UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

American International Group, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (212) 770-7000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes R          No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o         No R

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes R        No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o    No R

The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant (based on the closing price of the registrant’s most recently completed second fiscal quarter) was approximately $12,986,000,000.

As of January 31, 2012, there were outstanding 1,896,865,688 shares of Common Stock, $2.50 par value per share, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

None

Explanatory Note

This amendment (Amendment No. 1) to the Annual Report on Form 10-K for the year ended December 31, 2011 of American International Group, Inc. (the 2011 Annual Report on Form 10-K) is being filed solely for the purpose of (i) providing audited financial statements of AIA Group Limited (AIA) in accordance with Rule 3-09 of Regulation S-X and (ii) removing the “***” footnote included within Exhibit 101 that was filed as part of the 2011 Annual Report on Form 10-K on February 23, 2012. Other than adding the aforementioned financial statements, no other Item of the 2011 Annual Report on Form 10-K is affected by the change. As a result, they have been omitted from this Amendment No. 1.

Part IV

ITEM 15. EXHIBIT, FINANCIAL STATEMENT SCHEDULES

(a)   Financial Statements and Schedules.

Report of Independent Registered Public Accounting Firm *

Consolidated Balance Sheet at December 31, 2011 and 2010 *

Consolidated Statement of Operations for the years ended December 31, 2011, 2010 and 2009 *

Consolidated Statement of Comprehensive Income (Loss) for the years ended December 31, 2011, 2010 and 2009 *

Consolidated Statement of Equity for the years ended December 31, 2011, 2010 and 2009 *

Consolidated Statement of Cash Flows for the years ended December 31, 2011, 2010 and 2009 *

Notes to Consolidated Financial Statements *

Schedules.

I – Summary of Investments — Other than Investments in Related Parties at December 31, 2011*

II – Condensed Financial Information of Registrant at December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009*

III – Supplementary Insurance Information at December 31, 2011, 2010 and 2009 and for the years then ended *

IV – Reinsurance at December 31, 2011, 2010 and 2009 and for the years then ended *

V – Valuation and Qualifying Accounts at December 31, 2011, 2010 and 2009 and for the years then ended *

VI – AIA Group Limited Consolidated Financial Statements for the year ended November 30, 2011

Independent Auditor’s Report

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

Notes to the Consolidated Financial Statements and Significant Accounting Policies

Supplementary Information to the Consolidated Income Statement

Supplementary Information to the Consolidated Statement of Financial Position

Other Information

(b)         Exhibits.

Exhibit 23.1 – Consent of Independent Accountants

Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications

Exhibit 32 - 18 U.S.C. Section 1350 Certifications

Exhibit 101 - Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheet as of December 31, 2011 and December 31, 2010, (ii) the Consolidated Statement of Operations for the three years ended December 31, 2011, (iii) the Consolidated Statement of Shareholders’ Equity for the three years ended December 31, 2011, (iv) the Consolidated Statement of Cash Flows for the three years ended December 31, 2011, (v) the Consolidated Statement of Comprehensive Income (Loss) for the three years ended December 31, 2011 and (vi) the Notes to the Consolidated Financial Statements.*

(c)          Audited financial statements of AIA are provided in accordance with Rule 3-09 of Regulation S-X as Schedule VI

*Previously filed in the 2011 Annual Report on Form 10-K on February 23, 2012.

Schedule VI

AIA Group Limited

Consolidated Financial Statements

for the year ended 30 November 2011

Contents

1

Contents (continued)

2

REPORT OF INDEPENDENT AUDITORS

TO THE BOARD OF DIRECTORS OF AIA GROUP LIMITED

(incorporated in Hong Kong with limited liability)

In our opinion, the accompanying consolidated statement of financial position and the related consolidated statements of income, comprehensive income, changes in equity and cash flows present fairly, in all material respects, the financial position of AIA Group Limited and its subsidiaries (the “Company”) at November 30, 2011 and 2010, and the results of their operations and their cash flows for the years then ended in conformity with the International Financial Reporting Standards issued by the International Accounting Standards Board.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong

24 February 2012

3

Consolidated Income Statement

Note       (1)       Based upon shares outstanding at 30 November 2011 that are entitled to a dividend.

4

Consolidated Statement of Comprehensive Income

5

Consolidated Statement of Financial Position

Approved and authorised for issue by the board of directors on 24 February 2012

)

)

)    Directors

)

)

6

Consolidated Statement of Changes in Equity

7

Consolidated Statement of Cash Flows

Cash flows presented in this statement cover all the Group’s activities and include flows from unit-linked contracts, participating funds, and other policyholder and shareholder activities.

8

Notes to the Consolidated Financial Statements and Significant Accounting Policies

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, 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 ‘the AIA Group’ or ‘the Group’) is a life insurance based financial services provider operating in 15 jurisdictions throughout the Asia Pacific region.  The Group’s principal activity is the writing of life insurance business, providing life, pensions and accident and health insurance throughout Asia, and distributing related investment and other financial services products to its customers.

2.      Significant accounting policies

2.1       Basis of preparation and statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’), Hong Kong Financial Reporting Standards (‘HKFRS’) and the Hong Kong Companies Ordinance. HKFRS is substantially consistent with IFRS and the accounting policy selections that the Group has made in preparing these consolidated financial statements are such that the Group is able to comply with both IFRS and HKFRS.  References to IFRS, International Accounting Standards (‘IAS’) and  International Financial Reporting Interpretation Committee (‘IFRIC’) in these consolidated financial statements should be read as referring to the equivalent HKFRS, Hong Kong Accounting Standards (‘HKAS’) and Hong Kong (IFRIC) Interpretations (‘HK (IFRIC) – Int’) as the case may be.  Accordingly, there are no differences of accounting practice between IFRS and HKFRS affecting these consolidated financial statements.

The consolidated financial statements have been approved for issue by the Board of Directors on 24 February 2012.

The consolidated financial statements have been prepared using the historical cost convention, as modified by the revaluation of available for sale financial assets, certain financial assets and liabilities designated at fair value through profit or loss and derivative financial instruments, all of which are carried at fair value.

The accounting policies adopted are consistent with those of the previous financial year, except as described below.  In addition, the Group reclassified receivables of US$1,100m to other assets in the consolidated statement of financial position as of 30 November 2010 to be consistent with current year presentation.

During 2011, the Group changed the presentation for certain consolidated unit-linked investment funds to present on a gross basis the investment return and related investment expenses. The impact of this during 2011, was an increase in investment return, as well as an increase in investment expenses of US$82 million in the consolidated income statement. In addition, in Note 4, similar impacts are presented including increases in investment income related to unit-linked contracts of US$130 million, investment expenses related to unit-linked contracts of US$82 million, and investment experience of US$48 million.

(a) The following new amendments to standards have been adopted by the Group for the financial year ended 30 November 2011:

·                   Amendments to IAS 17, Leases: Classification of leases of land and buildings.  Before the amendments, the Group was required to classify leasehold land as operating leases and to present leasehold land as prepayments in the consolidated statement of financial position.  The amendments to IAS 17 have removed such a requirement.  The amendments require that the classification of leasehold land should be based on the general principles set out in IAS 17, that is, whether or not substantially all the risks and rewards incidental to ownership of a leased asset have been transferred to the lessee.

In accordance with the transitional provisions set out in the amendments to IAS 17, the Group reassessed the classification of unexpired leasehold land as at 30 November 2011 based on information that existed at the inception of the leases.  Leasehold land that qualifies for finance lease classification has been reclassified from prepayments on leasehold land to property, plant and equipment or investment property on a retrospective basis.  This resulted in prepayments on leasehold land with the carrying amounts of US$45m and US$587m as at 30 November 2011 (30 November 2010: US$115m and US$519m) being reclassified to property, plant and equipment and investment property respectively.  As the impact is not material, an additional balance sheet for year ended 30 November 2009 has not been presented in the consolidated statement of financial position.  The application of the amendments to IAS 17 has not affected the measurement of reported net income or equity.

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2.      Significant accounting policies (continued)

2.1       Basis of preparation and statement of compliance (continued)

(b) The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 December 2010 and have no material impact for the Group:

·                   Amendments to IFRS 2, Share-based payments, Group cash-settled share-based payment transactions;

·                   Amendments to IFRS 8, Operating Segments: Disclosure of information about segment assets;

·                   Amendments to IAS 7, Statement of Cash Flows: Classification of expenditure on unrecognised assets;

·                   Amendments to IAS 36, Impairment of Assets: Unit of accounting for goodwill impairment test;

·                   Amendments to IFRS 3, Business Combinations, Transition requirements for contingent consideration from a business combination that occurred before the effective date of the revised IFRS, Measurement of non-controlling interests, Un-replaced and voluntarily replaced share-based payment awards;

·                   Amendments to IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations: Disclosures of non-current assets (or disposal groups) classified as held for sale or discontinued operations;

·                   Amendments to IAS 18, Revenue, Determining whether an entity is acting as a principal or as an agent; and

·                   Amendments to IAS 21, The effects of changes in foreign exchange rates, IAS 28, Investments in associates, and IAS 31, Interests in joint ventures, Transition requirements for amendments arising as a result of IAS 27, Consolidated and separate financial statements.

(c) The following new standards, new interpretations and amendments to standards and interpretations have been issued but are not effective for the financial year ended 30 November 2011 and 2010 and have not been early adopted (the financial years for which the adoption is planned and required are stated in parenthesis).  The Group is yet to assess the full impact of these new standards on its financial position and results of operations; however, they are not expected to have a material impact on the financial position or results of operations of the Group but may require additional disclosures:

·                   IFRS 11, Joint Arrangements (2014);

·                   IFRS 12, Disclosure of Interests in Other Entities (2014);

·                  IAS 24, Related Party Disclosures, Revised definition of related parties (as revised in 2009) (2012);

·                   IAS 27, Separate Financial Statements (as revised in 2011) (2014);

·                   IAS 28, Investments in Associates and Joint Ventures (as revised in 2011) (2014);

·                   Amendment to IAS 1, Presentation of Financial Statements, Clarification of statement of changes in equity (2012);

·                   Amendment to IAS 1, Presentation of Items of Other Comprehensive Income (2013);

·                   Amendments to IFRS 7, Financial Instruments: Disclosures, Clarification of disclosures (2012);

·                   Amendments to IFRS 7, Financial Instruments: Disclosures, Enhancing disclosures about transfers of financial assets (2012);

·                   Amendments to IAS 12, Income Taxes, Recovery of underlying assets (2013);

·                   Amendments to IAS 32, Financial Instruments: Presentation on offsetting financial assets and financial liabilities (2015);

·                   Amendments to IFRS 7, Financial Instruments: Disclosures on offsetting financial assets and financial liabilities (2014); and

·                   Amendment to IFRIC Int – 14, Prepayments of a minimum funding requirement (2012).

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2.      Significant accounting policies (continued)

2.1       Basis of preparation and statement of compliance (continued)

(d) The following new standards, new interpretations and amendments to standards and interpretations have been issued but are not effective for the financial year ended 30 November 2011 and 2010 and have not been early adopted (the financial years for which the adoption is planned and required are stated in parenthesis). The Group is yet to assess the full impact of these new standards on its financial position and results of operations; however, they may have a material impact on the financial position or results of operations of the Group and require additional disclosures:

·                   IFRS 9, Financial Instruments (2016);

·                   IFRS 10, Consolidated Financial Statements (2014);

·                   IFRS 13, Fair Value Measurement (2014); and

·                   IAS 19, Employee Benefits (as revised in 2011) (2014).

Items included in the consolidated financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency).  The consolidated financial statements are presented in millions of US Dollars (US$m) unless otherwise stated, which is the Company’s functional currency, and the presentation currency of the Company and the Group.

The significant accounting policies adopted in the preparation of the Group’s consolidated financial statements are set out below.  These policies have been applied consistently in all periods presented.

2.2       Operating profit

The long-term nature of much of the Group’s operations means that, for management’s decision making and internal performance management purposes, the Group evaluates its results and its operating segments using a financial performance measure referred to as ‘operating profit’.  The Group defines operating profit before and after tax respectively as profit excluding the following non-operating items:

·                  investment experience (which consists of realised gains and losses, foreign exchange gains and losses, impairments and unrealised gains and losses on investments held at fair value through profit or loss);

·                  investment income related to unit-linked contracts (consisting of dividends, interest income and rental income);

·                  investment management expenses related to unit-linked contracts;

·                  corresponding changes in insurance and investment contract liabilities in respect of unit-linked contracts and participating funds (see Note 2.3) and changes in third party interests in consolidated investment funds resulting from the above;

·                  policyholders’ share of tax relating to changes in insurance and investment contract liabilities; and

·                  other significant items that management considers to be non-operating income and expenses.

Whilst these excluded non-operating items are significant components of the Group’s profit, the Group considers that the presentation of operating profit enhances the understanding and comparability of its performance and that of its operating segments.  The Group considers that trends can be more clearly identified without the fluctuating effects of these non-operating items, many of which are largely dependent on market factors.

Operating profit is provided as additional information to assist in the comparison of business trends in different reporting periods on a consistent basis and enhance overall understanding of financial performance.

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2.      Significant accounting policies (continued)

2.3       Critical accounting policies and the use of estimates

Critical accounting policies

The preparation of consolidated financial statements requires the Group to select accounting policies and make estimates and assumptions that affect items reported in the consolidated income statement, consolidated statement of financial position, other primary statements and notes to the consolidated financial statements.  The Group considers its critical accounting policies to be those where a diverse range of accounting treatments is permitted by IFRS and significant judgments and estimates are required.

Product classification

IFRS 4, Insurance Contracts, requires contracts written by insurers to be classified either as insurance contracts or investment contracts, depending on the level of insurance risk.  Insurance contracts are those contracts that transfer significant insurance risk, while investment contracts are those contracts without significant insurance risk.  Some insurance and investment contracts, referred to as participating business, have discretionary participation features, or DPF, which may entitle the customer to receive, as a supplement to guaranteed benefits, additional non-guaranteed benefits, such as policyholder dividends or bonuses.  The Group applies the same accounting policies for the recognition and measurement of obligations arising from investment contracts with DPF as it does for insurance contracts.

Accordingly, the Group performs a product classification exercise covering its portfolio of contracts to determine the classification of contracts to these categories.  Product classification requires the exercise of significant judgment 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.  For investment contracts that do not contain DPF, IAS 39, Financial Instruments: Measurement and Recognition, and, if the contract includes an investment management element, IAS 18, Revenue Recognition, are applied.  IFRS 4 permits the continued use of previously applied accounting policies for insurance contracts and investment contracts with DPF, and this basis has been adopted by the Group in accounting for such contracts.

The judgments exercised in determining the level of insurance risk deemed to be significant in product classification affect the amounts recognised in the consolidated financial statements as insurance and investment contract liabilities and deferred acquisition and origination costs.

Insurance contract liabilities (including liabilities in respect of investment contracts with DPF)

IFRS 4 permits a wide range of accounting treatments to be adopted for the recognition and measurement of insurance contract liabilities, including liabilities in respect of insurance and investment contracts with DPF.  The Group calculates 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 adjusted for a provision for the risk of adverse deviation for mortality, morbidity, expected investment yields, policyholder dividends (for other participating business), surrenders and expenses set at the policy inception date. These assumptions remain locked in thereafter, unless a deficiency arises on liability adequacy testing.  Interest rate assumptions can vary by geographical market, year of issuance and product.  Mortality, surrender and expense assumptions are based on actual experience by each geographical market, modified to allow for variations in policy form.  The Group exercises significant judgment 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 judgment is exercised in making appropriate estimates of gross profits, which are also regularly reviewed by the Group.

Participating business, consisting of contracts with DPF, is distinct from other insurance and investment contracts as the Group has discretion as to either the amount or the timing of the benefits declared.  In some geographical markets, participating business is written in a participating fund which is distinct from the other assets of the operating unit 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 applicable regulations.  The extent of such policyholder participation may change over time.

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2.      Significant accounting policies (continued)

2.3       Critical accounting policies and the use of estimates (continued)

Insurance contract liabilities (including liabilities in respect of investment contracts with DPF) (continued)

The Group accounts for insurance contract liabilities for participating business written in participating funds by establishing a liability for the present value of guaranteed benefits less estimated future net premiums to be collected from policyholders.  In addition, an insurance liability is recorded for the proportion of the net assets of the participating fund that would be allocated to policyholders assuming all relevant surplus at the date of the consolidated statement of financial position were to be declared as a policyholder dividend based upon applicable regulations.  Establishing these liabilities requires the exercise of significant judgment.  In addition, the assumption that all relevant performance is declared as a policyholder dividend may not be borne out in practice.  The Group accounts for other participating business by establishing a liability for the present value of guaranteed benefits and non-guaranteed participation, less estimated future net premiums to be collected from policyholders.

The judgments exercised in the valuation of insurance contract liabilities (including contracts with DPF) affect the amounts recognised in the consolidated financial statements as insurance contract benefits and insurance contract liabilities.

Deferred policy acquisition and origination costs

The costs of acquiring new insurance contracts, including commission, 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 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.

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 for mortality, administration, investment and surrenders, less benefit claims in excess of policyholder balances, administrative expenses and interest credited.  The interest rate used to compute the present value of estimates of expected gross profits is based on the Group’s estimate of the investment performance of the assets held to match these liabilities.  Estimates of gross profits are revised regularly.  Deviations of actual results from estimated experience are reflected in earnings.  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.

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 investment management service provided.  Such deferred origination costs are tested for recoverability at each reporting date.  The costs of acquiring 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.

The judgments 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.

Liability adequacy testing

The Group evaluates the adequacy of its insurance and investment contract liabilities with DPF at least annually.  Liability adequacy is assessed by portfolio of contracts in accordance with the Group’s manner of acquiring, servicing and measuring the profitability of its insurance contracts.  The Group performs liability adequacy testing separately for each geographical market in which it operates.

For traditional life insurance contracts, insurance contract liabilities, reduced by deferred acquisition costs and value of business acquired on acquired insurance contracts are compared with 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 costs and value of business acquired on acquired insurance contracts are written down to the extent of the deficiency.  If, after writing down deferred acquisition costs 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.

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2.      Significant accounting policies (continued)

2.3       Critical accounting policies and the use of estimates (continued)

Liability adequacy testing (continued)

Significant judgment is exercised in determining the level of aggregation at which liability adequacy testing is performed and in selecting best estimate assumptions.  The judgments exercised in liability adequacy testing affect amounts recognised in the consolidated financial statements as commission and other acquisition expenses, deferred acquisition costs and insurance contract benefits and insurance and investment contract liabilities.

Financial assets at fair value through profit or loss

The Group designates financial assets at fair value through profit or loss if this eliminates or reduces an accounting mismatch between the recognition and measurement of its assets and liabilities, or if the related assets and liabilities are actively managed on a fair value basis.  This is the case for:

·                       financial assets held to back unit-linked contracts and held by participating funds;

·                       financial assets managed on a fair value basis; and

·                       compound instruments containing an embedded derivative which would otherwise require bifurcation.

Available for sale financial assets

The available for sale category of financial assets is used where the relevant investments are not managed on a fair value basis.  These assets principally consist of the Group’s portfolio of debt securities (other than those backing participating fund liabilities and unit-linked contracts).  Available for sale financial assets are initially recognised at fair value plus attributable transaction costs and are subsequently measured at fair value.  Changes in the fair value of available for sale securities, except for impairment losses and foreign exchange gains and losses on monetary items, are recorded in a separate fair value reserve within total equity, until such securities are disposed of.

The classification and designation of financial assets, either as at fair value through profit or loss, or as available for sale, determines whether movements in fair value are reflected in the consolidated income statement or in the consolidated statement of comprehensive income respectively.

Fair values of financial assets

The Group determines the fair values of financial assets traded in active markets using quoted bid prices as of each reporting date.  The fair values of financial assets that are not traded in active markets are typically determined using a variety of other valuation techniques, such as prices observed in recent transactions and values obtained from current bid prices of comparable investments.  More judgment is used in measuring the fair value of financial assets for which market observable prices are not available or are available only infrequently.

Changes in the fair value of financial assets held by the Group’s participating funds affect not only the value of financial assets, but are also reflected in corresponding movements in insurance and investment contract liabilities. This is due to an insurance liability being recorded for the proportion of the net assets of the participating funds that would be allocated to policyholders if all relevant surplus at the date of the consolidated statement of financial position were to be declared as a policyholder dividend based on current local regulations.  Both of the foregoing changes are reflected in the consolidated income statement.

Changes in the fair value of financial assets held to back the Group’s unit-linked contracts result in a corresponding change in insurance and investment contract liabilities.  Both of the foregoing changes are also reflected in the consolidated income statement.

Impairment of financial assets

Financial assets, other than those at fair value through profit or loss, are assessed for impairment regularly.  This requires the exercise of significant judgment.  A financial investment is impaired if its carrying value exceeds the estimated recoverable amount and there is objective evidence of impairment to the investment.

Share-based compensation

The Group has adopted a number of share-based compensation plans to retain, motivate and align the interests of eligible employees, directors and officers with those of the Group.  These share-based compensation plans are predominantly accounted for as equity-settled plans under which shares or options to purchase shares are awarded.  The Group utilises a binomial lattice model to calculate the fair value of the share option grants, a Monte-Carlo simulation model and/or discounted cash flow technique to calculate the fair value of the other share awards.  These models require assumption inputs that may differ from actual results due to changes in economic conditions.  Further details of share-based compensation are provided in Notes 2.17 and 37.

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2.      Significant accounting policies (continued)

2.3       Critical accounting policies and the use of estimates (continued)

Use of estimates

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.

The table below sets out those items we consider particularly sensitive to changes in estimates and assumptions, and the relevant accounting policy.

Further details of estimation uncertainty in respect of the valuation and impairment of financial instruments are given in Notes 21 and 29 respectively.  Further details of the estimation of amounts for insurance and investment contract liabilities and deferred acquisition and origination costs are given in Notes 24, 25, 26 and 18 respectively.

2.4       Basis of consolidation

Subsidiaries

Subsidiaries are those entities (including special purpose entities) over which the Group, directly or indirectly, has power to exercise control over financial and operating policies in order to gain economic benefits.  Subsidiaries are consolidated from the date on which control is transferred to the Group and are excluded from consolidation from the date at which the Group no longer has control.  Intercompany transactions are eliminated.

The Group utilises the purchase method of accounting to account for the acquisition of subsidiaries, unless the acquisition forms part of the Group reorganisation of entities under common control.  Under this method, the cost of an acquisition is measured as the fair value of consideration payable, shares issued or liabilities assumed at the date of acquisition.  The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see 2.11 below).  Any surplus of the acquirer’s interest in the subsidiary’s net assets over the cost of acquisition is credited to the consolidated income statement.

The consolidated financial statements of the Group include the assets, liabilities and results of the Company and subsidiaries in which AIA Group Limited has a controlling interest, using accounts drawn up to the balance sheet date.

Investment funds

In several countries, the Group has invested in investment funds, such as mutual funds and unit trusts.  These invest mainly in equities, debt securities and cash and cash equivalents.  The Group’s percentage ownership in these funds can fluctuate from day to day according to the Group’s and third party participation in them.  Where the Group is deemed to control such funds, with control determined based on an analysis of the guidance in IAS 27 and SIC 12, they are consolidated, with the interests of parties other than the Group being classified as liabilities because there is a contractual obligation for the issuer to repurchase or redeem units in such funds for cash.  These are presented as ‘Third party interests in consolidated investment funds’ within other liabilities in the consolidated statement of financial position.  In instances where the Group’s ownership of investment funds declines marginally below 50% and, based on historical analysis and future expectations, the decline in ownership is expected to be temporary, the funds continue to be consolidated as subsidiaries under IAS 27.  Likewise, marginal increases in ownership of investment funds above 50% which are expected to be temporary are not consolidated.  Where the Group does not control such funds, they are not accounted for as associates and are, instead, carried at fair value through profit or loss within financial investments in the consolidated statement of financial position.

15

2.      Significant accounting policies (continued)

2.4       Basis of consolidation (continued)

Employee share-based trusts

Trusts are set up to acquire shares of the Company for distribution to participants in future periods through the share-based compensation schemes.  The consolidation of these trusts is evaluated in accordance with SIC 12; where the Group is deemed to control the trusts, they are consolidated.  Shares acquired by the trusts to the extent not provided to the participants upon vesting are carried at cost and reported as ‘Shares held by employee share-based trusts’ in the consolidated statement of financial position.

Non-controlling interests

Non-controlling interests are presented within equity except when they arise through the minority’s interest in puttable liabilities such as the unit holders’ interest in consolidated investment funds, when they are recognised as a liability, reflecting the net assets of the consolidated entity.

Acquisitions and disposals of non-controlling interests, except when they arise through the minority’s interest in puttable liabilities, are treated as transactions between equity holders.  As a result, any difference between the acquisition cost or sale price of the non-controlling interest and the carrying value of the non-controlling interest is recognised as an increase or decrease in equity.

Associates and joint ventures

Associates are entities over which the Group has significant influence, but which it does not control.  Generally, it is presumed that the Group has significant influence if it has between 20% and 50% of voting rights.  Joint ventures are entities whereby the Group and other parties undertake an economic activity which is subject to joint control arising from a contractual agreement.

Gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures.  Losses are also eliminated, unless the transaction provides evidence of an impairment of an asset transferred between entities.

Investments in associates are accounted for using the equity method of accounting.  Under this method, the cost of the investment in an associate, together with the Group’s share of that entity’s post-acquisition changes to equity, is included as an asset in the consolidated statement of financial position.  Cost includes goodwill arising on acquisition.  The Group’s share of post-acquisition profits or losses is recognised in the consolidated income statement and its share of post-acquisition movement in equity is recognised in equity.  Equity accounting is discontinued when the Group no longer has significant influence over the investment.  If the Group’s share of losses in an associate equals or exceeds its interest in the undertaking, additional losses are provided for, and a liability recognised, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.  The Group accounts for investments in joint ventures that are subject to joint control using the proportionate consolidation method.

The Company’s investments

In the Company statement of financial position, subsidiaries, associates and joint ventures are stated at cost, unless impaired.  The Company’s interests in investment funds such as mutual funds and unit trusts are designated at fair value through profit or loss.

16

2.      Significant accounting policies (continued)

2.5       Insurance and investment contracts

Consistent accounting policies for the measurement and recognition of insurance and investment contracts have been adopted throughout the Group to substantially all of its business.

In a limited number of cases, the Group measures insurance contract liabilities with reference to statutory requirements in the applicable jurisdiction, without deferral of acquisition costs.

Product classification

Insurance contracts are those contracts that transfer significant insurance risk.  These contracts may also transfer financial risk.  Significant insurance risk is defined as the possibility of paying significantly more in a scenario where the insured event occurs than in a scenario in which it does not. Scenarios considered are those with commercial substance.

Investment contracts are those contracts without significant insurance risk.

Once a contract has been classified as an insurance or investment contract no reclassification is subsequently performed, unless the terms of the agreement are later amended.

Certain contracts with DPF supplement the amount of guaranteed benefits due to policyholders.  These contracts are distinct from other insurance and investment contracts as the Group has discretion in the amount and/or timing of the benefits declared, and how such benefits are allocated between groups of policyholders.  Customers may be entitled to receive, as a supplement to guaranteed benefits, additional benefits or bonuses:

·                  that are likely to be a significant portion of the total contractual benefits;

·                  whose amount or timing is contractually at the discretion of the Group; and

·                  that are contractually based on:

-            the performance of a specified pool of contracts or a specified type of contract;

-            realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or

-            the profit or loss of the company, fund or other entity that issues the contract.

The Group applies the same accounting policies for the recognition and measurement of obligations and the deferral of acquisition costs arising from investment contracts with DPF as it does to insurance contracts.  The Group refers to such contracts as participating business.

In some jurisdictions participating business is written in a participating fund which is distinct from the other assets of the company or branch.  The allocation of benefits from the assets held in such participating funds is subject to minimum policyholder participation mechanisms which are established by regulation.  The extent of such policy participation may change over time.  The current policyholder participation in declared dividends for locations with participating funds is set out below:

In some jurisdictions participating business is not written in a distinct fund and the Group refers to this as other participating business.

17

2.      Significant accounting policies (continued)

2.5       Insurance and investment contracts (continued)

The Group’s products may be divided into the following main categories:

18

2.      Significant accounting policies (continued)

2.5       Insurance and investment contracts (continued)

In the notes to the financial statements, unit-linked contracts are presented together with pensions contracts for disclosure purposes.

The basis of accounting for insurance and investment contracts is discussed in Notes 2.5.1 and 2.5.2 below.

2.5.1    Insurance contracts and investment contracts with DPF

Premiums

Premiums from life insurance contracts, including participating policies and annuity policies with life contingencies, are recognised as revenue when due from the policyholder.  Benefits and expenses are provided in respect of such revenue so as to recognise profits over the estimated life of the policies.  For limited pay contracts, premiums are recognised in profit or loss when due, with any excess profit deferred and recognised in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments.

Amounts collected as premiums from insurance contracts with investment features but with sufficient insurance risk to be considered insurance contracts, such as universal life, and certain unit-linked contracts, are accumulated as deposits.  Revenue from these contracts consists of policy fees for the cost of insurance, administration, and surrenders during the period.

Upfront fees are recognised over the estimated life of the contracts to which they relate.  Policy benefits and claims that are charged to expenses include benefit claims incurred in the period in excess of related policyholder contract deposits and interest credited to policyholder deposits.

Unearned revenue liability

Unearned revenue liability arising from insurance contracts representing upfront fees and other non-level charges is deferred and released to the consolidated income statement over the estimated life of the business.

Deferred acquisition costs

The costs of acquiring new business, including commissions, underwriting and other policy issue expenses, which vary with and are primarily related to the production of new business, are deferred.  Deferred acquisition costs are subject to the testing of recoverability when issued and at least annually thereafter.  Future investment income is taken into account in assessing recoverability.

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.

Unamortised acquisition costs associated with internally replaced contracts that are, in substance, contract modifications, continue to be deferred and amortised.  Any remaining unamortised balance of deferred acquisition costs associated with internally replaced contracts that are, in substance, new contracts, are expensed.

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2.      Significant accounting policies (continued)

2.5       Insurance and investment contracts (continued)

2.5.1    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.