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Edited Transcript of 1299.HK earnings conference call or presentation 24-Feb-17 1:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 AIA Group Ltd Earnings Presentation

Hong Kong Feb 25, 2017 (Thomson StreetEvents) -- Edited Transcript of AIA Group Ltd earnings conference call or presentation Friday, February 24, 2017 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Tucker

AIA Group - Executive Director & Group CEO

* Garth Jones

AIA Group - Group CFO

* Gordon Watson

AIA Group - Regional Chief Executive

* William Lisle

AIA Group - Regional Chief Executive

* Ng Keng Hooi

AIA Group - Regional Chief Executive

* John Cai

AIA Group - CEO AIA China

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Conference Call Participants

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* Mengxi Sun

Goldman Sachs - Analyst

* Lance Burbidge

Autonomous Research - Analyst

* Dominic Chan

BNP Paribas - Analyst

* Leon Qi

Daiwa Securities - Analyst

* Kailesh Mistry

HSBC - Analyst

* Scott Russell

Macquarie - Analyst

* Esther Chwei

Deutsche Bank - Analyst

* Jan van der Schalk

CLSA - Analyst

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Presentation

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Mark Tucker, AIA Group - Executive Director & Group CEO [1]

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Okay. Good morning everyone, and let's begin. A very warm welcome to our full year results presentation. Our continued strong operating performance and financially disciplined execution have led to another excellent set of results and our most successful year yet.

Let me take you through the highlights. In 2016, VONB was up by 28% to close to $2.8 billion. IFRS operating profit increased by 15% to $4 billion and underlying free surplus generation was up 11%, also to $4 billion.

(Inaudible) EV equity increased to $43.7 billion, and maintained our robust solvency position. The Board has recommended a further 25% step-up in the final dividend from the higher base we set in 2015.

As you can see, we continue to deliver superior, profitable growth, which is driving both strong earnings and cash flow generation. This is a direct outcome of successfully and consistently executing our growth strategy for the sixth year running.

To aligning our strategy with the fundamental social and economic needs of the region, we are embedding our activities ever more deeply into the economic growth and prosperity of Asia. Our significant competitive advantages developed over our long history, and our unequaled distribution and product platforms, to our brand and financial strength, place us in a highly-advantaged position, a position where we can benefit from and contribute to demographic, social and economic progress across the region.

As you can see on these charts, Asian economic growth remains strong and stable, structural resilience and a significant monetary and fiscal flexibility. The high levels of economic growth in Asia are creating substantial and indeed, unprecedented levels of new economic activity.

By 2020, the cumulative new GDP in Asia will be five times larger than the new growth in the US, and in total will be larger than the entire US economy is today. And as you can see in the middle charts, this comes with increasing structural resilience and ever-higher quality.

Domestic demand has replaced traditional industrial output in exports as the primary driver of growth across the region. Indian exports are an increasingly smaller contributor to growth, with interregional demand continuing to grow rapidly.

And lastly, as you can see on the right hand side, Asian policymakers have significantly greater monetary and fiscal flexibility to promote domestic sources of growth than their western counterparts, and have demonstrated their ability and commitment to take action. Our business is very strongly supported by these major economic drivers of growth, as demonstrated by our track record of 28% compound annual growth rate in VONB since IPO.

The compounding nature of growing economies and increasing life penetration rates leads to unprecedented potential for AIA's life -- for Asia's life insurance markets, and within Asia, particularly for AIA. On a regional basis, these levels of economic expansion and accelerated insurance penetration lead to a $10 trillion life insurance market, 17 times the size of Asia today, 7 times larger than the G7, and greater than the whole of the current global life industry.

Let's take China as an example. China's life penetration is equal to the US's in 1938. It has doubled since 2000 and is set to nearly double again by 2020 in line with the State Council's targets. On this trajectory, China's life penetration will reach 7% in 2030, on a par with the US today, at which point China will have achieved in just 15 years what took the US more than 50 years to accomplish.

And this is beginning to happen right across Asia, which in turn is driving up the protection gap figures we often quote, reaching $73 trillion by 2020. This speaks to both the resilience of the life insurance markets in Asia and to the industry's potential being far in excess of the level of GDP growth. AIA is exceptionally well-placed at exactly the right time to capture this opportunity today and well into the future.

We are in the right region and we are in the right markets. Asia will account for more than a half of global ANP by 2025. And we have the right approach to each market with a balance of leading and highly-differentiated strategies driving stronger levels of profitability and far superior profit margins. This portfolio effect allows us significant flexibility in how we manage the Group across a number of dynamics, including growth, capital allocation and value creation.

As you know, we do not manage the business for the short term. Rather, we optimize performance across the portfolios as opportunities emerge on the ground from the macro to the micro. We actively assess channel, product and financial dynamics and deploy capital based on the ability to create value for shareholders over the long term.

To capture these opportunities, we are uniquely placed across the region to grow year after year. Our track record illustrates this well.

Overall VONB has increased more than four times in six years, and this has come from our diverse and balanced mix of sources across distribution, product and geography. We have the right balance of high-quality agents and partners, we have the right products in the right mix, and we have a diverse and strong portfolio of growth markets.

Those headline figures and our strong and consistent track record over time are further evidence of our success in capturing the enormous opportunities in the region. In executing our strategy, we have delivered significant growth and profitable new business, which has driven earnings to a substantial $4 billion in 2016.

This has created a very high-quality source of earnings for AIA which is in turn driving higher shareholder dividends. Today's 25% further step-up in the final dividend builds on the higher base established last year, and is a direct outcome of the successful execution of our profitable growth strategy.

We have achieved a great deal over the past six years, but as I have said many times before, we are still at a very early stage in a long, long journey as we continue to realize AIA's full potential in Asia for many, many, many years to come. Let me now hand over to Garth.

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Garth Jones, AIA Group - Group CFO [2]

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Thanks Mark and good morning everyone. AIA has delivered another year of excellent results with double-digit growth across all of our key metrics. As Mark just said, 2016 was AIA's most successful year yet. VONB grew by 28% to close to $2.8 billion. We've also delivered strong operating profit performances on both EV and IFRS reporting bases.

EV operating profit increased by 19% to $5.9 billion, driven by profitable new business growth and the prudent management of our in-force portfolio. This in turn has generated broad-based IFRS earnings growth with OPAT up by 15% and translated into increased underlying free surplus generation of over $4 billion.

The Board has recommended a significant step-up of 25% in the final dividend from our higher base established in 2015. This represents an 88% increase over the last two years and reflects both the strength of our financial results and confidence in our future prospects.

Today's excellent set of results continues our strong and sustained track record of growth since IPO, again demonstrating AIA's ability to deliver consistent performances throughout market cycles by focusing on high-quality, profitable new business that generates strong and stable earnings and cash flows.

Let me now take you through the results in more detail. VONB growth was 28%, reflecting our focus on total value creation. ANP was up by 31% to $5.1 billion and VONB margin remained strong at 52.8%. These results demonstrate the quality of our new business with regular premium sales up by 37%, representing over 90% of ANP.

We wrote $4.7 billion of new regular premiums in 2016, and this adds a significant further layer of premium revenue to our growing in-force renewal book of more than $17 billion. When combined with our high persistency levels, the compounding of regular premiums further drives the scale and quality of our earnings and cash flows over time.

Our strong profitability and business growth is a direct result of the quality, breadth and scale of our multichannel distribution platform. AIA pioneered the development of agency distribution in Asia and our agency channel remains an important competitive advantage. Agency VONB grew by 21%, accounting for 70% of the Group total.

Our premier agency strategy emphasizes the quality of our new hires, and our recruitment efforts have increased active new agents by 20% over the year. In 2016, AIA also became the only company ever to be ranked number 1 globally for MDRT-registered members for two consecutive years. Our partnership business delivered 35% VONB growth through the successful execution of our strategic bancassurance partnerships across the region, together with a significant contribution from our broker channel.

We continue to see significant opportunities to invest capital in organic growth at attractive returns for shareholders. We do this by following our disciplined approach of optimizing value creation rather than purely chasing top-line revenues.

You can see this reflected in the strong IRRs we achieved and the reduction in payback periods on invested capital. Margin on a PVNBP basis was stable and remained strong at 52.8% from positive shifts in country mix, channel mix and other items.

As we highlighted at the half year, the change in product mix was due to increased sales of participating products that balanced lower VONB margin with an improved new business strain. Although reported margins may vary, we will continue to write new business if risk-adjusted returns on capital are attractive, in order to drive absolute economic profit. This is what optimizes value for our shareholders.

AIA benefits from our broad regional presence, and our long-established, market-leading positions. Together with the quality of our multichannel distribution and our comprehensive product range, our strong platform has enabled us to consistently deliver an outstanding track record of growth, and is a major factor in our confidence in sustainability and resilience of the Group's overall future performance.

Our positive operating experience benefits from the quality of our distribution and the regular-premium, long-term nature of our business. Persistency has remained strong since IPO and was around 95% in 2016. Mortality and morbidity claims variances were once again positive at $200 million, demonstrating the disciplined management of our in-force book.

We continue to focus on prudent expense management and have reduced our Group operating expense ratio by a further 30 basis points to just under 8%, which we believe is one of the lowest operating expense ratios globally in the life insurance industry. Overall, operating variances now total more than $1.1 billion in aggregate since IPO.

EV equity increased from $39.8 billion to $45.7 billion before capital market movements and dividends. The combination of our excellent VONB growth and strong operating performance generated a 19% increase in EV operating profit to $5.9 billion. VONB of $2.8 billion was close to the figure for the expected return on EV equity, reflecting the significantly higher contribution to EV operating profit growth from the value of new business.

This growth has also driven the operating ROEV higher, to 15.4%. That's up by 390 basis points from 11.5% in 2010. I'll talk more about this later. Our closing EV equity of $43.7 billion is after a deduction of $4.1 billion for additional capital and reserves under the Hong Kong basis and the present value of future Group office expenses.

As you know, we manage the business for the long term and our EV methodology and long-term assumptions reflect this. In the calculation of the EV we used spot market interest rates and then trend over time to our long-term assumptions, which reflect market forward rates. You can see on the left hand side our long-term assumptions have remained prudent over time.

Cumulative investment variances from 2010 were positive at around $900 million in total. Finally, we also have an independent actuarial firm assess our EV on a market consistent basis and they confirmed that the results are not materially different to our reported EV. All of this demonstrates the prudence in our overall EV economic assumptions and calculation methodology.

While AIA is not immune to capital market movements, you can see from the sensitivities on the right hand side here, and from the source of earnings chart later, that we are resilient against short-term market volatility. As I've said in previous presentations, we continue to match our assets and liabilities in local currencies to minimize the economic effects of foreign exchange movements.

The sensitivity on this slide shows the translation effect into reported currency. Our sensitivity is reduced because close to 90% of our business in Hong Kong is written in USDs and by USD assets. And over 90% of the working capital held at the Group corporate center is invested in USD.

Our strong performance has continued through capital market volatility and foreign exchange depreciation. The high absolute level of growth and the compounding effects of consistent year-on-year performance means that the VONB in 2016 is over four times the amount generated in 2010, and is greater than the whole of 2012 and 2013 combined.

Turning now to our IFRS results. Operating profit after tax grew by 15% to close to $4 billion. Operating margin after tax has continued to be very strong due to the quality of the new business we write, the active management of our in-force book and our disciplined management of expenses.

As I said at the beginning, our strategy has consistently focused on growth in long-term, regular-premium business. As a result, our earnings have a high proportion of insurance and fee-based profits, which are less dependent on interest rates and overall investment returns, and therefore more resilient through market cycles.

Each market segment contributed more than $0.25 billion of OPAT in 2016. Our largest businesses continue to provide significant growth at scale. Thailand's earnings have more than doubled since 2010 to $0.75 billion.

Our emerging markets are also providing an increasing contribution. Other markets had a very strong year with OPAT up by 17%. China's OPAT increased by 29% and is now more than five times the 2010 figure. Overall, 13 of our 16 operating businesses reported double-digit OPAT growth compared with 2015.

You saw AIA's high-quality sources of profit on the previous slide, and this, together with our geographically-diverse portfolio, underpins the resilience and quality of our earnings. This is a distinct advantage for AIA and differentiates us both in the region and globally.

The next slide shows how this is driving improvements in ROE. As you can see from the left hand charts, growth in new business profitability has been an important driver of EV operating profit, which is up 2.4 times since IPO. This has generated a higher return on embedded value, up by 390 basis points to 15.4%. Over time, this supports strong IFRS earnings growth and has begun to translate into an increased ROE, which currently stands at 14.1%.

You can see the lag effect of this coming through since 2012 on the bottom right hand chart. It's important to remember AIA is a growth Company and this progress is therefore ongoing as we deploy capital to fund increasing levels of profitable new business growth, driving earnings higher and increasing ROE.

Shareholders' allocated equity provides a clearer reflection of the underlying drivers of the change in equity before the IFRS accounting treatment of AFS bonds. The increase in shareholders' allocated equity to $29.6 billion was mainly driven by higher operating profit after tax less the increased payment for shareholder dividends at $1.1 billion. IFRS total equity stood at $35 billion, up 12%.

As I said earlier, the high-quality sources of earnings that AIA generates, together with our geographically-diverse portfolio, underpins the resilience and sustainability of our earnings growth. Our disciplined strategy of focusing on value and consistently looking to improve the quality of our portfolio has delivered a strong track record of sustained growth in earnings over the past six years. This in turn has begun to translate into higher ROEs.

Moving on to capital and dividends. The Hong Kong ICO solvency ratio for AIA Co., our principal regulated operating company, has remained strong at 404%. This is a result of growth in retained earnings, offset by the net effects of short-term capital market movements, dividends to the holding company AIA Group Limited, and the cash payment for our increased shareholding in Tata AIA in the first half.

As well as a strong ICO solvency position, we have a conservative investment portfolio. The investment mix and the credit quality of our bond portfolio has remained stable over time, with an average credit rating of around single A. Taken together, this demonstrates the high quality nature of our investment portfolio.

We ensure that we maintain a prudent balance sheet, taking into consideration the financial flexibility needed to fund our significant new business growth opportunities and support our progressive dividend policy through market capital stress conditions. We generated just over $4 billion of underlying free surplus in 2016 and from this, we invested $1.4 billion into profitable new business. Investment variances, exchange rates and other items in total were positive in 2016 and amounted to just over $1 billion, while the payment for shareholder dividends was $1.1 billion. Our stock of free surplus increased to $9.8 billion.

As with our VONB and EV numbers, it is worth noting that all of the figures shown here are after allowing for the prudent Hong Kong reserving and capital basis. AIA has significant opportunities to invest capital in organic growth at attractive returns for shareholders. We have demonstrated this consistently over the past six years. We reduced new business strain as a percentage of VONB at the same time as achieving strong growth.

While new business strain reduction by itself is not our objective, we are disciplined in how we choose to deploy capital. With such attractive reinvestment economics, our ability to invest in new business growth remains an important priority and a differentiator for AIA.

Over time, this investment in profitable new business growth supports the generation of increasing amounts of free surplus and cash, which in turn allows us to finance further attractive new business growth, maintain a prudent balance sheet, and pay progressive dividends. This has been clearly demonstrated in our results.

This dynamic has enabled the Board to recommend a step-up in the final dividend to HKD0.6375 per share, which is a further increase of 25% from our higher base established in 2015. This means we have rebased our final dividend by 88% over the last two years. At 2.9 times the final dividend we declared in 2011, the significantly increased level in 2016 is the result of continuing to execute our growth strategy.

Today's significant step-up reflects both the strength of our excellent financial results and our confidence in the future prospects of the Group. The Board intends to follow AIA's prudent, sustainable and progressive dividend policy from this higher base, allowing for the funding of future growth opportunities and the financial flexibility of the Group.

In closing, the Group has delivered another set of excellent financial results in 2016. We have generated material growth in the value of new business by investing capital at attractive returns, and with increased capital efficiency. Profitable new business growth in turn is driving strong increases in IFRS operating profit and has begun to translate into an increased ROE.

We also generated increased capital and free surplus from the management of our in-force book, maintained our resilient solvency position, financed our growth, and uplifted our dividends. Our results have once again demonstrated our ability to deliver strong and consistent performances through market cycles.

I will now hand over to Gordon, Bill and Keng Hooi, who will share with you the excellent progress we have made in our businesses in 2016.

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Gordon Watson, AIA Group - Regional Chief Executive [3]

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Thank you, Garth, and good morning everyone. As Mark mentioned, Bill, Keng Hooi and myself and our leadership teams throughout the region have focused on executing our strategic priorities to deliver the very strong overall financial performance that you see today. Let me start with our largest operation and home market, Hong Kong.

AIA Hong Kong continued its track record of delivering excellent growth with VONB up 42%. Importantly, this year also marks the first time AIA Hong Kong has generated over $1 billion of VONB. ANP grew by 82% as we benefited from strong growth in both domestic Hong Kong and mainland Chinese customers. New business sold to mainland Chinese customers accounted for around half of AIA Hong Kong's VONB, reflecting the overall industry trend.

VONB margin remained strong at around 49%, with the change over the year showing increased sales of long-term participating products, as I highlighted in the first half. Over 90% of individual ANP came from regular-premium, long-term savings and protection products.

Agency delivered excellent VONB growth. We remain focused on recruiting high-caliber agents and attracting top young talent to our many initiatives, such as the Gen Y Club and road to MDRT programs. These initiatives contributed to a 21% increase in the number of new recruits in 2016, and close to two-thirds were aged 35 years or under.

Registered MDRT members in Hong Kong increased by more than 60%. This makes AIA Hong Kong on a standalone basis the third largest company globally.

AIA Hong Kong's partnership distribution delivered significant VONB growth across both the retail IFA and bancassurance channels. Our strategic long-term bancassurance partnership with Citibank also delivered an excellent performance, with VONB doubling over the prior year. And since its launch, AIA Vitality has further differentiated our protection proposition. The take up rate of AIA Vitality on integrated products exceeded 75% by the end of 2016, enhancing our engagement with customers in Hong Kong. In summary, our Hong Kong business delivered excellent results and high quality growth.

Now moving on to other markets, our other markets segment delivered VONB growth of 10% in 2016, with a higher growth rate in the second half of 15%. Turning to the key highlights, let me start with Australia. Our Australian operation, once again, delivered excellent double-digit VONB growth, driven by outstanding performances in both our individual retail IFA and Group insurance business. We maintained our leadership position in the individual life market, supported by a premier IFA service model.

AIA Vitality remains a critical component of our customer proposition in Australia. We expanded our program by adding new rewards partners and new product features, resulting in the number of AIA Vitality members more than doubling compared with 2015. Our focus on retention of major corporate clients during the year also enabled us to continue our strong growth in the Group insurance business.

Moving on to Indonesia, we continue to develop a high-quality, premier agency distribution in Indonesia. In the second half, we launched our financial advisor academy program to drive quality recruitment and to embed a culture of high activity levels and professionalism in our agents. Our approach has delivered strong double-digit VONB growth in the agency channel in 2016.

I am delighted to update you that we have renewed our long-standing partnership with BCA in Indonesia. AIA has been a close partner with BCA for over a decade and this week we extended our existing relationship for a further 10 years.

Our partnership aligns both parties' interests in growing new business profitably, with revenues for BCA variable in nature and dependent on future levels of VONB. We look forward to continuing to support BCA's significant customer base to meet their evolving protection and savings needs through our comprehensive range of products and services.

In the Philippines, overall market conditions were challenging in the first half of 2016 as we highlighted at the interim results. Our VONB improved in the second half and was up by more than 20% compared with the first half. We continued to strengthen our agency distribution through our new agency branch model and introduced several recruitment initiatives during the year to attract young professionals. Our joint venture with the Bank of the Philippine Islands continued to lead the bancassurance market and we saw a significant increase in the proportion of new business coming from new unit-linked protection products during the year.

Finally, Vietnam, our business in Vietnam delivered another year of excellent VONB growth. VONB margin increased significantly from an uplift in protection rider sales and expense efficiency improvements. We continued to expand our innovative agency branch model to a total of five cities throughout Vietnam.

These branches also serve as regional centers for training and professional development, aiming to attract younger and more productive agents. Now along with other recruitment and training initiatives, these branches supported more than a 20% increase in the number of active agents. So, in closing, our country CEOs and their teams remain highly focused on executing our key strategies to drive strong and sustainable results.

Thank you very much and let me hand over to Bill.

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William Lisle, AIA Group - Regional Chief Executive [4]

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Thank you, Gordon, and good morning everyone. I'm very pleased to be here this morning to update you on the progress in Malaysia, Korea, Sri Lanka, India and Cambodia.

Malaysia delivered another year of excellent growth with the VONB up 23%. ANP increased 25%, while VONB margin remained strong at 57%. Our premier agency strategy was an important driver of Malaysia's strong performance over the year, as we continued our relentless focus on quality recruitment and increased productivity through rigorous training and the innovative use of technology.

Our long-term career development programs have helped us attract high caliber people, leading to a 25% increase in active new agents. We also saw significant agency productivity improvements of over 20% from the roll out of activity management tools on our mobile office platform and new products targeted at the mass affluent segment. These initiatives have led to a significant increase in the number of agency MDRT qualifiers which grew 74% in 2016.

It's also worth noting that more than 90% of agency new business applications are now submitted digitally through iPoS. Takaful business is an increasing material contributor to our growth in Malaysia, with agency takaful ANP up 90% and the number of active takaful producing agents higher by more than 70%. In 2016, we became the second largest player in the family takaful sector. Our strategic bancassurance partnership with Public Bank continues to make very good progress, with higher average case sizes leading to double-digit VONB growth.

The launch of AIA Vitality in Malaysia provides our customers with the knowledge, tools and motivation to improve their health. As I said at the half year, AIA is the first company globally to integrate health and wellness benefits with unit-linked life insurance and takaful solutions, and the initial response since roll out in June has been very positive. In summary, our Malaysia team has continued to deliver excellent growth, building on the strong results from prior years.

Now let me take you through the many highlights of my other markets, beginning with Korea. Our Korean business has delivered positive VONB growth over the second half of 2016 and this momentum has continued into 2017. This has been achieved by the new leadership team's continued focus on strengthening our distribution capabilities and developing products that meet our customers' protection needs.

VONB margin increased by 5 percentage points, following a positive shift in product mix and the launch of new protection products in the second half. As a result of our disciplined approach in Korea, we've continued to deliver solid earnings growth with OPAT up by 10% in 2016.

Now moving on to Sri Lanka, our Sri Lankan business is the second largest life insurer in terms of first year premium and has continued to deliver excellent VONB growth from both agency and bancassurance channels during 2016.

We remain committed to the implementation of our premier agency strategy and have launched a number of initiatives including new incentive schemes, recruitment and training programs, as well as agency activity management tools. To further support agency, AIA is the first insurer to launch an e-payment platform in Sri Lanka, allowing payment of premiums via mobile phones and reducing our cash collection which is prevalent in the market.

In November, we expanded our bancassurance footprint by entering into a new long-term exclusive partnership with DFCC Bank, one of the largest private sector banks in Sri Lanka. In summary, AIA Sri Lanka has continued to demonstrate excellent performance through consistent execution.

Now let me move on to India. Following the increase in our shareholding in Tata AIA Life to 49% in the first half, our joint venture has continued to deliver strong results. We remain focused on capturing the protection gap opportunity through our multi-channel distribution platform. Our agency strategy focus is on selective recruitment and high quality training. In 2016, our average case size increased by 24% with market leading persistency.

We continue to work closely with our strategic bank partners, both Citibank and (inaudible) Bank, and the initial results have been very strong. Bancassurance has grown to account for around half our total ANP. I'm excited about the progress we've made so far and believe that our efforts are positioning Tata AIA Life well to capture the significant long-term growth opportunity in India.

Finally, I'd like to update you on Cambodia. I'm pleased to announce that our preparations to launch the business in Cambodia are well underway. And based on our discussions with the regulator, we expect to begin writing business later this year. Cambodia will represent AIA's first greenfield launch in a new market since IPO. Our strategy will be to bring the best of AIA to Cambodia, including full-time premier agency, a focus on protection, health and wellness, and a digitally-led operating model for customers, distribution and staff. We are confident this will strongly differentiate AIA in the market.

Thank you very much and now let me hand over to Keng Hooi.

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Ng Keng Hooi, AIA Group - Regional Chief Executive [5]

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Thank you Bill and good morning everyone. Let me now share with you the progress we have made in my three largest markets, beginning with Singapore. AIA Singapore delivered VONB of $316 million in 2016. As reported in the first half, strong growth in regular premium business was offset by lower single premium sales through the broker channel.

This reflected a combination of our deliberate approach to managing our product mix through proactive pricing actions and lower market sales. Regular premium VONB grew by 16%. Our agency business delivered a solid performance, with double-digit VONB growth from increased active agency numbers and higher productivity.

AIA continued to rank first in Singapore for registered MDRT members, with a 30% increase in the number of qualifiers. Our strategic partnership with Citibank also delivered solid progress, including the expansion of our telemarketing operations to capture the opportunities from Citibank's credit card customers. AIA is the leader in Singapore's protection market and our comprehensive wellness program, AIA Vitality, continued to gain good traction with VONB from integrated products up by 70%.

Moving now to Thailand, AIA Thailand reported VONB of $384 million. VONB margin was up by 5 percentage points to 81%, offset by lower new business volumes, including a period of reduced activity during the mourning period following the passing of the Thai King.

Our financial advisors program offers high quality induction training to new agents with high potential. New recruits through this program increased by 35% in 2016. The number of AIA agents qualified to sell unit-linked products increased by 43%, building on the significant growth achieved in the prior year. This has enabled us to capture around 90% of the unit-linked life insurance market.

We also ranked first in terms of registered MDRT members. AIA continued to lead the protection market with regular premium business accounting for 97% of ANP in the year. Our AIA Vitality program, launched in June, is the first comprehensive wellness program in Thailand and it will help further differentiate our protection proposition in the market.

Now turning to China, AIA China had another outstanding year in 2016 with VONB up by 54%, achieving more than $0.5 billion of VONB for the first time. VONB has more than doubled over the last two years and is close to eight times the amount at IPO. Importantly, earnings have tracked VONB growth, with OPAT 5.5 times higher over the same period.

The excellent performance of AIA China is the direct result of the consistent and sustained execution of our strategy by John Cai, our CEO, and his team. John spoke to you two years ago and, given the business is now double the size it was then, we thought it was a good time to update you on AIA's unique position and enormous potential in China. John.

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John Cai, AIA Group - CEO AIA China [6]

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Thank you Keng Hooi and good morning. It's good to be here with you again. As you know, we began AIA China's transformation around seven years ago. At the heart of our differentiated strategy is premium agency. Developing full-time professional agents that provide high quality advice and sophisticated protection and long-term savings products. This sets AIA apart in the industry, both to our customer and to our new recruits, enabling us to access the significant opportunities for growth in Chinese life insurance market.

China's economic progress has created, and is continuing to create, a vast middle class with a significant protection gap. GDP per capita has risen dramatically since 1980 and is about to reach $10,000. This is very important because it is the historical inflection point for insurance take up. As Mark showed you earlier, insurance penetration remains very low at less than 2%, despite doubling since 2000. This is set to nearly double again by 2020 and is on course to reach 7% by 2030.

[Only] China is uniquely and ideally positioned to capture this potential. We operate in five geographics representing more than $3 trillion of GDP. Our regional footprint covers the largest and wealthiest of China middle class, which is set to increase by 87 million to a total of 225 million people by 2030, nearly three quarters of the total US population today.

AIA is in the right place at the right time and we have the right strategy. You can get a real sense of this by looking at AIA's track record from (inaudible) provinces we operate in. Guangdong, at more than $1.2 trillion Guangdong has the largest economy of all the provinces in China. It is larger than Indonesia and, stand-alone, it is the tenth largest economy in the world.

However, this economic growth and prosperity isn't happening in every city at the same time. First it was Guangzhou and Foshan, and now cities like Dongguan and Zhongshan are also becoming wealthier. This progress will continue across the province.

AIA's strategy in Guangdong is initially focused on the 14 cities that are aligned with this economic development. You can see that Guangzhou and Foshan generated nearly all of our VONB in Guangzhou in 2010. Guangzhou's VONB has grown to be four times larger and eight times larger since IPO.

The other cities have begun to follow a similar pattern, now contributing around one third of Guangdong's VONB in 2016 and helping to drive the overall VONB growth in the presence of 7.6 times over this period. You can see from the chart, the sheer potential these cities will have on our future VONB growth as they become the size of Guangzhou and Foshan and beyond.

This wealth, in fact, isn't just happening in Guangdong province, but right across our footprint in China. For example, the same dynamics are happening in Jiangsu which has the second largest economy in China. The 11 cities we are currently in show a similar growth pattern as those in Guangdong.

As we have shown today, the scale and power of China's compounding economic growth and increased life insurance penetration is unprecedented. When this is combined with AIA China's differentiated strategy and successful execution, you can see the power of the results.

The tremendous growth potential that China offers AIA Group is very clear. And with our very productive agency force and a high-quality source of earnings driving a significant track record of VONB and OPAT growth since IPO, we are confident that we will continue to build on our track record of success in China for many, many years to come.

Thank you for listening and now I'll hand back to Keng Hooi.

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Ng Keng Hooi, AIA Group - Regional Chief Executive [7]

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Thanks John. In closing, Gordon, Bill and I remain confident that across our businesses we will continue to build on our track record of profitable new business growth. The potential is unlimited and our track record of delivery is excellent.

Let me now hand back to Mark, thank you.

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Mark Tucker, AIA Group - Executive Director & Group CEO [8]

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Thank you Keng Hooi. 2016 has been another year of strong execution and we have delivered an excellent set of results, despite economic, political and financial market volatility. You can clearly see there have been many, many significant macroeconomic challenges over the last six years. From changes in US monetary policy, concerns over growth in China, the continuing uncertainty over the future of the Eurozone, Brexit, and the more recent US election to only name a few.

Throughout all of this time, we've remained focused on managing the business and executing effectively. We have access to the most attractive markets in the world for life insurance, driven by strong fundamentals with high growth and superior margins. We have aligned our business's scale, position and competitive advantages with these fundamentals, and as a result we have delivered consistent and sustainable results.

So, in closing, we continue to do what we have always said we would. Our objective is to achieve large-scale and profitable growth, generating superior and sustainable value and increasing returns for our shareholders. I continue to believe that we're in the right place at the right time and with the right strategy to sustain the delivery of attractive financial returns to our shareholders for a long time to come.

We are just at the very beginning of this journey. We've had an excellent start to 2017 and we remain as confident by the opportunities for our business today as we have ever been.

Thank you for listening this morning and happy now to hand over to you for questions.

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Questions and Answers

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Mengxi Sun, Goldman Sachs - Analyst [1]

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Thanks Mark, this is Mengxi from Goldman's. I have three questions. The first question was about Hong Kong. So I think I would like to see your view that what are you seeing on the ground post the January China (inaudible) [new rules] on capital control. And what are you currently seeing on the ground and do you have any planned changes going forward, for example agency hiring et cetera, especially regarding the mainland background agent?

The second question is on China itself and I think, Mark, you spent a lot more time talking about China this time and John was actually here to do the presentation. Does that mean that you see a lot more significant opportunities this year, from this year on particularly? And can you give us an update on the ownership, 100% ownership, do you see the possibility of expanding that into more cities or even more provinces?

The last question is on the macro interest rate. So what is your interest rate view? I notice that in your assumption, you actually advised the assumption down, the interest rate assumption down. Also the forward rate is actually trending up. So what does that mean and what is your investment strategy from this year on accordingly? Thank you.

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Mark Tucker, AIA Group - Executive Director & Group CEO [2]

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Okay, thanks Mengxi. I think -- three questions, let's do them in order and I think begin with Hong Kong and I'll ask Gordon to take the first question in terms of Hong Kong.

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Gordon Watson, AIA Group - Regional Chief Executive [3]

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Yes, thanks Mengxi. Yes, no material effect on the ground. But let me talk about Hong Kong. I mean to give you some context, Hong Kong's got a very strong track record of growth since IPO across a range of customer segments and distribution channels.

Our growth has been more than 30% since the IPO and that includes prior to 2016. This is a segment that we've been looking at for a decade, over a decade. We also have strong growth from our Hong Kong customers. And if you look at the size of the business, it's relatively small. Out of 32 million visitors to Hong Kong from the mainland in the first nine months of last year, there were only 280,000 policies sold for the whole industry, which is less than 1%.

So I think our Hong Kong business is in very good shape. If you look at the fundamentals, I mentioned the number of new recruits is up 21%, the number of MDRTs increased by 60%, we doubled the VONB with a relationship with Citi and the take-out rate in Vitality is over 75%. So I think we're very well positioned to capture the enormous opportunity that it presents, so thanks.

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Mark Tucker, AIA Group - Executive Director & Group CEO [4]

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Yes, let me add to that. I mean I think this, again -- and I've said to this Group before that we think of the Group as a portfolio of countries. With the portfolio, some will be strongly performing. Some won't be as strongly performing.

Some will not be performing to the standards we expect, but what you've seen consistently over the last six years is a very strong performance. Our compound annual growth rate is 28%. As Gordon said, if you just take Hong Kong, the compound annual growth rate over that same period is 30%. That's through all the different changes and all the cycles.

I think we've given you guidance for the first time, in terms of our first two months of the year. I think partly, just because of volatility in the market, partly of reassurance that our business continues absolutely on track and we have started strongly and we expect the year to continue in that way. We're not going to specifically talk about the forecast for individual markets, but I think as a Group we've started very strongly. I think that's our aim, to continue in that way.

Your second question on China -- maybe I can ask John and Keng Hooi perhaps, to talk a little bit. In terms of -- about the future, I think they've grown -- as Keng Hooi said -- 8 times over the six years -- not quite to the standard we would expect. We expect higher growth, but John clearly knows that, but still a fantastic effort. We're not going to comment on what's being said by Government at the moment or -- it's been at a very high level. It indicates potential opening up, but there are no specific rules at this point time.

I think if the opportunity comes for us to further invest, to put more capital into China, then we'd be delighted to do that, but we'll only do it in a way clearly that is -- conforms and is aligned with how the regulators and the Government think. Those rules are not specific at this point in time. John, Keng Hooi --

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Ng Keng Hooi, AIA Group - Regional Chief Executive [5]

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Yes, maybe I can start first Mark. So what we have got John to show you is what is on the ground -- the Province, the potential. We always talk about China as one single big China -- yes -- but you look at that -- the Guangdong experience -- yes -- we are entering new cities -- yes -- but we've got to do it on a very careful and measured way. We don't want to jump into all the cities without the right people. We are not going to be able to get these things going on a very sustainable basis. Hopefully what John has shown you just now gives you a sense of potential.

The same thing is in Jiangsu. Jiangsu is in fact, growing at equally as fast, if not faster than Guangdong. Maybe John can add a bit more, yes.

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John Cai, AIA Group - CEO AIA China [6]

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Yes, first of all I think our strategies not rely on geographic expansion. You can see from the past record, we have demonstrated sustainable growth and very strong execution in the right strategy. Currently -- especially from the PowerPoints -- you can see currently we have 28 cities in the wealthiest area and focus on the Guangdong -- the fourteenth city -- only two -- less than five [million].

It's not the township. It's a mega-city. More than five million in population, most of the city and a lot of people have low penetration, so I think based on that, we are confident to continue to execute our strategy while we're exploring opportunities with our regulators to see any expansion.

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Mark Tucker, AIA Group - Executive Director & Group CEO [7]

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Okay. Next question?

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Operator [8]

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(Inaudible - microphone inaccessible).

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Mark Tucker, AIA Group - Executive Director & Group CEO [9]

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Hey?

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Operator [10]

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(Inaudible - microphone inaccessible).

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Mark Tucker, AIA Group - Executive Director & Group CEO [11]

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Did you say -- sorry -- MC, I apologize. Thanks (inaudible).

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Garth Jones, AIA Group - Group CFO [12]

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Yes, I think as you know we take -- and as I said again today -- we take a prudent approach to setting our long-term assumptions and I think you saw that when you look at the chart comparing forward rates against our overall assumptions. I think one of the things with interest rates, clearly interest rates have moved up more recently -- generally. But if you look at our November year end to November year end, you'll see that in the first half generally, they've declined and then there was an increase in the second half.

If you look overall, I think the spot rates were up about 19 basis points, whereas for China, Thailand and Korea, they were down. We've adjusted our assumptions for those three countries as a result. So I think you have to look at the year overall and look at it from November to November, country by country, to get a better picture.

Our investment strategy is unchanged. I mean we adopt a liability driven investment strategy, so it's about ALM management. Whilst rising interest rates -- gradually rising interest rates -- is a positive for us overall, we're not going to take a large tactical bet. Our focus is on the ALM driven basis of investing.

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Lance Burbidge, Autonomous Research - Analyst [13]

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Morning. It's Lance Burbidge from Autonomous. I've got three questions as well. First one, China again, the dividend of $46 million despite very strong growth, would we assume that, that will be on an upwards trajectory from here, unless there is further geographic expansion?

Second on persistency actually, in Hong Kong. I just wanted to check that the existing mainland business that you have on the books, you're fully confident in terms of its persistency, despite perhaps -- I suppose -- the funds coming out of China, coming down.

Then a specific question for Garth on, if you look at your undiscounted emergence from the embedded value, there's an enormous rise over the past few years, particularly last year, in the 20-year plus. Perhaps you could talk about where that's coming from and why.

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Mark Tucker, AIA Group - Executive Director & Group CEO [14]

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Okay, thanks Lance. I think in terms of the dividend remittance in China as you say, we -- in 2015, it was $1 million, last year it was $46 million. We'll continue to look again. If profits are earned, then we don't need the capital, then the remittances should continue in the normal course of business. In terms of persistency in Hong Kong, I'll be fully confident the answer is yes. Then I can -- third question to Garth.

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Garth Jones, AIA Group - Group CFO [15]

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Yes, I think what you're referring to Lance is that this monetization and clearly along with the (inaudible), you need to look at the ANW and particularly the free surplus that's contained in the ANW. So if you look at the history that we have, we've increased our free surplus to close to $10 billion from under $5 billion. We financed the acquisition, so it was about $2.5 billion and we paid our dividends, assume that again, the dividend was $1.1 billion. So I think the most important thing is to look at the overall picture.

I think importantly, the distributed earnings in the next five years are actually higher by about 50%. They're up to $15.5 billion. But I don't think you can just look at the (inaudible) in itself, I think is the key point.

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Dominic Chan, BNP Paribas - Analyst [16]

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Hi Mark. Congrats on your 4Q result. I'm Dominic Chan from BNP Paribas. I have three questions. My first question is on the operating outlook for Singapore and Malaysia. Singapore seems to have some difficult time last year on restructuring. I'm just wondering about the outlook in 2017 and 2018. In Malaysia, they (inaudible) growth in the second half, although it slowed down somewhat. Just want to understand why that would be the case.

My second question is on the Citibank assurance partnership. It looks like you have been doing great in Hong Kong with them. Just wondering the progress for the rest of the region with them.

My last question is on the BCA bank assurance video. Just wondering how much did you pay for the video with BCA? Thank you.

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Mark Tucker, AIA Group - Executive Director & Group CEO [17]

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Okay, alright. Thanks, Dominic. I think if I can ask Keng Hooi to talk about Singapore and Bill to talk about Malaysia and then Gordon can talk about Citi and I'll take the BCA.

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Ng Keng Hooi, AIA Group - Regional Chief Executive [18]

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Yes, thanks Dominic. Singapore -- at half year, we announced that there's a fall in single premium coming out of [broader] China, yes? We've taken basically a deliberate approach towards managing the product mix and also the portfolio product via pricing initiatives. The market is very competitive in some of those single premium pricing and we're taking the approach of just slowing down and not chasing after those businesses.

I think that -- taking on that the agency site has shown double digit growth -- yes -- strong VONB growth. We are still the largest in terms of number and MDRT qualifiers in Singapore -- 30% increase -- yes. The regular premium site of the business is growing by 16%, as I mentioned earlier. So if you look at it in terms of the portfolio, I would say that we are a lot more comfortable in terms of the mix. I think -- longer term, sustainably is with this mix, yes.

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William Lisle, AIA Group - Regional Chief Executive [19]

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Yes, thanks. Hey, Dominic. Thanks for the question. I think as Mark mentioned earlier, we don't manage the businesses for the short term. We're managing for the long term. We had an exceptionally strong first half and that growth has continued the way we would have expected it.

You look at the VONB growth of 23%, ANP growth of 25% -- all of our channels have moved forward significantly, particularly driven by our agency channel and our tactical business, which I mentioned had grown 90% ANP. So overall I think we're in good shape, but it is a challenging economic backdrop as you're aware. But I think the fact that the Malaysia business has outperformed the industry quite significantly, I think bodes well for the future. As Mark mentioned, we've got off to a very strong start.

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Mark Tucker, AIA Group - Executive Director & Group CEO [20]

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Gordon.

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Gordon Watson, AIA Group - Regional Chief Executive [21]

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Yes, thanks Dominic. Very happy with the relationship to date. It delivered very strong double digit growth this year. As you can see, that's part of the 35% growth for the whole of the partnership distribution. So now we're very actively focused on increasing productivity with the insurance specialists, with the relationship managers, so it's a good relationship.

It's doing well, but this is part of an overall partnership strategy and we've really seen good momentum. You saw BCA et cetera, (inaudible), so we've many bank assurance relationships across the region. Thanks.

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Mark Tucker, AIA Group - Executive Director & Group CEO [22]

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Going on specifically on BCA, I think you're aware we've had a 10-year relationship -- a very successful 10-year relationship -- with BCA. We've signed this week to -- what we've called -- strengthen, lengthen and extend that partnership another 10 years -- strengthened I think, the depth of it -- the length and the period -- and extended the breadth of coverage, which we're delighted to do. We've aligned the economics for the revenues with the VONB and there's no upfront, so that gives you a sense of the strength of the partnership and our belief in the future.

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Leon Qi, Daiwa Securities - Analyst [23]

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Okay. Thanks, Mark. This is Leon from Daiwa. I have three questions -- two on your strategic capital deployment and the last one on China. Firstly, is actually a follow up on the previous potential 100% ownership question in China. I take Mark's previous answer as a yes, if this happens you will want to expand into other markets.

But I remember that in the past few years we were always talking about that the current (inaudible) [licenses] we have in those provinces and cities is already covering one-third of the China GDP and the premium, covering one-third of the market is good enough for us to grow. These are the most affluent areas. How do you see that under the context of a potential relaxation of the ownership rules in China? That's just assuming it happens tomorrow.

Secondly on your M&A strategy, I know you don't comment on specific M&A deals, but there are a few news reports on your Thailand potential acquisition for SCB Thailand. Can you basically in general walk through your rationale behind potentially any M&A, let's say in your major [ASEAN] markets?

Given that currently what we are seeing in your geographic portfolio, [ASEAN] is relatively weaker, why you would be considering allocating more capital into those areas featuring relatively weaker growth potential?

Last question is still on China, because China is becoming increasingly important. I noticed a sustained expansion in your VONB margin in the mainline Chinese business. I assume it is a combined result of efficiency improvements, productivity improvement, and the product mix improvement.

But if you are trying to expand into other areas, how do you see your continued expense efficiency improvement in the past few years? Assuming if you don't have any geographical expansion in China, how long do you see such expense efficiency improvements can last or can sustain, because they have already been there for a few years. Thanks.

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Mark Tucker, AIA Group - Executive Director & Group CEO [24]

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Thank you for those questions. I think if you look at the 100% -- or the potential changes in China, and as you say -- perhaps I can ask John again to give a sense of the power and the potential, which I think you saw in those slides of where we are today.

We are delighted to be where we are today. We think there is enormous potential and capacity if it follows the patterns that we've seen within the richest parts -- the wealthiest parts of China. If we can expand, we will clearly. But I think we are delighted to be where we are.

Maybe John can give two seconds on any more depth as to how we can continue to grow within our existing markets.

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John Cai, AIA Group - CEO AIA China [25]

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Currently I think we have several front up growth opportunities. Number 1 is through our quality recruits. You can see from the past few years our active new agent [resource] as well as new agent productivity has continued to increase.

So we see that potential, especially in China with less and less industries getting less attractive compared to the insurance. We see being able to attract high quality agents from other industries, especially with our agents' average income getting very attractive.

Another is in terms of deeper penetration on these other cities. In the slide you can see in Guangdong, Foshan and Guangzhou is doing well. But we have another 12 cities opportunity. The size in that city for us still relatively small. So we find that a lot of opportunity.

The third one is MDRT as well as the high net worth customers. So we are more focusing on developing the high net worth solutions for our customers. So that's the three major engines what sustain the growth.

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Mark Tucker, AIA Group - Executive Director & Group CEO [26]

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Thanks John. If you look at M&A, I think you've got to put it in the basis of how we think of capital and cash. I think we've said our first port of call is investing in profitable new business. You've seen our IRRs go up again, 20% plus IRRs you've seen consistently over the last six years. As I say, we continue to focus on investing in profitable new business. We see unlimited opportunity to continue to do that.

We look at the strength of the solvency, the strength of the balance sheet, in times again where there is volatility, where there are capital regimes being looked at and revised and reviewed, and I think it's important that we stay strong at all times.

The third element is on dividends, and I think as Garth has said, you've seen a trebling of dividends over the last six years, which gives again a sense or our promise to have progressive dividends. You've seen an 88% increase in the last two years I think, which clearly demonstrates that as well.

The fourth element is the M&A side. We give ourselves the opportunity, we have the capability, we have the capacity to do that. We've always had the capability and the capacity. We've stayed incredibly disciplined. We've seen hundreds and hundreds of opportunities, and we've taken two or three over the period of time.

We are -- we've seen in some markets pricing getting to levels that don't make economic sense to us, and we're not going to be pushed into doing anything. We don't need to do M&A. We focus 99% on our organic opportunities, and they are substantial. But if we like the opportunity, we think that opportunity will add sustainable value to shareholders, then we have the capability and capacity to be able to do it.

I think there was a point made about Asian -- ASEAN being a weaker growth potential. We don't think so. I think we think they're a substantial opportunity. It's not of the scale necessarily of the North Asia, but still is substantial, and we will continue to invest in the ASEAN markets.

The third point was on China, and again looking at VONB margin particularly. We don't focus on margin as we've said a number of times. We focus on absolute VONB. We look to optimize absolute VONB with the combination of margin and volume.

Because of productivity, because of efficiency, because of scale, we have plenty of opportunities to continue to focus on that, and as we become -- John and his team have done a fantastic job with innovation in thinking about products, in thinking about automation and digitization. Again, China has done a superb job on that.

All of these factors mean that we will continue to look to grow absolute VONB, and we're not going to forecast any element of that. It's the absolute number that remains key to all that we think about and do.

Arjen. And don't tell me you've got three questions.

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Unidentified Participant [27]

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Two's okay? First one is on the dividend. As you just pointed out, you've grown that 88% last two years. Payout ratio is now around 33%. If I look at your free surplus slide on 33, your net -- surplus generation net of new business trade is $2.6 billion. You up-streamed dividends from subsidiaries of $2 billion. Your dividend is $1.1 billion. So that indicates obviously you could potentially double that again over time, noting your progressive statement on dividend policy.

So just -- and you've got an actual free surplus of around $10 billion, which to me looks like enough to fund M&A, expansion into China potentially, et cetera. So just some more color on that, and how you think about the dividend progression over time.

The second one was just a very quick question for Keng Hooi, just on the Singapore sales. That's obviously been down now three sequential quarters, given all the factors you discussed. So I was just curious, just for modeling purposes, are we seeing now the bottom on the single premiums? So we could expect 2017 to sort of start from a clean base, so to speak?

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Mark Tucker, AIA Group - Executive Director & Group CEO [28]

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Okay, Garth, maybe you can talk about dividends.

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Garth Jones, AIA Group - Group CFO [29]

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Yeah. Thanks Arjen, and thanks for reinforcing the strong performance this year. I mean clearly as Mark's just said, I think our focus absolutely has to be to invest in the significant profitable growth opportunities we have. We've seen a 28% compound increase in VONB over the past five or six years.

I think the first port of call has to be to continue to invest that capital. Our IRRs are in excess of 20%. The payback period has come down. Clearly increasing volumes of business require increasing amounts of capital.

In order to do this we also need to obviously maintain a healthy balance sheet, again as Mark mentioned, through market cycles. Clearly as we continue to add business, the size of the balance sheet becomes bigger. We're a growth company, and the balance sheet is growing as well.

Dividends, you've seen the prudent progressive sustainable work continue, and you've seen that in the past. I think our track record of getting the value growth to translate into earnings growth to translate into capital and cash and dividends will continue.

Lastly, as Mark says, we need to be able to -- we see a lot of opportunities, not surprising given what you've just mentioned. People come to us and say are you interested in this opportunity? But we remain very disciplined financially to make sure they remain attractive to us.

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Mark Tucker, AIA Group - Executive Director & Group CEO [30]

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Keng Hooi.

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Ng Keng Hooi, AIA Group - Regional Chief Executive [31]

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Yeah, thanks Arjen. I think obviously that market is very complicated, and very competitive. The brokers in the Singaporean market -- we -- when the pricing and all that is already aggressive, we are not going to chase it. They are also issues around the guarantees and all that, which we try to keep away from. So these are the challenges that we are facing in this market.

I think the more important thing is we have to move our own distribution, our agency, which are very strong, into the high net worth and also the mass affluence market. I think there's huge potential then. We had a big increase in integrated products using AIA Vitality. So we're getting our agency to change in terms of how they engage our customer out there. It's about wellness. It's about integrated products. It's about a new way of engaging our customer.

This will take a bit of time, but over time I think this will drive much more sustainable growth. There's potential for a lot more regular premium product on the high net worth fragment, which we are doing here.

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Kailesh Mistry, HSBC - Analyst [32]

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Good morning. It's Kailesh Mistry here from HSBC. Three questions as well. Firstly, on new business trading. It's down significantly as a proportion of both sales and new business profit. What was the key driver? Is it capital, or the other elements?

Secondly, there's a comment in the statement about technology projects leading to a fall in -- sorry, replacing policy administration systems in some countries. Presumably this is going to reduce unit costs going forward. Has this been reflected in the embedded value, or is that going to come in the future?

Then the last question on cash remittance, the decline was driven by Singapore and Thailand. Is there anything of concern there?

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Garth Jones, AIA Group - Group CFO [33]

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If I take those in turn Mark? The new business trading you've seen some impact from geography but also product mix. We said that there was a shift towards lower margin, lower new business strength participating products in Hong Kong in particular, and that it's benefited from that.

I think on the last question about the capital, I don't think there's anything significant to note in that. Nothing unusual. Clearly we look at our business plans. We look at our liquidity needs and so on. We take remittances from wherever we think it is most appropriate.

The most important thing to note is that our remittances again remained at $2 billion, and clearly the money continues to flow up to the Group. Again I'll reinforce to get that message of seeing the value of new business growth in these markets translating to earnings growth, and then translating into cash that moves up to the top of the Group.

Sorry, I've forgotten what the second question was.

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Mark Tucker, AIA Group - Executive Director & Group CEO [34]

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The second question was about the systems and the unit costs.

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Garth Jones, AIA Group - Group CFO [35]

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Yeah, no, we don't make any allowance for that in our projections going forward in terms of the expense efficiencies. We're really basing this on our current business model.

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Mark Tucker, AIA Group - Executive Director & Group CEO [36]

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Scott.

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Scott Russell, Macquarie - Analyst [37]

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Morning everyone. Scott Russell from Macquarie here. Just two quick questions please, both on capital requirements. Just picking up on the new business strain question, all of 2016 in Hong Kong at least seems to be characterized by capital efficient par products being very popular. So clearly that's what mainland visitors are buying in Hong Kong.

Capital efficient par strikes me as being a bit of an oxymoron. So perhaps you could be a little bit more specific please on what's changed with the product features there to reduce the capital intensity of what is historically quite a capital-intensive product.

The second question is just a simple one on the required capital. It fell a lot during the year, I think it was almost $1 billion down to under $7 billion, and that's helped obviously drive up free surplus. Perhaps just a bit of color on what happened there please.

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Garth Jones, AIA Group - Group CFO [38]

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Yeah, sure. I think it's -- very happy to take it offline with you Scott. The real answer is to go and look at the Hong Kong basis. Clearly we're subject to the Hong Kong LCI basis, and obviously the way that par products are treated in different markets is different. You'll see different capital requirements in different places.

The Hong Kong basis is very prudent, and demonstrably so. You can see that from our numbers across the markets, and how much overlay we have. But par products, I think you've also got to look at the benefits that are within them, and some of the protection benefits. That helps also.

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Mark Tucker, AIA Group - Executive Director & Group CEO [39]

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The required capital.

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Garth Jones, AIA Group - Group CFO [40]

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The required capital has changed again a number of different things. I think the change towards par products will help a little bit. We've also seen the interest rate movements also help slightly.

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Esther Chwei, Deutsche Bank - Analyst [41]

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Esther from Deutsche Bank. Two questions. One is on Hong Kong business. I think Mark, your statement about the very strong growth in the first two months of the year would mean to me that Hong Kong is probably business as usual. But I'd like to get a bit of color as to -- given there have been a lot of noise surrounding the mainland Chinese business in Hong Kong.

So could you share with us if there has been -- what kind of changes have you implemented post the series of measures from China, if there is any? What are you seeing on the ground? Has there been any change in the type of products that people buy, change in agent behavior, anything you could share would be appreciated on Hong Kong business.

My second question is on Thailand. Yes, AIA is a portfolio of businesses, but if we look at the growth coming out of the different markets, it's clear that Thailand and Singapore seem to have underperformed the growth in other markets. So we just want to get a sense of the development in Thailand. The agency restructuring has been ongoing for a while, and the growth seems to still relatively muted. So would like to see what's happening there. Thanks.

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Mark Tucker, AIA Group - Executive Director & Group CEO [42]

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Okay. We're happy to take those questions. Maybe Gordon can talk about -- I think with regards to Hong Kong from the compliance side, and talk about some of the things we've been doing there, and how we think about that business.

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Gordon Watson, AIA Group - Regional Chief Executive [43]

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Yeah. Thanks Esther. I'll give an answer on the health of the Hong Kong business and the fundamentals, which I think are pretty good. In terms of what we do, we focus obviously across a number of different customer segments in Hong Kong. We monitor closely any developments relating to customers visiting from the mainland to make sure we have robust compliance and ongoing measures.

So to give you an example, we validate the applicant's travel documents and entry proof. They sign a declaration of the applicant to confirm that the solicitation was not conducted on the mainland. We do general mystery shopping. We do welcome calls, and of course with a zero tolerance policy. So we have stringent compliance rules and controls in place on the sale of insurance policies to all the offshore customers.

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Mark Tucker, AIA Group - Executive Director & Group CEO [44]

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This is nothing, Esther, nothing new in the sense of across all of our operations we operate clearly within the regulations of those markets. Our own risk management and risk control requirements are always in excess of local. I think the other element, as Gordon has mentioned, is we have zero tolerance for violations of regulatory requirements. So I think that gives you a sense, maybe a little bit more color on Hong Kong.

With regard to Thailand, I mean again Keng Hooi can talk in a little bit more depth, but I think -- don't forget that Thailand is again a significant and material contributor to operating profit up 17% this year. It remains an important business. We know it's not growing at the speed or in the direction that we would like and we expect. Keng Hooi is going to put all of that right.

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Ng Keng Hooi, AIA Group - Regional Chief Executive [45]

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Well you know if you look at that business, it has got a huge agency force. It is our largest agency force among all our countries. So we are making a lot of efforts to improve productivity, via training, new products. We are doing a number of things to just bring the productivity up in terms of our existing agency.

Of course we are injecting new blood into the agency force as well. We started the FA program, financial advisor program, recruiting younger agents who are graduates, who are more hungry and enthusiastic to come into this business. But you can imagine because of the size of the business, even though we recruit all these FAs, the numbers that we recruit are in the thousands, it is still a relatively small percentage of the overall agency. So it's going to take a bit more time to continue to transform.

It's a multi-year journey that we have to take, you see, to transform this agency force. We don't want to take shortcuts, you see, and inject a low quality number of agents into this agency force, and [worse illustration].

I know -- you know Mark has not been very patient with me. I hope you will be more patient with me.

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Unidentified Participant [46]

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Hello, this is (inaudible) from Petro Capital. I just wanted to ask, competitors like Ping An have built up a whole ecosystem of online insurance sales applications and direct sales models. So how do you plan to deal with such disruptions to this existing agent model of online and direct sales of insurance products? Thank you.

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Mark Tucker, AIA Group - Executive Director & Group CEO [47]

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Are you speaking specifically about China or across the region?

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Unidentified Participant [48]

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(Microphone inaccessible).

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Mark Tucker, AIA Group - Executive Director & Group CEO [49]

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John, I think maybe you can --

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John Cai, AIA Group - CEO AIA China [50]

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Yes, we do notice the online insurance sales start to demonstrate a strong growth, although it's from a low base. As a matter of fact we also have online shops with several providers as well, but more importantly for us our strategy is more focusing on online/offline integration.

Currently we build a strong mobile technology for agency. Almost 99% of our business submit online through agents. Now we transform our sales process through the mobile technology, as well as our customer engagement.

For example our traditional submission for business from submission to finish the welcome call usually takes about average seven days. This year we launched a new technology enabling our agents to complete the whole end-to-end process in 20 minutes. So that's the power of that technology and internet, enable us to improve our productivity, improve our customer service, and improve our efficiency. That's our strategy.

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Mark Tucker, AIA Group - Executive Director & Group CEO [51]

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Thanks John.

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Unidentified Participant [52]

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[Li Yoong] from Bernstein. I have two questions. The first question is regarding the VONB margin in Hong Kong. I am fully aware that there might be a shift in the customer as well as the product mix. How should we think about it in 2017?

The second question is regarding the other markets. We understand the Company in the second half lumps Korea into the other market. We're just wondering if there are any further steps to break down or single out some other specific countries outside of the others. Thank you.

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Mark Tucker, AIA Group - Executive Director & Group CEO [53]

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VONB margin in Hong Kong, Gordon.

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Gordon Watson, AIA Group - Regional Chief Executive [54]

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Yeah, thanks for the question. Obviously as Mark said we manage to absolute VONB. When you talk about products, the median age of our customers in Hong Kong is about 43 and ageing rapidly. Critical illness is big. We -- Garth spoke about participating long-term savings, and we did write a larger portion of participating savings last year in 2016 compared to 2015.

Obviously these products have a higher ticket size than pure protection products, so that's why the VONB margin was reduced. But just to remind you, our VONB grew 42% in Hong Kong in 2016 on top of the 32% the prior year.

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Mark Tucker, AIA Group - Executive Director & Group CEO [55]

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In terms of the other market breakdown, I think we -- again we just have segment level qualifications, and I think we decided again to move Korea into that. I think we gave warning of that at the half-year. No other plans.

I think if -- we hope at some point in time that every single market can be individually set out when it reaches the scale that it needs to. So that's certainly our ambition, to give you as much as we can. But during that build-up process I think we -- our disclosure I think continues to be excellent but you're not going to see any further breakdown until certain levels and criteria are reached.

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Jan van der Schalk, CLSA - Analyst [56]

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Good morning, Jan van der Schalk, CLSA. My favorite slide and a bunch of questions on it. First of all, on persistency rate which has increased year-on-year by about 20%, which in my opinion verges on the insane, if not very good. Two questions. One, have you changed your assumptions? And two, anticipating that you haven't, what do you think is driving that increase in persistency?

Second question on mortality and morbidity variances and also EV operating variances. How long can you stay wrong on these issues? The increase is very interesting. When do you think that -- if the conservatism you've put in there really starts running out, if it ever does?

Last question on Hong Kong and the shift on margin. Can we think about that more on a risk-adjusted basis? Can you give us a sense of the ROE that you're generating on the current book versus the book last year? Thank you.

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Mark Tucker, AIA Group - Executive Director & Group CEO [57]

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Garth can talk about the persistency.

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Garth Jones, AIA Group - Group CFO [58]

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Yes, I think what we've seen generally - I think the persistency continues to improve and I think again some of it is down to some of the things John has just talked about. I think the quality of the sale is obviously a key driver of persistency and that's something that we continue to look at.

I think the drive towards premier agency in particular and some of the things we've done over the past five or six years are around things like the agency compensation, to align that and have measures that are built around persistency, things like the [happy calls] and making sure that customers are getting sold products that they need, they can afford. That's what drives persistency ultimately so that's where we've been focused there. As well as obviously things like good customer service.

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Mark Tucker, AIA Group - Executive Director & Group CEO [59]

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I think just if I could add to that, I think also the quality of the agency is an important factor here. The training, the amount of training we do to agents before they are allowed to sell is double or treble the industry average and I think we're moving further and further to ensure that our agents are the best trained, the most professional, the most productive in the industry. I think we've been very disciplined in standards and ultimately that will turn into high quality business.

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Garth Jones, AIA Group - Group CFO [60]

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The morbidity and mortality claims experience continues to be good and as I said, we take a prudent approach to our assumptions throughout and you've seen the sustained operating variances being positive.

If experience continues to be very positive we'll gradually reflect it in our results but obviously what we don't want to do is to take an approach that isn't prudent. And I think when we've looked at our assumptions overall you've seen the prudence in them. I think that's reflected both in the variances and in some of the other things I talked about when I talked about the review of our assumptions overall and the review we have done on a market consistent type approach being not materially different from the traditional approach. But I'll leave you to draw your own conclusions on that one.

I think in terms of risk-adjusted ROEs, they're obviously very attractive also and we do make allowance for that. I think as we use a traditional approach we also have a traditional ROEV type approach but the returns are attractive.

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Unidentified Participant [61]

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Hi management. This is [Judy] from Morgan Stanley. I've got two questions. One is on the capital efficiency and strain (technical difficulty - microphone inaccessible). Is this a target for management as well to increase capital efficiency (technical difficulty) the decline of [new business strain] or does it more of a (technical difficulty) your product mix. So say next year if you need to change the product mix in Singapore or Hong Kong, then we're going to see a different trend in your [strain]?

The second question is about the interest rate sensitivity (technical difficulty) at this time. It looks like (inaudible) do the upward shock and downward shock, the result becoming less symmetric. Is that [the reason we're] still seeing that your Korean assumption is getting closer to the (inaudible) level of your book? That's why you're seeing a lot more impact as interest continues to move down?

Just one more specific question. You mentioned that in Hong Kong the sales have been quite strong in the first two months. Are we changing product mix if we compare that to last year? This is in light of the [strain] question. Thank you.

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Mark Tucker, AIA Group - Executive Director & Group CEO [62]

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I'm going to take that in reverse order. Perhaps Garth can do one and two. I'll take the third.

We said that we've had an excellent start throughout the business. We haven't specifically mentioned any markets at all in that. We made an excellent start across the Group and as I say, I go back to -- the Group is a portfolio of many businesses, so the short answer to your third question.

Garth, perhaps the first two.

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Garth Jones, AIA Group - Group CFO [63]

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Yes, I think the EV sensitivities. I think deal with that first. I think the key thing there is to say that the business (inaudible) are small. I think that's the real thing to focus on there. I think we're looking at less than 1%, 0.9% -- for a 50 basis point change is very small. And clearly there's part of that will depend on the mix of business. We also reduced our assumptions in some countries so the 50 basis points will be from different bases.

I think the critical thing is to ensure that you look at the absolute number and say well that's a fraction or less than a fraction of the of the EV.

On strain, I think the critical thing there is to understand that what we're doing is we're looking for improved capital efficiency product by product, country by country. I think our focus has always been on value growth whilst ensuring that we get high levels of return on capital. So I don't think you should necessarily look at the strain and say well this is it. I think obviously if business had higher strain but still attractive IRRs then we will right it and that's where we'll deploy our capital.

But having said that I think we obviously continue to look product by product, country by country on how we can make the product, the business more capital efficient.

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Unidentified Participant [64]

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Thank you. This is (technical difficulty - microphone inaccessible) from J.P. Morgan. I have two questions. One is about the product mix strategy. So there was a question on your product mix. Last one year you actually increased your (inaudible) volume on the [top] policy. So actually, if you think about the product mix since the IPO actually there was the big increase on the [saving volumes] for the last six years. Perhaps the other last six years -- we do live in a low interest rate environment, so in Asia a lot of the households prefer the other top policy or saving or (inaudible) bank deposit.

On the assumption that you have an interest rate type rise then how this could impact on the other savings part of strategy and how this impact on the other profits you see in your back book.

Second question is about the other claims side. So I actually was very, very happy to see a positive claim variance for every year and as we (inaudible) here say helping people live longer, healthier and better life actually you are really focusing on better claim management in the future. So far the Vitality seems to be more like a marketing tool but in the future how this Vitality could impact on your claim experience? Thank you.

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Mark Tucker, AIA Group - Executive Director & Group CEO [65]

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Maybe Garth to talk about mix and Gordon to talk about Vitality.

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Garth Jones, AIA Group - Group CFO [66]

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I think what you've seen is the mix has moved towards a greater element of protection and long term savings has moved more towards participating products and what's what you see when you look at the sources of earnings coming through also.

I think where I would be more concerned was if we were writing more deposit replacement products which then -- I think that's where you get into questions around will they persist and so on and that would be a greater concern. But as we've said consistently, the last six years we've been writing better quality business, long term savings and protection and we see that coming through in the quality of the earnings that we have and the quality of the cash flows that we have coming out from that.

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Gordon Watson, AIA Group - Regional Chief Executive [67]

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Yes, thanks for the question on Vitality and knowing that it's all about living longer, healthier, better lives. The first couple of countries that we launched Vitality, Australia was really the first and already we can see some good persistency improvements coming through from Vitality in Australia. And we've launched Vitality, a lighter version of Vitality across six and then another four markets in the Vitality Active.

But we've got a lot going on around the region so if we look at Hong Kong, we've had weekly challenges which really is a great way -- as you said the marketing campaign, it's much more than that. We have a full science backed wellness program. In Malaysia, Bill and (inaudible) have done a great job and they are the first country in the world to actually integrate a health and wellness benefit into a unit linked and (inaudible) product. Singapore integrated products up 70% over the prior year and in Thailand, if you look at the agents that are selling Vitality -- who are active in selling Vitality and the case count is 50% higher than an agent that does not sell Vitality.

So this is fundamental to what we do and we're excited about rolling Vitality out across the many countries we operate in.

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Mark Tucker, AIA Group - Executive Director & Group CEO [68]

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Just to add to that, I think we've seen in the countries both improved persistency and an improved claims performance. So it's early days but ultimately if you look at the Discovery, the South African model, they see over time significant persistency and claims advantages through this which is clearly very important to us.

Okay, I think we probably are at the end. Let me just sum up in a few words. I think you've seen in our view a very strong set of 2016 results across all financial metrics and on top of that you've seen an excellent start to 2017. I think you've seen and hopefully we've demonstrated again today unparalleled and really unprecedented opportunities within the markets we're in on an organic basis. They may be inorganic but fundamentally on an organic basis we have unbelievable opportunities and I think John's given you a good sense of China.

And I think the combination we feel gives a great growth story, a great growth strategy, a combination of macro and micro. The macro is clear. The micro is specific to AIA and our ability to deliver. This is a track record that we feel and we've felt consistently that we let results do the talking. But as I say, we remain as excited today as we've ever been and the opportunities for us and the continued growth of AIA are significant.

Many thanks for coming this morning and for listening. Thank you.