siong Independent Non-executive Directors Mr. Jack Chak-Kwong SO Mr. Chung-Kong CHOW Mr. John Barrie HARRISON Mr. George Yong-Boon YEO Professor Lawrence Juen-Yee LAU Ms. Swee-Lian TEO Dr. Narongchai AKRASANEE Mr. Cesar Velasquez PURISIMA Ms. SUN Jie (Jane) AUDIT COMMITTEE Mr. Cesar Velasquez PURISIMA (Chairman) Mr. John Barrie HARRISON Mr. Jack Chak-Kwong SO Mr. George Yong-Boon YEO Dr. Narongchai AKRASANEE Ms. SUN Jie (Jane) 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 Professor Lawrence Juen-Yee LAU Ms. Swee-Lian TEO Dr. Narongchai AKRASANEE Mr. Cesar Velasquez PURISIMA Ms. SUN Jie (Jane) REMUNERATION COMMITTEE Mr. George Yong-Boon YEO (Chairman) Mr. Jack Chak-Kwong SO Ms. SUN Jie (Jane) Mr. Edmund Sze-Wing TSE 298 AIA GROUP LIMITEDADDITIONAL INFORMATIONCORPORATE INFORMATION1H Six-month period ended 30 June. 2010 RSU Scheme 2010 SO Scheme 2011 ESPP 2012 ASPP 2020 ESPP 2020 RSU Scheme 2020 SO Scheme 2021 ASPP 2H active agent Restricted Share Unit Scheme of the Company adopted on 28 September 2010 (as amended) under which the Company granted restricted share units to employees, directors (excluding independent non-executive directors) or officers of the Company or any of its subsidiaries. It was terminated with effect from 31 July 2020 prior to the adoption of the 2020 RSU Scheme. Share Option Scheme of the Company adopted on 28 September 2010 (as amended), under which the Company granted share options to employees, directors (excluding independent non-executive directors) or officers of the Company or any of its subsidiaries. It was terminated with effect from 29 May 2020 upon the adoption of the 2020 SO Scheme. Employee Share Purchase Plan of the Company adopted on 25 July 2011 (as amended), a voluntary share purchase plan with matching offer to facilitate and encourage AIA share ownership by employees. It was terminated with effect from 31 October 2020 (being the last day of the 2019/2020 plan year). Agency Share Purchase Plan of the Company adopted on 23 February 2012, a share purchase plan with matching offer to facilitate and encourage AIA share ownership by agents. It was terminated with effect from 31 March 2021 (being the last day of the 2020/2021 plan year). Employee Share Purchase Plan of the Company adopted on 1 August 2020, a voluntary share purchase plan with matching offer to facilitate and encourage AIA share ownership by employees, and is effective for a period of 10 years from the date of adoption. Restricted Share Unit Scheme of the Company adopted on 1 August 2020, under which the Company may grant restricted share units to employees, directors (excluding independent non-executive directors) or officers of the Company or any of its subsidiaries, and is effective for a period of 10 years from the date of adoption. Share Option Scheme of the Company adopted on 29 May 2020, under which the Company may grant share options to employees, directors (excluding independent non-executive directors) or officers of the Company or any of its subsidiaries, and is effective for a period of 10 years from the date of adoption. Agency Share Purchase Plan of the Company adopted on 1 February 2021, a share purchase plan with matching offer to facilitate and encourage AIA share ownership by agents, and is effective for a period of 10 years from the date of adoption. Six-month period ended 31 December. An agent who sells at least one policy per month. The number of active agents is calculated as the average number of active agents across the specific period. 299 ANNUAL REPORT 2022ADDITIONAL INFORMATIONGLOSSARYOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONactive market A market in which all the following conditions exist: • the items traded within the market are homogeneous; • willing buyers and sellers can normally be found at any time; and • prices are available to the public. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. ANW is the market value of assets in excess of the assets backing the policy reserves and other liabilities of the life (and similar) business of AIA, plus the IFRS equity value 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. 2023 Annual General Meeting of the Company to be held at 11:00 a.m. (Hong Kong time) on Thursday, 18 May 2023. adjusted net worth or ANW AER AGM AIA or the Group AIA Group Limited and its subsidiaries. AIA Co. AIA Everest AIA International AIA Vitality AIA Company Limited, a company incorporated in Hong Kong and a wholly- owned subsidiary of the Company. AIA Everest Life Company Limited, a subsidiary of AIA Co. acquired from The Bank of East Asia, Limited. AIA International Limited, a company incorporated in Bermuda and an indirect wholly-owned 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. ALC The AIA Leadership Centre located in Bangkok, Thailand. amortised cost The amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount and the maturity amount, and minus any reduction for impairment or uncollectibility. 300 AIA GROUP LIMITEDADDITIONAL INFORMATIONannualised new premiums or ANP ASEAN businesses Asia available capital available for sale (AFS) financial assets bancassurance BEA BEPS 2.0 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. ASEAN, officially the Association of Southeast Asian Nations, businesses refers to AIA’s operations in Thailand, Singapore, Malaysia, Vietnam, Indonesia, the Philippines, Cambodia, Myanmar and Brunei. Mainland China, Hong Kong SAR, Thailand, Singapore, Malaysia, Australia, Cambodia, Indonesia, Myanmar, New Zealand, the Philippines, South Korea, Sri Lanka, Taiwan (China), Vietnam, Brunei, Macau SAR and India. For a regulated entity, available capital refers to the resources and financial instruments eligible to be counted towards satisfying the prescribed capital requirement according to the respective regulatory requirements. For a non- regulated entity, available capital refers to IFRS equity less intangible assets, plus eligible financial instruments, including subordinated securities as well as senior notes approved for inclusion. 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. The distribution of insurance products through banks or other financial institutions. The Bank of East Asia, Limited. The common name for the tax policy work led by the Organisation for Economic Co-operation and Development on the “Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy”. best estimate liabilities or BEL IFRS 17 BEL is the present value of best estimate future cashflows discounted at the IFRS 17 discount rates. Blue Cross Blue Cross (Asia-Pacific) Insurance Limited. Board CBIRC The board of Directors. The China Banking and Insurance Regulatory Commission. 301 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGLOSSARYCER 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 balance sheet exchange rates. China Post Life China Post Life Insurance Co., Ltd. Company 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. These are consolidated in the financial statements. contractual service margin or CSM A component of the carrying amount of the asset or liability for a group of insurance contracts representing the unearned profit the entity will recognise as it provides insurance contract services under the insurance contracts in the group. Corporate Governance Code Corporate Governance Code set out in Appendix 14 to the Listing Rules, as amended from time to time. cost of capital or CoC COVID-19 C-ROSS 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. COVID-19 is the disease caused by the coronavirus called SARS-CoV-2. China Risk-Oriented Solvency System. Dealing Policy Directors’ and Chief Executives’ Dealing Policy of the Company. deferred acquisition costs or DAC 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. 302 AIA GROUP LIMITEDADDITIONAL INFORMATIONdeferred origination costs or DOC 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, after allowing for taxes. ExCo The Executive Committee of the Group. fair value through profit or loss or FVTPL first year premiums free surplus Under IAS 39, Financial Instruments: Recognition and Measurement, financial assets that are held to back unit-linked contracts and participating funds or financial assets and liabilities that are held for trading. A financial asset or financial liability that is measured at fair value in the statement of financial position with gains and losses arising from movements in fair value being presented in the consolidated income statement as a component of the profit or loss for the year. First year premiums 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 adjusted for certain assets that are not eligible for regulatory capital purposes. Free surplus for AIA is stated after adjustment to reflect consolidated reserving and capital requirements. group available capital The sum of the available capital of each entity within the Group. group minimum capital requirement or GMCR The sum of the minimum capital requirements of each entity within the Group. 303 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGLOSSARY Group Office 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. group prescribed capital requirement or GPCR The sum of the prescribed capital requirements of each entity within the Group. It represents the level below which the HKIA may intervene on grounds of capital adequacy. GWS Group-wide Supervision. GWS Capital Rules Insurance (Group Capital) Rules (Chapter 41O of the Laws of Hong Kong). HKFRS Hong Kong Financial Reporting Standards. holding company financial resources Debt, equity shares and interests in investment funds, deposits, cash and cash equivalents and dividends paid but not settled by subsidiaries, net of obligations under repurchase agreements, at the Group’s listed holding company, AIA Group Limited. These are presented in note 46 to the consolidated financial statements. Hong Kong The Hong Kong Special Administrative Region (SAR) of the People’s Republic of China (PRC); in the context of our reportable market segments, Hong Kong includes Macau SAR. Hong Kong Companies Ordinance Companies Ordinance (Chapter 622 of the Laws of Hong Kong), as amended from time to time. Hong Kong Insurance Authority or HKIA Insurance Authority established under the Hong Kong Insurance Ordinance. 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. IAIG IAIS IAS IASB IFA IFRS 304 Internationally Active Insurance Group. International Association of Insurance Supervisors. International Accounting Standards. International Accounting Standards Board. Independent financial adviser. Standards and interpretations adopted by the IASB comprising: • • • International Financial Reporting Standards; IAS; and Interpretations developed by the IFRS Interpretations Committee (IFRS IC) or the former Standing Interpretations Committee (SIC). AIA GROUP LIMITEDADDITIONAL INFORMATION Insurance Capital Standard or ICS A risk-based global insurance capital standard applicable to IAIGs being developed by the IAIS. insurance finance reserve Insurance finance reserve comprises the cumulative insurance finance income or expenses recognised in other comprehensive income. 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 insurance applications on tablet devices. life 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. leverage ratio under IAS 39 and IFRS 4 Leverage ratio under IAS 39 and IFRS 4 is total borrowings expressed as a percentage of the sum of total borrowings and total equity. leverage ratio under IFRS 9 and IFRS 17 Leverage ratio under IFRS 9 and IFRS 17 is total borrowings expressed as a percentage of the sum of total borrowings, total equity and net CSM. Listing Rules The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, as amended from time to time. Local Capital Summation Model or LCSM LCSM is the method used by the HKIA as a measure of group capital under the new Group-wide Supervision (GWS) framework. Under the LCSM, AIA’s published group available capital, group minimum capital requirement (GMCR) and group prescribed capital requirement (GPCR) are calculated as the sum of the available capital, minimum capital requirements and prescribed capital requirements according to the respective regulatory requirements for each entity within the Group, subject to any variation considered necessary by the HKIA. Adjustments are made to eliminate double counting. From 1 January 2022 onwards, Group LCSM surplus is the excess of the group available capital over the GPCR, and the Group LCSM cover ratio is the ratio of the group available capital to the GPCR. Prior to 1 January 2022, the Group LCSM surplus and the Group LCSM cover ratio are calculated by replacing the GPCR with the GMCR. 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. minimum capital requirement or MCR The level at which, if not maintained by the regulated entity, may result in the severest penalty, the most extreme intervention measures, or the withdrawal of authorisation to carry on the whole or any part of its business, being imposed on or taken against the regulated entity under the laws relating to regulatory capital in the jurisdiction in which the entity is authorised. (For details, please refer to the Insurance (Group Capital) Rules, Rule 4 from the HKIA). 305 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGLOSSARYModel Code n/a n/m Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules, as amended from time to time. Not available. Not meaningful. net contractual service margin or net CSM Net contractual service margin is the contractual service margin after allowing for reinsurance and taxes. 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 assumptions used to determine expected long-term investment return are the same, in all material respects, as those 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 Markets AIA’s Other Markets are Australia, Cambodia, India, Indonesia, Myanmar, New Zealand, the Philippines, South Korea, Sri Lanka, Taiwan (China) and Vietnam. 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 Participating funds are distinct portfolios where the policyholders have a contractual right to receive at the discretion of the insurer additional benefits based on factors such as the performance of a pool of assets held within the fund, as a supplement to any guaranteed benefits. The allocation of benefits from the assets held in the participating funds is subject to minimum policyholder participation mechanisms established by regulation. persistency The percentage of insurance policies remaining in force from month to month in the past 12 months, as measured by premiums. policyholder and shareholder investments Investments other than those held to back unit-linked contracts as well as assets from consolidated investment funds. pps Percentage points. 306 AIA GROUP LIMITEDADDITIONAL INFORMATION prescribed capital requirement or PCR PVNBP margin The level at which, if maintained by the regulated entity, would not give rise to a power to impose any penalty, sanction or intervention measures against, or withdrawal of authorisation of, the regulated entity under the laws relating to regulatory capital in the jurisdiction in which the entity is authorised. (For details, please refer to the Insurance (Group Capital) Rules, Rule 5 from the HKIA). VONB gross of non-controlling interests 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. renewal premiums Premiums receivable in subsequent years of a recurring premium policy. reverse repos Reverse repurchase agreements. risk adjustment or RA The compensation an entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk as the entity fulfils insurance contracts. 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. RSPUs RSSUs RSUs SFO Restricted stock purchase units. Restricted stock subscription units. Restricted share units. Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended from time to time. Share(s) For the Company, shall mean ordinary share(s) in the capital of the Company. Shareholder(s) Holder(s) of shares of the Company. shareholders’ allocated equity Shareholders’ allocated equity is total equity attributable to shareholders of the Company less fair value reserve. shareholders’ allocated equity measured under IFRS 9 and IFRS 17 Shareholders’ allocated equity measured under IFRS 9 and IFRS 17 is total equity attributable to shareholders of the Company less fair value reserve and insurance finance reserve. shareholders’ equity Shareholders’ equity is total equity attributable to shareholders of the Company. Singapore The Republic of Singapore; in the context of our reportable market segments, Singapore includes Brunei. single premium A single payment that covers the entire cost of an insurance policy. solvency The ability of an insurance company to satisfy its policyholder benefits and claims obligations. 307 ANNUAL REPORT 2022OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGLOSSARYSOs Share options. Tata AIA Life 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. underlying free surplus generation or UFSG Underlying free surplus generation represents free surplus generated from the in-force business, adjusted for certain non-recurring items, and before free surplus used to fund new business, unallocated Group Office expenses, finance costs, investment return variances and other non-operating items. The underlying free surplus generation is also calculated after reflecting the consolidated reserving and capital requirements. unit-linked investments Financial investments held to back unit-linked contracts. 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. VIF is the present value of projected after-tax statutory profits by Business Units 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 gross of non-controlling interests 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. unit-linked products value of in-force business or VIF value of new business or VONB VONB margin 308 AIA GROUP LIMITEDADDITIONAL INFORMATIONOUR PURPOSE IS TO HELP PEOPLE LIVE HEALTHIER, LONGER, BETTER LIVES. AIA GROUP LIMITED 友邦保險控股有限公司 STOCK CODE 1299 INVESTING IN A HEALTHY ASIA ANNUAL REPORT 2022 A 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 2 2 AIA.COM

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