STRICTLY CONFIDENTIAL AGEAS CAPITAL (ASIA) LIMITED (incorporated with limited liability under the laws of the British Virgin Islands)
U.S.$250,000,000 4.125 per cent. Guaranteed Notes due 2023 Unconditionally and Irrevocably Guaranteed by
AGEAS INSURANCE COMPANY (ASIA) LIMITED 富通保險(亞洲)有限公司* (incorporated with limited liability under the laws of Bermuda)
Issue Price: 99.272 per cent.
The U.S.$250,000,000 4.125 per cent. Guaranteed Notes due 2023 (the Notes) will be issued by Ageas Capital (Asia) Limited (the Issuer) and will be unconditionally and irrevocably guaranteed (the Guarantee of the Notes) by Ageas Insurance Company (Asia) Limited (the Guarantor or the Company), the holding company of the Issuer. The Notes will be unsecured obligations of the Issuer ranking pari passu without any preference among themselves. The Notes and the Guarantee of the Notes will rank at least pari passu with all other present and future unsecured and unsubordinated obligations of the Issuer and the Guarantor, respectively, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application. Interest on the Notes is payable semi-annually in arrear on 25 April and 25 October in each year, commencing on 25 October 2013. Payments on the Notes will be made without deduction for or on account of taxes of the British Virgin Islands, Bermuda and Hong Kong to the extent described under “Terms and Conditions of the Notes - Taxation”. The Notes mature on 25 April 2023 at their principal amount but may be redeemed before then at the option of the Issuer, in whole but not in part, at any time at the Make Whole Redemption Price (as defined in the Terms and Conditions of the Notes), together with interest accrued to the date fixed for redemption. See “Terms and Conditions of the Notes — Redemption and Purchase — Redemption at the option of the Issuer”. The Notes are subject to redemption, in whole but not in part, at their principal amount, together with accrued interest, at the option of the Issuer at any time in the event of certain changes affecting taxes of the British Virgin Islands, Bermuda or Hong Kong. See “Terms and Conditions of the Notes - Redemption and Purchase - Redemption for tax reasons”. The Notes may also be redeemed at the option of the holders of the Notes at 101 per cent. of their principal amount together with accrued interest following the occurrence of a Change of Control Trigger Event (as defined in the Terms and Conditions of the Notes) with respect to the Guarantor. See “Terms and Conditions of the Notes — Redemption and Purchase — Redemption for Change of Control Trigger Event”. Approval in-principle has been received from the Singapore Exchange Securities Trading Limited (the SGX-ST) for the listing and quotation of the Notes on the Official List of the SGX-ST. The SGX-ST assumes no responsibility for the correctness of any of the statements made or opinions or reports contained in this Offering Circular. Admission of the Notes to the Official List of the SGX-ST and quotation of the Notes on the SGX-ST and the above approval-in-principle of the SGX-ST is not to be taken as an indication of the merits of the Guarantor, its subsidiaries, its associated companies, its jointly-controlled entities or the Notes. The Notes will be traded on the SGX-ST in a minimum board lot size of US$200,000 as long as any of the Notes remain listed on the SGX-ST. The Notes will be rated A- by Fitch Ratings Limited (Fitch) and Baa2 by Moody’s Investors Service Limited (Moody’s). A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Investing in the Notes involves certain risks. See “Risk Factors” beginning on page 10. The Notes and the Guarantee of the Notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the Securities Act) and may not be offered, sold or delivered within the United States. The Notes are being offered and sold only outside the United States in offshore transactions in reliance on Regulation S under the Securities Act. For a description of these and certain further restrictions on offers and sales of the Notes and the distribution of this Offering Circular, see “Subscription and Sale”. The Notes will be represented by beneficial interests in a global certificate (the Global Note Certificate) in registered form, without interest coupons attached, which will be registered in the name of, and shall be deposited on or about 25 April 2013 (the Closing Date) with, a common depositary for Euroclear Bank SA/NV (Euroclear) and Clearstream Banking, socie´te´ anonyme (Clearstream, Luxembourg). Beneficial interests in the Global Note Certificate will be shown on, and transfer thereof will be effected only through, records maintained by Euroclear and Clearstream, Luxembourg. Except as described herein, certificates for Notes will not be issued in exchange for interests in the Global Note Certificate.
Joint Lead Managers and Joint Bookrunners
BNP PARIBAS HSBC Standard Chartered Bank
This Offering Circular is dated 18 April 2013.
* For identification purpose only IMPORTANT NOTICE
Each of the Issuer and the Company, having made all reasonable enquiries, confirms that (i) this Offering Circular contains all information with respect to the Issuer, the Company and the Notes and the Guarantee of the Notes which is material in the context of the issue and offering of the Notes and the Guarantee of the Notes, (ii) the statements contained in it relating to the Issuer and the Company are in every material particular true and accurate and not misleading, (iii) the opinions and intentions expressed in this Offering Circular with regard to the Issuer and the Company are honestly and reasonably held, have been reached after considering all relevant circumstances, are based on reasonable assumptions, (iv) there are no other facts in relation to the Issuer, the Company, the Notes or the Guarantee of the Notes, the omission of which would, in the context of the issue and offering of the Notes and the Guarantee of the Notes, make any statement in this Offering Circular misleading in any material respect and (v) all reasonable enquiries have been made by the Issuer and the Company to ascertain such facts in relation to the Issuer, the Company, the Notes and the Guarantee of the Notes and to verify the accuracy of all such information and statements. Subject as provided herein, each of the Issuer and the Company accepts full responsibility for the accuracy of information contained in this Offering Circular.
No person has been or is authorised to give any information or make any representation other than those contained in this Offering Circular and, if given or made, such information or representation must not be relied upon as having been authorised by the Issuer, the Company or the Joint Lead Managers set forth in “Subscription and Sale” elsewhere in this Offering Circular. This Offering Circular does not constitute an offer to sell or a solicitation of an offer to buy any Notes by any person except in compliance with all applicable laws and regulations. This Offering Circular has been prepared by the Issuer and the Company solely for use in connection with the proposed offering of the Notes described in this Offering Circular. No representation or warranty, express or implied, is made by the Joint Lead Managers or the Agents (each as defined in this Offering Circular) or any of their respective affiliates or advisers as to the accuracy or completeness of the information contained herein, and nothing contained in this Offering Circular is, or shall be relied upon as, a promise or representation by the Joint Lead Managers, the Agents, or their respective affiliates or advisers. Neither the Joint Lead Managers nor the Agents have separately verified the information contained herein. Neither the delivery of this Offering Circular nor any sale made hereunder shall under any circumstances imply that the information herein is correct as at any date subsequent to the date hereof or constitute a representation that there has been no change or development reasonably likely to involve an adverse change in the affairs of the Issuer or the Company since the date hereof. To the fullest extent permitted by law, none of the Joint Lead Managers accept any responsibility for the contents of this Offering Circular or for any statement made or purported to be made by any Joint Lead Manager or on its behalf in connection with the Issuer or the Company or the issue and offering of the Notes. Each Joint Lead Manager accordingly disclaims all and any liability whether arising in tort or contract or otherwise (save as referred to above) which it might otherwise have in respect of this Offering Circular or any such statement.
This Offering Circular does not constitute an offer of, or an invitation to subscribe for or purchase, any Notes. This Offering Circular is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation by the Issuer, the Company, the Joint Lead Managers or the Agents that any recipient of this Offering Circular should purchase any of the Notes. Each investor contemplating purchasing Notes should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of each of the Issuer and the Company.
The distribution of this Offering Circular and the offering of the Notes in certain jurisdictions may be restricted by law. It may not be used for or in connection with any offer to, or solicitation by, anyone in any jurisdiction in which it is unlawful to make such an offer or solicitation.
i Persons into whose possession this Offering Circular may come are required by the Issuer, the Company and the Joint Lead Managers to inform themselves about and to observe such restrictions. No action is being taken in any jurisdiction to permit an offering to the general public of the Notes or the distribution of this Offering Circular in any jurisdiction where action would be required for such purposes. For a description of certain restrictions on offers, sales and deliveries of Notes and on distribution of the Offering Circular, see “Subscription and Sale”.
IN CONNECTION WITH THE ISSUE OF THE NOTES, STANDARD CHARTERED BANK, AS THE STABILISING MANAGER (THE STABILISING MANAGER) (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER), MAY OVER-ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) WILL UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE NOTES. ANY STABILISATION ACTION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.
FORWARD-LOOKING STATEMENTS
Certain statements under “Risk Factors”, “Business” and elsewhere in this Offering Circular constitute “forward-looking statements”. Words such as “believe”, “expect”, “plan”, “anticipate”, “schedule”, “estimate” and similar words or expressions identify forward-looking statements. However, these words are not the exclusive means of identifying forward-looking statements. In addition, all statements other than statements of historical facts included in this Offering Circular, including, but without limitation, those regarding the financial position and results of operations, business strategy, prospects, capital expenditure and investment plans of the Company and the plans and objectives of the Company’s management for its future operations (including development plans and objectives relating to the Company’s operations), are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results or performance of the Company to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company’s present and future business strategies and the environment in which the Company will operate in the future. These forward-looking statements speak only as of the date of this Offering Circular. Each of the Issuer and the Company expressly disclaims any obligation or undertaking to release any updates or revisions to any forward-looking statements contained herein to reflect any change in the Issuer’s or the Company’s expectations with regard thereto or any change of events, conditions or circumstances, on which any such statements were based. This Offering Circular discloses, under “Risk Factors” and elsewhere, important factors that could cause actual results, performances or achievements of the Issuer or the Company to differ materially from the Issuer’s or the Company’s expectations. All subsequent written and forward-looking statements attributable to the Issuer or the Company or persons acting on behalf of the Issuer or the Company are expressly qualified in their entirety by such cautionary statements.
ii CERTAIN TERMS AND CONVENTIONS
Except as otherwise indicated or required by context, all references in this Offering Circular to Company are to the Company and its subsidiaries taken as a whole.
Unless otherwise specified or the context otherwise requires, references to Hong Kong are to the Hong Kong Special Administrative Region of the PRC, PRC are to the People’s Republic of China (excluding, for the purposes of this Offering Circular only, Hong Kong, the Macau Special Administrative Region of the PRC (Macau) and Taiwan), U.S. or United States are to the United States of America, Hong Kong dollars, HK dollars and HK$ are to the lawful currency of Hong Kong, Renminbi are to the lawful currency of the PRC, references to U.S. dollars or U.S.$ are to the lawful currency of the United States and EUR are to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the Treaty on the Functioning of the European Union, as amended.
This Offering Circular contains translations of certain HK dollar amounts into U.S. dollars, and vice versa, at specific rates solely for the convenience of the reader. For convenience only and unless otherwise noted, all translations between HK dollars and U.S. dollars in this Offering Circular were made at the rate of HK$7.8 to U.S.$1.00. No representation is made that the HK dollar or U.S. dollar amounts referred to in this Offering Circular could have been or could be converted into U.S. dollars or HK dollars at any particular rate or at all.
In this Offering Circular where information has been presented in thousands or millions of units, amounts may have been rounded up or down. Accordingly, totals of columns or rows of numbers in tables may not be equal to the apparent total of the individual items and actual numbers may differ from those contained herein due to rounding. References to information in billions of units are to the equivalent of a thousand million units.
iii CONTENTS
Page
SUMMARY ...... 1
SUMMARY FINANCIAL INFORMATION AND OTHER FINANCIAL AND OPERATING DATA ...... 4
THE ISSUE ...... 7
RISK FACTORS ...... 10
TERMS AND CONDITIONS OF THE NOTES ...... 26
THE GLOBAL NOTE CERTIFICATE ...... 43
USE OF PROCEEDS ...... 45
CAPITALISATION AND INDEBTEDNESS ...... 46
THE ISSUER ...... 48
BUSINESS ...... 49
MANAGEMENT ...... 70
RELATED PARTY TRANSACTIONS ...... 76
TAXATION ...... 77
SUBSCRIPTION AND SALE ...... 80
GENERAL INFORMATION ...... 84
INDEX TO FINANCIAL STATEMENTS ...... F-1
iv SUMMARY
The summary below is only intended to provide a limited overview of information described in more detail elsewhere in this Offering Circular. As it is a summary, it does not contain all of the information that may be important to investors and terms defined elsewhere in this Offering Circular shall have the meaning when used in this Summary. Prospective investors should therefore read this Offering Circular in its entirety.
The Issuer
The Issuer is a wholly owned subsidiary of the Company and was incorporated as an International Business Company under the laws of the British Virgin Islands on 5 November 2004 with the name PCI Capital Limited and subsequently changed its name to Fortis Capital (Asia) Limited on 19 July 2007 and to Ageas Capital (Asia) Limited on 12 July 2010. The Company Number is 622508. Its registered office is located at Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands. The Issuer, whose primary purpose is to act as a financing subsidiary of the Company, will remain as a wholly owned subsidiary of the Company as long as the Notes are outstanding and will advance the net proceeds from the sale of the Notes to the Company. The Issuer has not engaged, since its incorporation, in any material activities other than those incidental to its registration, to the issue of U.S.$100,000,000 5.875 per cent. notes due 2014, to the proposed issue of the Notes and the authorisation of documents and agreements referred to herein to which it is or will be a party. The Issuer has not engaged and will not, as long as the Notes are outstanding, engage in any business activity except any activity relating to the offering, sale or issuance of any indebtedness or the lending of the proceeds thereof to the Company and/or its subsidiaries or in connection with any hedging or derivative transaction and any other activities in connection with any of the above. The Issuer has no subsidiaries.
The Guarantor
Overview
The Company is a foreign owned and locally managed non-bank affiliated life insurance company in Hong Kong. The Company is also the tenth largest life insurer in Hong Kong, measured by newly generated life insurance business measured by APE as at 31 December 2012, according to the provisional statistics published by the OCI. The Company offers a comprehensive range of life insurance products, including traditional, whole and term life products, accident and health products and investment linked products to individual and corporate customers through its 2,858 exclusive agents and IFAs as at 31 December 2012. As at 31 December 2012, the Company had 414,321 policies with a sum insured of HK$142 billion (U.S.$18 billion). The Company’s operations are based in Hong Kong, and, as at 31 December 2012, all of the Company’s policies in-force were issued in Hong Kong. A majority of the Company’s revenues are derived from operations conducted in Hong Kong.
Competitive Strengths
The Company believes that its competitive strengths include:
Solid market position in Hong Kong. Amongst 63 insurers authorised by the OCI to issue long-term insurance policies in Hong Kong, the Company ranked 11th in terms of total in-force premium for the year ended 31 December 2012 according to provisional statistics released by OCI. It ranked 10th in terms of newly generated life insurance business as measured by annual premium equivalent as at the same date. The Company believes that its considerable knowledge and understanding of the local life insurance market allows it to anticipate and respond quickly to changes in the industry and to introduce products that meet its customers’ changing needs.
1 Well-established and trusted brand name. The Company believes that it is a respected and trusted brand in the insurance industry. The Company has received a number of awards in recent years, including the “Hong Kong Business High Flyers Award” in the life insurance category for six consecutive years, the “PROchoice Life Insurance Award” from Capital Weekly magazine for four consecutive years and the “Outstanding Insurer” in the Quamnet Outstanding Enterprise Awards for two consecutive years. To further strengthen its brand awareness, the Company was the first insurance company to advertise on twin neon signs on both sides of Victoria Harbour. The Company has also used the latest social media technology for advertising purposes. These initiatives earned the Company “Best Social Media Marketing” in Capital Weekly Sales & Marketing Excellence Awards, and the “Outstanding Achiever” in Social Media Engagement (Insurance) in Benchmark Wealth Management Awards in 2012.
Large and highly productive agency sales force. The Company believes that its exclusive agency sales force is one of its most valuable assets and a core distribution channel, providing the Company with access to quality new customers and the ability to strengthen its relationships with existing ones. As at 31 December 2012, the Company has 2,858 exclusive agents in Hong Kong which represented a 15 per cent. increase from 2011, compared to the 8 per cent. increase in the industry overall and a 9.3 per cent. increase from 2010, compared to the 5 per cent. increase in the industry overall. The expanded distribution network enabled the Company to achieve an APE growth of 24 per cent. in 2012, compared to the 9.8 per cent. increase in the industry overall.
Stable financial position. The Company has a proven track record of maintaining a strong balance sheet. Since the Company was acquired by the Ageas Group in 2007, the Company has consistently maintained a solvency ratio above the minimum statutory requirement. As at 31 December 2012, the Company’s solvency ratio was 370 per cent.
Sound investment portfolio. As at 31 December 2012, the Company has approximately HK$18 billion (U.S.$2.3 billion) in investment assets under its general and shareholders’ funds, 90 per cent of which was allocated to investment grade fixed income products. The portfolio achieved a 7.6 per cent. investment yield per annum as at 31 December 2012.
Strategy
The Company’s goal is to strengthen its position in the Hong Kong insurance market in order to provide consistent returns for the Company’s shareholders while maintaining prudent risk management practices.
To achieve its goals, the Company intends to pursue the following business strategies:
Continue to strengthen distribution network. The Company has recently introduced a number of measures to expand its distribution network, improve agent productivity and reduce agent turnover. As a result of these measures, the Company increased its agency sales force by 15 per cent. and its APE growth by 24 per cent. in 2012. The Company intends to continue to expand its sales force through active recruitment and to motivate its agents through training, performance evaluations, compensation schemes and transparency of senior management. In addition, the Company will continue to develop cooperative distribution arrangements and explore the use of alternative distribution channels.
Continue to broaden product offering. The Company is committed to introducing innovative new products and adjusting its product mix in response to changing customer needs. The Company was one of the first insurance companies in Hong Kong to offer investment-linked products under the CIES since the scheme’s creation in 2012. The Company intends to continue to broaden its product offering to better serve its existing and prospective customers.
2 Enhance operational efficiency, information technology and customer service. The Company intends to continuously enhance its operational efficiency and customer service through cost-saving initiatives and innovative information technology solutions. In this regards, the Company aims to continuously:
• enhance customer experience and improve operational efficiency through a greater use of innovative technologies;
• develop its proprietary and user-friendly applications for mobile devices to support its insurance agents in respect of sales and customer relationship building efforts;
• use advanced analytics to monitor, analyse and manage the quality of the business; and
• seek marketing opportunities on innovative platforms, such as social media, to increase brand awareness and support its marketing and product campaigns.
Maintain a strong capital base and prudent risk management. The Company aims to maintain a strong capital base and a high solvency ratio. The Company intends to fund its expansion plans using operating cash flows, focus on low capital and less interest rate sensitive products, conduct periodic reviews to monitor its capital base and, where necessary, re-balance its investment portfolio management to better match the duration of its assets and liabilities. In addition, the Company intends to continue to maintain its high underwriting standards in screening new customers and approving policy applications.
3 SUMMARY FINANCIAL INFORMATION AND OTHER FINANCIAL AND OPERATING DATA
The summary financial information set forth below has been extracted from the Company’s audited consolidated financial statements as at and for the years ended 31 December 2010, 2011 and 2012, which are included elsewhere in this Offering Circular. These results should be read in conjunction with the audited financial statements and the notes thereto.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December
2010 2011 2012 2012
HK$ HK$ HK$ U.S.$ (in millions) (in millions) (in millions) (in millions) INCOME Gross premiums ...... 2,399 2,594 2,883 370 Less: Reinsurance premiums ...... (254) (304) (301) (39)
Premiums, net of reinsurance...... 2,145 2,290 2,583 331 Interest income ...... 537 572 695 89 Dividend and other investment income ...... 26 1 2 IM(1) Realised and unrealised capital gains and losses on investments...... 53 31 17 2 Other realised and unrealised gains and losses ...... 51 (4) IM(1) IM(1) Fee and commission income ...... 435 406 547 70 Gain/(loss) related to investments for unit-linked contracts . . 428 (814) 585 75 Other income ...... 15 10 13 2
Total income ...... 3,690 2,493 4,440 569
EXPENSES Claims and benefits ...... (1,914) (1,948) (2,260) (290) (Charges)/income related to unit-linked contracts ...... (447) 795 (650) (83) Agency commission and allowances ...... (677) (833) (1,037) (133) Change in deferred acquisition costs ...... 25 244 492 63 Change in impairment...... (16) (4) (2) IM(1) Operating and administrative expenses ...... (426) (470) (506) (65) Finance costs ...... (54) (54) (63) (8)
Total expenses ...... (3,510) (2,269) (4,026) (516)
PROFIT BEFORE TAX ...... 180 223 414 53 Tax...... 39 (29) (35) (4)
PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS ...... 220 195 380 49
OTHER COMPREHENSIVE INCOME FOR THE YEAR (AFTER TAXATION AND RECLASSIFICATION ADJUSTMENTS): Cash flow hedges: net movement in the hedging reserve, before and after taxation ...... (19) (18) 8 1 Available-for-sale financial assets: net movement in the fair value reserve, before and after taxation ...... 253 1,196 595 76
234 1,178 603 77
TOTAL COMPREHENSIVE INCOME FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS ...... 454 1,373 983 126
(1) immaterial
4 CONSOLIDATED BALANCE SHEET
As of 31 December
2010 2011 2012 2012
HK$ HK$ HK$ U.S.$ (in millions) (in millions) (in millions) (in millions) ASSETS Property, plant and equipment...... 49 61 85 11 Deferred acquisition costs ...... 1,994 2,238 2,730 350 Investment properties ...... 6881 Amount due from intermediate holding companies. . . 849 811 804 103 Amount due from a fellow subsidiary ...... 5 5 5 IM(1) Pledged deposits ...... 39 51 51 7 Financial assets ...... 10,959 14,674 16,933 2,170 Investments related to unit-linked contracts ...... 4,054 4,030 5,795 743 Derivative financial instruments ...... — — 9 1 Premiums receivable ...... 76 99 96 12 Prepayments, deposits and other debtors ...... 635 747 1,019 131 Time deposits with original maturity more than three months ...... — 81 — — Cash and cash equivalents...... 1,562 1,056 869 111
Total assets...... 20,227 23,860 28,406 3,640
LIABILITIES Insurance contract liabilities ...... 10,671 11,873 13,119 1,682 Investment contract liabilities ...... 14 11 9 1 Liabilities related to unit-linked contracts...... 4,054 4,030 5,795 743 Derivative financial instruments ...... 22 40 35 4 Amount due to an immediate holding company . . . . . 173 127 82 10 Amount due to an intermediate holding company . . . — 25 21 3 Amount due to fellow subsidiaries ...... 31 37 34 4 Interest-bearing loans ...... 773 773 1,131 145 Payables to policyholders...... 214 269 374 48 Accrued expenses and other creditors ...... 340 411 543 70 Tax payable...... 48 59 73 9
Total liabilities ...... 16,339 17,654 21,217 2,719
EQUITY Issued capital ...... 1,088 1,088 1,088 139 Reserves ...... 2,800 5,118 6,101 782
Total equity attributable to equity holders ...... 3,888 6,206 7,189 921
Total liabilities and equity...... 20,227 23,860 28,406 3,640
(1) immaterial
5 OTHER FINANCIAL AND OPERATING DATA
The following table sets out certain financial and operating data of the Company as at and for the years indicated, which has been derived from the “Hong Kong Long Term Business Returns” filed by the Company with the Office of the Commissioner of Insurance, the annual return of the Company under the Insurance Companies Ordinance (Chapter 41 of the Laws of Hong Kong) as at and for the years ended 31 December 2010, 2011 and 2012 and other internal data of the Company. This data should be read in conjunction with operating data and the audited financial statements and the notes thereto, which are included elsewhere in this Offering Circular.
2010 2011 2012
Total in-force premiums (for the year ended 31 December) (HK$ in millions) ...... 3,456 3,945 4,524
Gross premiums (for the year ended 31 December) (HK$ in millions) ...... 2,399 2,594 2,883
Premium inflow from investment contracts without discretionary participation features (for the year ended 31 December) (HK$ in millions) ...... 1,051 1,231 1,568
Gross Inflow (for the year ended 31 December) (HK$ in millions) ...... 3,450 3,825 4,451
Number of policies (as at 31 December) ...... 374,359 388,200 414,321
Number of agents (as at 31 December) ...... 2,271 2,482 2,858
6 THE ISSUE The following contains some summary information about the Notes. Some of the terms described below are subject to important limitations and exceptions. Words and expressions defined in “Terms and Conditions of the Notes” shall have the same meanings in this summary. For a more complete description of the terms of the Notes, see “Terms and Conditions of the Notes” in this Offering Circular.
Issuer Ageas Capital (Asia) Limited.
Guarantor Ageas Insurance Company (Asia) Limited.
The Notes U.S.$250,000,000 aggregate principal amount of 4.125 per cent. Guaranteed Notes due 2023.
Guarantee of the Notes The Guarantor has unconditionally and irrevocably guaranteed the due and punctual payment of all sums from time to time payable by the Issuer in respect of the Notes.
Issue Price 99.272 per cent. of the principal amount.
Form and The Notes will be issued in registered form in the Denomination denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof.
Issue Date 25 April 2013.
Maturity Date 25 April 2023.
Offering The Notes are being offered only outside the United States in reliance on Regulation S under the Securities Act. The Notes and the Guarantee of the Notes have not been registered, and will not be registered under the Securities Act and, subject to certain exemptions, may not be offered or sold in the United States.
Interest The Notes will bear interest from, and including, the Issue Date at the rate of 4.125 per cent. per annum, until the Maturity Date, payable semi-annually in arrear on 25 April and 25 October in each year.
Status The Notes constitute direct, general, unconditional, unsubordinated and (subject to Condition 3 of the Terms and Conditions of the Notes) unsecured obligations of the Issuer which will at all times rank pari passu without any preference or priority among themselves and at least pari passu with all other present and future unsecured and unsubordinated obligations of the Issuer, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application.
The payment obligations of the Guarantor under the Guarantee of the Notes constitute direct, general, unconditional, unsubordinated and (subject to Condition 3 of the Terms and Conditions of the Notes) unsecured obligations of the Guarantor which will at all times rank at least pari passu with all other present and future unsecured obligations of the Guarantor, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application.
7 Negative Pledge The Notes will contain a negative pledge provision as further described in Condition 3 of the Terms and Conditions of the Notes.
Cross Acceleration The Notes will contain a cross acceleration provision as further described in Condition 8(c) of the Terms and Conditions of the Notes.
Events of Default Upon the occurrence of certain events as described in Condition 8 of the Terms and Conditions of the Notes, upon notice in writing addressed to the Issuer and the Guarantor and delivered to the Issuer and the Guarantor or to the Specified Office (as defined in the Agency Agreement referred to in the Terms and Conditions of the Notes) of the Fiscal Agent, any Noteholder may declare its Notes immediately due and payable, whereupon they shall become immediately due and payable at their principal amount together with accrued interest without further action or formality.
Transfer Restrictions The Notes will not be registered under the Securities Act or under any state securities laws of the United States and will be subject to customary restrictions on transfer and sale. See “Subscription and Sale”.
Final Redemption Unless previously redeemed, or purchased and cancelled, the Notes will be redeemed at their principal amount on 25 April 2023.
Redemption for Tax The Issuer may redeem all and not some of the Notes at their Reasons principal amount, together with interest accrued to, but excluding the date fixed for redemption, in the event of certain changes in British Virgin Islands, Bermuda or Hong Kong taxation, as further described in Condition 5(b) of the Terms and Conditions of the Notes.
Redemption at the The Issuer may redeem the Notes at any time, in whole but not option of the Issuer in part, at the Make Whole Redemption Price, together with interest accrued to the date fixed for redemption, as further described in Condition 5(d) of the Terms and Conditions of the Notes.
Redemption upon A Noteholder shall have the right, at such Noteholder’s option, Change of Control to require the Issuer to redeem all but not some only of such Trigger Event Noteholder’s Notes at 101 per cent. of its principal amount together with the accrued interest following the occurrence of a Change of Control Trigger Event with respect to the Guarantor, as further described in Condition 5(c) of the Terms and Conditions of the Notes.
Further Issues The Issuer may from time to time, without the consent of the Noteholders, create and issue further Notes having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest) so as to form a single series with the Notes.
Fiscal Agent BNP Paribas Securities Services, Luxembourg Branch.
8 Paying and Transfer BNP Paribas Securities Services, Luxembourg Branch. Agent
Registrar BNP Paribas Securities Services, Luxembourg Branch.
Clearing Systems The Notes will be represented by beneficial interests in the Global Note Certificate in registered form, which will be registered in the name of, and shall be deposited on or about the Closing Date with, a common depositary for Euroclear and Clearstream, Luxembourg. Beneficial interests in the Global Note Certificate will be shown on, and transfers thereof will be effected only through, records maintained by, Euroclear and Clearstream, Luxembourg. Except as described herein, certificates for Notes will not be issued in exchange for interests in the Global Note Certificate.
Governing Law English law.
Ratings The Notes will be rated A- by Fitch and Baa2 by Moody’s. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation.
Listing Approval in-principle has been received from the SGX-ST for the listing and quotation of the Notes on the Official List of the SGX-ST. The Notes will be traded on the SGX-ST in a minimum board lot size of U.S.$200,000 for so long as the Notes are listed on the SGX-ST. The SGX-ST assumes no responsibility for the correctness of any of the statements made or opinions or reports contained in this Offering Circular. Admission of the Notes to the Official List of the SGX-ST and quotation of the Notes on the SGX-ST and the above approval-in-principle of the SGX-ST is not to be taken as an indication of the merits of the Issuer, the Guarantor, its subsidiaries, its associated companies, its jointly-controlled entities or the Notes.
Use of Proceeds See section entitled “Use of Proceeds”.
ISIN XS0913601950.
Common Code 091360195.
9 RISK FACTORS
Any potential investor should carefully consider the following risk factors, together with all of the other information contained in this Offering Circular, before making an investment decision. These risk factors could cause the Company’s future results to differ materially from those expressed or implied in any forward-looking statements made by the Company. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company may also harm the Company’s businesses.
Any potential investor should consider the risks and uncertainties described below carefully before making an investment decision. Any potential investor should pay particular attention to the fact that the Company operates in Hong Kong and is governed by a legal and regulatory environment that in some respects differs from that which prevails in other countries. The Company’s business, financial condition or results of operations could be affected materially and adversely by any of these risks and potential investors may lose all or part of their investment.
Risks Relating to the Company’s Business
The Company’s growth is dependent on its ability to continue to grow its agency and Independent Financial Advisor distribution channels and increase productivity by training and incentive programmes to its agents. The Company also depends on its most productive and experienced individual insurance agents.
A substantial portion of the Company’s business is conducted through its agents. For the year ended 31 December 2012, over 76 per cent. of the Company’s new individual business premiums were generated by these agents. The Company established the Independent Financial Advisor (IFA) distribution channel in 2008. For the year ended 31 December 2012, the Company’s IFAs generated approximately 24 per cent. of the Company’s new individual business premiums. In 2009, the number of agents in the Company’s agency sales force decreased significantly by approximately 25 per cent. as a result of the highly competitive nature of the insurance industry in Hong Kong which may at times cause a sudden unexpectedly high turnover in agency sales force. Although the number of agents in the Company’s agency sales force has subsequently recovered to around the 2009 levels, there can be no assurance that the number of the Company’s individual agents will not decrease or that the Company will be able to recruit and retain agents. If the Company is unable to attract and retain these agents and the impact thereof is not offset by new business generated by the Company’s IFAs, the Company’s business, financial condition and results of operations could be materially and adversely affected.
The Company also depends on experienced individual agents to distribute the Company’s insurance products. Certain key agents are responsible for a disproportionately high level of the Company’s new individual business premiums, and as such the Company is highly dependent on such agents. Increasing competition for experienced individual agents, including such key agents, from insurance companies and other business enterprises may also force the Company to increase the compensation of its experienced individual agents, which would increase operating costs and reduce the Company’s profitability. Furthermore, there can be no assurance that the Company will be able to maintain these relationships at all or at costs acceptable to the Company. If the Company is unable to recruit and retain its experienced individual agents or only at higher compensation costs, the Company’s business, financial condition and results of operations may be adversely affected.
10 Changes in interest rates may affect the Company’s profitability.
The Company’s profitability is affected by changes in interest rates and market fluctuations. A number of jurisdictions in which the Company operates or to which the Company has exposure through its fixed income investments, including Hong Kong, is currently experiencing a period of historically low interest rates. If interest rates were to increase in the future, surrenders and withdrawals of insurance policies and contracts may increase as policyholders seek other investments with higher perceived returns. This process may result in cash outflows and may require the Company to sell investment assets at a time when the prices of those assets are adversely affected by the increase in market interest rates, which may result in realised capital losses. If interest rates were to decline, the income that the Company realises from its investments may decline, affecting the Company’s profitability. In addition, as instruments in its investment portfolio mature, the Company may have to reinvest the funds it receives in investments bearing lower interest rates.
For some of its long term life insurance products, the Company is obligated to pay a minimum interest or crediting rate to its policyholders, which is established when the product is priced. These products expose the Company to the risk that changes in interest rates may reduce the Company’s spread, or the difference between the rates that the Company is required to pay under the policies and the rate of return the Company is able to earn on its investments intended to support its insurance obligations. If the rates of return on its investments fall below the minimum rates the Company guarantees under those insurance products, the Company’s business, financial condition and results of operations could be materially and adversely affected.
The Company’s business operations are concentrated in Hong Kong.
The Company’s operations are based in Hong Kong and, as at 31 December 2012, all of the Company’s policies in-force (as further described in “Business — Overview”) were issued in Hong Kong. A majority of the Company’s revenues are therefore derived from operations conducted in Hong Kong. While the level of new business has grown in the Hong Kong insurance market in recent years and the Company believes that the insurance penetration rate could increase, there can be no assurance that such growth will continue at the same rate or at all or that the level of new business will not decrease. Furthermore, the impact on the Hong Kong insurance industry of certain trends and events, such as the pace of economic growth, is unclear. Consequently, the growth and development of the Hong Kong insurance market is subject to a number of uncertainties that are beyond the Company’s control. Any reduction in growth or any decrease in new business in Hong Kong could adversely affect the Company’s business, financial condition or results of operations.
Unavailability of bancassurance arrangements may impact the Company’s growth.
Currently, the Company does not distribute its insurance products through bank branches and/or joint ventures with banks (bancassurance). If the Company is unable to broaden its existing distribution channel by establishing bancassurance arrangements with banks, there can be no assurance that the Company’s growth will continue at the same rate, or at all, or the Company’s growth may decrease.
If the Company does not or is unable to match the duration of its assets and liabilities closely, the Company will be subject to increased interest rate risk, which may have a material adverse effect on the Company’s business, results of operations and financial condition.
Like other insurance companies, the Company seeks to manage interest rate risk through matching, to the extent possible, the average duration of its investment assets and the corresponding insurance policy liabilities they support. Matching the duration of the Company’s assets to their related liabilities reduces the Company’s exposure to changes in interest rates, because the effect of the changes will largely be offset against each other. The
11 global capital markets currently do not provide an effective or efficient means for the Company to hedge all of its interest rate risk through financial instruments or their derivative products. Also, the Company may be restricted by applicable insurance laws and other market factors. The Company seeks to manage the risk of duration mismatch by focusing on product offerings whose maturity profiles are in line with the duration of investments available to the Company in the prevailing investment environment. However, if the Company is unable to match more closely the duration of its assets and liabilities, it will continue to be exposed to interest rate changes, which may materially and adversely affect its business, financial condition and results of operations.
Customer preferences for insurance, investments and pension products as well as wealth management solutions may change and the Company may not respond appropriately or in time to sustain the Company’s business or its market share in the geographical markets in which the Company operates.
The insurance, investment, pension and wealth management markets as well as the preferences of the Company’s customers are constantly evolving. As a result, the Company must continually respond to these changes to remain competitive, grow the Company’s business and maintain market share in the geographical markets in which the Company operates. The Company faces many risks when introducing new products. Although, according to the Office of the Commissioner of Insurance in Hong Kong (the OCI) provisional statistics for 2012, the new businesses relating to life insurance products in Hong Kong grew from HK$24,564 million to HK$46,317 million in terms of APE from 2008 to 2012, the Company’s new products may fail to achieve market acceptance, which could have an adverse impact on the Company’s business, financial condition and results of operations.
The Company’s future success will depend on the Company’s ability to adapt to changing customer preferences, industry standards and new product offerings and services. Any of these changes may require the Company to re-evaluate the Company’s business model and adopt significant changes to the Company’s strategies and business plan. Any inability to adapt to these changes would have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s investment returns are subject to factors beyond its control.
The Company’s investment returns, and thus its profitability, may be adversely affected from time to time by conditions affecting its specific investments and, more generally, by market fluctuations as well as global general economic, market and political conditions. In particular, the Company’s ability to make a profit on its insurance products depends in part on the returns on investments supporting its obligations under these products, and the value of specific investments may fluctuate substantially. Future movements in market interest rates, unfavourable conditions in the global securities markets or other factors may cause the Company’s investment income to decrease significantly, and could have a material adverse effect on its business, financial condition and results of operations.
Concentration of the Company’s investment portfolio in any particular counterparty, asset class, market or segment of the economy may increase the Company’s risk of suffering investment losses.
The Company’s investment portfolio is comprised primarily of debt securities, and the Company holds significant amounts of government and governmental agency bonds, financial institution bonds and corporate bonds. As a result, the Company has significant credit exposure to banking and other financial institutions and corporate issuers. Events or developments that have a negative effect on any particular counterparty, industry, asset class, group of related industries, country or geographic region may have a negative effect on the Company’s investment portfolio if the Company’s portfolio is overly concentrated in that particularly affected counterparty, industry or industries, asset class or geographic region. For example, as at 31 December 2012, the Company’s largest exposure to one single counterparty
12 was 2.5 per cent. of its fixed income portfolio and such exposure to one single counterparty could further increase up to 8 per cent. of its fixed income portfolio in 2014, which has been pre-approved by the Company’s investment committee. The OCI does not impose any restriction on counterparty exposure limits. The Company’s investment committee sets maximum exposure limits to ensure counterparty risk diversifications but such limits may be modified by the committee if determined necessary. Market or financial crises in one geography or one area could easily negatively impact other geographies or areas, in which the Company may have investment exposure. These types of concentrations in the Company’s investment portfolio increase the risk that, in the event the Company experiences a significant loss in any of these investments, the Company’s business, financial condition and results of operations could be materially and adversely affected.
An illiquid trading market for the Company’s investments may result in the Company having to sell such investments at prices significantly lower than the prices recorded in its consolidated financial statements.
There may not be a liquid trading market for certain of the Company’s investments, which is in turn affected by numerous factors, including the existence of suitable buyers and market makers, market sentiment and volatility, the availability and cost of credit and general economic, political and social conditions. If the Company were required to dispose of these or other potentially illiquid assets on short notice, the Company could be forced to sell such assets at prices significantly lower than the prices the Company recorded in its consolidated financial information.
Defaults on the Company’s fixed income investments and by its counterparties may materially and adversely affect its business, financial condition and results of operations.
As at 31 December 2012, the Company held HK$16 billion (U.S.$2.1 billion) of fixed income securities. The issuers whose fixed income securities the Company holds or to which the Company is synthetically or otherwise exposed (such as trading counterparties, counterparties under swaps and other derivative contracts, other financial intermediaries and guarantors) may fail to pay or otherwise default on their obligations due to bankruptcy, a lack of liquidity, a downturn in the economy, operational failures or other reasons. There is no assurance that the Company will not suffer losses due to these defaults which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Differences between actual claims experience and the assumptions used in pricing and establishing liabilities for the Company’s insurance and annuity products may materially and adversely affect its business, financial condition and results of operations.
The Company’s earnings depends upon, among others, the extent to which its actual claims results are consistent with the assumptions used in setting the prices for its products and establishing the liabilities in its financial statements for its obligations for future policy benefits and claims. While the aggregate amount of actual claims results was less than the Company’s established liabilities for future policy benefits and claims in each of 2010, 2011 and 2012, to the extent that trends in actual claims results are worse than the underlying assumptions used in establishing these liabilities, the Company could be required to update its relevant assumptions and liabilities. Any such change could have an adverse effect on the Company’s business, financial condition and results of operations.
13 The Company establishes liabilities for obligations for future policy benefits and claims based on the expected payout of benefits, calculated through the use of assumptions for interest rates, investment returns, mortality, morbidity, expenses and persistency, policyholder behaviour as well as certain macroeconomic factors such as inflation. These assumptions are determined from the assessment of the Company’s relevant experience and market data whilst applying a prudent margin. These assumptions may deviate from the Company’s actual experience. The Company reviews its assumptions annually based on its actual experience in policy benefits and claims results and also evaluates its liabilities based on its assessment of assumptions. If any change is made to the Company’s liabilities as a result of such review, evaluation, a change in assumptions or otherwise, the amount of such change is recognised as either a gain or an expense in the Company’s income statement for the period in which such change occurs. If the liabilities originally established for future policy benefits prove inadequate, the Company would need to increase its liabilities established for future policy benefits, which may have a material adverse effect on its business, financial condition and results of operations.
The Company’s risk management and internal reporting systems, policies and procedures may leave it exposed to unidentified or unanticipated risks.
The Company’s policies and procedures may not be fully effective to identify, monitor and manage risks. Many of the Company’s methods of managing risk and exposures are based upon its use of observed historical market behaviour or statistics based on historical models. As a result, these methods may not accurately predict future exposures, which could be significantly greater than what the historical measures indicate. Other risk management methods depend upon the evaluation of information regarding markets, customers or other matters that are publicly available or otherwise accessible to the Company, which may not always be accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events. Failure in or the ineffectiveness of these systems could materially and adversely affect the Company’s business, financial condition and results of operations or result in losses.
If the Company fails to adapt risk management policies and procedures to its changing business, its business, results of operations and financial condition could be materially and adversely affected.
Any significant failure in the Company’s information technology systems could have a material adverse effect on its business, financial condition and results of operations.
The Company’s business is highly dependent on the ability of its information technology systems to process in a timely manner a large number of transactions across numerous and diverse markets and products at a time when transaction processes become increasingly complex and the volume of such transactions grows at a significant rate. The proper functioning of the Company’s financial control, accounting, customer database, customer service and other data processing systems, including those relating to underwriting and claim processing, is critical to its business and to its ability to compete effectively. The Company’s business activities would be materially disrupted in the event of a partial or complete failure of any of its primary information technology or communications systems, which could be caused by, among other things, software bugs, computer virus attacks or conversion errors due to system upgrading without network back-up. In addition, difficulties in upgrading, developing and expanding the Company’s information technology systems beyond the Company’s control could lead to the eventual failures in its information technology systems. Any prolonged failure could damage the Company’s reputation and materially and adversely affect its business, financial condition and results of operations.
14 The Company may not be able to timely detect, deter or prevent fraud or other misconduct from the Company’s employees, agents, customers or other third parties which could harm the Company’s reputation or lead to regulatory sanctions or litigation costs.
Fraud or other misconduct committed by the Company’s employees, agents, customers or other parties could result in violations of law by the Company, regulatory sanctions, litigation or serious reputational or financial harm. Fraud or other misconduct could include:
• engaging in misrepresentation or fraudulent activities when marketing or selling insurance policies to customers or misselling products or misappropriation of products;
• hiding unauthorised or unsuccessful activities, resulting in unknown and unmanaged risks or losses; or
• otherwise not complying with laws or the Company’s control policies or procedures.
The Company may not be able to deter every case of above mentioned fraud or other misconduct committed by the Company’s employees, agents, customers or other parties, and the precautions the Company takes to prevent and detect these activities may not be fully effective in all cases. Fraud or other misconduct committed by the Company’s employees, agents, customers or other third parties could lead to a material adverse effect on the Company’s business, results of operations and financial condition.
The Company’s business is dependent on its ability to attract and retain certain personnel, including senior management, underwriting personnel, actuaries, information technology specialists, investment managers and other professionals.
The success of the Company’s business is dependent on its ability to attract and retain key personnel who have in-depth knowledge of and experience in the life insurance market in Hong Kong, including members of its senior management, qualified underwriting personnel, actuaries, information technology specialists and experienced investment managers. The Company competes to attract and retain these personnel with other life insurance companies and financial institutions, some of which may offer better compensation arrangements. As the insurance and investment businesses continue to expand and increasingly overlap in Hong Kong, the Company expects that competition for these professionals will increase in the future. To the Company’s knowledge, no member of its senior management has plans to retire or leave the Company in the near future. However, if the Company is unable to continue to attract and retain key personnel, its financial performance could be materially and adversely affected. In particular the Company believes that the recent success in its business is, to a significant extent, attributable to the strategy and performance of its current management team. Should such personnel cease to be involved in the Company’s business, the Company’s business, financial condition and results of operations could be materially and adversely affected.
Reinsurance that the Company purchases may not be adequate to protect it against losses.
The Company attempts to limit its potential loss through the purchase of reinsurance. The availability and cost of reinsurance protection is subject to market conditions, and the Company may not always be able to obtain the types and amounts of reinsurance adequate for the Company’s business needs. In addition, the Company is subject to credit risk with respect to its reinsurance because the Company remains liable to its policyholders. The Company may experience difficulties in recovering material reinsurance receivables under its reinsurance contracts if one or more of the Company’s reinsurers becomes insolvent or is unable or unwilling to make timely payments.
15 Large claims resulting from catastrophic events could adversely affect the Company’s business, financial condition and results of operations.
Catastrophes including natural disasters and disease breakout could lead to an increase in claims on existing life, medical, property and casualty insurance and reinsurance policies resulting in increase buyouts which could materially reduce the Company’s earnings and cash flow. Catastrophes can be caused by various natural or man-made hazards, which could result in losses in the Company’s investment portfolios, due to, among other things, the failure of the Company’s counterparties to perform, or significant volatility or disruption in financial markets. This could in turn adversely affect the Company’s business, financial condition and results of operations.
Although the Company carries reinsurance to reduce the Company’s catastrophe loss exposures, due to limitations in the relevant terms of its reinsurance contracts and the underwriting capacity limits in the reinsurance market, as well as difficulties in assessing the Company’s exposures to catastrophes, this reinsurance may not be sufficient to protect the Company adequately against losses.
The Company’s financial strength is rated by A.M. Best, Fitch and Moody’s and a decline in these ratings could affect the Company’s standing in the insurance industry and cause its sales and earnings to decrease.
Ratings are a factor in establishing the competitive position of insurance companies. Financial strength ratings measure a company’s ability to meet its insurance obligations. Credit ratings measure a company’s ability to repay its debt obligations and directly affect the cost and availability of unsecured financing. A ratings downgrade, therefore, could result in a substantial loss of business as customers and agents may move to other insurers with higher ratings. A.M. Best Company Inc. (A.M. Best) maintains a letter scale rating system ranging from “A++” to “F” (“F” in liquidation). Fitch maintains a letter rating system ranging from “AAA” to “D” (“D” is default). Moody’s maintains a letter and number scale rating system ranging from “Aaa” to “C” (“C” is default). The Company is currently assigned an “A-” rating by A.M. Best, which is the fourth highest of A.M. Best’s fifteen rating levels, an “A” by Fitch, which is the sixth highest of Fitch’s nineteen rating levels and a “Baa1” by Moody’s, which is the eighth highest of Moody’s twenty one rating levels. These ratings reflect the opinions of A.M. Best, Fitch and Moody’s of the Company’s financial strength; they are not evaluations directed to investors in the Notes and are not recommendations to buy, sell or hold the Notes. These ratings are subject to periodic review by, and may be revised downward or revoked at the sole discretion of A.M. Best, Fitch and Moody’s. If any of the Company’s ratings are lowered, the Company’s competitive position in the insurance industry may suffer, and it may be more difficult for the Company to sell its products.
Changes in taxation on the Company’s business may materially and adversely affect the Company’s business, financial condition and results of operations.
The Company derives benefits from operating in the relatively favourable tax jurisdiction of Hong Kong. For the Company’s business carried on in and from Hong Kong, the Company is subject to Hong Kong profits tax in respect of premium and relevant income derived from Hong Kong at the standard rate of 16.5 per cent. on the assessable amount of such income. Income generated and capital gains from the Company’s overseas investments are free from Hong Kong profits tax.
In 2011, the Inland Revenue Department of Hong Kong (the IRD) issued additional tax assessments of HK$3.66 million (U.S.$0.5 million) to the Company in relation to its life insurance investment linked business, underwritten in fiscal years 2005/06 and 2006/07 on the basis that its preliminary assessments did not account for certain portions of the premiums paid by policyholders. Although the Company filed an objection notice to the IRD’s additional
16 assessments, there can be no assurance that the IRD will reduce or withdraw its additional assessments. As of the date of this Offering Circular, the IRD’s additional assessments remain pending and the Company has set aside a provision of HK$59 million (U.S.$7.6 million) in respect of the IRD’s additional assessments for fiscal years 2005/06 and 2006/07 and the Company’s estimation of the potential additional assessments for fiscal year 2007/08 and onwards.
There can be no assurance that the tax laws and practices in Hong Kong will not be changed in the future. In the event any such changes are made that increase the Company’s general taxation liability, there would be an adverse impact on the Company’s business, financial condition and results of operations.
If the Company needs additional capital in the future, the Company may not be able to obtain such capital in time or on acceptable terms, or at all.
In order for the Company to grow, remain competitive, enter new businesses, expand the Company’s scale of operations or meet regulatory capital adequacy or solvency margin ratio requirements, the Company may need new capital in the future. The Company’s ability to obtain additional capital in the future is subject to a variety of uncertainties, including:
• the Company’s future financial condition, results of operations and cash flows;
• the ability to obtain the necessary regulatory approvals on a timely basis;
• the Company’s shareholders’ ability to make continuous contributions;
• general market conditions for capital raising activities; and
• economic, political and other conditions in Hong Kong and elsewhere.
In the event that the Company is unable to obtain additional capital in time or on acceptable terms, or at all, the Company’s business, results of operations and financial condition could be adversely affected.
The Company may not be able to successfully manage its growth.
The Company’s future growth may place significant demands on the Company’s managerial, operational and capital resources. The expansion of the Company’s business activities exposes the Company to various challenges, including, but not limited to:
• continuing to expand and train actuarial staff, enhance actuarial capabilities and develop adequate underwriting and claims settlement capabilities and skills;
• meeting higher requirements for cost controls, meeting the demand for a broader capital base and satisfying an on-going need to meet the minimum solvency margin requirements; and
• strengthening and expanding the Company’s risk management and information technology systems to effectively manage the risks associated with existing and new lines of insurance products and services and increased marketing and sales activities.
In particular, the Company may not be able to rapidly recruit and effectively train and retain a sufficient number of qualified personnel to keep pace with the growth of the Company’s business.
17 Further, to the extent the Company pursues its growth strategy through acquisitions, there is no assurance that the Company will be able to identify and secure suitable acquisition opportunities or that the Company will be able to implement its strategies and policies in respect of acquired entities in a timely fashion. Furthermore, any particular acquisition may not produce the intended benefits.
The Company is and may be involved in litigation involving its insurance operations which could result in financial losses or harm its businesses.
The Company is involved in litigation involving its insurance operations.
In September 2009, the Company commenced proceedings against an ex-agent (the Defendant) for repayment of five loans after the Defendant’s contract was terminated with the Company in June 2009. The Defendant settled part of the claim by repaying two of the outstanding loans. Subsequently, the Defendant filed a defence, denying his liability to the three outstanding loans and counterclaiming HK$31,241,201 for contractual benefits and damages. As of the date of this Offering Circular, the Company has set aside HK$4.5 million as provision for the litigation.
The Company continues to claim for repayment of the outstanding loans from the Defendant and plans to defend the Defendant’s counterclaim. A trial relating to this matter is scheduled to commence in November 2013.
Notwithstanding the above, there is no assurance that a judgment favourable to the Company will be rendered, in which event, it could have an adverse effect on the Company’s financial results. See “Business — Legal Proceedings and Tax Disputes.”
Except as disclosed above, the Company does not believe that any pending legal matter is likely to have a material adverse effect on its business, financial condition or results of operations.
An actual or perceived reduction in the Company’s financial strength could increase policy surrenders and withdrawals, damage the Company’s business relationships and negatively impact new sales of the Company’s products.
Policyholders’ confidence in the financial strength of an insurance company, as well as in the financial services industry generally, is an important factor affecting the Company’s business. Any actual or perceived reduction in the Company’s financial strength could adversely affect the Company’s business because any such development may, among other things:
• increase the number of policy surrenders and withdrawals;
• damage the Company’s relationship with its creditors, customers and the distributors of the Company’s products;
• negatively impact sales of the Company’s products which may require the Company to reduce prices for its products and services to remain competitive; and
• increase the Company’s borrowing costs as well as affect the Company’s ability to obtain financing on a timely basis and reinsurance on acceptable terms.
There is no assurance that the Company will not experience any reductions in its financial strength, actual or perceived, in the future, which may have a material adverse effect on the Company’s business, financial condition and results of operations.
18 Currency fluctuations could adversely affect the Company’s results of operations.
The Company carries more U.S. dollar denominated assets than are needed to cover its U.S. dollar denominated liabilities. The Hong Kong dollar has been pegged to the U.S. dollar since 1983. However, there is no assurance that this peg will be maintained in the future. If the U.S. dollar is to depreciate against the Hong Kong dollar after the peg is discontinued or changed, then the Company’s financial position, when measured in Hong Kong dollar terms, could be adversely affected.
Risks Relating to the Industry
The Company expects competition in the Hong Kong insurance industry to increase, which may materially and adversely affect the growth of its business.
The Company faces competition from both domestic and foreign invested life insurance companies operating in Hong Kong and financial institutions that sell other financial investment products comparable to the Company’s. Competition with respect to the types of insurance in which the Company is engaged is based on many factors, such as underwriting expertise, reputation, market knowledge and experience in the lines written, the jurisdictions in which the insurer is licensed or otherwise authorised to do business, premiums charged, as well as other terms and conditions of the insurer offered, services offered and speed of claims payment and perceived overall financial strength of the insurer. If the Company is not able to adapt to these increasingly competitive pressures in the future, its growth rate may decline, which could materially and adversely affect its earnings.
The Hong Kong insurance market is dominated by a relatively small number of insurance companies; further concentration may adversely affect the Company’s business.
The Hong Kong life insurance market is dominated by a small number of insurers, some of which have greater financial resources and/or economies of scale than the Company. The market share of the five largest insurance companies operating in Hong Kong for linked and non-linked insurance business as at 31 December 2012 was over 65 per cent. (by annual premium equivalent (APE)), according to the OCI’s provisional statistics for long term business. Further concentration of the market may adversely affect the Company’s business. The Company also faces competition from bank assurance companies and smaller insurance companies, which may develop strong positions in various markets in which the Company operates.
Increased regulation of the insurance industry in Hong Kong may impose additional costs and restrictions on the Company’s activities.
The Company operates in a highly regulated industry. The OCI supervises and administers the insurance industry in Hong Kong under the Insurance Companies Ordinance (Chapter 41 of the Laws of Hong Kong) (ICO). In exercising its authority, it is given wide discretion to administer the law. The regulations to which the Company is subject are generally designed to protect the interests of policyholders, as opposed to insurers and other investors, and relate to the authorisation to transact certain lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, valuation requirements, changes in control and a variety of other financial and non-financial components of an insurance company’s business. If the level of regulation is increased or if any limitation or requirement is modified in the future, the Company’s business, financial condition and results of operations could be materially and adversely affected.
19 The Company’s ability to comply with minimum solvency requirements is affected by a number of factors, and its compliance may force it to raise additional capital or to reduce its growth.
The Company is required by the OCI to maintain the Company’s solvency at a level in excess of a minimum solvency requirement, which was HK$828 million as at 31 December 2012. The Company is also required by the Insurance Act 1978 of Bermuda, as amended, and related regulations (the Bermuda Insurance Act) to meet or exceed an enhanced capital requirement. The Company’s solvency is affected primarily by the policy reserves it is required to maintain that, in turn, are affected by the volume of policies and contracts it sells and by regulations on the determination of statutory reserves. The Company’s solvency is also affected by a number of other factors, including the profit margin of its products, returns on its investments, underwriting and acquisition costs and policyholder and shareholder dividends. As at 31 December 2012, the Company’s solvency ratio was 370 per cent., more than two times the statutory minimum solvency levels required by Hong Kong law. If the Company grows rapidly in the future, or if the solvency levels required as a matter of Hong Kong and Bermuda law are raised in the future, the Company may need to raise additional capital to meet its solvency requirement. If the Company is not able to raise additional capital, the growth of its business may be adversely affected. Any material impairment of the Company’s solvency level could change its customers’ or its business associates’ perception of its financial health, and could adversely affect its business, results of operations and financial condition.
The Company’s business is inherently subject to market fluctuations and general economic conditions, particularly in Asia.
The Company’s business is inherently subject to global capital market fluctuations and general economic conditions. Global market factors, including inflation, deflation, interest rates, credit spreads, equity prices, real estate markets, energy prices, foreign currency exchange rates, consumer spending, business investment, government spending, the volatility and strength of the capital markets, the ongoing European sovereign debt crises and the so-called “fiscal cliff” in America resulting from impending tax rises and spending reductions, all affect the business and economic environment and, ultimately, the amount and profitability of the Company’s business. Adverse economic conditions, volatility and disruptions in global capital markets, such as those that occurred in late 2008 and 2009 during the global financial crisis and which have continued following the Eurozone sovereign debt crisis, can have an adverse effect on the Company, in part because the Company’s insurance liabilities and investment portfolios are sensitive to changing market factors.
Moreover, any potential market and economic downturns or geopolitical uncertainties in Hong Kong, its neighbouring countries or regions or the rest of the world may exacerbate the risks relating to the Hong Kong capital markets, which are expected to remain fragile and often volatile. During severe market downturns, the Company, like other insurance companies in Hong Kong, may have to dispose of certain of its investment assets, possibly at unfavourable prices, so as to maintain its solvency margin. In addition, limitations on the availability of financial derivative products in Hong Kong may limit the Company’s ability to hedge its market risk or interest rate risk.
In addition, upheavals in the financial markets can also affect the Company’s business through their effects on general levels of economic activity, employment and customer behaviour. In an economic downturn characterised by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for the Company’s financial and insurance products could be adversely affected. Demand for the Company’s insurance products, in particular, would be adversely affected by lower levels of disposable income. In addition, the Company may experience an elevated incidence of claims and lapses or surrenders of policies. The Company’s policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether.
20 The recent financial and debt crises have precipitated, and may continue to raise the possibility of, fiscal, monetary, regulatory and other governmental actions in Hong Kong and elsewhere. The Company cannot predict whether or when such actions may occur, nor can the Company predict what ultimate impact, if any, such actions or any other governmental actions could have on the Company’s business, results of operations and financial condition.
Hong Kong’s relationship with the rest of the PRC is unpredictable and could disrupt the Company’s business.
Hong Kong is a special administrative region of the PRC with its own local government. Hong Kong enjoys a high degree of autonomy from the PRC under the principle of “one country, two systems”. However, there can be no assurance that the Company’s financial condition and results of operations will not be adversely affected as a consequence of the exercise of PRC sovereignty over Hong Kong.
The Company’s operations are based in Hong Kong. A majority of the Company’s revenues are derived from operations conducted in Hong Kong. As a result, the Company’s financial condition and results of operations may be influenced by the political situation in Hong Kong and by the general state of the Hong Kong economy and the economies of the surrounding region, particularly the PRC.
If there is a change to Bermuda law or application of Bermuda law, there could be a significant and negative impact on the business of the Company.
The Company is a registered Bermuda insurance company and is subject to regulation and supervision in Bermuda. Bermuda insurance statutes, regulations and policies of the Bermuda Monetary Authority (the BMA) and the Minister of Finance in Bermuda require the Company, among other things, to: (a) maintain minimum levels of capital and surplus; (b) satisfy solvency standards; (c) restrict dividends and distributions; (d) obtain prior approval of ownership and transfer of shares; and (e) provide for the performance of certain periodic examinations of the Company and its financial condition. As a Class E insurer, the Company is required to maintain “Statutory Capital and Surplus” at a level equal to or in excess of its “Enhanced Capital Requirement” (ECR) which is established by reference to either the “Bermuda Solvency and Capital Requirement” (BSCR) model or an approved internal capital model. The BSCR is a risk based capital model which provides a method for determining an insurer’s capital requirement in terms of “Statutory Capital and Surplus”, by taking into account the risk characteristics of different aspects of the insurer’s business. To enable the Bermuda Monetary Authority (BMA) to better assess the quality of an insurer’s capital resources, the BMA has introduced a “three-tiered capital system” which commenced 1 January 2013. Under this system, the company’s capital instruments will be classified as basic or ancillary capital, which in turn will be classified into one of three tiers based on their “loss absorbency” characteristics. The highest quality capital will be classified as Tier 1 Capital and the lesser quality capital will be classified as Tier 2 Capital or Tier 3 Capital. Under this regime, not less than 80 per cent. of Tier 1 Capital and up to 20 per cent. of Tier 2 Capital may be used to support the company’s “Minimum Solvency Margin”. In addition, the available statutory capital and surplus of a company shall be equal to the sum of the following amounts:
(a) an amount of the insurer’s Tier 1 Capital which shall not be less than 50 per cent. of the value of the insurer’s ECR;
(b) an amount of the insurer’s Tier 2 Capital which shall not be more than the amount of clause (a); and
(c) an amount of the insurer’s Tier 3 Capital which shall not be more than 17.65 per cent. of the aggregate of the amounts calculated in clauses (a) and (b) to the extent that the aggregate sum of (b) and (c) does not exceed the amount of (a).
21 The BMA has recently introduced a “Group Supervision” regime. The BMA may, in respect of an insurance group, determine whether it is appropriate for it to be the “Group Supervisor” of that group. If the BMA determines that the Company should be subject to group supervision by the BMA, additional regulations will apply to the Company, including a “Group Solvency Requirement”.
It is not possible to predict the future impact on the Company’s operations as a result of changes in laws and regulations to which the Company may become subject. These statutes and regulations may, in effect, restrict the ability of the Company to write new policies, to distribute funds or to pursue investment strategies.
The BMA has been enhancing and continues to enhance Bermuda’s insurance regulatory framework with an aim to achieve European Solvency II equivalency, among other things. It is not possible to predict the future impact on the Company’s operations as a result in the changes in the laws and regulations, to which the Company is or may become subject.
Risks Relating to the Notes
The Notes and the Guarantee of the Notes will be effectively subordinated to the Company’s existing and future secured indebtedness and the Guarantee will be structurally subordinated to all existing and future obligations of the Company’s other subsidiaries.
The Notes will be the unsecured and unsubordinated obligations of the Issuer and will rank equally in right of payment with all of the Issuer’s existing and future unsecured and unsubordinated obligations. The Guarantee of the Notes will be the Company’s unsecured and unsubordinated obligation and will rank equally with all of the Company’s other existing and future unsecured and unsubordinated obligations. The Notes will be effectively subordinated to all of the Issuer’s existing and future secured indebtedness, to the extent of assets securing such indebtedness. The Guarantee of the Notes will be effectively subordinated to all of the Company’s existing and future secured indebtedness, to the extent of the assets securing such indebtedness. As at 31 December 2012, the Company had no outstanding secured indebtedness. The Company’s obligations under the Guarantee will be structurally subordinated to all existing and future obligations of its direct and indirect subsidiaries. All claims of creditors of these subsidiaries, including trade creditors, lenders and all other creditors, will have priority as to the assets of such subsidiaries over claims of the Company and its creditors, including Noteholders (as defined in Condition 2(a) of the Terms and Conditions of the Notes) as beneficiaries of the Guarantee. As at 31 December 2012, the Company’s subsidiaries had total liabilities (excluding amounts owed to the Company) of HK$774.6 million (U.S.$99.3 million).
The Guarantee of the Notes will be effectively subordinated to the liabilities of the Company’s long term business, to the extent of the assets maintained by the Company in respect of such business.
The ICO provides that an insurer carrying on long term insurance (as defined in such Ordinance) must segregate the assets in respect of its long term business to meet any liabilities attributable to that business. These segregated assets shall be applicable only for the purposes of meeting liabilities attributable to the long term business of the insurer, provided that where, on insolvency, the value of the assets available for the long term business exceeds the amount of liabilities, any surplus will be available for distribution to the Company’s other unsecured creditors, including holders of Notes under the Guarantee of the Notes. Therefore, the Guarantee of the Notes will be effectively subordinated to the liabilities of the Company’s long term business, to the extent of the assets maintained by the Company in respect of such business. As at 31 December 2012, the Company had HK$24.7 billion (U.S.$3,167 million) of assets maintained in respect of its long term business.
22 The Bermuda Insurance Law provides that, subject to any rules made for determining the amount of the liabilities of an insurer to policyholders of any class or description for the purpose of proof in a winding up and generally for carrying into effect the Bermuda Insurance Act in respect to the winding up of insurers (Winding-Up Rules), in any winding up of a long-term insurer: (i) the assets representing the fund maintained by the insurer in respect of its long-term business are only available for meeting the liabilities of the insurer attributable to its long-term business; and (ii) other assets of the insurer are only available for meeting the liabilities of the insurer attributable to its other business. Where the value of the assets mentioned in either (i) or (ii) exceeds the amount of the liabilities mentioned therein, the restriction imposed does not apply to the excess. No Winding-Up Rules have been made to date. The Guarantee of the Notes will therefore be effectively subordinated to liabilities of the Company’s long-term business, to the extent of the assets in the fund maintained by the Company’s in respect of such business. Where the value of the assets available in the fund maintained by the Company’s in respect of its long-term business exceeds the amount of liabilities attributable to the Company’s long-term business, any surplus will be available for distribution to other unsecured creditors, including holders of the Notes under the Guarantee of the Notes.
The Bermuda legal advisers to the Company have advised that they are not aware of any long term insurers incorporated in Bermuda that have commenced any form of insolvency proceedings in Bermuda. They have advised that, as a matter of Bermuda law, there is considerable uncertainty over how any such company would be liquidated.
There may be no public market for the Notes.
The Notes are a new issue of securities for which there is currently no trading market. Application has been made for the listing of the Notes on the SGX-ST. There can be no assurance as to whether a trading market for the Notes will develop or as to the liquidity of any such trading market. If any of the Notes are traded after their initial issue, they may trade at a discount or premium from their initial offering price, depending on prevailing interest rates, the market for similar securities and the market for the Notes and other factors, including general economic conditions and the Company’s financial condition, performance and prospects. There can be no assurance as to the future price level of the Notes after their initial issue.
The Notes may not be a suitable investment for all investors.
Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:
(i) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained or incorporated by reference in this Offering Circular or any applicable supplement;
(ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio;
(iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal or interest payments is different from the potential investor’s currency;
(iv) understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant financial markets; and
23 (v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.
The conditions of the Notes contain provisions which require the Issuer to offer to redeem all outstanding Notes upon the occurrence of a Change of Control Trigger Event
Under the conditions of the Notes, following the occurrence of a Change of Control Trigger Event (as defined in Condition 5(c) of the Terms and Conditions of the Notes), any Noteholder will have the right to require the Issuer to redeem all but not some only of that Noteholder’s Notes at 101 per cent. of the principal amount of the Notes plus accrued interest up to but excluding the redemption date. If a Change of Control Trigger Event were to occur, there can be no assurance that the Issuer or, failing which, the Company would have sufficient funds available at such time to pay the redemption price of the outstanding Notes. Furthermore, an occurrence of a Change of Control Trigger Event could be outside of the control and/or knowledge of the Issuer or the Company and there can be no assurance that a Change of Control Trigger Event will not occur.
The conditions of the Notes contain provisions which may permit their modification without the consent of all investors.
The conditions of the Notes contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority.
Noteholders could be adversely affected by a change in English law or administrative practice.
The conditions of the Notes are based on English law in effect as at the date of this Offering Circular. No assurance can be given as to the impact of any possible judicial decision or change to English law or administrative practice after the date of this Offering Circular and any such change could materially adversely impact the value of the Notes affected by it.
If an investor holds Notes which are not denominated in the investor’s home currency, he will be exposed to movements in exchange rates adversely affecting the value of his holding. In addition, the imposition of exchange controls in relation to any Notes could result in an investor not receiving payments on those Notes.
The Issuer will pay principal and interest on the Notes and the Company will make any payments under the Guarantee of the Notes in United States dollars. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the Investor’s Currency) other than United States dollars. These include the risk that exchange rates may significantly change (including changes due to devaluation of the United States dollars or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to United States dollars would decrease (1) the Investor’s Currency — equivalent yield on the Notes, (2) the Investor’s Currency — equivalent value of the principal payable on the Notes and (3) the Investor’s Currency — equivalent market value of the Notes.
24 The value of the Notes may be adversely affected by movements in market interest rates.
Investment in the Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of them.
Credit ratings assigned to the Notes may not reflect all the risks associated with an investment in the Notes.
Fitch and Moody’s have assigned credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised or withdrawn by the rating agency at any time.
The reporting and disclosure standards applicable to the Company may differ significantly from those applicable to companies with equity securities listed on a stock exchange and only limited financial information of the Company will be made available to Noteholders so long as the Notes are rated.
Shares in the Company are not listed on any stock exchange. As a result, the Company is not bound by any continuing obligations similar to those imposed on companies with equity securities listed on the SGX-ST or on other stock exchanges.
Further, the Company is not bound by any continuing obligation as regards publication of non-public price sensitive information, major transactions/very substantial transactions or connected transactions, nor is it subject to any code as regards corporate governance. Although the Company will be required to comply with the continuing obligations of the SGX-ST pursuant to the listing of the Notes on such exchange, the Company cannot provide any assurance that the level of publicly available information in relation to the Company or the Company, or the information disclosed by the Company on an ongoing basis, will be equivalent to that available or disclosed in relation to companies with equity securities listed on the SGX-ST or on other stock exchanges.
Legal investment considerations may restrict certain investments.
The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (1) the Notes are legal investments for it, (2) the Notes can be used as collateral for various types of borrowing and (3) other restrictions apply to its purchase or pledge of the Notes. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules.
25 TERMS AND CONDITIONS OF THE NOTES
The following other than the words in italics is the text of the terms and conditions of the Notes which will appear on the reverse of each of the definitive certificates evidencing the Notes.
The U.S.$250,000,000 4.125 per cent. Guaranteed Notes due 2023 (the “Notes”, which expression includes any further notes issued pursuant to Condition 13 (Further issues) and forming a single series therewith) of Ageas Capital (Asia) Limited (the “Issuer”) are constituted by a deed of covenant dated 25 April 2013 (as amended or supplemented from time to time, the “Deed of Covenant”) entered into by the Issuer and are the subject of (a) a deed of guarantee dated 25 April 2013 (as amended or supplemented from time to time, the “Deed of Guarantee”) entered into by Ageas Insurance Company (Asia) Limited (the “Guarantor”) and, (b) a fiscal agency agreement dated 25 April 2013 (as amended or supplemented from time to time, the “Fiscal Agency Agreement”) between the Issuer, the Guarantor, BNP Paribas Securities Services Luxembourg Branch as registrar (the “Registrar”, which expression includes any successor registrar appointed from time to time in connection with the Notes), BNP Paribas Securities Services Luxembourg Branch as fiscal agent (the “Fiscal Agent”, which expression includes any successor fiscal agent appointed from time to time in connection with the Notes), the transfer agents named therein (the “Transfer Agents”, which expression includes any successor or additional transfer agents appointed from time to time in connection with the Notes) and the paying agents named therein (together with the Fiscal Agent, the “Paying Agents”, which expression includes any successor or additional paying agents appointed from time to time in connection with the Notes). References herein to the “Agents” are to the Registrar, the Fiscal Agent, the Transfer Agents and the Paying Agents and any reference to an “Agent” is to any one of them. Certain provisions of these terms and conditions (the “Conditions”) are summaries of the Fiscal Agency Agreement, the Deed of Covenant and the Deed of Guarantee and subject to their detailed provisions. The Noteholders (as defined below) are bound by, and are deemed to have notice of, all the provisions of the Fiscal Agency Agreement, the Deed of Covenant and the Deed of Guarantee applicable to them. Copies of the Fiscal Agency Agreement, the Deed of Covenant and Deed of Guarantee are available for inspection by Noteholders during normal business hours at the Specified Offices (as defined in the Fiscal Agency Agreement) of each of the Agents, the initial Specified Offices of which are set out below.
1. Form, Denomination, Status and Guarantee
(a) Form and denomination: The Notes are in registered form in the denomination of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof (each, an “Authorised Denomination”).
(b) Status of the Notes: The Notes constitute direct, general, unconditional, unsubordinated and (subject to Condition 3 (Negative Pledge)) unsecured obligations of the Issuer which will at all times rank pari passu without any preference or priority among themselves and at least pari passu with all other present and future unsecured and unsubordinated obligations of the Issuer, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application.
(c) Guarantee of the Notes: The Guarantor has in the Deed of Guarantee unconditionally and irrevocably guaranteed the due and punctual payment of all sums from time to time payable by the Issuer in respect of the Notes. This guarantee (the “Guarantee of the Notes”) constitutes direct, general, unconditional, unsubordinated and (subject to Condition 3 (Negative Pledge)) unsecured
26 obligations of the Guarantor which will at all times rank at least pari passu with all other present and future unsecured obligations of the Guarantor, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application.
Pursuant to the Insurance Companies Ordinance (Cap. 41 of the Laws of Hong Kong) (the ICO), the Guarantee of the Notes will be effectively subordinated to the liabilities of the Guarantor’s long term business (as defined in the ICO), to the extent of the assets maintained by the Guarantor in respect of such business. As of 31 December 2012, the Company had HK$24.6 billion (U.S.$3.174 billion) of assets maintained in respect of its long term business. See “Risk Factors — Risks Relating to the Notes — The Guarantee of the Notes will be effectively subordinated to the liabilities of the Company’s long term business, to the extent of the assets maintained by the Company in respect of such business”.
2. Register, Title and Transfers
(a) Register: The Registrar will maintain a register (the “Register”) in respect of the Notes outside the United Kingdom in accordance with the provisions of the Fiscal Agency Agreement. In these Conditions, the “Holder” of a Note means the person in whose name such Note is for the time being registered in the Register (or, in the case of a joint holding, the first named thereof) and “Noteholder” shall be construed accordingly. A certificate (each, a “Note Certificate”) will be issued to each Noteholder in respect of its registered holding. Each Note Certificate will be numbered serially with an identifying number which will be recorded in the Register.
(b) Title: The Holder of each Note shall (except as otherwise required by law) be treated as the absolute owner of such Note for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any other interest therein, any writing on the Note Certificate relating thereto (other than the endorsed form of transfer) or any notice of any previous loss or theft of such Note Certificate) and no person shall be liable for so treating such Holder. No person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act 1999.
(c) Transfers: Subject to paragraphs (f) (Closed periods) and (g) (Regulations concerning transfers and registration) below, a Note may be transferred upon surrender of the relevant Note Certificate, with the endorsed form of transfer duly completed and signed by the Noteholder or his attorney duly authorised in writing, at the Specified Office of the Registrar or any Transfer Agent, together with such evidence as the Registrar or (as the case may be) such Transfer Agent may reasonably require to prove the title of the transferor and the authority of the individuals who have executed the form of transfer; provided, however, that a Note may not be transferred unless the principal amount of Notes transferred and (where not all of the Notes held by a Holder are being transferred) the principal amount of the balance of Notes not transferred are Authorised Denominations. Where not all the Notes represented by the surrendered Note Certificate are the subject of the transfer, a new Note Certificate in respect of the balance of the Notes will be issued to the transferor. No transfer of title to a Note will be valid unless and until entered on the Register.
(d) Registration and delivery of Note Certificates: Within five business days of the surrender of a Note Certificate in accordance with paragraph (c) (Transfers) above, the Registrar will register the transfer in question and deliver a new Note Certificate of a like principal amount to the Notes transferred to each relevant Holder at its Specified Office or (as the case may be) the Specified Office of any Transfer Agent or (at the request and risk of any such relevant Holder) by uninsured first class mail
27 (free of charge to the Holder and at the Issuer’s (failing which the Guarantor’s) expense airmail if overseas) to the address specified for the purpose by such relevant Holder. In this paragraph, “business day” means a day on which commercial banks are open for general business (including dealings in foreign currencies) in the city where the Registrar or (as the case may be) the relevant Transfer Agent has its Specified Office.
(e) No charge: The transfer of a Note will be effected without charge by or on behalf of the Issuer, the Registrar or any Transfer Agent but upon (i) payment (or the giving of such indemnity or security as the Issuer, the Registrar or (as the case may be) such Transfer Agent may require) in respect of any tax or other duty of whatsoever nature which may be levied or imposed in connection with such transfer, (ii) the Registrar or (as the case may be) such Transfer Agent being satisfied in its absolute discretion with the documents of title or identity of the person making the application, and (iii) the Issuer and/or the Registrar and/or the relevant Transfer Agent being satisfied that the Regulations (as defined in the Fiscal Agency Agreement) concerning the transfer of Notes have been complied with.
(f) Closed periods: Noteholders may not require transfers of a Note to be registered:
(i) during the period of 15 calendar days ending on the due date for any payment of principal or interest in respect of the Notes;
(ii) during the period of 15 calendar days ending on any date on which Notes may be called for redemption by the Issuer at its option pursuant to Condition 5(b) (Redemption for tax reasons) or Condition 5(d) (Redemption at the option of the Issuer); and
(iii) after a Put Exercise Notice has been delivered in respect of the relevant Note(s) in accordance with Condition 5(c) (Redemption for Change of Control Trigger Event).
(g) Regulations concerning transfers and registration: All transfers of Notes and entries on the Register are subject to the detailed regulations concerning the transfer of Notes scheduled to the Fiscal Agency Agreement. The regulations may be changed by the Issuer with the prior written approval of the Fiscal Agent and the Registrar. A copy of the current regulations will be mailed (free of charge to the Holder and at the Issuer’s (failing which the Guarantor’s) expense) by the Registrar to any Noteholder who requests in writing a copy of such regulations.
3. Negative Pledge
So long as any Note remains outstanding (as defined in the Fiscal Agency Agreement), neither the Issuer nor the Guarantor shall, and the Issuer and the Guarantor shall procure that none of the Guarantor’s Principal Subsidiaries will, create or permit to subsist any Security Interest upon the whole or any part of its present or future undertaking, assets or revenues (including uncalled capital) to secure any Relevant Indebtedness or Guarantee of Relevant Indebtedness without at the same time or prior thereto (a) securing the Notes equally and rateably therewith or (b) providing such other security for the Notes as may be approved by an Extraordinary Resolution (as defined in the Fiscal Agency Agreement) of the Noteholders.
28 In these Conditions:
“Guarantee” means, in relation to any indebtedness of any Person, any obligation of another Person to pay such indebtedness including (without limitation):
(a) any obligation to purchase such indebtedness;
(b) any obligation to lend money, to purchase or subscribe shares or other securities or to purchase assets or services in order to provide funds for the payment of such indebtedness;
(c) any indemnity against the consequences of a default in the payment of such indebtedness; and
(d) any other agreement to be responsible for such indebtedness;
“Person” means any individual, company, corporation, firm, partnership, joint venture, undertaking, association, organisation, trust, state or agency of a state or other entity, whether or not having separate legal personality;
“Principal Subsidiaries” means any Subsidiary of the Guarantor:
(a) whose gross revenue (consolidated in the case of a Subsidiary which itself has consolidated Subsidiaries) or whose gross assets (consolidated in the case of a Subsidiary which itself has consolidated Subsidiaries) represent not less than 5 per cent. of the consolidated gross revenue, or, as the case may be, the consolidated gross assets of the Guarantor and its Subsidiaries taken as a whole, all as calculated respectively by reference to the latest audited or reviewed financial statements (consolidated or, as the case may be, unconsolidated) of the Subsidiary and the then latest audited or reviewed consolidated financial statements of the Guarantor, provided that:
(i) in the case of a Subsidiary acquired after the end of the financial period to which the then latest audited or reviewed consolidated financial statements of the Guarantor relate for the purpose of applying each of the foregoing tests, the reference to the Guarantor’s latest audited or reviewed consolidated financial statements shall be deemed to be a reference to such audited or reviewed financial statements as if such Subsidiary had been shown therein by reference to its then latest relevant audited or reviewed financial statements, adjusted as deemed appropriate by the auditor for the time being, after consultation with the Guarantor;
(ii) if at any relevant time in relation to the Guarantor or any Subsidiary no financial statements are prepared and audited, its gross revenue and gross assets (consolidated, if applicable) shall be determined on the basis of pro forma consolidated financial statements (consolidated, if applicable) prepared for this purpose; and
(iii) if the financial statements of any Subsidiary (not being a Subsidiary referred to in proviso (i) above) are not consolidated with those of the Guarantor, then the determination of whether or not such Subsidiary is a Principal Subsidiary shall be based on a pro forma consolidation of its financial statements (consolidated, if appropriate) with the consolidated financial statements (determined on the basis of the foregoing) of the Guarantor; or
29 (b) to which is transferred all or substantially all of the business, undertaking and assets of another Subsidiary which immediately prior to such transfer is a Principal Subsidiary, whereupon (a) in the case of a transfer by a Principal Subsidiary, the transferor Principal Subsidiary shall immediately cease to be a Principal Subsidiary and (b) the transferee Subsidiary shall immediately become a Principal Subsidiary, provided that on or after the date on which the relevant financial statements for the financial period current at the date of such transfer are published, whether such transferor Subsidiary or such transferee Subsidiary is or is not a Principal Subsidiary shall be determined pursuant to the provisions of sub-paragraph (a) above;
A report by two of the directors of the Guarantor that in their opinion (making such adjustments (if any) as they shall deem appropriate) a Subsidiary is or is not or was or was not at any particular time or during any particular period a Principal Subsidiary shall, in the absence of manifest error, be conclusive and binding on the Issuer, the Guarantor and the Noteholders.
“Relevant Indebtedness” means any indebtedness which is in the form of or represented by any bond, note, debenture, debenture stock, loan stock, certificate or other instrument which is, or is capable of being, listed, quoted or traded on any stock exchange or in any securities market (including, without limitation, any over-the-counter market);
“Security Interest” means any mortgage, charge, pledge, lien or other security interest including, without limitation, anything analogous to any of the foregoing under the laws of any jurisdiction; and
“Subsidiary” means, in relation to any Person (the “first Person”) at any particular time, any other Person (the “second Person”):
(a) whose affairs and policies the first Person controls or has the power to control, whether by ownership of share capital, contract, the power to appoint or remove a majority of members of the governing body of the second Person or otherwise; or
(b) whose financial statements are, in accordance with applicable law and generally accepted accounting principles, consolidated with those of the first Person.
4. Interest
The Notes bear interest from 25 April 2013 (the “Issue Date”) at the rate of 4.125 per cent. per annum, (the “Rate of Interest”) payable semi-annually in arrear on 25 April and 25 October in each year (each, an “Interest Payment Date”), subject as provided in Condition 6 (Payments).
Each Note will cease to bear interest from the due date for redemption unless, upon due presentation, payment of principal is improperly withheld or refused, in which case it will continue to bear interest at such rate (both before and after judgment) until whichever is the earlier of (a) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (b) the day which is seven days after the Fiscal Agent has notified the Noteholders that it has received all sums due in respect of the Notes up to such seventh day (except to the extent that there is any subsequent default in payment to the relevant Noteholder under these Conditions).
The amount of interest payable on each Interest Payment Date shall be U.S.$4,125 in respect of each Note of U.S.$200,000 denomination and U.S.$20.63 in respect of each Note of U.S.$1,000 denomination. If interest is required to be paid in respect of a Note on any other date, it shall be calculated by applying the Rate of Interest to the Calculation Amount, multiplying the product by the relevant Day Count Fraction, rounding the
30 resulting figure to the nearest cent (half a cent being rounded upwards) and multiplying such rounded figure by a fraction equal to the Authorised Denomination of such Note divided by the Calculation Amount, where “Calculation Amount” means U.S.$1,000 and “Day Count Fraction” means, in respect of any period, the number of days in the relevant period divided by 360 (the number of days to be calculated on the basis of a year of 360 days with 12 30-day months).
5. Redemption and Purchase
(a) Scheduled redemption: Unless previously redeemed, or purchased and cancelled in accordance with the Conditions, the Notes will be redeemed at their principal amount on 25 April 2023 (the “Maturity Date”), subject as provided in Condition 6 (Payments).
(b) Redemption for tax reasons: The Notes may be redeemed at the option of the Issuer in whole, but not in part, at any time, on giving not less than 30 nor more than 60 days’ notice to the Noteholders (which notice shall be irrevocable) at their principal amount, together with interest accrued to, but excluding, the date fixed for redemption, if:
(i) (A) the Issuer has or will become obliged to pay additional amounts as provided or referred to in Condition 7 (Taxation) as a result of any change in, or amendment to, the laws or regulations of the British Virgin Islands or any political subdivision or any authority thereof or therein having power to tax, or any change in the application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after 18 April 2013; and (B) such obligation cannot be avoided by the Issuer taking reasonable measures available to it; or
(ii) (A) the Guarantor has or (if a demand was made under the Guarantee of the Notes) would become obliged to pay additional amounts as provided or referred to in Condition 7 (Taxation) or the Guarantee of the Notes, as the case may be, as a result of any change in, or amendment to, the laws or regulations of Bermuda or Hong Kong or any political subdivision or any authority thereof or therein having power to tax, or any change in the application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after 18 April 2013; and (B) such obligation cannot be avoided by the Guarantor taking reasonable measures available to it;
provided, however, that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer or the Guarantor would be obliged to pay such additional amounts if a payment in respect of the Notes were then due or (as the case may be) a demand under the Guarantee of the Notes were then made.
Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuer shall deliver or procure that there is delivered to the Fiscal Agent:
(A) a certificate signed by two directors of the Issuer stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred; and
31 (B) an opinion of independent legal advisers of recognised standing to the effect that the Issuer or (as the case may be) the Guarantor has or will become obliged to pay such additional amounts as a result of such change or amendment.
Upon the expiry of any such notice as is referred to in this Condition 5(b), the Issuer shall be bound to redeem the Notes in accordance with this Condition 5(b).
(c) Redemption for Change of Control Trigger Event: Following the occurrence of a Change of Control Trigger Event, the Issuer shall give notice to Noteholders and the Fiscal Agent in accordance with Condition 14 (Notices) by not later than 14 days following the first day on which it becomes aware of the occurrence of a Change of Control Trigger Event, which notice shall specify the procedure for exercise by holders of their rights to require redemption of the Notes pursuant to this Condition 5(c) (Redemption for Change of Control Trigger Event), and the Holder of any Note will have the right at any time following the occurrence of a Change of Control Trigger Event, at such Holder’s option, to require the Issuer to redeem all but not some only of that Holder’s Notes on the Change of Control Trigger Event Put Date at 101 per cent. of its principal amount, together with accrued interest up to, but excluding the Change of Control Trigger Event Put Date. To exercise such right, the Holder of the relevant Note must deposit at the Specified Office of any Paying Agent a duly completed and signed notice of redemption, in the form for the time being current, obtainable from the Specified Office of any Paying Agent (a “Put Exercise Notice”), together with the Note Certificates evidencing the Notes to be redeemed by not later than 30 days following a Change of Control Trigger Event, or, if later, 30 days following the date upon which notice thereof is given to Noteholders by the Issuer in accordance with Condition 14 (Notices). The “Change of Control Trigger Event Put Date” shall be the 14th day after the expiry of such period of 30 days as referred to above.
A Put Exercise Notice, once delivered, shall be irrevocable and the Issuer shall redeem the Notes subject to the Put Exercise Notices delivered as aforesaid.
In this Condition 5(c) (Redemption for Change of Control Trigger Event):
“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person;
a“Change of Control” occurs when:
(a) Ageas Insurance International N.V. ceases to hold, directly or indirectly, more than 50 per cent. of the voting rights of the issued share capital of the Guarantor or ceases to have the direct or indirect right to appoint and/or remove all or the majority of the members of the Guarantor’s board of directors or other governing body, whether obtained by ownership of share capital, the possession of voting rights, contract or otherwise;
(b) any Person or Persons, other than the Controlling Entity, acting together acquires Control of the Guarantor; or
(c) the Guarantor consolidates with or merges into or sells or transfers all or substantially all of its assets to any other Person, unless the consolidation, merger, sale or transfer will not result in the other Person or Persons acquiring Control over the Guarantor or the successor entity;
32 a“Change of Control Trigger Event” means the occurrence of a Change of Control, and if the Guarantor is rated by a Rating Agency on a Rating Date, the occurrence of both a Change of Control and a Rating Decline;
“Control” means the acquisition or control of more than 50 per cent. of the voting rights of the issued share capital of the Guarantor or the right to appoint and/or remove all or the majority of the members of the Guarantor’s board of directors or other governing body, whether obtained directly or indirectly, and whether obtained by ownership of share capital, the possession of voting rights, contract or otherwise and the terms “Controlling” and “Controlled” shall have meanings correlative to the foregoing;
“Controlling Entity” means Ageas Insurance International N.V. (incorporated in the Netherlands) or any of its Affiliates;
“Fitch” means Fitch Ratings Limited;
“Investment Grade” means (i) a long term debt rating of “Baa3” or above by Moody’s, or any of its successors or assigns; or (ii) a long term debt rating of “BBB-” or above by Fitch, or any of its successors or assigns;
“Moody’s” means Moody’s Investors Service, Inc.;
“Rating Agency” means each of Moody’s and Fitch;
“Rating Date” means in connection with a Change of Control Trigger Event, that date which is 90 days prior to the earlier of (x) such Change of Control and (y) a public notice of the occurrence of such Change of Control or of the intention by the Guarantor or any other Person or Persons to effect such Change of Control; and
“Rating Decline” means the occurrence on, or within 90 days after, the later of the date, or notice by the Issuer or the Guarantor, or public notice of the occurrence of, a Change of Control or the intention by the Guarantor or any other Person or Persons to effect a Change of Control (which period shall be extended so long as the rating of the Notes is under publicly announced consideration for possible downgrade by any of the Rating Agencies) (the “Rating Change Period”) of any of the events listed below:
(a) in the event the Notes are rated by one or more Rating Agencies on the Rating Date as Investment Grade, the rating of the Notes by that or any such Rating Agency shall be below Investment Grade or the Notes shall cease to be rated by any Rating Agency; or
(b) in the event the Notes are rated below Investment Grade by one or more Rating Agencies on the Rating Date, the rating of the Notes or by that or any such Rating Agency shall be decreased by one or more gradations (including gradations within rating categories as well as between rating categories) or the Notes shall cease to be rated by any Rating Agency, provided in each case that a Rating Decline arising by virtue of a particular change in rating will be deemed not to have occurred unless the Rating Agency publicly announces or confirms within the Rating Change Period (whether or not at the request of the Issuer or the Guarantor) that the reduction or withdrawal was the result (in whole or in part) of any event or circumstance comprised in or arising as a result of the Change of Control or anticipated Change of Control.
33 (d) Redemption at the option of the Issuer: The Issuer may, at any time, on giving not less than 15 days’ nor more than 30 days’ notice to the Holders, the Registrar and the Fiscal Agent (which shall be irrevocable), redeem the Notes in whole, but not in part, at their Make Whole Redemption Price, together with interest accrued but unpaid to the date fixed for redemption.
For the purpose of this Condition 5(d) (Redemption at the option of the Issuer):
“business day” means any day on which banks are open for general business (including dealings in foreign currencies) in Hong Kong and New York City;
“Comparable Treasury Issue” means the United States Treasury selected by the Determination Agent as having a maturity comparable to the remaining term of the Notes from the relevant date fixed for redemption to the Maturity Date, that would be utilised, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of a maturity most nearly equal to the Maturity Date;
“Comparable Treasury Price” means, with respect to any redemption date, the average of three, or such lesser number as is obtained by the Determination Agent, Reference Treasury Dealer Quotations for the relevant date fixed for redemption of the Notes;
“Determination Agent” means an independent investment bank of international repute, appointed by the Issuer and the Guarantor (and notice thereof is given to Holders of the Notes and the Fiscal Agent by the Issuer in accordance with Condition 14 (Notices)) for the purposes of performing any of the functions expressed to be performed by it under these Conditions;
“Interest Period” means each period from, and including, the Issue Date or an Interest Payment Date to, but excluding, the immediately following Interest Payment Date or, as the case may be, the Maturity Date;
“Make Whole Redemption Price” means in respect of each Note, (a) the principal amount of such Note or, if this is higher (b) the amount equal to the sum of the present value of the principal amount of such Note, together with the present values of the interest payable for the relevant Interest Periods from the relevant date fixed for redemption to the Maturity Date, in each case, discounted to such redemption date on a semi-annual compounded basis at the adjusted US Treasury Rate plus 0.50 per cent., all as determined by the Determination Agent;
“Reference Treasury Dealer” means each of the three nationally recognised investment banking firms selected by the Determination Agent that are primary US Government securities dealers;
“Reference Treasury Dealer Quotations” means with respect to each Reference Treasury Dealer and any date fixed for redemption of the Notes, the average, as determined by the Determination Agent, of the bid and asked prices for the Comparable Treasury Issue, expressed in each case as a percentage of its principal amount, quoted in writing to the Determination Agent by such Reference Treasury Dealer at 5:00 p.m., New York City time on the third business day immediately preceding such due date for redemption; and
“U.S. Treasury Rate” means either (a) the rate per annum equal to the yield, that represents the average for the week immediately preceding that in which the third business day prior to the relevant date fixed for redemption falls, appearing in the
34 most recently published statistical release designated “H.15(519)” or any successor publication that is published weekly by the Board of Governors of the Federal Reserve System and that establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption “Treasury Constant Maturities” for the maturity corresponding to the Comparable Treasury Issue provided that (a) if no maturity appears that is within three months before or after the Maturity Date, yields for the two published maturities most closely corresponding to the Comparable Treasury Issue shall be determined and the US Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, and (b) if such release (or any successor release) is not published during the week preceding that in which the third business day prior to the relevant date falls or such release (or successor release) does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for the relevant date fixed for redemption, in each case calculated on the third business day immediately preceding the relevant date fixed for redemption.
Any reference in these Conditions to principal and/or interest shall be deemed to include any Make Whole Redemption Price which may be payable under this Condition 5(d) (Redemption at the option of the Issuer).
(e) Notice of Redemption: All Notes in respect of which any notice of redemption is given under this Condition 5 (Redemption and Purchase) shall be redeemed on the date specified in such notice in accordance with this Condition 5 (Redemption and Purchase). If there is more than one notice of redemption given in respect of any Note (which shall include any notice given by the Issuer pursuant to Condition 5(b) (Redemption for tax reasons), 5(d) (Redemption at the option of the Issuer)orany Put Exercise Notice given by a Noteholder pursuant to Condition 5(c) (Redemption for Change of Control Trigger Event)) the notice given first in time shall prevail and in the event of two notices being given on the same date, the first to be given.
(f) No other redemption: The Issuer shall not be entitled to redeem the Notes otherwise than as provided in paragraphs (a) (Scheduled redemption)to(d)(Redemption at the option of the Issuer) above.
(g) Purchase: The Issuer, the Guarantor or any of their respective Subsidiaries may at any time purchase Notes in the open market or otherwise and at any price.
(h) Cancellation: All Notes so redeemed or purchased by the Issuer, the Guarantor or any of their respective Subsidiaries shall be cancelled and may not be reissued or resold.
6. Payments
(a) Principal: Payments of principal shall be made by U.S. dollar cheque drawn on, or, upon application by a Holder of a Note to the Specified Office of the Fiscal Agent not later than the fifteenth day before the due date for any such payment, by transfer to a U.S. dollar account maintained by the payee with, a bank in New York City and (in the case of redemption) upon surrender (or, in the case of part payment only, endorsement) of the relevant Note Certificates at the Specified Office of any Paying Agent.
(b) Interest: Payments of interest shall be made by U.S. dollar cheque drawn on, or upon application by a Holder of a Note to the Specified Office of the Fiscal Agent not later than the fifteenth day before the due date for any such payment, by transfer to a U.S.
35 dollar account maintained by the payee with, a bank in New York City and (in the case of interest payable on redemption) upon surrender (or, in the case of part payment only, endorsement) of the relevant Note Certificates at the Specified Office of any Paying Agent.
(c) Payments subject to fiscal laws and other laws: All payments in respect of the Notes are subject in all cases to any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 7 (Taxation). No commissions or expenses shall be charged to the Noteholders in respect of such payments.
(d) Payments on business days: Where payment is to be made by transfer to a U.S. dollar account, payment instructions (for value the due date, or, if the due date is not a business day, for value the next succeeding business day) will be initiated and, where payment is to be made by U.S. dollar cheque, the cheque will be mailed (at the risk and, if mailed at the request of the Noteholder otherwise than by ordinary mail, expense of the Noteholder) (i) (in the case of payments of principal and interest payable on redemption) on the later of the due date for payment and the day on which the relevant Note Certificate is surrendered (or, in the case of part payment only, endorsed) at the Specified Office of a Paying Agent and (ii) (in the case of payments of interest payable other than on redemption) on the due date for payment. A Holder of a Note shall not be entitled to any interest or other payment in respect of any delay in payment resulting from (A) the due date for a payment not being a business day or (B) a cheque mailed in accordance with this Condition 6 (Payments) arriving after the due date for payment or being lost in the mail. In this paragraph, “business day” means any day on which banks are open for general business (including dealings in foreign currencies) in New York City and Hong Kong and, in the case of surrender (or, in the case of part payment only, endorsement) of a Note Certificate, in the place in which the Note Certificate is surrendered (or, as the case may be, endorsed).
(e) Partial payments: If a Paying Agent makes a partial payment in respect of any Note, the Issuer shall procure that the amount and date of such payment are noted on the Register and, in the case of partial payment upon presentation of a Note Certificate, that a statement indicating the amount and the date of such payment is endorsed on the relevant Note Certificate.
(f) Record date: Each payment in respect of a Note will be made to the person shown as the Holder in the Register at the opening of business in the place of the Registrar’s Specified Office on the fifteenth day before the due date for such payment (the “Record Date”). Where payment in respect of a Note is to be made by cheque, the cheque will be mailed (at the risk and, if mailed at the request of the Noteholder otherwise than by ordinary mail, at the expense of such Noteholder) to the address shown as the address of the Holder in the Register at the opening of business on the relevant Record Date.
7. Taxation
All payments of principal and interest in respect of the Notes by or on behalf of the Issuer or the Guarantor shall be made free and clear of, and without withholding or deduction for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the British Virgin Islands, Bermuda or Hong Kong or any political subdivision thereof or any authority therein or thereof having power to tax, unless the withholding or deduction of such taxes, duties, assessments or governmental charges is required by law. In that event the Issuer or (as the case may be) the Guarantor shall pay such additional
36 amounts as will result in receipt by the Noteholders of such amounts after suchwithholding or deduction as would have been received by them had no such withholding or deduction been required, except that no such additional amounts (including any interest) shall be payable in respect of any Note:
(a) Other connection: held by a Holder which is liable to such taxes, duties, assessments or governmental charges in respect of such Note or, as the case may be, payments made by the Guarantor by reason of its having some connection with the jurisdiction by which such taxes, duties, assessments or charges have been imposed, levied, collected, withheld or assessed other than the mere holding of the Note; or
(b) Payment to individuals: where such withholding or deduction is imposed on a payment to an individual or residual entity and is required to be made pursuant to European Council Directive 2003/48/EC on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or
(c) Payment by another Paying Agent: held by a Holder who would have been able to avoid such withholding or deduction by arranging to receive the relevant payment through another Paying Agent in a member state of the European Union; or
(d) Presentation more than 30 days after the Relevant Date: where (in the case of a payment of principal or interest on redemption) the relevant Note Certificate is surrendered for payment more than 30 days after the Relevant Date except to the extent that the relevant Holder would have been entitled to such additional amounts if it had surrendered the relevant Note Certificate on the last day of such period of 30 days assuming (whether or not such is in fact the case) that day to have been a business day (as defined in Condition 6 (Payments)); or
(e) Failure to make declarations: in respect of which the Note Certificate representing it is presented for payment by or on behalf of a Holder who would not be liable or subject to the withholding or deduction by making a declaration of non-residence or other similar claim for exemption to the relevant tax authority.
In these Conditions, “Relevant Date” means whichever is the later of (1) the date on which the payment in question first becomes due and (2) if the full amount payable has not been received in New York City by the Fiscal Agent on or prior to such due date, the date on which (the full amount having been so received) notice to that effect has been given to the Noteholders.
Any reference in these Conditions to principal or interest shall be deemed to include any additional amounts in respect of principal or interest (as the case may be) which may be payable under this Condition 7 (Taxation).
If the Issuer or the Guarantor becomes subject at any time to any taxing jurisdiction other than the British Virgin Islands, Bermuda or Hong Kong respectively, references in these Conditions to the British Virgin Islands, Bermuda or Hong Kong shall be construed as references to the British Virgin Islands, Bermuda or Hong Kong (as the case may be) and/or such other jurisdiction.
37 8. Events of Default
If any of the following events occurs and is continuing:
(a) Non-payment: the Issuer fails to pay any amount of principal in respect of the Notes within 7 days of the due date for payment thereof or fails to pay any amount of interest in respect of the Notes within 14 days of the due date for payment thereof; or
(b) Breach of other obligations: the Issuer or the Guarantor defaults in the performance or observance of any of its other obligations under or in respect of the Notes, the Deed of Covenant or the Guarantee of the Notes and such default remains unremedied for 30 days after written notice thereof, addressed to the Issuer and the Guarantor by any Noteholder, has been delivered to the Issuer and the Guarantor or to the Specified Office of the Fiscal Agent; or
(c) Cross-acceleration of Issuer, Guarantor or Subsidiary:
(i) any Indebtedness for Borrowed Money of the Issuer, the Guarantor or any of their respective Subsidiaries is not paid when due or (as the case may be) within any originally applicable grace period;
(ii) any such Indebtedness for Borrowed Money becomes due and payable prior to its stated maturity (as extended by an applicable grace period) otherwise than at the option of the Issuer, the Guarantor or (as the case may be) the relevant Subsidiary or (provided that no event of default, howsoever described, has occurred) any person entitled to such Indebtedness for Borrowed Money; or
(iii) the Issuer, the Guarantor or any of their respective Subsidiaries fails to pay when due or (as the case may be) within any applicable grace period any amount payable by it under any Guarantee of any Indebtedness for Borrowed Money,
provided that the amount of indebtedness referred to in sub-paragraph (i) and/or sub-paragraph (ii) above and/or the amount payable under any Guarantee referred to in sub-paragraph (iii) above, individually or in the aggregate, exceeds U.S.$10,000,000 (or its equivalent in any other currency or currencies; or
(d) Unsatisfied judgment: one or more judgment(s) or order(s) from which no further appeal or judicial review is permissible or sought under applicable law for the payment of any amount is rendered against the Issuer, the Guarantor or any of the Guarantor’s Principal Subsidiaries and continue(s) unsatisfied and unstayed for a period of 30 days after the date(s) thereof or, if later, the date therein specified for payment; or
(e) Security enforced: a secured party takes possession, or a receiver, manager or other similar officer is appointed, of the whole or any material part of the undertaking, assets and revenues of the Issuer, the Guarantor or any of the Guarantor’s Principal Subsidiaries and is not discharged within 30 days; or
(f) Insolvency, etc.: (i) the Issuer, the Guarantor or any of the Guarantor’s Principal Subsidiaries becomes insolvent or is unable to pay its debts as they fall due, (ii) an administrator or liquidator of the Issuer, the Guarantor or any of the Guarantor’s Principal Subsidiaries or the whole or any material part of the undertaking, assets or revenues of the Issuer, the Guarantor or any of the Guarantor’s Principal Subsidiaries is appointed (or application for any such appointment is made), (iii) the
38 Issuer, the Guarantor or any of the Guarantor’s Principal Subsidiaries takes any action for a readjustment or deferment of any of its material obligations or makes a general assignment or an arrangement or composition with or for the benefit of its creditors or declares a moratorium in respect of any material part of its indebtedness or any Guarantee of any indebtedness given by it, or (iv) the Issuer, the Guarantor or any of the Guarantor’s Principal Subsidiaries ceases or threatens to cease to carry on all or any material part of its business; or
(g) Winding up, etc.: an order is made or an effective resolution is passed for the winding up, liquidation or dissolution of the Issuer, the Guarantor or any of the Guarantor’s Principal Subsidiaries; or
(h) Analogous event: any event occurs which under the laws of the British Virgin Islands or Bermuda has an analogous effect to any of the events referred to in paragraphs (d) (Unsatisfied judgment)to(g)(Winding up, etc.) above; or
(i) Failure to take action etc: any action, condition or thing at any time required to be taken, fulfilled or done in order (i) to enable the Issuer and the Guarantor lawfully to enter into, exercise their respective rights and perform and comply with their respective obligations under and in respect of the Notes, the Deed of Covenant and the Deed of Guarantee, (ii) to ensure that those obligations are legal, valid, binding and enforceable, and (iii) to make the Note Certificates, the Deed of Covenant or the Deed of Guarantee admissible in evidence in the courts of the British Virgin Islands and Bermuda is not taken, fulfilled or done; or
(j) Unlawfulness: it is or will become unlawful for the Issuer or the Guarantor to perform or comply with any of its obligations under or in respect of the Notes, the Deed of Covenant or the Deed of Guarantee; or
(k) Guarantee not in force: the Guarantee of the Notes is not (or is claimed by the Guarantor not to be) in full force and effect during its term; or
(l) Controlling shareholder: the Issuer ceases to be a wholly-owned Subsidiary of the Guarantor, then any Noteholder may, by written notice addressed to the Issuer and the Guarantor and delivered to the Issuer and the Guarantor or to the Specified Office of the Fiscal Agent, declare its Notes to be immediately due and payable, whereupon they shall become immediately due and payable at their principal amount together with accrued interest without further action or formality. Notice of any such declaration shall promptly be given to all other Noteholders.
The Agents need not do anything to ascertain whether any Event of Default has occurred and will not be responsible to Noteholders or any other person for any loss arising from any failure by it to do so, and, unless and until the Agent otherwise has notice in writing to the contrary, the Agent may assume that (i) no such event has occurred and (ii) that the Issuer is performing all of its obligations under the Fiscal Agency Agreement and the Conditions.
In this Condition, “Indebtedness for Borrowed Money” means any indebtedness (whether being principal, premium, interest or other amounts) for or in respect of any moneys borrowed, any notes, bonds, debentures, debenture stock, loan stock or other securities, any amount raised pursuant to any note purchase facility or loan facility, any liability under or in respect of any acceptance, acceptance credit or dematerialised equivalent, or any amount raised under any other transaction (including any forward sale or purchase agreement) having the commercial effect of a borrowing.
39 9. Prescription
Claims for principal and interest on redemption shall become void unless the relevant Note Certificates are surrendered for payment within ten years in the case of principal and five years in the case of interest of the appropriate Relevant Date. The Agents shall not be responsible or liable for any amounts so prescribed.
10. Replacement of Note Certificates
If any Note Certificate is lost, stolen, mutilated, defaced or destroyed, it may be replaced at the Specified Office of the Registrar and the Transfer Agent, subject to all applicable laws and stock exchange requirements, upon payment by the claimant of the expenses incurred in connection with such replacement and on such terms as to evidence, security, indemnity and otherwise as the Issuer may reasonably require. Mutilated or defaced Note Certificates must be surrendered before replacements will be issued.
11. Agents
In acting under the Fiscal Agency Agreement and in connection with the Notes, the Agents act solely as agents of the Issuer and the Guarantor and do not assume any obligations towards or relationship of agency or trust for or with any of the Noteholders.
The initial Agents and their initial Specified Offices are listed below. The Issuer and the Guarantor reserve the right at any time to vary or terminate the appointment of any Agent and to appoint a successor registrar or fiscal agent and additional or successor paying agents and transfer agents; provided, however, that the Issuer and the Guarantor shall at all times maintain a fiscal agent and a registrar and a paying agent in an EU member state that will not be obliged to withhold or deduct tax pursuant to any law implementing European Council Directive 2003/48/EC.
Notice of any change in any of the Agents or in their Specified Offices shall promptly be given to the Noteholders.
12. Meetings of Noteholders; Modification
(a) Meetings of Noteholders: The Fiscal Agency Agreement contains provisions for convening meetings of Noteholders to consider matters relating to the Notes, including the modification of any provision of these Conditions. Any such modification may be made if sanctioned by an Extraordinary Resolution. Such a meeting may be convened by the Issuer and the Guarantor (acting together) and shall be convened by them upon the request in writing of Noteholders holding not less than one-tenth of the aggregate principal amount of the then outstanding Notes. The quorum at any meeting convened to vote on an Extraordinary Resolution will be two or more persons holding or representing one more than half of the aggregate principal amount of the outstanding Notes or, at any adjourned meeting, two or more persons being or representing Noteholders whatever the principal amount of the Notes held or represented; provided, however, that consideration of any proposal (i) to change any date fixed for payment of principal or interest in respect of the Notes, (ii) to reduce the amount of principal or interest payable on any date in respect of the Notes, (iii) to alter the method of calculating the amount of any payment in respect of the Notes or the date for any such payment on redemption or maturity, (iv) to change the currency of payments under the Notes, (v) to amend the percentage of Notes outstanding required to call an Event of Default, (vi) to amend the terms of the Guarantee of the Notes or (vii) to change the quorum requirements relating to meetings or the majority required to pass an Extraordinary Resolution (each, a “Reserved Matter”) may only be sanctioned by an Extraordinary Resolution passed
40 at a meeting of Noteholders at which two or more persons holding or representing not less than two-thirds or, at any adjourned meeting, one third of the aggregate principal amount of the outstanding Notes form a quorum. Any Extraordinary Resolution duly passed at any such meeting shall be binding on all the Noteholders, whether present or not.
In addition, a resolution in writing signed by or on behalf of Holders of not less than 90 per cent. of the aggregate principal amount of Notes outstanding will take effect as if it were an Extraordinary Resolution passed at a meeting of Noteholders duly convened and held. Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders.
(b) Modification: The Notes, these Conditions, the Deed of Covenant, the Deed of Guarantee and the Fiscal Agency Agreement may be amended without the consent of the Noteholders to correct a manifest error. In addition, the parties to the Fiscal Agency Agreement may agree to modify any provision thereof, but the Issuer shall not agree, without the consent of the Noteholders, to any such modification unless it is of a formal, minor or technical nature, it is made to correct a manifest error or it is, in the opinion of such parties, not materially prejudicial to the interests of the Noteholders.
13. Further Issues
The Issuer may from time to time, without the consent of the Noteholders, create and issue further notes having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest) so as to form a single series with the Notes.
14. Notices
Notices to the Noteholders will be sent to them by first class mail (or its equivalent) or (if posted to an overseas address) by airmail (at the Issuer’s, failing which, the Guarantor’s expense) at their respective addresses on the Register. Any such notice shall be deemed to have been given on the second day after the date of mailing.
15. Currency Indemnity
If any sum due from the Issuer in respect of the Notes or any order or judgment given or made in relation thereto has to be converted from the currency (the “first currency”) in which the same is payable under these Conditions or such order or judgment into another currency (the “second currency”) for the purpose of (a) making or filing a claim or proof against the Issuer, (b) obtaining an order or judgment in any court or other tribunal or (c) enforcing any order or judgment given or made in relation to the Notes, the Issuer shall indemnify each Noteholder, on the written demand of such Noteholder addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent, against any loss suffered as a result of any discrepancy between (i) the rate of exchange used for such purpose to convert the sum in question from the first currency into the second currency and (ii) the rate or rates of exchange at which such Noteholder may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof.
This indemnity constitutes a separate and independent obligation of the Issuer and shall give rise to a separate and independent cause of action.
41 16. Governing Law and Jurisdiction
(a) Governing law: The Notes and any non-contractual obligations arising out of or in connection with the Notes are governed by English law.
(b) English courts: The courts of England have exclusive jurisdiction to settle any dispute (a “Dispute”) arising out of or in connection with the Notes (including any non-contractual obligation arising out of or in connection with the Notes).
(c) Appropriate forum: Each of the Issuer and the Guarantor agrees that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that it will not argue to the contrary.
(d) Rights of the Noteholders to take proceedings outside England: Condition 16(b) (English courts) is for the benefit of the Noteholders only. As a result, nothing in this Condition 16 (Governing law and jurisdiction) prevents any Noteholder from taking proceedings relating to a Dispute (“Proceedings”) in any other courts with jurisdiction. To the extent allowed by law, Noteholders may take concurrent Proceedings in any number of jurisdictions.
(e) Process agent: The Issuer agrees that the documents which start any Proceedings and any other documents required to be served in relation to those Proceedings may be served on it by being delivered to TMF Corporate Services Limited at 5th Floor, 6 St. Andrew Street, London EC4A 3AE or, if different, its registered office for the time being or at any address of the Issuer in Great Britain at which process may be served on it in accordance with the Companies Act 2006. If such person is not or ceases to be effectively appointed to accept service of process on behalf of the Issuer, the Issuer shall appoint another person to act as its agent. This Condition applies to Proceedings in England and to Proceedings elsewhere.
42 THE GLOBAL NOTE CERTIFICATE
The Global Note Certificate contains the following provisions which apply to the Notes in respect of which they are issued while they are represented by the Global Note Certificate, some of which modify the effect of the Terms and Conditions of the Notes. Terms defined in the Terms and Conditions of the Notes have the same meaning in the paragraphs herein.
The Notes will be represented by a Global Note Certificate which will be registered in the name of, and deposited with, BNP Paribas Securities Services, Luxembourg Branch, acting as common depositary on behalf of Euroclear and Clearstream, Luxembourg.
The Global Note Certificate will become exchangeable in whole, but not in part, for Individual Note Certificates if (a) Euroclear or Clearstream, Luxembourg is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business or (b) any of the circumstances described in Condition 8 (Events of Default) occurs.
Whenever the Global Note Certificate is to be exchanged for Individual Note Certificates, such Individual Note Certificates will be issued in an aggregate principal amount equal to the principal amount of the Global Note Certificate within five business days of the delivery, by or on behalf of the registered Holder of the Global Note Certificate, Euroclear and/or Clearstream, Luxembourg, to the Registrar of such information as is required to complete and deliver such Individual Note Certificates (including, without limitation, the names and addresses of the persons in whose names the Individual Note Certificates are to be registered and the principal amount of each such person’s holding) against the surrender of the Global Note Certificate at the Specified Office of the Registrar. Such exchange will be effected in accordance with the provisions of the Agency Agreement and the regulations concerning the transfer and registration of Notes scheduled thereto and, in particular, shall be effected without charge to any Holder, but against such indemnity as the Registrar may require in respect of any tax or other duty of whatsoever nature which may be levied or imposed in connection with such exchange.
If:
(a) Individual Note Certificates have not been issued and delivered by 5:00 p.m. (local time) on the thirtieth day after the date on which the same are due to be issued and delivered in accordance with the terms of the Global Note Certificate; or
(b) any of the Notes evidenced by the Global Note Certificate has become due and payable in accordance with the Conditions or the date for final redemption of the Notes has occurred and, in either case, payment in full of the amount of principal falling due with all accrued interest thereon has not been made to the Holder of the Global Note Certificate on the due date for payment in accordance with the terms of the Global Note Certificate, then, at 5:00 p.m. (local time) on such thirtieth day (in the case of (a) above) or at 5:00 p.m. (local time) on such due date (in the case of (b) above) the Registrar shall in respect of each person shown in the records of Euroclear and/or Clearstream, Luxembourg (or any other relevant clearing system) as being entitled to interest in the Notes (each an Accountholder), enter in the Register the name of such Accountholder as the holder of direct rights under the deed of covenant dated 25 April 2013 (the Deed of Covenant) in respect of the Notes in an aggregate principal amount equal to the principal amount shown in the records of Euroclear and/or Clearstream, Luxembourg (or any other relevant clearing system) of such Accountholder’s interest in the Notes. To the extent that the Registrar makes such entries in the Register, the holder will have no further rights under the Global Note Certificate, but without prejudice to the rights which the holder or Accountholders may have under the Deed of Covenant. Under the Deed of Covenant, Accountholders will acquire directly against the
43 Issuer, subject to their rights being entered in the Register as described above and subject as provided in the Deed of Covenant, all those rights to which they would have been entitled if, immediately before the date on which the Registrar is required to enter in the Register the rights of the Accountholders, they had been the registered holders of Notes in an aggregate principal amount equal to the principal amount of Notes they were shown as holding in the records of Euroclear, Clearstream, Luxembourg or any other relevant clearing system (as the case may be).
In addition, the Global Note Certificate will contain provisions that modify the Terms and Conditions of the Notes as they apply to the Notes evidenced by the Global Note Certificate. The following is a summary of certain of those provisions:
Payments on business days: In the case of all payments made in respect of the Global Note Certificate business day means any day on which banks are open for general business (including dealings in foreign currencies) in New York City and Hong Kong.
Payment Record Date: Each payment in respect of the Global Note Certificate will be made to the person shown as the Holder in the Register at the close of business (in the relevant clearing system) on the Clearing System Business Day before the due date for such payment (the Record Date) where Clearing System Business Day means a day on which each clearing system for which the Global Note Certificate is being held is open for business.
Notices: Notwithstanding Condition 14 (Notices), so long as the Global Note Certificate is held on behalf of Euroclear, Clearstream, Luxembourg or any other clearing system (an Alternative Clearing System), notices to Holders of Notes represented by the Global Note Certificate may be given by delivery of the relevant notice to Euroclear, Clearstream, Luxembourg or (as the case may be) such Alternative Clearing System.
44 USE OF PROCEEDS
The net proceeds from the offering of the Notes, after deducting underwriting commissions and expenses, are estimated to be approximately U.S.$246 million. The net proceeds will be used to refinance existing indebtedness of the Issuer and/or for the Company’s general corporate purposes.
45 CAPITALISATION AND INDEBTEDNESS
The following table sets forth the Company’s consolidated capitalisation and indebtedness as at 31 December 2012 on an actual basis and as adjusted to give effect to the sale of the Notes in this offering with an estimated net proceeds of approximately U.S.$246 million (HK$1,918.8 million), after deducting the underwriting commission and other estimated expenses payable by the Company in connection with the offering of the Notes, but before giving effect to the use of proceeds and the proposed changes to the shareholder’s equity as explained below. This table should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Offering Circular.
As at 31 December 2012
Actual As adjusted
HK$ U.S.$ HK$ U.S.$
(in millions) (in millions) (in millions) (in millions) Debt Short term bank and other borrowings (including current portion of long term bank and other borrowings)(1) ...... 72 9 72 9 Long term bank and other borrowings (net of current portion)(1) ...... 1,059 136 1,059 136 Notes to be issued ...... — — 1,950 250
Total debt...... 1,131 145 3,081 395
Shareholder’s equity(3) Ordinary shares (180,000,000 authorised at U.S.$1.00 par value per share, 121,000,000 issued)(2) ...... 940 121 940 121 Class A redeemable preference shares 9,000,000 authorised at U.S.$1.00 par value per share, 9,000,000 issued)(2) .... 70 9 70 9 Class B redeemable preference shares (11,000,000 authorised at U.S.$1.00 par value per share, 10,000,000 issued)(2)(3) .. 78 10 78 10
Other reserves...... 3,792 486 3,792 486
Retained profits ...... 2,309 296 2,309 296
Total shareholders’ equity ...... 7,189 922 7,189 922
Total capitalisation(4) ...... 8,320 1,067 10,270 1,317
(1) A rate of HK$7.8 to U.S.$1.00 was adopted for the conversion of Hong Kong dollars to U.S. dollars.
(2) U.S. dollar amounts have been translated into Hong Kong dollars at the exchange rate applicable on the relevant issue date.
(3) The Board of Directors of the Company has authorised the issuance of up to 10,000,000 shares of Class C preference shares at a purchase price of U.S.$25.00 per share which are expected to be issued in April 2013 and subscribed by Bright Victory International Limited and, simultaneously, 10,000,000 shares of Class B redeemable preference shares are expected to be redeemed by the Company at a purchase price of U.S.$10 per share.
(4) Total capitalisation represents the sum of the total shareholders’ equity and total debt.
46 Save as disclosed above, there has been no material change in the capitalisation and indebtedness of the Company since 31 December 2012.
Capitalisation and Indebtedness of the Issuer
The authorised share capital of the Issuer is U.S.$50,000 divided into 50,000 ordinary shares of U.S.$1.00 par value each, of which one fully paid share is issued in the name of the Company.
The following table sets forth the capitalisation and indebtedness of the Issuer as at 31 December 2012, on an actual basis and as adjusted to give effect to the sale of the notes in this offering with an estimated net proceeds of approximately U.S.$246 million, after deducting the underwriting commission and other estimated expenses payable by the Company in connection with this offering of the Notes.
As at 31 December 2012
Actual As Adjusted
U.S.$ U.S.$
Debt Long term bank and other borrowings...... 100,000,000 100,000,000 Notes to be issued ...... — 250,000,000 Shareholders’ equity Ordinary shares (50,000 authorised at U.S.$1.00 par value per share, 1 issued) ...... 1 1
Total capitalisation ...... 100,000,001 350,000,001
There has been no material change in the capitalisation and indebtedness of the Issuer since 31 December 2012.
The Issuer is not required by British Virgin Islands law to publish any financial statements.
47 THE ISSUER
Formation
The Issuer is a wholly owned subsidiary of the Company and was incorporated as an International Business Company under the laws of the British Virgin Islands on 5 November 2004 with the name PCI Capital Limited and subsequently changed its name to Fortis Capital (Asia) Limited on 19 July 2007 and to Ageas Capital (Asia) Limited on 12 July 2010. The Company Number is 622508. Its registered office is located at Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands.
Business Activity
The Issuer, whose primary purpose is to act as a financing subsidiary of the Company, will remain as a wholly owned subsidiary of the Company as long as the Notes are outstanding and will advance the net proceeds from the sale of the Notes to the Company. The Issuer has not engaged, since its incorporation, in any material activities other than those incidental to its registration, to the issue of U.S.$100,000,000 5.875 per cent. notes due 2014, to the proposed issue of the Notes and the authorisation of documents and agreements referred to herein to which it is or will be a party. The Issuer has not engaged and will not, as long as the Notes are outstanding, engage in any business activity except any activity relating to the offering, sale or issuance of any indebtedness or the lending of the proceeds thereof to the Company and/or its subsidiaries or in connection with any hedging or derivative transaction and any other activities in connection with any of the above. The Issuer has no subsidiaries.
Directors and Officers
The directors of the Issuer are Mr. Charles Stuart Fraser, Mr. Paul Roger Headey and Mr. John William Thompson. The secretary of the Issuer is Ms. Lisa Li. None of the directors of the Issuer holds any shares or options to acquire shares of the Issuer.
The business address of the directors and the secretary of the Issuer is 28/F., Wing On Centre, 111 Connaught Road Central, Hong Kong.
The Issuer does not have any employees.
48 BUSINESS
Overview
The Company is a foreign owned and locally managed non-bank affiliated life insurance company in Hong Kong. The Company is also the tenth largest life insurer in Hong Kong, measured by newly generated life insurance business measured by APE as at 31 December 2012, according to the provisional statistics published by the OCI. The Company offers a comprehensive range of life insurance products, including traditional, whole and term life products, accident and health products and investment linked products to individual and corporate customers through its 2,858 exclusive agents and IFAs as at 31 December 2012. As at 31 December 2012, the Company had 414,321 policies with a sum insured of HK$142 billion (U.S.$18 billion). The Company’s operations are based in Hong Kong, and, as at 31 December 2012, all of the Company’s policies in-force were issued in Hong Kong. A majority of the Company’s revenues are derived from operations conducted in Hong Kong.
The following table sets forth information relating to the Company’s total in-force premium for the years ended 31 December 2010, 2011 and 2012, respectively.
Total in-force(1) premium
Year ended Year ended Year ended 31 December 2010 31 December 2011 31 December 2012
(HK$ in per cent. (HK$ in per cent. (HK$ in per cent. Products millions) of Total millions) of Total millions) of Total
Whole life ...... 1,305 38 1,319 33% 1,454 32% Medical ...... 391 11 435 11% 493 11% Accident & Disability. . . 144 4 145 4% 149 3% Dread disease...... 291 8 366 9% 457 10% Endowment ...... 103 3 190 5% 184 4% Term...... 55 2 60 1% 64 1% Investment linked..... 1,144 33 1,408 36% 1,700 38% Others ...... 22 1 22 1% 24 1%
Total ...... 3,456 100% 3,945 100% 4,524 100%
(1) in-force means a policy that is shown on records as active on a given date and that has not matured by death of otherwise or been surrendered or otherwise terminated.
49 The following table sets forth information relating to the Company’s total policies in-force as at 31 December 2010, 2011 and 2012, respectively.
Total number of policies in-force
As at 31 December 2010 As at 31 December 2011 As at 31 December 2012
per cent. per cent. per cent. Products Number of Total Number of Total Number of Total
Whole life ...... 201,833 54% 200,628 52% 201,324 49% Medical ...... 19,492 5% 21,593 6% 23,678 6% Accident & Disability . . 662 0%(1) 652 0%(1) 638 0%(1) Dread disease ...... 30,743 8% 35,826 9% 41,863 10% Endowment ...... 5,751 2% 7,558 2% 8,659 2% Term ...... 67,818 18% 67,914 17% 75,188 18% Investment linked .... 45,587 12% 51,654 13% 60,321 15% Others ...... 2,473 1% 2,375 1% 2,650 1%
Total ...... 374,359 100% 388,200 100% 414,321 100%
(1) less than 0.5 per cent.
For the year ended 31 December 2012, the Company recorded HK$2.9 billion (U.S.$372 million) in total premium, total net revenues of HK$4.4 billion (U.S.$564 million), operating profit of HK$414 million (U.S.$53 million) and net income of HK$379.8 million (U.S.$49 million). As at 31 December 2012, the Company recorded total assets of HK$28.4 billion (U.S.$3.6 billion) and shareholders equity of HK$7.2 billion (U.S.$923 million).
The Company’s solvency margin pursuant to Hong Kong’s insurance laws was 370 per cent. as at 31 December 2012, which was significantly higher than the minimum solvency ratio under the ICO of 100 per cent. and the minimum solvency ratio of 150 per cent., which the Company has undertaken to the Insurance Authority to maintain. See “Business — Supervision and Regulation”.
As at 31 December 2012, the investment assets under the Company’s general and shareholders’ funds amounted to approximately HK$18 billion (U.S.$2,308 million). The investment yield of the Company’s general and shareholders’ funds as at 31 December 2012 was 7.6 per cent. per annum. In addition, the assets under management for the linked products which the investment was held on behalf of the policyholders totalled HK$5.8 billion (U.S.$744 million) as at 31 December 2012.
The Company, under the name of The New Zealand Insurance Life (Bermuda) Limited, was incorporated in 1985. Subsequently, in 2007, the Company was acquired by Fortis (the former name of the Ageas Group). In 2010, Fortis rebranded itself as Ageas and the Company changed its name from Fortis Insurance Company (Asia) Limited to its current name.
50 Ageas Group
The Company is a member of the group of companies (collectively, the Ageas Group) controlled by Ageas SA/NV (Ageas), a company incorporated in Belgium. The Ageas Group is an international insurance group based in Europe with a heritage spanning more than 180 years. The Ageas Group’s history began in 1824 when AG Life started in Belgium. The Ageas Group commenced its insurance activities in Asia in 2001. In 2008, the Ageas Group divested its banking activities and focused only on insurance business. The Company believes its association with the Ageas Group has provided it with strong and trusted brand recognition in Hong Kong. The Ageas Group, through its subsidiaries, affiliates and partnerships, operates in various countries in Europe and Asia. The table below sets out the Ageas Group’s ownership interest with respect to each subsidiary, affiliate and partnership by geographical location and its respective inflows calculated based on the sum of gross written premiums and, premium inflow from investment contracts without discretionary participation features, on a 100 per cent. ownership basis as at and for the year ended 31 December 2012:
As at/for the year ended 31 December 2012
Life Insurance Non-Life Insurance Equity Ownership Business Inflows Business Inflows Total Inflows
(per cent.) (EUR in millions) (EUR in millions) (EUR in millions)
Europe Belgium ...... 75 5,127 1,759 6,886 France ...... 100 271 — 271 Italy ...... 25 — 219 219 Luxembourg ...... 33 2,213 — 2,213 Portugal ...... 51 763 240 1,003 Turkey ...... 36 — 567 567 United Kingdom .... 100 86 2,143 2,229 Asia China...... 25 4,565 — 4,565 Hong Kong ...... 100 447 — 447 India ...... 26 109 — 109 Malaysia...... 31 786 570 1,356 Thailand ...... 31/15(1) 1,224 181 1,405
Total ...... 15,591 5,679 21,270
(1) The Ageas Group owns 31 per cent. interest in its life insurance business and 15 per cent. interest in its non-life insurance business.
51 Corporate structure
Ageas SA/NV (Belgium)
(100%)
Ageas Insurance International N.V. (Netherlands)
(100%)
Ageas Asia Holdings Limited 富通亞洲控股有限公司 (Bermuda)
(100%) (100%) (100%) (100%) Bright Victory International Limited (BVI) Ageas Investment Management (Asia) Limited 52 (100%) (100%) 富保投資管理有限公司 (HK)
Ageas Insurance Company Ageas Trustees (HK) Limited Ageas Insurance Brokers (HK) Limited Ageas Asia Services Limited (Asia) Limited 富通信託(香港)有限公司 (HK) 富保顧問(香港)有限公司 富通保險(亞洲)有限公司 (HK) (HK) (Bermuda)
(100%) (100%) (100%) (100%)
Ellerby Holdings Limited Ageas Wealth Management (HK) Limited Shabhala International Limited Ageas Capital (Asia) Limited (BVI) ఒলఒဳଉτࠉʔ ̇ (BVI) (BVI) (HK) (100%) (100%) Prior Company Limited ݢඏτࠉʔ̇ Ageas (King’s Road) Limited (HK) (BVI) represents the Company and its subsidiaries (100%) Foundasia (HK) Limited (HK) In recent years, the Company has undertaken a series of initiatives that are designed to improve its market position and strengthen its financial and operating performance. The Company believes these initiatives are improving its business and that improvements in its results can be attributed to the changes it has implemented.
Competitive Strengths
The Company believes that its competitive strengths include:
Solid market position in Hong Kong. Amongst 63 insurers authorised by the OCI to issue long-term insurance policies in Hong Kong, the Company ranked 11th in terms of total in-force premium for the year ended 31 December 2012 according to provisional statistics released by OCI. It ranked 10th in terms of newly generated life insurance business as measured by annual premium equivalent as at the same date. The Company believes that its considerable knowledge and understanding of the local life insurance market allows it to anticipate and respond quickly to changes in the industry and to introduce products that meet its customers’ changing needs.
Well-established and trusted brand name. The Company believes that it is a respected and trusted brand in the insurance industry. The Company has received a number of awards in recent years, including the “Hong Kong Business High Flyers Award” in the life insurance category for six consecutive years, the “PROchoice Life Insurance Award” from Capital Weekly magazine for four consecutive years and the “Outstanding Insurer” in the Quamnet Outstanding Enterprise Awards for two consecutive years. To further strengthen its brand awareness, the Company was the first insurance company to advertise on twin neon signs on both sides of Victoria Harbour. The Company has also used the latest social media technology for advertising purposes. These initiatives earned the Company “Best Social Media Marketing” in Capital Weekly Sales & Marketing Excellence Awards, and the “Outstanding Achiever” in Social Media Engagement (Insurance) in Benchmark Wealth Management Awards in 2012.
Large and highly productive agency sales force. The Company believes that its exclusive agency sales force is one of its most valuable assets and a core distribution channel, providing the Company with access to quality new customers and the ability to strengthen its relationships with existing ones. As at 31 December 2012, the Company has 2,858 exclusive agents in Hong Kong which represented a 15 per cent. increase from 2011, compared to the 8 per cent. increase in the industry overall and a 9.3 per cent. increase from 2010, compared to the 5 per cent. increase in the industry overall. The expanded distribution network enabled the Company to achieve an APE growth of 24 per cent. in 2012, compared to the 9.8 per cent. increase in the industry overall.
Stable financial position. The Company has a proven track record of maintaining a strong balance sheet. Since the Company was acquired by the Ageas Group in 2007, the Company has consistently maintained a solvency ratio above the minimum statutory requirement. As at 31 December 2012, the Company’s solvency ratio was 370 per cent.
Sound investment portfolio. As at 31 December 2012, the Company has approximately HK$18 billion (U.S.$2.3 billion) in investment assets under its general and shareholders’ funds, 90 per cent of which was allocated to investment grade fixed income products. The portfolio achieved a 7.6 per cent. investment yield per annum as at 31 December 2012.
Strategy
The Company’s goal is to strengthen its position in the Hong Kong insurance market in order to provide consistent returns for the Company’s shareholders while maintaining prudent risk management practices.
53 To achieve its goals, the Company intends to pursue the following business strategies:
Continue to strengthen distribution network. The Company has recently introduced a number of measures to expand its distribution network, improve agent productivity and reduce agent turnover. As a result of these measures, the Company increased its agency sales force by 15 per cent. and its APE growth by 24 per cent. in 2012. The Company intends to continue to expand its sales force through active recruitment and to motivate its agents through training, performance evaluations, compensation schemes and transparency of senior management. In addition, the Company will continue to develop cooperative distribution arrangements and explore the use of alternative distribution channels.
Continue to broaden product offering. The Company is committed to introducing innovative new products and adjusting its product mix in response to changing customer needs. The Company was one of the first insurance companies in Hong Kong to offer investment-linked products under the Capital Investment Entrant Scheme (CIES) since the scheme’s creation in 2012. The Company intends to continue to broaden its product offering to better serve its existing and prospective customers.
Enhance operational efficiency, information technology and customer service. The Company intends to continuously enhance its operational efficiency and customer service through cost-saving initiatives and innovative information technology solutions. In this regards, the Company aims to continuously:
• enhance customer experience and improve operational efficiency through a greater use of innovative technologies;
• develop its proprietary and user-friendly applications for mobile devices to support its insurance agents in respect of sales and customer relationship building efforts;
• use advanced analytics to monitor, analyse and manage the quality of the business; and
• seek marketing opportunities on innovative platforms, such as social media, to increase brand awareness and support its marketing and product campaigns.
Maintain a strong capital base and prudent risk management. The Company aims to maintain a strong capital base and a high solvency ratio. The Company intends to fund its expansion plans using operating cash flows, focus on low capital and less interest rate sensitive products, conduct periodic reviews to monitor its capital base and, where necessary, re-balance its investment portfolio management to better match the duration of its assets and liabilities. In addition, the Company intends to continue to maintain its high underwriting standards in screening new customers and approving policy applications.
Products
The Company offers a comprehensive range of insurance products to its customers. The table below illustrates the type of products the Company offers and the importance of such products measured by in-force premium relative to its business.
(per cent.) of portfolio Total in force Accident premiums Number of Year ended Whole & Dread Investment (HK$ in policies (in 31 December Life Medical Disability Disease Endowment Term linked Others billions) thousands)
2010...... 38% 11% 4% 8% 3% 2% 33% 1% 3.46 374 2011...... 33% 11% 4% 9% 5% 1% 36% 1% 3.95 388 2012...... 32% 11% 3% 10% 4% 1% 38% 1% 4.52 414
54 Life Insurance Products
The Company currently distributes a wide range of individual life insurance products, including whole life, endowment, term insurance, dread disease, medical and accident and disability coverage in Hong Kong through its agency sales force. As market conditions change, the Company continues to develop and expand its range of investment linked products to cater to recent increases in demand. The new business growth of the Company was supported by its introduction of a full range of new products including traditional products and investment linked products.
Traditional Life Insurance Products
The Company’s traditional life insurance products contain a wide range of individual products as set out below. For the year ended 31 December 2012, the products accounted for approximately 62 per cent. of the Company’s individual premium income.
Whole life Products. Whole life products provide a guaranteed benefit upon the death of the insured in return for the periodic payment of a fixed premium over a pre-determined period. Policyholders may receive dividends in cash or apply them to increase death coverage, increase values available upon surrender or reduce the premiums to be paid. Some products guarantee certain surrender values, similar to such products sold in the United States, whereas some products do not guarantee surrender values. Some whole life products also provide for guaranteed periodic cash payments. All of the Company’s whole life products are participating products with annual dividends and some of these products also provide terminal dividends upon termination of the policy arising from death or surrender after the policy has been in-force for a certain period of time. For the year ended 31 December 2012, whole life products accounted for approximately 32 per cent. of the Company’s individual premium income.
Medical Insurance Products. Medical insurance provides for benefits when the policyholder is hospitalised due to sickness or accident. Two main types of benefits are provided. The first provides for reimbursement of daily room and board, doctors’ visits, laboratory tests, hospital expenses and surgical and related expenses, up to certain prescribed limits and limited to certain periods of hospitalisation. Major medical riders (which provide insurance cover in excess of basic policy coverage) can also be attached to existing policies to enhance the benefit features. The other types of benefits provide for daily cash payments during hospitalisation irrespective of the actual expenses and are designed mainly to replace lost income. For the year ended 31 December 2012, medical insurance products accounted for approximately 11 per cent. of the Company’s individual premium income.
Accident and Disability Insurance Products. Accident insurance policies provide benefits that cover death, dismemberment and periodic payments arising from accidents and injuries, some with medical benefits and hospitalisation allowances. Most products are relatively simple, affordable and short term, and are often sold as bundled products with or riders to other insurance products. The majority of the disability products sold are disability waiver of premium riders that waive the premium on the basic or whole policy while the policyholder is disabled. Some disability income products provide for monthly income while the policyholder is totally and permanently disabled. For the year 31 December 2012, accident and disability products accounted for approximately 3 per cent. of the Company’s individual premium income.
Dread Disease Coverage. Dread disease insurance products provide for benefit payments when the policyholder is diagnosed with certain major diseases covered under the product. The benefit payment may either be an advance payment of the permanent policy or an additional payment depending on the different type of products being offered. Innovative dread disease products have been developed in recent years which include multiple payments for certain diseases and partial payment upon early stage diagnosis. For the year 31 December 2012, dread disease products accounted for approximately 10 per cent. of the Company’s individual premium income.
55 Endowment Products. Endowment products typically provide death protection over the policy period and maturity benefits upon survival at the end of such policy period. Some of the Company’s endowment products also provide annual dividends similar to its whole life products. The Company also offers short term endowment product with guaranteed maturity benefits denominated in Renminbi currency. For the year ended 31 December 2012, endowment products accounted for approximately 4 per cent. of the Company’s individual premium income.
Term Insurance. Term insurance provides a guaranteed benefit upon the death of the insured within a specified time period in return for the periodic payment of premiums. Premiums are generally guaranteed at a fixed amount for the coverage period. Term insurance products are sometimes referred to as pure protection products, as there are normally no savings or investment elements. Term contracts expire without value at the end of the coverage period if the insured party is still alive. For the year ended 31 December 2012, term insurance products accounted for approximately 1 per cent. of the Company’s individual premium income.
Group Insurance. The Company also offers the term life, dread disease, accident and disability benefits insurance products described above to employer and employee groups as group insurance products. Gross written premiums generated from the Company’s group insurance products amounted to HK$3.6 million (U.S.$0.5 million) for the year ended 31 December 2012 and were HK$4.0 million and HK$3.8 million for the same period during 2011 and 2010, respectively. These constituted approximately 0.1 per cent. and 0.1 per cent. of the Company’s total gross premiums for these periods, respectively.
Investment Linked Products
Investment linked products are so called “unbundled” products for which the premiums are split into protection and savings. The savings components are invested in unitised (investment funds divided into a number of shares of equal value) funds (totalling 122) selected by the policyholders. Gains and losses on the unitised funds are reflected in the unit price and are passed on to the policyholders. These products are required to be classified under a separate class of business under the ICO. For the year ended 31 December 2012, investment linked products (including unit linked products) accounted for approximately 38 per cent. of the Company’s individual premium income. The Company’s investment linked business comprised 48 per cent. of its total individual new business in terms of the APE for the year ended 31 December 2012.
New product development
To meet increasing customer demand for investment linked insurance products, the Company enhanced its investment linked and protection products by launching several new investment linked products with different features to meet the distinct needs of various customers and to diversify the Company’s product range offering. In 2010, the Company launched a new regular premium investment linked product, “Wealth Partner”, which has enhanced investment features and provides investment options in 122 different types of funds. “Wealth Partner” has more features and flexible terms compared to other investment linked products to accommodate customers’ requirements. In the same year, the Company launched a new series of medical insurance products with enhanced features and benefits. In 2011, two new investment linked products were introduced, “Cheers”, which is a limited payment investment linked plan with life protection features and “Aviator”, which is a single premium investment linked product designed for customers wishing to apply for residency in Hong Kong under the CIES. In the same year, the Company introduced a new series of critical illness riders which provides more comprehensive features and benefits.
56 The Company expects to continue to expand and adjust its products in order to meet the requirements of its customers. The Company’s product strategy is defined by senior management and the product development is led by the Company’s business development department who considers both the commercial and financial aspects of product development. Recent product development initiatives include:
Investment linked products. In line with increasing customer demand for investment linked insurance products, the Company launched three new investment linked products in the last three years to meet different needs of customers. The Company’s investment funds platform has also been enhanced with an increased number of fund choices and fund houses (totalling 15) available for customer selection.
Product updates. The Company continuously updates its products to meet customer needs. The Company generally undertakes a review of each of its products every one or two years. For example, the Company enhanced the dread disease insurance product in 2011 after its launch in early 2009. The Company has also recently upgraded the benefits of, and repriced, the medical insurance products in 2010 and 2012, respectively.
Other products. In 2012, the Company developed an unbundled life product similar to the universal life product in the United States. Premiums on unbundled products may be lump sum or periodic and are paid into an investment account with multiple currencies and flexibility for the Company to determine and reset the minimum guaranteed interest rates. The Company determines the rate at which interest accrues on the amounts in the investment account subject to a minimum. The costs of life insurance and management fees are deducted from the amounts deposited in the investment account from time to time. The Company has developed whole life plans that provide death benefits, hospitalisation benefits or dread disease over a policyholders’ entire lifetime. The amount payable on death is equal to the total sum assured less any hospitalisation or dread diseases benefits paid.
Distribution Channels
Agency
As at 31 December 2012, the Company employed 2,858 agents who, as at the same date, generated over 76 per cent. of the Company’s new business premium income. All of the Company’s sales agents work on an exclusive basis.
The APE of the Company grew by 24 per cent. for the year ended 2012 compared to the corresponding period in 2011, and by 24 per cent. compared to the corresponding period in 2010. The growth during this period resulted from:
• the Company facilitating frequent and open communications between senior management and agents and improved training programmes for agents to increase their product knowledge and selling skills.
• the Company utilising different recruitment initiatives, including a revamp of its recruitment packages and an enhancement of its training programmes to target new agents.
• the Company introducing a series of monitoring processes, including a new sales management information system (MIS) that enhances project work streams to increase the efficiency in the management of the agency team.
• the Company launching a project to encourage agents, which included the introduction of a compensation framework aimed to improve the persistence of existing policies.
57 Agency sales force
The following table sets forth information relating to the Company’s agency sales force as at the dates indicated.
As at 31 December
2010 2011 2012
Number of agents ...... 2,271 2,482 2,858
The number of agents increased by 9.3 per cent. as at 31 December 2011 as compared to the previous year. Similarly, there was continual and stronger growth in the number of agents in 2012 representing a 15 per cent. increase as compared to the previous year. The turnover rate relating to the Company’s agency sales force was stable with a declining trend.
Recruitment
The Company has an extensive recruitment programme in place that is aimed at recruiting both experienced agents and recent university graduates to its business. In order to attract quality agents, the Company offers various financial packages to assist agents and the Company incentivises current agents to recruit new agents by providing them with recruitment bonuses. For example, the Company offers competitive financial packages to graduates to enable them to establish themselves in the business without the need for external funding. The Company recruits its agents from a wide range of industry sectors in addition to the insurance industry.
Retention
In 2009, the Company’s agency sales force declined by 25 per cent. as a result of the highly competitive nature of the insurance industry in Hong Kong which may at times cause sudden unexpected high turnovers. Since then, the Company has taken measures to improve agent retention. One of the main strategies used by the Company was to offer competitive financial packages. The Company’s agents are paid on a commission only basis and are able to earn relatively high compensation when they perform well. In addition, the senior agency leaders are offered extra incentives based on their level of, and the target growth in, productions. The Company has undertaken measures to simplify its agents’ interaction with the operational side of the Company’s business and to reduce their administrative responsibility to enable them to concentrate on sales. The Company launched a new business support information system to enhance point of sales and operation services. Other technologies have also been leveraged in recent years such as the use of the iPad platform to provide financial needs analysis and risk profile tools.
Training
As part of its continuing commitment to developing its agency workforce, the Company has instituted a number of training programmes for its agents. The Company’s training programmes are tailor-made for agents taking into account the different cultural backgrounds and levels of experience of the Company’s agents. For example, the Company offers specific training to new agents and training support to more experienced agents in order to enable them to attain industry recognised professional qualifications. All of the Company’s training programmes are designed to promote product knowledge and selling skills. The Company’s training academy has developed comprehensive internal training for the Company’s staff and agents and has been awarded the ‘Best in Class in Training and Development (Insurance)’ by Benchmark Wealth Management for 2012.
58 IFA
The Company has continued to develop the IFA distribution channel in the past few years since it was first established in 2008. Individual agents distribute insurance products on behalf of the Company to customers and are, in general, tied to one insurance company. IFAs act on behalf of customers and provide independent financial advice to the customers and are able to partner with different insurance companies. The new business (including new policies written to both new and existing customers) contributed by the IFA distribution channel has continued to grow and, for the year ended 31 December 2012, new business (in terms of APE) generated through the IFA distribution channel represented 24 per cent. of such business. The IFA distribution channel had also increased as a result of the Company’s engagement with more major IFAs in the Hong Kong market. The Company reviews the product range offered and fund options under its investment linked products with the IFAs from time to time.
Marketing
The Company aims to continually promote the Ageas brand image as one of the leading insurance companies in Hong Kong. The Company utilises a variety of publicity channels, including radio, television, internet and magazines, in-flight entertainment system, bus shelters and billboards, to reach the local market.
The Company believes that as a customer focused insurance company, the Company’s brand and brand recognition is important. The Company has introduced a number of initiatives to strengthen its brand, which include the following initiatives:
• The Company launched a rebranding campaign in August 2010 which included the use of a large-size illuminated harbour-front billboard displaying the Company’s new rebranded name and logo.
• In 2011, to further raise its profile in Hong Kong, the Company designed an advertising campaign to increase public awareness of its new brand and the theme “We love the future”. The Company was one of the first insurance companies in Hong Kong to use “U tie”, an image recognition technology, which allows customers to be connected to the services or promotions offered by the Company automatically by taking photos of the Company’s advertisements enhanced with the “U tie” technology on MTR billboards.
• The Company sponsors a number of high profile sporting and other events, such as the following:
• The Company is committed to developing youth football in Hong Kong and giving local children the opportunity to enjoy world-class football training free-of-charge. It is the presenting sponsor of the Kitchee FCBEscola in conjunction with FC Barcelona.
• The Company was the major sponsor of Hong Kong League winners Kitchee’s exhibition football match on 27 May 2011 against Spanish League (La Liga) football team Villarreal C.F., staged to raise funds for victims of the Japanese earthquake, tsunami and nuclear disaster.
• The Company has been the title sponsor of the HKPGA Golf Championships for the past four years.
• The Company is the sponsor for the champion “Fly by Wire” of the National Sportsboat and the Belgian Beer Festival since 2011.
59 The Company’s long-term commitment to the community has been recognised by the Hong Kong Council of Social Service. In 2012, the Company was awarded a “10 Consecutive Years Caring Company Logo” by The Hong Kong Council of Social Service.
Pricing
The pricing or premium rates that the Company attributes to its life insurance products are determined by a number of factors, including product design, profit targets and competition. The Company bases these profit calculations on assumptions with respect to mortality, morbidity rates, investment returns, persistency rates, agency commissions and allowances, management expenses and inflation. These assumptions are derived from the Company’s industry experience, demographic statistics and also information supplied to it by its reinsurers.
Underwriting and Claim Settlement
In order to be able to underwrite insurance policies or conduct claims processing, each of the Company’s underwriters and claims adjusters attends a series of training programmes and an internal assessment. The performance of each of the Company’s underwriters and claims adjusters is closely monitored according to standards and procedures. In addition to internal reviews, the Company’s underwriting and claims files are subject to review by its reinsurers.
Underwriting
The Company’s life insurance underwriting process involves a risk assessment that determines whether the risk related to a particular proposed insured, including both mortality risk and morbidity risk, is consistent with the amount of risk that the Company is willing to accept. During this process, the Company considers the risk characteristics of the individual to be insured, including age, medical condition, occupation and financial profile and compliance risk, in line with the guidelines set by the Company’s reinsurers.
The Company maintains strict guidelines regarding the extent of the review that it conducts with respect to the proposed insured depending on the type and amount of the policy that the applicant is applying for. For example, in the case of policies where the sum insured is in excess of certain limits as defined in the Company’s underwriting guidelines, the Company requires the insured to undergo a medical examination performed at one of the Company’s appointed medical centres, which will ordinarily involve urine tests and blood tests.
The Company establishes underwriting limits for each of its underwriters based upon their experience and level of qualification. To ensure that underwriters do not approve applications which exceed their authorised policy limits, the Company has implemented procedures to check that proper approval is given to each application.
Claim Settlement
The Company has established a professional claims processing system under which life insurance claims are processed by a team of 12 claim settlement staff. Each member of the claim settlement staff must pass the Company’s internal assessments. The Company has established claim settlement limits for each member of its claim settlement staff. To ensure that claim settlement staff do not exceed their claims authority limits, the Company has implemented a centralised claims settlement information technology system that will not accept any claim for settlement if the amount of the claim exceeds the limit for that staff.
60 The Company’s life insurance claim staff use a standardised set of rules and procedures when settling claims, which helps ensure the quality, consistency and efficiency of its claims settlement process. To enhance its claims settlement efficiency, the Company classifies its life insurance claims into two different categories, “major” and “minor”, with major claims being claims that involve death, dismemberment, critical illness, waiver of premium and payments of disability income. The settlement of each of these categories of claims is handled under a separate set of procedures.
Reserves
For all of its product lines, the Company establishes, and carries as liabilities, actuarially determined amounts that are calculated to meet its future obligations under its insurance policies.
Financial statement reserves
In accordance with HKFRS, the Company’s reserves for financial reporting purposes are based on actuarially recognised methods for estimating future policy benefits and claims. The Company expects these reserve amounts, along with future premiums to be received on policies and contracts and investment earnings on these amounts, to be sufficient to meet its insurance policy and contract obligations. The amount of the Company’s insurance liabilities as at 31 December 2012 was HK$18.9 billion (U.S.$2,423 million).
The Company establishes the liabilities for obligations for future policy benefits and claims based on assumptions that are uncertain when made. The Company’s assumptions include assumptions for mortality, morbidity and investment returns. See “Risk Factors — Risks Relating to the Company’s Business”. The Company’s actual experiences may be different from its assumptions and, as a result, it cannot determine precisely the amounts that it will ultimately pay to settle these liabilities or when these payments will need to be made. These amounts may vary from the estimated amounts, particularly when these payments may not occur until well into the future. The Company evaluates its liabilities periodically, based on changes in the assumptions used to establish the liabilities, as well as its actual policy benefits and claims experience.
Statutory surplus and solvency ratio
The Company is required under Hong Kong’s insurance laws to report statutory reserves for regulatory purposes. The minimum level of paid-up capital the Company is required to hold is HK$828 million as at 31 December 2012. The Company also maintains assets in excess of liabilities to meet the solvency requirements under Insurance Companies (Margin of Solvency) Regulations. See “Business — Supervision and Regulation”.
The table below illustrates the Company’s solvency ratio and the surplus to the statutory requirement.
As at 31 December
2010 2011 2012
(HK$ in millions, except ratios)
Solvency Margin Requirement ...... 580 720 828 Statutory Surplus ...... 2,860 2,597 3,060 Solvency Ratio ...... 493% 361% 370%
61 Reinsurance
In accordance with the ICO, the Company is required to maintain adequate reinsurance arrangements. The Company has therefore entered into various reinsurance agreements with a number of reinsurers for the reinsurance of individual risks, group risks and defined blocks of business. In general, death risks are primarily reinsured on a surplus basis, under which the Company is reinsured for losses above a specified amount. Under its internal reinsurance policy, the Company obtains reinsurance for risks exceeding HK$1,200,000 or U.S.$150,000 for each type of risk the Company insures. For example, for a term life policy with an accident rider, the Company would obtain reinsurance for both the term life and accident benefits, in each case for risks over HK$1,200,000. In general, the Company’s reinsurance agreements do not have a definite term but may be terminated by either party at the end of a calendar year with advance notice of three to six months.
These reinsurance agreements spread the risk and reduce the effect on the Company of benefit claims paid. Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse the Company for the insured, or ceded, amount in the event the claim is paid. However, the Company remains liable to its policyholders for the ceded amount if the reinsurer fails to meet the obligations assumed by it.
For the year ended 31 December 2012, the amount of premiums ceded to the Company’s reinsurers totalled HK$301 million (U.S.$39 million). As at 31 December 2012, the Company’s principal reinsurers were Cologne Reinsurance Company (rated AAA by Standard & Poor’s Ratings Services, a Division of the McGraw Hill Companies Inc. (Standard & Poor’s)) and RGA Reinsurance Company (rated AA+ by Standard & Poor’s), which reinsured 53 per cent. and 30 per cent. of the amounts the Company reinsures, respectively. The Company does not provide any reinsurance services to third parties.
Other Businesses
General Insurance
In order to offer a comprehensive range of products to its customers, the Company also acts as an agent and offers a range of general insurance products, such as motor vehicle, employee compensation, property, marine cargo, engineering, personal accident and public liability insurance policies that are underwritten by China Taiping Insurance Holdings Company Limited, MSIG Insurance (Hong Kong) Limited and Asia Insurance Company Limited. Total fee income from the Company’s general insurance business for the year ended 31 December 2012 was HK$9.9 million (U.S.$1.3 million).
Credit Cards
The Company launched an Ageas Visa Credit Card product in 2001 in association with The Bank of East Asia, Limited and VISA International. These cards are issued free of initial or annual fees to policyholders of the Company and supplementary cards are issued to immediate family members of primary cardholders. These cards can be used for settling the Company’s policy’s premium payments without credit card charges. As at 31 December 2012, the Company had issued over 42,000 Ageas Visa Credit Cards. The Company shares 50 per cent. of any net profits or losses generated by the use of these cards.
62 Investments
As at 31 December 2012, the investment assets under the Company’s general and shareholders’ funds amounted to approximately HK$18 billion (U.S.$2,308 million). The investment yield of the Company’s general and shareholders’ funds as at 31 December 2012 was 7.6 per cent. per annum and was 13.1 per cent. and 6.6 per cent. per annum as at 31 December 2011 and 2010, respectively. In addition, the assets under management for linked products where the investment is held by the Company on behalf of the policyholders totalled HK$5.8 billion (U.S.$744 million).
The Company’s investment committee reviews its investment guidelines on an ongoing basis. The committee is comprised of the Company’s Chief Executive Officer, Chief Financial Officer, Chief Commercial Officer, Chief Operating Officer and Chief Risk Officer.
As at 31 December 2012, the asset portfolio in the Company’s general and shareholders’ funds comprised of 90 per cent. of fixed income investments, 3 per cent. of equities and unit trusts investments, 7 per cent. of other investments and less than 0.5 per cent. of real estate investments. As at 31 December 2012, the Company held a diversified fixed income portfolio, where the largest exposure to one single bond issuer was 2.5 per cent. of its fixed income portfolio. However, the Company’s largest exposure to a single bond issuer could further increase up to 8 per cent. of its fixed income portfolio in 2014 (on the assumption that its fixed income portfolio otherwise remains same as at 31 December 2012) and such potential increase has been approved by the Company’s investment committee. The Company held a fixed income portfolio of high credit quality, where less than 1 per cent. of its total fixed income portfolio comprised of non-investment grade securities.
The table below sets out the investment mix of the Company’s general and shareholders’ funds as at 31 December 2010, 2011 and 2012, respectively.
As at 31 December Investments 2010 2011 2012
Fixed Income ...... 82% 87% 90% Equities and Unit Trusts ...... 2% 3% 3% Real Estate ...... 0%(1) 0%(1) 0%(1) Cash ...... 13% 8% 5% Policy Loans ...... 3% 2% 2% Total ...... 100% 100% 100%
(1) less than 0.5 per cent.
The table below sets out the Company’s fixed income investments by categories of issuer as at 31 December 2010, 2011 and 2012.
As at 31 December Issuers 2010 2011 2012
Government ...... 33% 29% 25% Corporate...... 67% 71% 75% Total ...... 100% 100% 100%
63 The table below sets out the Company’s fixed income investments by investment tenor as at 31 December 2010, 2011 and 2012.
As at 31 December Tenor 2010 2011 2012
1 year or less ...... 4% 2% 4% 1-5 years ...... 19% 22% 21% 5-10 years ...... 38% 40% 38% more than 10 years ...... 39% 37% 37% Total ...... 100% 100% 100%
As at 31 December 2012, the exposure of the Company’s fixed income investments was weighted towards Asia. The table below illustrates the breakdown of exposure by country/region.
Percentage of Fixed Country/region Income Assets
Hong Kong and China...... 29% Other Asia ...... 20% United States ...... 31% Europe ...... 14% Others ...... 5% Japan ...... 1%
The table below illustrates the investment returns on, and value of, the assets of the Company’s general and shareholders’ funds over the last five years.
Portfolio size For the year ended 31 December Investment yield (1) (HK$ in millions)
2008 ...... 6.8% $11,801 2009 ...... -0.5%(2) $12,182 2010 ...... 6.6% $12,648 2011...... 13.1%(2) $15,940 2012 ...... 7.6% $17,970
(1) Investment yield includes recurring yield, realised and unrealised gain
(2) Changes were primarily due to fluctuations in interest rates in the relevant year which affected the market value of fixed income investments.
64 Risk Management
Management of risk exposure is fundamental to the Company’s operations. The Company has established a comprehensive risk management framework to manage risks across its operations on a continuous basis. The Company’s risk management framework is designed to foster a strong and well-informed risk management culture across its operations and to support its business decisions. Each business unit is responsible for identifying and reporting various risks to the appropriate committees, which have been set up by the Company to oversee and review the risk management of its key business activities and has set up a comprehensive infrastructure of policies and procedures. The Company integrates these risk management processes of its various activities through its executive committee which meets every month and reports directly to the Company’s Board of Directors. The Company also has various departments involved in the risk management function, including actuarial, legal, compliance and internal audit, to further enhance its risk governance.
Investment Risk and Asset & Liability Management
The Company’s investment committee is responsible for setting strategic investment guidelines and counterparty exposure limits to maintain counterparty diversification, reviewing and monitoring monthly risk management reports and managing market risks. The Company is committed to maintaining a diversified portfolio, with no European soverign exposure. The investment committee, which is internally managed, may modify the Company’s exposure limits to improve capital management efficiencies. The Company also performs resilience tests to its portfolio each month to ensure that the Company has sufficient capital to protect it in any sudden and unexpected swings in the capital markets.
The objective of the Company’s asset and liability management is to match its assets with its liabilities on the basis of duration and cash flow matching to minimise the impact of the asset and derivatives markets constraints. In addition, the Company maintains a highly liquid investment portfolio to avoid any cashflow shortfalls and to allow the Company to sell its assets from time to time to meet any financial liability.
Underwriting and Claims Risk
The Company’s underwriting and claims committee has the primary objectives of providing advice on policies relating to underwriting and claims settling and to oversee the claims position of the Company. The committee formulates and reviews the Company’s underwriting policy and claims settlement policy, monitors the Company’s claims experience and investigates adverse experience and fraudulent cases. Periodic audits are also carried out to evaluate the effectiveness and efficiency of the control process on underwriting and claims.
Operational Risk
Operational risk is the risk of loss resulting from breakdowns in information, communication, transaction processing, settlement systems and procedures. Operational risks include failure to obtain proper internal authorisations or to properly document transactions, equipment failure, inadequate training or errors by employees. The Company manages operational risk by establishing clear policies and procedures. The Company’s internal administration processes are regularly reviewed by its re-insurers and the Company discusses the processes with its auditors annually. The Company has an audit committee which is responsible for reviewing the Company’s overall operations and overseeing its internal audit department.
The Company also frequently reviews its pricing assumptions and performs monthly actuarial simulation modelling to ensure the Company’s pricing adequacy. The Company also monitors its business risk with financial projections and embedded value estimation.
65 Credit Risk
Credit risk occurs whenever the Company relies on a third party to satisfy its financial obligation to the Company. Credit risk also arises in reinsurance, settlement and treasury activities. The Company manages its credit risk in its investment portfolio through detailed analysis of individual counterparties and adherence to risk tolerance limits to ensure that such risk is contained within the Company’s risk appetite.
Market Risk
Market risk arises from the possibility of financial loss caused by changes in financial instruments’ fair values or future cash flows due to fluctuations in key variables, including interest rates, foreign exchange rates and equity and property market prices.
The Company manages its market risks by adopting an investment strategy that takes into account its insurance liability profiles as well as potential price fluctuations of the underlying investment. In addition, the Company also uses derivatives to reduce its interest rate and foreign exchange rate risks.
Departments
Actuarial. The actuarial department provides guidance at least once a year on calculation of technical provisions, underwriting policy and reinsurance arrangements. This department identifies any deficiencies in such matters and provides recommendations as to how such deficiencies should be remedied.
Legal and Compliance. The legal department develops the risk framework, guidelines and policies based on the legal, regulatory and administrative requirements. This department is also responsible for identifying any potential dispute or litigation that could affect the risk governance system or requirements of the Company. The compliance department performs the necessary controls to ensure the proper implementation and compliance of the guidelines and policies developed by the legal department.
Internal Audit. The internal audit department evaluates the effectiveness of the Company’s risk management system and processes, reports issues and deficiencies to the appropriate risk committees and provides recommendations for improving such processes.
Employees
As at 31 December 2010, 2011 and 2012, the Company had 282, 307 and 345 employees, respectively. The Company offers its employees attractive compensation packages that are linked to the performance of the Company. None of the Company’s employees is subject to collective bargaining agreements governing their employment with the Company. The Company believes that it enjoys satisfactory relations with its employees.
Credit Ratings
Ratings by independent agencies are an important factor in establishing the competitive position of insurance companies and are important to the Company’s ability to market and sell its products. Financial strength ratings measure a company’s ability to meet its insurance obligations. Credit ratings measure a company’s ability to repay its debt obligations and directly affect the cost and availability of unsecured financing. Rating organisations continually review the financial positions of insurers, including the Company. The Company is currently assigned financial strength ratings of “A-” by A.M. Best (the fourth highest of 15 rating levels), “A” by Fitch (the sixth highest of 19 rating levels) and “Baa1” by Moody’s (the eighth highest of 19 rating levels). These ratings reflect A.M. Best’s, Fitch’s and Moody’s respective
66 opinions of the Company’s ability to pay claims and are not evaluations directed to investors in the Notes and are not recommendations to buy, sell or hold the Notes. A.M. Best maintains a letter scale rating system ranging from “A++” to “F”. Fitch maintains a letter scale rating system ranging, for non-defaulting companies, from “AAA” to “C”. Moody’s maintains a letter scale rating system ranging, for non-defaulting companies, from “Aaa to “C”. These ratings are subject to periodic review by, and may be revised downward or revoked at the sole discretion of, A.M. Best, Fitch and Moody’s.
Information Technology
All core business processes of the Company are supported by information technology systems and infrastructure. In recent years, the Company has increased its investment in new systems and upgraded its hardware capacity and network infrastructure to meet the requirements of its internal staff and insurance agents. New business and servicing processes are supported by a single back-end system and customer service solution is based on modern technology. The Company’s agents are supported by a range of innovative information technology solutions such as a web-based portal for inquiry, sales illustration and application submission as well as pre-sale tools on mobile devices for quotation, financial needs analysis and agency recruitment.
Legal Proceedings and Tax Disputes
In September 2009, the Company commenced proceedings against an ex-agent (the Defendant) for the repayment of five loans after the Defendant’s contract was terminated with the Company in June 2009. The Defendant settled part of the claim by repaying two of the outstanding loans. Subsequently, the Defendant filed a defence to deny his liability with respect to the three outstanding loans and a counterclaim for HK$31,241,201 for contractual benefits and damages, which is approximately the same amount outstanding on the loans. As of the date of this Offering Circular, the Company has set aside HK$4.5 million as provision for the litigation. The Company maintains its claim for the repayment of the outstanding loans from the Defendant and intends to defend the Defendant’s counterclaim. A trial relating to this matter is scheduled to commence in November 2013.
In 2011, the IRD issued additional tax assessments of HK$3.66 million to the Company in relation to its life insurance investment linked business, underwritten in fiscal years 2005/06 and 2006/07 on the basis that its preliminary assessments did not account for certain portions of the premiums paid by policyholders. Although the Company filed an objection notice to the IRD’s additional assessments, there can be no assurance that the IRD will reduce or withdraw its additional assessments. As of the date of this Offering Circular, the IRD’s additional assessments remain pending and the Company has set aside a provision of HK$59 million in respect of the IRD’s additional assessments for fiscal years 2005/06 and 2006/07 and the Company’s estimation of the potential additional assessments for fiscal year 2007/08 and onwards.
Except as disclosed above, the Company is not involved in any current or pending legal matter or tax dispute that is likely to have a material adverse effect on its business, financial condition or results of operations.
67 Competition
The Company is ranked tenth in Hong Kong with market share of 2 per cent. measured by APE according to the provisional statistics released by OCI as at 31 December 2012.
Although the Hong Kong insurance market is a relatively liberalised market with few barriers to entry, the market is concentrated. According to statistics released by OCI as at 31 December 2012, over 65 per cent. of market share (by APE) for linked and non-linked insurance business was held by five life insurance companies. The Company’s competitors can broadly be placed into four groups:
• large predominantly foreign-owned multinationals insurance companies with an individual market share (by premium) in excess of 5.0 per cent.;
• medium sized foreign owned multinationals and large locally owned insurance companies (including the Company) with an individual market share (by premium) in excess of 2.0 per cent. but less than 5.0 per cent.;
• other insurance companies with an individual market share (by premium) of less than 2.0 per cent.; and
• banks and financial institutions.
In 2011, the Company enhanced its IFA distribution channel to penetrate the local market by means of differentiation from key competitors through product innovation and IFA centric service proposition. See “Business — Recent Initiatives”.
Properties
The Company’s principal executive offices are located at Wing On Centre, 111 Connaught Road Central, Hong Kong. The Company leases all of its office premises in Hong Kong.
Subsidiaries
The Company does not have any material subsidiaries. Other than the Issuer, all of the Company’s subsidiaries are either property holding companies or dormant companies.
Supervision and Regulation
The Company is subject to extensive local regulatory oversight in Hong Kong.
The main source of statutory regulation of the insurance market and insurance businesses in Hong Kong is the ICO and its subsidiary regulations, which set out requirements for the authorisation, ongoing compliance and reporting obligations of insurers and insurance intermediaries. The OCI is the regulatory body set up for the administration of the ICO. The OCI regulates the Company and it is subject to the requirements of the ICO. The OCI is headed by the Commissioner of Insurance, who has been appointed as the Insurance Authority for administering the ICO. The principal functions of the Insurance Authority are to ensure that the interests of policyholders or potential policyholders are protected and to promote the general stability of the insurance industry. The Insurance Authority has the following major duties and powers: (i) authorisation of insurers to carry on insurance business in Hong Kong; (ii) regulation of insurers’ financial condition, primarily through the examination of the annual audited financial statements and business returns submitted by the insurers; and (iii) development of legislation and guidelines on insurance supervision.
68 The OCI requires that the Company meets the solvency ratio requirements of the ICO. The ICO (among other matters) sets minimum solvency ratio requirements that an insurer must meet in order to be authorised to carry on insurance business in or from Hong Kong. The minimum solvency ratio under the ICO is 100 per cent.
The Insurance Authority is empowered by the ICO to raise objection if it appears that any person is not fit and proper to be a controller or director of an authorised insurer. Fit and proper standards include: the sufficiency of a holding company’s financial resources; the viability of a holding company’s business plan for its insurance subsidiaries which are regulated by the Insurance Authority; the clarity of the group’s legal, managerial and operational structures; the identities of any other holding companies or major regulated subsidiaries; whether the holding company, its directors or controllers are subject to receivership, administration, liquidation or other similar proceedings or have failed to satisfy any judgment debt under a court order or are the subject of any criminal convictions or in breach of any statutory or regulatory requirements; the soundness of the group’s corporate governance measures; the soundness of the group’s risk management framework; the receipt of information from its insurance subsidiaries which are regulated by the Insurance Authority to ensure that they are managed in compliance with applicable laws, rules and regulation; and its role in overseeing and managing the operations of its insurance subsidiaries which are regulated by the Insurance Authority.
The Company is in compliance with the solvency and capital adequacy requirements applied by the regulators in Hong Kong.
Capital and regulatory orders specific to the Company
The OCI has imposed additional requirements or restrictions on the Company. As of the date of this Offering Circular, the requirements and restrictions summarised below may be considered material to the Company.
Hong Kong Office of the Commissioner of Insurance
The Company has given to the Insurance Authority an undertaking that it will:
(i) ensure that (a) the Company will at all times maintain a solvency ratio of not less than 150 per cent. on an individual insurer basis; (b) it will not withdraw capital or transfer any funds or assets out of the Company that will cause the Company’s solvency ratio to fall below 150 per cent., except with the prior written consent of the Insurance Authority; and (c) should the solvency ratio of the Company fall below 150 per cent., the Company will take steps as soon as possible to restore it to at least 150 per cent. in a manner acceptable to the Insurance Authority;
(ii) notify the Insurance Authority in writing as soon as it becomes aware of any person (a) becoming a controller (within the meaning of Section 9(1)(c)(ii) of the ICO) of the Company through the acquisition of shares; or (b) ceasing to be a controller (within the meaning of Section 9(1)(c)(ii) of the ICO) of the Company through the disposal of the Company’s shares;
(iii) be subject to the supervision of the Insurance Authority and the Company will be required to continually comply with the Insurance Authority’s guidance on the “fit and proper” standards of a controller pursuant to Section 8(2) of the ICO; and
(iv) fulfill all enhancements or improvements to the guidance referred to in subparagraph (iii) above, as well as administrative measures issued from time to time by the Insurance Authority or requirements that may be prescribed by the Insurance Authority in accordance with the ICO, regulations under the ICO or guidance notes issued by the Insurance Authority from time to time.
69 MANAGEMENT
The Company
Powers and functions of the Company’s Board of Directors (the Board)
The Bye-Laws of the Company provide that the Company may by a resolution of shareholders appoint any person to be a director. In addition, the Board shall have power at any time to appoint any individual to be a director in order to fill a casual vacancy. Directors may be removed by the shareholders of the Company at a special general meeting of the Company called for the purpose, provided that at least 14 days’ notice of such meeting is given to the director concerned (who is entitled to be heard at such meeting). The vacancy created by such removal may be filled by the election of another director at the special general meeting or, in the absence of any such election, by the Board.
At present, there are ten directors who are appointed in accordance with the Bye-Laws of the Company.
The overall management and supervision of the Company is undertaken by the Board and the Chief Executive Officer’s function is under the supervision and control of the Board.
Existing Directors
Term in office Name Age Position (year(s))
Mr. Jozef G. De Mey 1 ...... 69 Chairman 3 Mr. Christophe Alexandre Henri BOIZARD 2 .... 53 Deputy Chairman Less than 1 Mr. Charles Stuart FRASER ...... 60 Chief Executive Officer 5 Mr. Gary Lee CRIST...... 55 Director 4 Mr. Filip A. L. COREMANS ...... 48 Director 3 Mr. Frank Johan Gerard VAN KEMPEN 3 ...... 46 Director 1 Mr. Emmanuel Gerard Clement VAN GRIMBERGEN 2...... 45 Director Less than 1 Mr. Stuart Hamilton LECKIE...... 67 Independent non-executive Director 5 Mr. Yiu Wa Alec TSUI ...... 63 Independent non-executive Director 5 Prof. Ka Lok CHAN ...... 51 Independent non-executive Director 5
1 Mr. Jozef G De Mey has been a director of the Company for 5 years and has been the Chairman of the Board for 3 years.
2 Messrs. Christophe Alexandre Henri Boizard and Emmanuel Gerard Clement Van Grimbergen have been appointed as directors of the Company with effect from 1 April 2013.
3 Mr. Frank Johan Gerard Van Kempen has been appointed a director of the Company with effect from 1 July 2012.
70 Directors’ Biographical Information
Jozef G. De Mey
Mr. De Mey is the Chairman of the Board of the Company and Ageas SA/NV. He is also the Chairman of the Corporate Governance Committee of Ageas SA/NV.
He started his career in 1967 at the Insurance Control Authorities of the Ministry of Economic Affairs. From 1969 until 1971 he worked at Kredietbank Belgium. In 1971 he joined John Hancock, a financial services provider, where he held various positions until he joined Fortis in 1990. At Fortis, Mr. De Mey served as General Manager of Fortis International, CEO of Fortis AG, and was appointed member of the Executive Committee in September 2000, where he was responsible for the Belgian and international insurance activities. In 2007, he was appointed Chief Investment Officer within the Executive Committee. Mr. De Mey retired from Fortis in December 2007. He continued to hold a number of non-executive board memberships in Fortis operating companies. In February 2009, he became non-executive Chairman of the Board of Directors of Fortis which was renamed Ageas in 2010.
He is also Vice Chairman of Muang Thai Group Holding Company Limited, Muang Thai Life Assurance Public Company Limited and Taiping Life Insurance Company Limited and holds directorships with De Eik N.V., Credimo N.V., Credimo Holding N.V., Zinner N.V. and Festival van Vlaanderen Gent.
Mr. De Mey holds a degree in Mathematics from the University of Gent and graduated in Actuary from the University of Louvain.
Christophe Alexandre Henri Boizard
Mr. Boizard is the Deputy Chairman of the Board of the Company and the Chief Financial Officer of Ageas SA/NV.
He has ample experience in the financial world and the insurance sector. From 2009 to 2011, he was a member of the Executive Committee of Partner Re Global. From 2006 to 2009 he was appointed Chief Financial Officer of PARIS RE. From 1989 to 2006, Mr. Boizard worked for AXA group as Director of the Finance and Control Department at AXA Courtage and AXA France and as Chief Financial Officer at AXA Assicurazioni, initially for Italy, but later including the Mediterranean Basin. Mr. Boizard holds directorships at Royal Park Investments in Brussels, AG Real Estate Investments in Brussels, Ageas Finance in Utrecht and Cardif Lux in Luxembourg. He graduated from Ecole Centrale Paris in 1981.
Mr. Boizard holds a Master of Sciences degree from Stanford University in the United States and graduated from Centre des Hautes Études d’Assurances.
Charles Stuart Fraser
Mr. Fraser is a Director, Chief Executive Officer and a Risk Committee member of the Company.
Mr. Fraser is a member of the Life Insurance Council of the Hong Kong Federation of Insurers, the key interface between the industry and regulators. He is also the Chairman of the Investment-linked Assurance Schemes (ILAS) Working Group, which implements key changes to the structure and governance of unit-linked products. He is a senior business executive with over 30 years of extensive international experience in the financial services sector, especially in the areas of life assurance and long-term savings. He has worked at both regional and operational levels and has led entry strategies to new markets in Europe and Asia by either greenfield or acquisition. Mr. Fraser joined Fortis (which was renamed Ageas in 2010) in July
71 2006 as Director, Commercial Development and Support, Asia of Fortis Insurance International and has been the Chief Executive Officer of the Company since July 2007. Prior to joining Fortis, Mr. Fraser held a series of senior management positions with Aviva Life Insurance and Commercial Union Europe, London.
Mr. Fraser holds a Master of Arts Degree in Marketing from the University of Central England, United Kingdom and a Post Graduate Diploma in Marketing from the Chartered Institute of Marketing, United Kingdom. He is a Chartered Insurer of the Chartered Insurance Institute (Life) of the United Kingdom.
Gary Lee Crist
Mr. Crist is a Director of the Company and the Chief Executive Officer of Ageas in Asia. He is responsible for the strategic development of Ageas’ insurance activities in Hong Kong.
Before joining Ageas in January 2002, Mr. Crist held a variety of professional and managerial positions in the Asian insurance business since 1981. This includes senior management positions with Russell Miller Advisors Asia in Singapore and Indonesia, with Liberty International in Indonesia and with CIGNA in Indonesia, Thailand, Hong Kong, Guam and the Philippines.
He also holds directorships with Muang Thai Group Holding Company Limited, Muang Thai Insurance Public Company Limited, Muang Thai Life Assurance Public Company Limited, Muangthai Holding Company Limited, Taiping Life Insurance Company Limited, Maybank Ageas Holding Berhad, Etiqa Insurance Berhad, Etiqa Takaful Berhad and Etiqa Offshore Insurance (L) Limited, which are all operating or holding companies associated with Ageas in Asia.
Mr. Crist holds a Masters Degree from the American Graduate School of International Management in Glendale, Arizona, U.S. and a Bachelors Degree from Wittenberg University in Springfield, Ohio, U.S.
Filip A. L. Coremans
Mr. Coremans is a Director and a member of both the Audit Committee and the Risk Committee of the Company. He is also the Chief Financial Officer of Ageas in Asia since September 2009.
He also holds directorships with Muang Thai Insurance Public Company Limited, Muang Thai Life Assurance Public Company Limited, Taiping Asset Management Limited and IDBI Federal Life Insurance Company Limited, and sits on the supervisory board of Taiping Life Insurance Company Limited, the operating companies associated with Ageas in Thailand, India and China, respectively.
Before taking up his current role, Mr. Coremans held numerous senior management positions and directorships within various Ageas entities in Asia since 2003. Prior to joining Ageas, Mr. Coremans was the Corporate Controller of KBC Insurance Group and Deputy Head of the Life Insurance department at ING Insurance Belgium.
Mr. Coremans holds a Master of Business Administration Degree in International Business Finance, a Masters degree in Actuarial Sciences and a Bachelor Degree in Applied Economics, all from Catholic University of Leuven, Belgium.
72 Frank Johan Gerard van Kempen
Mr. Van Kempen is a Director of the Company and the Chief Commercial Officer of Ageas in Asia.
Before taking up his current role, Mr. Van Kempen has been in a variety of professional and managerial positions in the insurance business in Europe, U.S. and Asia since 1993. Prior to joining Ageas, Mr. Van Kempen was the Regional Director, Insurance Product Management of Prudential Asia Corporation, Hong Kong. Between 1993 and 2009, Mr. Van Kempen held a series of senior positions with ING in The Netherlands, Romania, U.S. and Hong Kong.
He also holds directorships with Muang Thai Holding Company Limited, Etiqa Insurance Berhad and Etiqa Takaful Berhad, the operating companies associated with Ageas in Thailand and Malaysia.
Mr. Van Kempen holds a Master of Actuarial Science Degree from the University of Amsterdam and a Master of Marketing from Tilburg University, The Netherlands. He is also a Fellow of the Dutch Actuarial Association and the Actuarial Society of Hong Kong.
Emmanuel Gerard Clement Van Grimbergen
Mr. Van Grimbergen is a Director of the Company, the Group Risk Officer of Ageas SA/NV and a member of the Ageas Management Committee.
Before joining Ageas in 2011, he worked for ING for 18 years in the Risk/Actuarial departments. He held various senior management positions at ING Insurance Belgium and ING Central Europe. In early 2000, he became Chief Actuary of ING South West Europe and, in 2004, he was appointed Chief Insurance Risk Officer of ING Insurance Retail Banking. In 2007, he moved to Amsterdam as the Chief Risk Officer of ING Central and Rest of Europe.
Mr. Van Grimbergen holds a Master’s degree in both mathematics and actuarial sciences and he is also a member of the Institute of Actuaries in Belgium.
Stuart Hamilton Leckie, O.B.E., J.P., F.I.A., F.S.A.
Mr. Leckie is an Independent Non-executive Director and the Chairman of both the Audit Committee and the Risk Committee of the Company.
Mr. Leckie is based in Hong Kong and advises on investments and pensions in Hong Kong and Mainland China. He is the author of books titled “Pension Funds in China” and “Investment Funds in China”. He is the Founding Chairman of the Hong Kong Retirement Schemes Association, acts as a trustee of a number of retirement schemes and is a member of the CFA Institute Advisory Council. Mr. Leckie worked in life insurance in the United Kingdom before moving to Hong Kong in 1979.
Mr. Leckie served as the Chairman of Watson Wyatt (now Towers Watson) in Asia - Pacific and as Chairman of Fidelity Investments, Asia-Pacific. He has advised the Chinese Government on pensions reform and advised the Hong Kong Government on the establishment of the Mandatory Provident Fund.
73 Yiu Wa Alec Tsui
Mr. Tsui is an Independent Non-executive Director and a member of Audit Committee of the Company.
He is also the Chairman of WAG Worldsec Corporate Finance Limited and a Director of Industrial and Commercial Bank of China (Asia) Limited. He is an Independent Non-executive Director of a number of listed companies on The Stock Exchange of Hong Kong Limited, NASDAQ, Shanghai Stock Exchange and The Philippine Stock Exchange, Inc., namely, China Power International Development Limited, China Chengtong Development Group Limited, Pacific Online Limited, China Oilfield Services Limited, Summit Ascent Holdings Limited, COSCO International Holdings Limited, Melco Crown Entertainment Limited, ATA Inc and Melco Crown (Philippines) Resorts Corporation (previously known as Manchester International Holdings Unlimited Corporation).
Mr. Tsui holds a Bachelor of Science degree and a Master of Engineering degree in Industrial Engineering from the University of Tennessee and has completed the Program for Senior Managers in Government at the John F. Kennedy School of Government at Harvard University.
Mr. Tsui was the Chairman of the Hong Kong Securities Institute from 2001 to 2004 and the Chief Operating Officer of Hong Kong Exchanges and Clearing Limited in 2000. He was also the Adviser and Council Member of the Shenzhen Stock Exchange from July 2001 to June 2002. He has numerous years of experience in finance and administration, corporate and strategic planning and management positions.
Ka Lok Chan
Professor Chan is an Independent Non-executive Director and a member of the Audit Committee of the Company.
He is the Head of the Finance Department and the Synergis-Geoffrey YEH Chair Professor of Finance at the Hong Kong University of Science and Technology (HKUST), where he also holds concurrent positions as the Director of the Centre for Fund Management and the Director of the Value Partners Center for Investing. He is also the Associate Dean (Research and Resource Planning) of HKUST Business School. Professor Chan obtained his Ph.D. in Finance from Ohio State University and taught at Arizona State University from 1990 to 1997 before joining HKUST. He is also a Chartered Financial Analyst. Professor Chan actively participates in the local profession in Hong Kong.
He has served as a member in the Risk Management Committee of the Hong Kong Exchanges and Clearing Limited, the HKSAR Advisory Committee on Human Resource Development (Financial Services), Committee on Unit Trusts and Committee on Investment-Linked Assurance and Pooled Retirement Funds of the Securities and Futures Commission of Hong Kong, and currently serves as a member of Hang Seng Index Service Limited and FTSE Asia-Pacific Regional Committee.
Committees
Audit Committee
The Audit Committee assists the Board in fulfilling its supervision and monitoring responsibilities in respect of internal control in the broadest sense within the Company, including internal control over financial reporting. The Audit Committee comprises Mr. Stuart Hamilton Leckie, Mr. Yiu Wa Alec Tsui, Prof. Ka Lok Chan and Mr. Filip A. L. Coremans.
74 Risk Committee
The Risk Committee assists the Board in fulfilling its supervision and monitoring responsibilities in respect of risk management in the broadest sense within the Company. The Risk Committee comprises Mr. Stuart Hamilton Leckie, Mr. Charles Stuart Fraser, Mr. and Mr. Filip A. L. Coremans.
Compensation of Directors
In 2012, the total remuneration of all Directors was HK$3,982,000 (U.S.$510,513).
The Issuer
The Board of Directors of the Issuer has three members, namely Mr. Charles Stuart Fraser, Mr. Paul Roger Headey and Mr. John William Thompson. The secretary of the Issuer is Ms. Lisa Yee Man Li. There are no further officers of the Issuer.
75 RELATED PARTY TRANSACTIONS
The Company has entered into a number of life policies with its agents and with the staff of companies that are associates of the Company. The Company believes that the terms of these policies are similar to those offered to its other customers and were entered into on an arm’s length basis in the ordinary and usual course of business and on terms that are fair and reasonable so far as the Company’s shareholders are concerned.
All the outstanding preference shares issued by the Company are held by a member of the Ageas Group. Please refer to the relevant notes to the audited financial statements of the Company for the terms of the preference shares and for any other material party transactions of the Company as at and for the years ended 31 December 2010, 31 December 2011 and 31 December 2012.
76 TAXATION
The following is a general description of certain tax considerations relating to the Notes and is based on law and relevant interpretation thereof in effect as at the date of this Offering Circular all of which are subject to changes and does not constitute legal or taxation advice. It does not purport to be a complete analysis of all tax considerations relating to the Notes, whether in those countries or elsewhere. Prospective purchasers of Notes should consult their own tax advisers as to which countries’ tax laws could be relevant to acquiring, holding and disposing of Notes and receiving payments of interest, principal and/or other amounts under the Notes and the consequences of such actions under the tax laws of those countries. It is emphasised that neither the Issuer nor any other persons involved in the Programme accepts responsibility for any tax effects or liabilities resulting from the subscription for purchase, holding or disposal of the Notes.
Bermuda
Tax
Under current Bermuda legislation, there is no withholding tax, capital gains tax, income or profits tax, capital transfer tax, estate duty or inheritance tax payable in Bermuda by the Company or any shareholders who are resident outside Bermuda. Furthermore, the Company has obtained from the Minister of Finance in Bermuda, under the Exempted Undertakings Tax Act, 1966 (as amended), an assurance that, in the event of there being enacted in Bermuda any legislation which in the future may impose tax computer on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, such tax shall not, until 28 March 2016, be applicable to the Company or to any of its operations, or to shares, debentures or other obligations of the Company except insofar as such tax applies to persons ordinarily resident in Bermuda and holding such shares, debentures or other obligations of the Company except insofar as such tax applies to persons ordinarily resident in Bermuda and holding such shares, debentures or other obligations of the Company or to land in Bermuda leased or let to the Company.
Stamp duty
As an exempted company, the Company is exempt from all stamp duties except on transactions involving “Bermuda property”. This term relates essentially to real and personal property physically situated in Bermuda, including shares in local (as opposed to exempted) companies. None of the Company, the shareholders and the holders of the Notes, as the case may be (other than persons ordinarily resident in Bermuda), are subject to stamp duty or other similar duty in relation to the Notes (including the transfer thereof).
British Virgin Islands
As the Issuer is incorporated pursuant to the BVI Business Companies Act, 2004 (as amended) of the British Virgin Islands (BVI) (i) payment of principal, premium, (if any) and interest in respect of the Notes will not be subject to taxation in the BVI, (ii) no withholding tax will be required to be deducted by the Issuer on such payments to any holder of a Note save for interest payable to an individual resident in the European Union on any payment to or by the Issuer by way of principal or interest on borrowings, and (iii) the Notes will not be liable to stamp duty in the BVI. Gains derived from the sale of the Notes by persons who are non resident in the BVI or not otherwise liable to BVI income tax will not be subject to BVI income tax. The BVI currently has no capital gains, estate duty, inheritance tax or gift tax.
77 The European Union Savings Directive (the Directive) on the taxation of savings income in the form of interest payments took effect on 1 July 2005. The aim of this Directive is to enable savings income in the form of interest payments made in one Member State to beneficial owners who are individuals resident in another Member State to be made subject to effective taxation in accordance with the laws of the latter Member State.
Pursuant to the bilateral agreements that the BVI has entered into with each of the Member States, the BVI has given paying agents the option to offer beneficial owners the choice of having withholding tax on interest payments deducted at source or information about such payments exchanged with the relevant Member State.
The Directive specifies that any jurisdiction implementing the withholding tax must set up procedures to allow beneficial owners to opt not to pay a withholding tax either by authorising the paying agent to report information or by providing a tax certificate drawn up by their competent authority.
Under the withholding tax option, a BVI paying agent will automatically deduct tax from interest payments at the rate of 35 per cent. The paying agent will pay the withholding tax to the Commissioner of Inland Revenue in the BVI. 75 per cent. of the withholding tax levied will be remitted to the tax authorities in the receiving Member State and the Commissioner of Inland Revenue will retain 25 per cent.
Receiving Member States will not receive information relating to the beneficial owner. Under the automatic exchange of information option, the Directive requires the following information be collected by the BVI paying agent:
(a) the identity and residence of the beneficial owner;
(b) the name and address of the paying agent;
(c) the account number of the beneficial owner; and
(d) information concerning the savings income.
This information must be reported by the BVI paying agent at least once a year to the competent authority in the country where the account is held and forwarded to the competent authority of the country where the beneficial owner resides.
EU Directive on the Taxation of Savings Income
Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in that other Member State; however, for a transitional period, Austria and Luxembourg may instead apply a withholding system in relation to such payments, deducting tax at rates rising over time to 35 per cent. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to the exchange of information relating to such payments.
78 A number of non-EU countries, and certain dependent or associated territories of certain Member States, have adopted similar measures (either provision of information or transitional withholding) in relation to payments made by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in a Member State. In addition, the Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or collected by such a person for, an individual resident or certain limited types of entity established in one of those territories.
On 13 November 2008, the European Commission published a proposal for amendments to the Directive, which included a number of suggested changes which, if implemented, would broaden the scope of the requirements described above. Investors who are in any doubt as to their position should consult their professional advisers.
79 SUBSCRIPTION AND SALE
BNP Paribas, Hong Kong Branch, The Hongkong and Shanghai Banking Corporation Limited and Standard Chartered Bank (the Joint Lead Managers) have, pursuant to a Subscription Agreement dated 18 April 2013 among the Issuer, the Guarantor and the Joint Lead Managers, agreed with the Issuer, subject to the satisfaction of certain conditions, to subscribe for the Notes at the Issue Price (99.272 per cent. of their principal amount), any subsequent offering of the Notes to investors may be at a price different from the Issue Price. The Issuer has agreed to pay the Joint Lead Managers certain fees and an underwriting commission, to reimburse the Joint Lead Managers for certain of their expenses in connection with the initial sale and distribution of the Notes, and to indemnify the Joint Lead Managers against certain liabilities in connection with the offering and sale of the Notes. The Joint Lead Managers are entitled in certain circumstances to be released and discharged from their obligations under the Subscription Agreement prior to the closing of the issue of the Notes. The Joint Lead Managers and certain of their affiliates may have performed investment banking and advisory services for the Guarantor from time to time, for which they may have received customary fees and expenses. The Joint Lead Managers and certain of their affiliates may, from time to time, engage in transactions with and perform services for the Guarantor in the ordinary course of business.
The Joint Lead Managers and certain of their affiliates may purchase the Notes and be allocated the Notes for asset management and/or proprietary purposes but not with a view to distribution. The Joint Lead Managers and their respective affiliates may purchase the Notes for their own accounts and enter into transactions, including credit derivatives, such as asset swaps, repackaging and credit default swaps relating to the Notes and/or other securities of the Issuer or its subsidiaries or associates at the same time as the offer and sale of the Notes or in secondary market transactions. Such transactions would be carried out as bilateral trades with selected counterparties and separately from any existing sale or resale of the Notes to which this Offering Circular relates (notwithstanding that such selected counterparties may also be purchasers of the Notes).
United States
The Notes and the Guarantee of the Notes have not been and will not be registered under the Securities Act, and may not be offered or sold within the United States except in accordance with Regulation S or pursuant to any other exemption from, the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S.
Each Joint Lead Manager has agreed that, except as permitted by the Subscription Agreement, it has not offered, sold or delivered and will not offer, sell or deliver any Notes within the United States, except in accordance with Rule 903 of Regulation S. In addition, until 40 days after commencement of the offering, an offer or sale of Notes within the United States by a dealer whether or not participating in the offering may violate the registration requirements of the Securities Act.
Terms used in the paragraph above have the meanings given to them by Regulation S under the Securities Act.
80 United Kingdom
Each Joint Lead Manager has represented, warranted and undertaken that:
(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, or FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and
(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.
The Netherlands
Each Joint Lead Manager has represented, warranted and undertaken that it will not make an offer of Notes which is the subject of the offering contemplated by this Offering Circular to the public in the Netherlands unless such offer is made exclusively to legal entities which are qualified investors (as defined in the Prospectus Directive and which includes authorised discretionary asset managers acting for the account of retail investors under a discretionary investment management contract) in the Netherlands.
For the purposes of this provision, the expression an offer of Notes to the public in the Netherlands in relation to any Notes means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in the Netherlands by any measure implementing the Prospectus Directive in the Netherlands, the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Netherlands, and includes any relevant implementing measure in the Netherlands, and the expression 2010 PD Amending Directive means Directive 2010/73/EU).
Hong Kong
Each Joint Lead Manager has represented, warranted and undertaken that:
(i) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any Notes other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) (the SFO) of Hong Kong and any rules made under the SFO; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) (the CO) of Hong Kong or which do not constitute an offer to the public within the meaning of the CO; and
(ii) it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Notes, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the SFO and any rules made under the SFO.
81 Singapore
This Offering Circular has not been registered as a prospectus with the Monetary Authority of Singapore under the Securities and Futures Act, Chapter 289 of Singapore, as amended (the SFA). Each Joint Lead Manager has represented, warranted and undertaken that it has not offered or sold any Notes or caused such Notes to be made the subject of an invitation for subscription or purchase and will not offer or sell such Notes or cause such Notes to be made the subject of an invitation for subscription or purchase, and has not circulated or distributed, nor will it circulate or distribute, this Offering Circular or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of such Notes, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the SFA, (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Note:
Where the Notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,
securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within 6 months after that corporation or that trust has acquired the Notes pursuant to an offer made under Section 275 except:
(i) to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;
(ii) where no consideration is or will be given for the transfer;
(iii) where the transfer is by operation of law; or
(iv) as specified in Section 276(7) of the SFA or Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations.
Japan
The Notes have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (the Financial Instruments and Exchange Act). Accordingly, each Joint Lead Manager has represented, warranted and undertaken that it has not, directly or indirectly, offered or sold and will not, directly or indirectly, offer or sell any Notes in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organised under the laws of Japan)
82 or to others for re-offering or re-sale, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Act and other relevant laws, ministerial guidelines and regulations of Japan.
Bermuda
Each Joint Lead Manager has acknowledged that: (i) this Offering Circular, the Notes and any other document relating to the Notes are not subject to, and have not received approval from either the Bermuda Monetary Authority or the Registrar of Companies in Bermuda and no statement to the contrary, explicit or implicit, is authorised to be made in this regard; (ii) the Notes may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003 of Bermuda; (iii) non-Bermudian persons may not carry on or engage in any trade or business in Bermuda unless such persons are authorised to do so under applicable Bermuda legislation; and (iv) engaging in the activity of offering or marketing the securities being offered in Bermuda to persons in Bermuda may be deemed to be carrying on business in Bermuda.
British Virgin Islands
Each Joint Lead Manager has represented, warranted and undertaken that it has not and will not make any invitation to the public or any member of the public in the British Virgin Islands to purchase the Notes and the Notes may not be offered or sold, directly or indirectly, in the British Virgin Islands, except as otherwise permitted by British Virgin Islands law.
83 GENERAL INFORMATION
1. Clearing Systems: The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg. The securities codes for the Notes are as follows:
Common Code: 091360195
ISIN: XS0913601950
2. Authorisations: The Issuer has obtained all necessary consents, approvals and authorisations in the British Virgin Islands in connection with the issue and performance of the Notes. The Guarantor has obtained all necessary consents, approvals and authorisations in Bermuda in connection with the Guarantee of the Notes. The issue of the Notes was authorised by written resolutions of the directors of the Issuer dated 10 April 2013 and the giving of the Guarantee of the Notes was authorised by a resolution of the Board of the Guarantor passed on 10 April 2013.
3. Listing of the Notes: Approval in-principle has been received from the SGX-ST for the listing and quotation of the Notes on the Official List of the SGX-ST. So long as the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, the Guarantor shall appoint and maintain a paying agent in Singapore, where the Notes may be presented or surrendered for payment or redemption, in the event that the Global Note Certificate is exchanged for Individual Certificates. In addition, in the event that the Global Note Certificate is exchanged for Individual Certificates, an announcement of such exchange shall be made by or on behalf of the Issuer through the SGX-ST and such announcement will include all material information with respect to the delivery of the Individual Certificates, including details of the paying agent in Singapore, for so long as the Notes are listed on the SGX-ST and the rules of the SGX-ST so require.
4. No Material Adverse Change: There has been no material adverse change in the financial or trading position or prospects of the Issuer or the Company since 31 December 2012.
5. Litigation: Except as disclosed in this Offering Circular, neither the Issuer nor the Company is involved in any governmental, legal or arbitration proceedings which is material in the context of the issue of the Notes, nor is the Issuer or the Company aware that any such proceedings are pending or threatened.
6. Available Documents: Copies of the latest annual report and the most recently published consolidated financial statements of the Company may be obtained free of charge, and copies of the Agency Agreement (which includes the form of the Global Note Certificate), the Deed of Covenant and the Deed of Guarantee, will be available for inspection at the specified office of the Company at 28/F, Wing On Centre, 111 Connaught Road Central, Hong Kong during normal business hours, so long as any of the Notes is outstanding.
The consolidated financial statements of the Company for each of the years ended 31 December 2012 and 2011 are available in electronic form on the website of the SGX-ST by accessing this Offering Circular, and the future consolidated year-end financial statements of the Company will be uploaded to the website of the SGX-ST on an ongoing basis for so long as any of the Notes is outstanding.
7. Auditor: The consolidated financial statements of the Company for each of the years ended 31 December 2012 and 2011 have been audited by KPMG, Certified Public Accountants.
84 8. Issuer’s Financial Statements: Under British Virgin Islands law, the Issuer is not required to publish interim or annual financial statements. The Issuer has not published, and does not propose to publish, any of its financial statements. The Issuer is, however, required to keep proper books of account as are sufficient to show and to explain its transactions and which will, at any time, enable the financial position of the Issuer to be determined with reasonable accuracy.
85 INDEX TO FINANCIAL STATEMENTS
The information on page F-2 to F-209 are extracted from the audited consolidated financial statements of the Company for the years ended 31 December 2011 and 2012 together with the independent auditor’s reports as they appear in the 2011 and 2012 annual reports of the Company.
References to page numbers in the audited consolidated financial statements refer to the original page numbers in the 2011 and 2012 annual reports, and cross-references to page numbers included in the independent auditors’ reports are to such original page numbering.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED 31 DECEMBER 2012
Independent Auditor’s Report ...... F-2
Consolidated Statement of Comprehensive Income ...... F-4
Consolidated Balance Sheet ...... F-6
Consolidated Statement of Changes in Equity ...... F-8
Consolidated Cash Flow Statement ...... F-9
Balance Sheet ...... F-13
Notes to the Consolidated Financial Statements ...... F-15
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED 31 DECEMBER 2011
Independent Auditor’s Report ...... F-105
Consolidated Statement of Comprehensive Income ...... F-107
Consolidated Balance Sheet ...... F-109
Consolidated Statement of Changes in Equity ...... F-111
Consolidated Cash Flow Statement ...... F-112
Balance Sheet ...... F-116
Notes to the Consolidated Financial Statements ...... F-118
F-1 F-2 F-3 AGEAS INSURANCE COMPANY (ASIA) LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2012
Notes 2012 2011 HK$’000 HK$’000 INCOME Gross premiums 2,883,495 2,593,806 Less: Reinsurance premiums (300,828) (303,554)
Premiums, net of reinsurance 4 2,582,667 2,290,252 Interest income 5 694,585 571,705 Dividend and other investment income 6 1,710 1,231 Realised and unrealised capital gains and losses on investments 7 16,761 31,281 Other realised and unrealised gains and losses 8 151 (3,825) Fee and commission income 9 546,592 406,094 Gain/(loss) related to investments for unit-linked contracts 585,448 (813,764) Other income 12,583 9,990
Total income 4,440,497 2,492,964
EXPENSES Claims and benefits 10 (2,260,001) (1,947,519) (Charges)/income related to unit-linked contracts (649,504) 794,608 Agency commission and allowances (1,037,135) (832,530) Change in deferred acquisition costs 19 491,858 244,138 Change in impairment 11 (2,000) (4,061) Operating and administrative expenses (505,852) (470,248) Finance costs 12 (63,446) (53,854)
Total expenses (4,026,080) (2,269,466)
PROFIT BEFORE TAX 13 414,417 223,498 Tax 15 (34,716) (28,581)
PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS 16 379,701 194,917
continued/…
6
F-4 AGEAS INSURANCE COMPANY (ASIA) LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (continued)
Year ended 31 December 2012
Notes 2012 2011 HK$’000 HK$’000
OTHER COMPREHENSIVE INCOME FOR THE YEAR (AFTER TAXATION AND RECLASSIFICATION ADJUSTMENTS):
Cash flow hedges: net movement in the hedging reserve, before and after taxation 30 7,864 (18,016) Available-for-sale financial assets: net movement in the fair value reserve, before and after taxation 24 595,417 1,196,184
603,281 1,178,168
TOTAL COMPREHENSIVE INCOME FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS 982,982 1,373,085
The notes on pages 17 to 106 form part of these financial statements. Details of dividends payable to equity shareholders of the Company attributable to the profit for the year are set out in note 45.
7
F-5 AGEAS INSURANCE COMPANY (ASIA) LIMITED
CONSOLIDATED BALANCE SHEET
At 31 December 2012
Notes 2012 2011 HK$’000 HK$’000 ASSETS Property, plant and equipment 17 84,674 61,018 Deferred acquisition costs 19 2,729,732 2,237,874 Investment properties 20 8,387 7,680 Amount due from intermediate holding companies 36 804,425 810,967 Amount due from a fellow subsidiary 35 5,275 5,078 Pledged deposits 28 51,270 51,480 Financial assets 21 16,932,721 14,673,894 Investments related to unit-linked contracts 25 5,795,473 4,030,387 Derivative financial instruments 30 9,142 - Premiums receivable 26 96,471 98,787 Prepayments, deposits and other debtors 27 1,019,436 746,560 Time deposits with original maturity more than three months 28 - 80,676 Cash and cash equivalents 28 868,633 1,055,581 Total assets 28,405,639 23,859,982 LIABILITIES Insurance contract liabilities 39 13,118,922 11,873,467 Investment contract liabilities 41 9,294 10,780 Liabilities related to unit-linked contracts 42 5,795,473 4,030,387 Derivative financial instruments 30 35,209 39,595 Amount due to an immediate holding company 37 81,502 127,073 Amount due to an intermediate holding company 37 21,125 24,661 Amount due to fellow subsidiaries 35 34,230 36,589 Interest-bearing loans 38 1,130,690 773,383 Payables to policyholders 31 374,085 268,865 Accrued expenses and other creditors 34 543,058 410,944 Tax payable 73,346 58,515 Total liabilities 21,216,934 17,654,259 continued/…
8
F-6 F-7 AGEAS INSURANCE COMPANY (ASIA) LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2012
Available- Total for-sale equity Issued Share Share investment attributable share premium Contributed option Hedging revaluation Retained to equity Note capital account surplus reserve reserve reserve profits holders HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Balance at 1 January 2011 1,087,724 701,505 - 20,615 (21,116) 298,716 1,800,282 3,887,726 ------
Changes in equity for 2011: Profit for the year ------194,917 194,917 Other comprehensive income for the year - - - - (18,016) 1,196,184 - 1,178,168
Total comprehensive income for the year - - - - (18,016) 1,196,184 194,917 1,373,085 ------
Capital injection - - 1,011,121 - - - - 1,011,121 Dividend paid 45 ------(66,209) (66,209)
Balance at 31 December 2011 and 1 January 2012 1,087,724 701,505* 1,011,121* 20,615* (39,132)* 1,494,900* 1,928,990* 6,205,723 ------
Changes in equity for 2012: Profit for the year ------379,701 379,701 Other comprehensive income for the year - - - - 7,864 595,417 - 603,281
Total comprehensive income for the year - - - - 7,864 595,417 379,701 982,982 ------
At 31 December 2012 1,087,724 701,505* 1,011,121* 20,615* (31,268)* 2,090,317* 2,308,691* 7,188,705
* These reserve amounts comprised the consolidated reserves of HK$6,100,981,000 (2011: HK$5,117,999,000) in the consolidated balance sheet.
The notes on pages 17 to 106 form part of these financial statements.
10
F-8 AGEAS INSURANCE COMPANY (ASIA) LIMITED
CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 December 2012
Notes 2012 2011 HK$’000 HK$’000 CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax: From continuing operations 414,417 223,498 Adjustments for: Finance costs 12 63,446 53,854 Depreciation of property, plant and equipment 13 26,847 30,481 Revaluation gain on investment properties 20 (707) (1,547) Loss on disposal of items of property, plant and equipment 8 - 102 Interest income from policy loans and loans to agents 5 (35,670) (35,520) Interest income from bonds, deposits and cash and cash equivalents 5 (618,036) (494,931) Interest income from a loan to an intermediate holding company 5 (40,879) (41,254) Dividend income from listed and unlisted investments 6 (1,667) (726) Dividend income related to investments for unit-linked contracts (3,872) (1,829) Net realised and unrealised capital (gains)/losses on financial assets at fair value through profit or loss related to investments from unit-linked contracts (585,878) 826,750 Fair value gains: Available-for-sale financial assets (reclassified from other comprehensive income) 24 (16,054) (29,734) Impairment loss on loans to agents 11 5,348 6,159 Reversal of impairment on cash and bank balances pledged 11 (904) - (793,609) 535,303
continued/….
11
F-9 AGEAS INSURANCE COMPANY (ASIA) LIMITED
CONSOLIDATED CASH FLOW STATEMENT (continued)
Year ended 31 December 2012
Notes 2012 2011 HK$’000 HK$’000 CASH FLOWS FROM OPERATING ACTIVITIES (continued) Increase in policy loans (5,851) (8,165) Increase in loans to agents (4,343) (25,972) Increase in amount due from fellow subsidiaries (197) (562) (Decrease)/increase in amount due to fellow subsidiaries (2,359) 5,240 (Decrease)/increase in amount due to intermediate holding companies (3,466) 58,130 Decrease in amount due to an immediate holding company (45,571) (45,967) Increase in deferred acquisition costs (491,858) (244,138) Decrease/(increase) in premiums receivable 2,316 (23,020) Increase in prepayments, deposits and other debtors (221,092) (60,862) Purchases of available-for-sale financial assets (2,470,121) (3,591,963) Proceeds from disposal of available-for-sale financial assets 821,947 1,114,218 Purchases of financial assets at fair value through profit or loss (3,482,368) (2,961,093) Proceeds from disposal of financial assets at fair value through profit or loss 2,355,574 2,145,440 Proceeds on receipt of cash and bank balances pledged for an early terminated cross currency swap agreement 3,027 - Decrease/(increase) in time deposits with original maturity more than three months 80,676 (80,676) Increase in payables to policyholders 105,220 55,091 Increase in accrued expenses and other creditors 103,769 68,817 Decrease in investment contract liabilities (1,486) (3,028) Increase in insurance contract liabilities 1,115,445 1,053,340 Increase in policyholders’ dividends and bonuses 130,010 149,397 Increase/(decrease) in liabilities related to unit-linked contracts 1,765,086 (23,241)
Cash used in operations (1,039,251) (1,883,711)
continued/….
12
F-10 AGEAS INSURANCE COMPANY (ASIA) LIMITED
CONSOLIDATED CASH FLOW STATEMENT (continued)
Year ended 31 December 2012
Notes 2012 2011 HK$’000 HK$’000 CASH FLOWS FROM OPERATING ACTIVITIES (continued) Cash used in operations (1,039,251) (1,883,711) Interest received from policy loans and loans to agents 35,670 35,520 Interest received from bonds, deposits and cash and cash equivalents 594,307 462,023 Interest received from a loan to an intermediate holding company 47,351 46,223 Interest paid on cross-currency swap agreements (111,368) (65,809) Interest received from cross-currency swap agreements 103,766 58,926 Dividends received from listed and unlisted investments and investments for unit-linked contracts 5,539 2,555 Interest paid on an interest-bearing notes (47,316) (46,218) Hong Kong profits tax paid (19,885) (17,873) Net cash outflow from operating activities (431,187) (1,408,364)
CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property, plant and equipment 17 (50,503) (42,398) Increase in pledged deposits (1,913) (12,435) Net cash outflow from investing activities (52,416) (54,833)
CASH FLOWS FROM FINANCING ACTIVITIES Capital injection from immediate holding company 44 - 1,011,121 Dividends paid to Class B redeemable preference shares 45 - (66,209) Financing received under a financial reinsurance arrangement 348,798 - Net cash inflow from financing activities 348,798 944,912
NET DECREASE IN CASH AND CASH EQUIVALENTS (134,805) (518,285) Cash and cash equivalents at beginning of year 1,149,105 1,667,390
CASH AND CASH EQUIVALENTS AT END OF YEAR 1,014,300 1,149,105
continued/….
13
F-11 AGEAS INSURANCE COMPANY (ASIA) LIMITED
CONSOLIDATED CASH FLOW STATEMENT (continued)
Year ended 31 December 2012
Notes 2012 2011 HK$’000 HK$’000 ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 329,815 413,528 Non-pledged time deposits with original maturity of less than three months 538,818 642,053 28 868,633 1,055,581 Cash and cash equivalents attributable to unit-linked assets 25 145,667 93,524
1,014,300 1,149,105
The notes on pages 17 to 106 form part of these financial statements.
14
F-12 AGEAS INSURANCE COMPANY (ASIA) LIMITED
BALANCE SHEET
At 31 December 2012
31 December 31 December Notes 2012 2011 HK$’000 HK$’000
ASSETS Property, plant and equipment 17 84,674 61,018 Deferred acquisition costs 19 2,729,732 2,237,874 Interests in subsidiaries 18 5,352 5,154 Amount due from intermediate holding companies 36 804,425 810,967 Amount due from a fellow subsidiary 35 5,275 5,078 Pledged deposits 28 51,270 51,480 Financial assets 21 16,932,721 14,673,894 Investments related to unit-linked contracts 25 5,795,473 4,030,387 Derivative financial instruments 30 9,142 - Premiums receivable 26 96,471 98,787 Prepayments, deposits and other debtors 27 1,019,396 746,105 Cash and cash equivalents 28 864,004 1,007,701 Total assets 28,397,935 23,728,445
LIABILITIES Insurance contract liabilities 39 13,118,922 11,873,467 Investment contract liabilities 41 9,294 10,780 Liabilities related to unit-linked contracts 42 5,795,473 4,030,387 Derivative financial instruments 30 35,209 39,595 Amount due to an immediate holding company 37 81,502 127,073 Amount due to an intermediate holding company 37 21,125 24,661 Amount due to fellow subsidiaries 35 34,230 36,589 Amounts due to subsidiaries 18 1,217,638 1,094,328 Interest-bearing loan 38 357,935 - Payables to policyholders 31 374,085 268,865 Accrued expenses and other creditors 34 541,166 409,000 Tax payable 73,346 58,515 Total liabilities 21,659,925 17,973,260
continued/…
15
F-13 F-14 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
1. CORPORATE STATEMENTS
The Company was incorporated in Bermuda as an exempted company with limited liability under the Bermuda Companies Act 1981 (as amended) on 27 June 1985. The Company’s principal place of business in Hong Kong is located at 28th Floor, Wing On Centre, 111 Connaught Road Central, Hong Kong.
During the year, the Company has been principally engaged in the provision of an extensive range of whole life, endowment, unit-linked and term life insurance products to individuals in Hong Kong as well as other insurance products which included accident, medical and disability insurance, to individuals, and employee groups, and general insurance products through agency arrangements. The Company is also engaged in the administration of retirement schemes.
In the opinion of the directors, the holding company of the Company is Bright Victory International Limited which is incorporated in the British Virgin Islands, and the Company’s ultimate holding company is ageas SA/NV (“Ageas”), a company incorporated in Belgium. On 3 August, the Board of Directors of ageas SA/NV officially acknowledged the merger of ageas SA/NV and ageas NV (formerly were together as the Company’s ultimate holding companies). As a result of this merger ageas SA/NV is from that date on the sole ultimate holding company. The ultimate holding company produces financial statements available for public use.
2.1 BASIS OF PREPARATION
These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) (which include all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, except for investment properties, available-for-sale financial assets, financial assets and financial liabilities at fair value through profit or loss and derivative financial instruments, which have been measured at fair value. These financial statements are presented in Hong Kong dollars and all values are rounded to the nearest thousand except where otherwise indicated.
Basis of consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2012. The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All income, expenses and unrealised gains and losses resulting from intercompany transactions and intercompany balances within the Group are eliminated in full on consolidation.
17
F-15 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.2 IMPACT OF NEW INTERPRETATIONS AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS
The HKICPA has issued several amendments to HKFRSs that are first effective for the current accounting period of the Group and the Company:
Amendments to HKFRS 7, Financial instruments: Disclosures - Transfers of financial assets Amendments to HKAS 12, Income taxes - Deferred tax: Recovery of underlying assets
The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 2.3).
These amendments have not yet had a material impact on the Group’s current year financial statements as these changes will first be effective as and when the Group enters a relevant transaction.
2.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE INTERPRETATIONS AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS
Up to the date of issue of these financial statements, the HKICPA has issued the following amendments and new standards which are not yet effective for the year ended 31 December 2012 and which have not been adopted in these financial statements. These include the following which may be relevant to the Group.
Effective for accounting periods beginning on or after
Amendments to HKAS 1, Presentation of financial statements 1 July 2012 Presentation of items of other comprehensive income
HKFRS 10, Consolidated financial statements 1 January 2013
HKFRS 12, Disclosure of interests in other entities 1 January 2013
18
F-16 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE INTERPRETATIONS AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS (continued)
Effective for accounting periods beginning on or after
HKFRS 13, Fair value measurement 1 January 2013
HKAS 27, Separate financial statements (2011) 1 January 2013
Annual Improvements to HKFRSs 2009-2011 Cycle 1 January 2013
Amendment to HKFRS 7, Financial instruments: Disclosures 1 January 2013 Disclosures - Offsetting financial assets and financial liabilities
Amendments to HKAS 32, Financial instruments: Presentation 1 January 2014 Offsetting financial assets and financial liabilities
HKFRS 9, Financial instruments 1 January 2015
The Group is in the process of making an assessment of what the impact of these amendments is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the consolidated financial statements, except for the adoption of HKFRS 9, Financial Instruments, which will eliminate the available-for-sale category. However, the final HKFRS 9 requirements for classification and measurement and impairment remain uncertain and so it remains impracticable to quantify the effect of HKFRS 9 as at the date of the publication of these financial statements.
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are presently exercisable are taken into account.
The results of subsidiaries are included in the Company’s separate statement of comprehensive income for the year to the extent of dividends received and receivable. The Company’s investments in subsidiaries are stated at cost less any impairment losses in the Company’s separate balance sheet.
19
F-17 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currencies These financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to the profit and loss for the year with the exception of differences on a cross currency swap agreement that provides a hedge against an interest- bearing note. These are taken directly to other comprehensive income until the full repayment of the interest-bearing note or termination of the currency swap agreement, at which time they are recognised in the profit and loss for the year. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
Deferred acquisition costs (“DAC”) The direct acquisition costs and a portion of indirect acquisition costs relating to the production of new business are deferred in so far as there are sufficient margins in the future profits of the new business to fund the amortisation of DAC. DAC include first year commissions and other costs related to the acquisition of new business. All other acquisition costs and all maintenance costs are expensed as and when incurred.
For new business issued up to 30 April 2007, DAC is carried at cost and amortised on the straight-line basis over 10 years, adjusted for any unfavourable actual experience and any permanent impairment in value determined by reference to margins in the future premium. Since 1 May 2007, the Group has adopted an approach by which DAC of new business is amortised according to the expected future premiums or profits and actual persistency.
20
F-18 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of non-financial assets The carrying amounts of the Group’s non-financial assets, other than investment property, deferred tax assets, and deferred acquisition costs arising from the contractual rights under insurance contracts, are reviewed at each reporting date to determine whether there is any indication of impairment. Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than financial assets), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash- generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the profit and loss for the year in the period in which it arises in those expense categories consistent with the function of the impaired assets. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill and certain financial assets is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation) had no impairment loss been recognised for the asset in prior years. A reversal of such an impairment loss is credited to the profit and loss for the year in the period in which it arises.
21
F-19 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Related parties
(a) A person, or a close member of that person’s family, is related to the Group if that person:
(i) has control or joint control over the Group; (ii) has significant influence over the Group; or (iii) is a member of the key management personnel of the Group or the Group’s parent.
(b) An entity is related to the Group if any of the following conditions applies:
(i) The entity and the Group are members of the same Group (which means that each parent, subsidiary and fellow subsidiary is related to the others); (ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a Group of which the other entity is a member); (iii) Both entities are joint ventures of the same third party; (iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity; (v) The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group; (vi) The entity is controlled or jointly controlled by a person identified in (a); or (vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.
Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the profit and loss for the year in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment, and where the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement.
22
F-20 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, plant and equipment and depreciation (continued)
Depreciation is calculated on the straight-line basis so as to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows:
Leasehold land 50 years or the lease term, whichever is shorter Buildings 40 years Computer equipment 3 years Furniture, fixtures and equipment 5 years Motor vehicles 5 years
Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.
Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each balance sheet date.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the profit and loss for the year in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.
Investments and other financial assets Financial assets within the scope of HKAS 39 are classified as financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for- sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs.
The Group assesses whether a contract contains an embedded derivative when the Group first becomes a party to it and assesses whether an embedded derivative is required to be separated from the host contract which is not measured at fair value through profit or loss when the analysis shows that the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required under the contract.
The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the balance sheet date.
23
F-21 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments and other financial assets (continued)
All regular way purchases and sales of financial assets are recognised on the trade date, that is the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.
Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments or financial guarantee contracts. Gains or losses on financial assets held for trading are recognised in the profit and loss for the year. The net fair value gain or loss recognised in the profit and loss for the year does not include any dividends on these financial assets, which are recognised in accordance with the policy set out for “Revenue recognition” below.
Where a contract contains one or more embedded derivatives, the entire hybrid contract may be designated as a financial asset at fair value through profit or loss, except where the embedded derivative does not significantly modify the cash flows or it is clear that separation of the embedded derivative is prohibited.
Financial assets may be designated upon initial recognition as at fair value through profit or loss if the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognising gains or losses on them on a different basis; (ii) the assets are part of a group of financial assets which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management strategy; or (iii) the financial asset contains an embedded derivative that would need to be separately recorded.
Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held to maturity when the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are subsequently measured at amortised cost less any allowance for impairment. Amortised cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. Gains and losses are recognised in the profit and loss for the year when the investments are derecognised or impaired, as well as through the amortisation process.
24
F-22 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments and other financial assets (continued) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are subsequently carried at amortised cost using the effective interest method less any allowance for impairment. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognised in the profit and loss for the year when the loans and receivables are derecognised or impaired, as well as through the amortisation process.
Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified in any of the other three categories. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses recognised in other comprehensive income and presented within a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in other comprehensive income is included in the profit and loss for the year. Interest and dividends earned are reported as interest income and dividend income, respectively and are recognised in the profit and loss for the year in accordance with the policies set out for “Revenue recognition” below. Losses arising from the impairment of such investments are recognised in the profit and loss for the year as “Impairment losses on available-for-sale financial assets” and are transferred from the available-for-sale investment revaluation reserve.
When the fair value of unlisted/unquoted equity securities cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such securities are stated at cost less any impairment losses.
Fair value The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business at the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; a discounted cash flow analysis; and/or option pricing models.
Impairment of financial assets The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.
25
F-23 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of financial assets (continued) Assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables or held-to- maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognised in the profit and loss for the year. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognised in the profit and loss for the year, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.
In relation to other receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor and significant changes in technological, market, economic or legal environment that have an adverse effect on the debtor) that the Group will not be able to collect all of the amounts due under the original terms of an invoice. The carrying amount of the receivables is reduced through the use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.
Available-for-sale financial assets If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the profit and loss for the year, is transferred from other comprehensive income to the profit and loss for the year. A provision for impairment is made for an available-for-sale equity investment when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgement. Impairment losses on equity instruments classified as available for sale are not reversed through the profit and loss for the year.
Impairment losses on debt instruments are reversed through the profit and loss for the year if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in the profit and loss for the year.
26
F-24 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Derecognition of financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: the rights to receive cash flows from the asset have expired; the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass- through” arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, where the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.
Financial liabilities at amortised cost (including interest-bearing notes and borrowings) Financial liabilities including amounts payable to policyholders, other payables, interest- bearing notes, and policyholders’ dividends and bonuses are initially stated at fair value less directly attributable transaction costs and are subsequently measured at amortised cost, using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost. The related interest expense is recognised within “Finance costs” in the profit and loss for the year.
Gains and losses are recognised in the profit and loss for the year when the liabilities are derecognised as well as through the amortisation process.
27
F-25 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are acquired for the purpose of sale in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the profit and loss for the year. The net fair value gain or loss recognised in the profit and loss for the year does not include any interest charged on these financial liabilities.
Where a contract contains one or more embedded derivatives, the entire hybrid contract may be designated as a financial liability at fair value through profit or loss, except where the embedded derivative does not significantly modify the cash flows or it is clear that separation of the embedded derivative is prohibited.
Financial liabilities may be designated upon initial recognition as at fair value through profit or loss if the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the liabilities or recognising gains or losses on them on a different basis; (ii) the liabilities are part of a group of financial liabilities which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management strategy; or (iii) the financial liability contains an embedded derivative that would need to be separately recorded.
Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference between the respective carrying amounts is recognised in the profit and loss for the year.
28
F-26 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Derivative financial instruments and hedging The Group uses derivative financial instruments such as cross currency swap agreements to hedge its risks associated with foreign currency fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to the profit and loss for the year.
The fair value of cross currency swap agreements is determined by reference to the present value of estimated future cash flows.
For the purpose of hedge accounting, hedges are classified as cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction, or a foreign currency risk in an unrecognised firm commitment.
At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Group will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
Cash flow hedges which meet the strict criteria for hedge accounting are accounted for as follows:
The effective portion of the gain or loss on the hedging instrument is recognised directly in other comprehensive income, while the ineffective portion is recognised immediately in the profit and loss for the year;
Amounts taken to other comprehensive income are transferred to the profit and loss for the year when the hedged transaction affects the profit and loss for the year, such as when hedged financial income or financial expense is recognised or when a forecast sale or purchase occurs.
29
F-27 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Derivative financial instruments and hedging (continued) If the forecast transaction or firm commitment is no longer expected to occur, the amounts previously recognised in other comprehensive income are transferred to the profit and loss for the year. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, the amounts previously recognised in other comprehensive income remain in equity until the forecast transaction or firm commitment occurs.
Investment properties Investment properties are interests in land and buildings held to earn rental income and/or for capital appreciation rather than for use in the production or supply of goods or services or for administrative purposes; or for sale in the ordinary course of business. The Group’s interests in land and buildings are held in respect of the Group’s long term insurance business for investment purposes. Investment properties are stated in the balance sheet at fair value. Any gain or loss arising from the change in fair value or from the retirement or disposal of an investment property is recognised in the profit and loss.
An investment property is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. When an investment property is derecognised, any gain or loss on disposal or retirement, which is the difference between the net sales proceeds and the carrying amount of the relevant asset, is recognised in the profit and loss.
When the Group holds a property interest under an operating lease to earn rental income and/or for capital appreciation, the interest is classified and accounted for as an investment property on a property-by-property basis. Any such property interest which has been classified as an investment property is accounted for as if it were held under a finance lease (see below “leased assets”), and the same accounting policies are applied to that interest as are applied to other investment properties leased under finance leases. Lease payments are accounted for as described below in “leased assets”.
For a transfer from investment properties to owner-occupied properties, the deemed cost of property for subsequent accounting is its fair value at the date of change in use. If a property occupied by the Group as an owner-occupied property becomes an investment property, the Group accounts for such property in accordance with the policy stated under “Property, plant and equipment and depreciation” up to the date of change in use, and any difference at that date between the carrying amount and the fair value of the property is accounted for as a revaluation in accordance with the policy stated under “Property, plant and equipment and depreciation” above.
30
F-28 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Prepayments Prepayments made in connection with the recruitment of agents are capitalised and amortised to the profit and loss for the year over the term of the contract with the agent.
Premiums receivable Premiums receivable represent premiums which are due for payment. The Group normally allows policyholders to make payment within a grace period of one month from the due date. The grace period may be extended by one further month by management purely on a discretionary basis. Insurance policies continue in force if default premiums are settled before the expiry of the grace period.
Cash and cash equivalents For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.
For the purpose of the balance sheets, cash and cash equivalents comprise cash on hand and at banks, including term deposits, which are not restricted as to use and not attributable to investment related to unit-linked contracts.
Provisions A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.
When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the profit and loss for the year.
31
F-29 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Insurance contract liabilities Insurance contract liabilities represent net future policy liabilities as determined by the appointed actuary of the Group using a net level premium approach.
The provision for life insurance contracts with fixed level premiums is calculated on the basis of the prospective actuarial valuation method where the assumptions used depend on the circumstances prevailing. The liability is determined as the sum of the expected discounted value of the benefit payments, less the expected discounted value of the theoretical premiums that would be required to meet the benefits, based on the valuation assumptions as to mortality, lapse rate, expense and investment income that are appropriate at the time of valuation, plus a margin for adverse deviation. Changes to the liabilities at each reporting date are recorded in the profit and loss for the year as an expense. The liabilities on yearly renewable premium contracts are the liabilities for the unexpired risks carried at the balance sheet date. The liability is derecognised when the contract expires, is discharged or is cancelled.
Investment contract liabilities Liabilities for investment contracts are carried at fair values through accumulated cash flows plus investment income credited to the contracts, either at the discretion of the Group or linked to the changes in unit fund values.
Deposits and withdrawals are recorded directly as an adjustment to the liability in the balance sheet, known as deposit accounting.
Fees charged and investment income received are recognised in the profit and loss for the year when earned.
The liability is derecognised when the contract expires, is discharged or is cancelled. For a contract that can be cancelled by the policyholder, the fair value cannot be less than the surrender value.
Reinsurance The Group cedes insurance risk in the normal course of business for its insurance contracts. Reinsurance assets represent balances due from reinsurance companies. Recoverable amounts are estimated in a manner consistent with the insurance contract liabilities and are in accordance with the reinsurance contract and are accounted for in the same period as the underlying claim.
An impairment review is performed at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when objective evidence exists that the Group may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that the Group will receive from the reinsurer can be measured reliably. The impairment loss is recorded in the profit and loss for the year.
32
F-30 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reinsurance (continued) Gains or losses on buying reinsurance are recognised in the profit and loss for the year immediately at the date of purchase and are not amortised.
Reinsurance arrangements do not relieve the Group from its obligations to policyholders.
Liability adequacy test A liability adequacy test is performed at each reporting date to verify whether the insurance liabilities, net of deferred acquisition cost, are adequate using current estimates of future cash flows under the insurance contracts. The liability value is adjusted if insufficient to meet future obligations, taking into account future premiums, investment income, benefits and expenses and cash flows from embedded options and guarantees. If the test shows that a deficiency exists, the shortfall is immediately recorded in the profit and loss for the year. The liability adequacy test is performed at a company level.
Leased assets An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.
Classification of assets leased to the Group Assets that are held by Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases, with the following exceptions:
Property held under operating leases that would otherwise meet the definition of an investment property is classified as investment property on a property-by-property basis and, if classified as investment property, is accounted for as if held under a finance lease (see above “investment properties”); and Land held for own use under an operating lease, the fair value of which cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease. For these purposes, the inception of the lease is the time that the lease was first entered into by the Group, or taken over from the previous lessee.
33
F-31 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Leased assets (continued) Assets acquired under finance leases Where the Group acquires the use of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments, of such assets are included in fixed assets and the corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost or valuation of the assets over the term of the relevant lease or, where it is likely the Group will obtain ownership of the asset, the life of the asset, as set out above in “investment properties”. Impairment losses are accounted for in accordance with the accounting policy as set out above in “property, plant and equipment and depreciation”. Finance charges implicit in the lease payments are charged to profit or loss over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.
Operating lease charges Where the Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.
The cost of acquiring land held under an operating lease is amortised on a straight-line basis over the period of the lease term except where the property is classified as an investment property (see above “investment properties”) or is held for development for sale.
Income tax Income tax comprises current and deferred tax. Income tax is recognised in the profit and loss for the year, or in other comprehensive income or equity if it relates to items that are recognised in the same or a different period directly in other comprehensive income or equity.
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities.
Deferred tax is provided, using the liability method, on all temporary differences as at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
34
F-32 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income tax (continued) Deferred tax liabilities are recognised for all taxable temporary differences, except:
where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised, except:
where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available against which the temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be utilised. Conversely, any previously unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
35
F-33 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Employee benefit Share-based payments Share options and restricted shares are granted to directors and to employees by Ageas for services received. The fair value of the services received is determined by reference to the fair value of the share options and restricted shares granted. Compensation expense is measured on the grant date based on the fair value of the options and restricted shares and is recognised over the vesting period of the options and restricted shares with a corresponding increase in equity.
The fair value of the share options is determined using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the expected volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option.
When the Group is required to compensate Ageas for the share-based payment arrangements, the respective recharge liability is recognised and remeasured at the end of each reporting period at the fair value of the liability with a corresponding adjustment in equity.
Retirement benefit schemes The Group operates a defined contribution Mandatory Provident Fund retirement benefit scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance for those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’ basic salaries and other allowances and are charged to the profit and loss for the year as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme.
Prior to the MPF Scheme becoming effective, the Group operated a defined contribution retirement benefit scheme (the “ORSO Scheme”) for those employees who were eligible to participate in the ORSO Scheme. The ORSO Scheme operated in a similar way to the MPF Scheme, except that when an employee left the ORSO Scheme before his/her interest in the Group’s employer contributions vested fully, the ongoing contributions payable by the Group were reduced by the relevant amount of the forfeited employer’s contributions. With effect from 1 December 2000, the Group has operated both schemes and those employees who were eligible to participate in the ORSO Scheme are also eligible to participate in the MPF Scheme.
Preference share capital Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any dividends are discretionary. Dividends on preference share capital classified as equity are recognised as distributions within equity.
36
F-34 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Preference share capital (continued) Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders, or if dividend payments are not discretionary. The liability is recognised in accordance with the Group’s policy for interest-bearing borrowings and accordingly dividends thereon are recognised on an accrual basis in profit or loss as part of finance costs.
Dividends Final dividends proposed by the directors are classified as a separate allocation of retained profits within the equity section of the balance sheet, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability.
Interim dividends are simultaneously proposed and declared, because the Company’s bye-laws grant the directors the authority to declare interim dividends. Consequently, interim dividends are recognised immediately as a liability when they are proposed and declared.
Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. Other borrowing costs are expensed in the period in which they are incurred.
Product classification The Group issues contracts that transfer insurance risk or financial risk or both.
Insurance contracts are those contracts for which the Group has accepted significant insurance risk from policyholders providing coverage for death, accident and sickness at the inception of the contract. As a general guideline, the Group determines whether it has significant insurance risk, by comparing benefits paid with benefits payable if the insured event did not occur. The Group also accepts financial risk on insurance contracts. Financial risk is the risk of a possible future change in a specified interest rate, security price, commodity price, foreign exchange rate, index of price or rate, credit rating or credit index or other variables.
Investment contracts are those contracts on which the Group accepts financial risk but that do not transfer significant insurance risk.
Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during this period, unless all rights and obligations are extinguished or expire. Investment contracts can, however, be reclassified as insurance contracts after inception if insurance risk becomes significant.
37
F-35 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Premiums Premiums in respect of traditional policies and group policies are recognised as income as and when they fall due, whereas those in respect of universal life and unit-linked contracts are accounted for as they are received. Premiums on reinsurance contracts that transfer underwriting risk are expensed as incurred. Ceded reinsurance recoveries are accounted for in the same period as the underlying claim. Commissions Commissions and bonuses payable to agents for the first policy year are included as a component of deferred acquisition costs. Commissions received on reinsurance policies that transfer underwriting risk are recognised as income at the same time as the reinsurance premiums are accounted for. Fees and commission income Insurance and investment contract policyholders are charged for policy administration services and investment management services. The policy administration fee is recognised as revenue in the period in which it is earned. Investment management fees related to asset management services are recognised over the period of the services provided. Realised gains and losses on investments Realised gains and losses on investments are determined as the difference between the sales proceeds and cost or amortised cost. For equity securities, unit trusts and mutual funds, the cost is determined by using a weighted average per portfolio. Interest income Interest income is recognised on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset. Rental income Rental income is recognised on a time proportion basis over the lease terms. Dividend income Dividend income is recognised when the shareholders’ right to receive payment has been established. Benefits and insurance claims Death claims and surrenders are recorded when notifications have been received. Maturities and annuity payments are recorded when due. Benefits recorded are then accrued to the liability.
38
F-36 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES
The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosures as at the reporting date. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Judgements In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements:
Product classification Contracts are classified as insurance contracts where they transfer significant insurance risk from the holder of the contract to the Group. The Group’s accounting policy for the classification of insurance and investment contracts is discussed in more detail in note 2.4.
There are a number of contracts sold where the Group exercises judgement about the level of insurance risk transferred. Typically, these are contracts which contain a significant savings component. The level of insurance risk is assessed by considering whether there are any scenarios with commercial substance in which the Group is required to pay significant additional benefits. These benefits are those which exceed the amounts payable if no insured event were to occur. These additional amounts include claims liability and assessment costs, but exclude the loss of the ability to charge the holder of the contract for future services.
Estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
Estimation of fair value of investment properties The fair values of investment properties are based on valuations performed by an independent, professionally qualified valuer, based on an open market, existing use basis. The valuer valued the investment properties by reference to the rental and sales evidence as available on the market and where appropriate on the basis of capitalisation of the net rental income.
39
F-37 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)
Estimation uncertainty (continued) Life insurance contract liabilities The estimation of the ultimate liabilities arising from claims made under life insurance contracts is the Group’s most critical accounting estimate. There are sources of uncertainty that need to be considered in the estimation of the liabilities that the Group will ultimately pay for those claims.
Four major components in the estimation of the liabilities for insurance contracts are death benefits, lapse rates, expenses and investment returns. Estimates are made as to the expected number of deaths for each of the years in which the Group is exposed to risk. The Group bases these estimates on standard industry and national mortality tables that reflect historical mortality experience, adjusted, where appropriate, to reflect the Group’s unique risk exposure. The estimated number of deaths determines the value of possible future benefits to be paid out which will be factored into ensuring sufficient cover by reserves, which in return is monitored against the current and future premiums. Lapse rates are based on the historical experience of the Company. Expenses are based on the renewal compensation cost structure and the maintenance expenses level of the Company. Investment returns are based on the investment strategy of the Company, with due regard to the expected return on assets backing the insurance contracts.
Estimates for future deaths, lapse rates, expenses and investment returns are determined at the inception of the contract and are used to calculate the liability over the term of the contract. At each reporting date, these estimates are reassessed for adequacy and changes will be reflected in adjustments to the liability.
The carrying value at the balance sheet date of the current year life insurance contract liabilities, net of policyholders’ dividends and bonuses was HK$11,796,865,000 (2011: HK$10,608,478,000).
DAC For new businesses issued up to 30 April 2007, DAC are carried at cost and amortised on the straight-line basis over 10 years, adjusted for any unfavourable actual experience and any permanent impairment in value determined by reference to margins in the future premium. Since 1 May 2007, the Group has adopted an approach by which DAC of new businesses are amortised according to the expected future premiums or profits and actual persistency.
40
F-38 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)
Estimation uncertainty (continued)
Fair value of financial assets and derivative financial instruments determined using valuation techniques Fair value, in the absence of an active market, is estimated by using valuation techniques, such as recent arm’s length transactions, reference to the current market value of another instrument which is substantially the same, a discounted cash flow analysis and/or option pricing models. For reference to similar instruments, instruments must have similar credit ratings.
For a discounted cash flow analysis, estimated future cash flows and discount rates are based on current market information and rates applicable to financial instruments with similar yields, credit quality and maturity characteristics. Estimated future cash flows are influenced by factors such as economic conditions (including country-specific risks), concentrations in specific industries, types of instruments or currencies, market liquidity and financial conditions of counterparties. Discount rates are influenced by risk-free interest rates and credit risk.
The carrying values at the balance sheet date of financial assets, derivative financial assets and derivative financial liabilities are HK$22,582,202,000, HK$9,142,000 and HK$35,209,000 respectively (2011: HK$18,610,703,000, HK$Nil and HK$39,595,000, respectively).
Impairment of non-financial assets The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Indefinite life intangible assets are tested for impairment annually and at other times when such indicator exists. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows.
Impairment of available-for-sale financial assets The Group classifies certain assets as available-for-sale and recognises movements in their fair values in other comprehensive income. When the fair value declines, management makes assumptions about the decline in value to determine whether there is an impairment that should be recognised in the profit and loss for the year. At 31 December 2012, no impairment loss has been recognised for an available-for-sale financial asset (2011: HK$Nil). The carrying amount of available-for-sale assets was HK$16,494,213,000 (2011: HK$14,240,232,000).
41
F-39 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
4. PREMIUMS, NET OF REINSURANCE
Group 2012 2011 HK$’000 HK$’000
Gross premiums on life insurance contracts: Non-linked 2,774,343 2,538,004 Unit-linked 109,152 55,802 2,883,495 2,593,806
Reinsurers’ share of life insurance contracts premiums: Non-linked (299,966) (302,479) Unit-linked (862) (1,075) (300,828) (303,554)
Premiums, net of reinsurance 2,582,667 2,290,252
Further analysis of gross premiums is as follows: Group 2012 2011 HK$’000 HK$’000
Single premiums 133,110 84,009 First year premiums 508,992 385,325 Renewal premiums 2,241,393 2,124,472
Gross premiums on life insurance contracts 2,883,495 2,593,806
42
F-40 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
5. INTEREST INCOME
For the year ended 31 December, interest income is broken down as follows: Group 2012 2011 HK$’000 HK$’000
Interest income from bonds 614,291 483,269 Interest income from deposits, cash and cash equivalents 3,745 11,662 Interest income from policy loans and loans to agents 35,670 35,520 Interest income from a loan to an intermediate holding company 40,879 41,254
Total interest income 694,585 571,705
6. DIVIDEND AND OTHER INVESTMENT INCOME
The details of dividend and other investment income for the year ended 31 December are shown below: Group 2012 2011 HK$’000 HK$’000 Dividend income from listed and unlisted investments 1,667 726 Rental income and rates received from investment properties 43 505
Total dividend and other investment income 1,710 1,231
43
F-41 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
7. REALISED AND UNREALISED CAPITAL GAINS AND LOSSES ON INVESTMENTS For the year ended 31 December, realised and unrealised capital gains and losses on investments are broken down as follows: Group 2012 2011 HK$’000 HK$’000 Realised gains/(losses) on investments: Listed available-for-sale financial assets 6,924 32,041 Unlisted available-for-sale financial assets 9,130 (2,307)
Total realised gains on investments (note 24) 16,054 29,734 Unrealised gains on investments: Revaluation of an investment property (note 20) 707 1,547 Total realised and unrealised capital gains on investments 16,761 31,281
8. OTHER REALISED AND UNREALISED GAINS AND LOSSES For the year ended 31 December, other realised and unrealised gains and losses are broken down as follows: Group 2012 2011 HK$’000 HK$’000 Loss on disposal of property, plant and equipment - (102) Others 151 (3,723)
Total other realised and unrealised gains/(losses) 151 (3,825)
44
F-42 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
9. FEE AND COMMISSION INCOME
For the year ended 31 December, fee and commission income is broken down as follows:
Group 2012 2011 HK$’000 HK$’000
Reinsurance commission income and refund 136,288 155,228 Fees on investment contracts 325,252 192,780 General insurance commission under agency agreements 6,141 5,227 Others 78,911 52,859
Total fee and commission income 546,592 406,094
10. CLAIMS AND BENEFITS
The details of claims and benefits are shown below:
Group 2012 2011 HK$’000 HK$’000
Claims 420,047 364,310 Reinsurers’ and coinsurers’ share of claims (85,689) (63,013)
Claims, net of reinsurers’ and coinsurers’ share 334,358 301,297
Surrenders and maturities 674,413 461,375 Policyholders’ dividends and interests 194,378 174,878 Increase in insurance contract liabilities 1,056,852 1,009,969
Total claims and benefits 2,260,001 1,947,519
45
F-43 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
11. CHANGE IN IMPAIRMENT
For the year ended 31 December, change in impairment is broken down as follows:
Group 2012 2011 HK$’000 HK$’000
Impairment loss on loans to agents (note 23) 5,348 6,159 Reversal of impairment on loans to agents (note 23) (695) (2,098) Reversal of impairment on advances to agents (note 27) (1,749) - Reversal of impairment on cash and bank balances pledged (904) -
Total impairment losses 2,000 4,061
12. FINANCE COSTS Group 2012 2011 HK$’000 HK$’000
Interest on interest-bearing notes 46,688 46,783 Net interest expense on cross currency swap agreements (note (i)) 7,621 7,071 Interest on financing received under a financial reinsurance arrangement (note (ii)) 9,137 -
63,446 53,854
Notes: (i) Please refer to note 30 to the financial statements for cross currency swap agreements the Group have entered into. (ii) Please refer to note 38 to the financial statements for the financial reinsurance arrangement the Group have entered into.
46
F-44 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
13. PROFIT BEFORE TAX
The Group’s profit before tax is arrived at after charging/(crediting):
Group 2012 2011 HK$’000 HK$’000
Auditors’ remuneration 2,874 2,403 Depreciation from property, plant and equipment (note 17) 26,847 30,481 Net foreign exchange (gains)/losses (151) 3,723 Amortisation of deferred acquisition costs (note (i) and note 19) 355,821 295,077 Operating lease rentals on land and buildings 101,402 80,096 Employee benefit expense (including directors’ remuneration (note 14)): Wages and salaries 163,505 138,632 Equity-settled share option expense 173 147 Net retirement benefit scheme contributions for employees 11,507 8,990
Total employee benefit expenses 175,185 147,769
Net retirement benefit scheme contributions for agents 18,699 14,694
Gross rental and management fee income (43) (505) Direct operating expenses arising (including repairs and maintenance) on rental-earning investment properties 101 140
Net rental and management fee expense/(income) 58 (365)
Note: (i) The amortisation of deferred acquisition costs for the year is included in “Change in deferred acquisition costs” on the face of the consolidated statement of comprehensive income, and is disclosed in note 19 to the financial statements.
47
F-45 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
14. DIRECTORS’ REMUNERATION
Directors’ remuneration for the year, disclosed pursuant to the Section 161 of the Hong Kong Companies Ordinance is as follows:
2012 2011 HK$’000 HK$’000 Executive and non-executive directors: Salaries, allowances and benefits in kind 3,732 3,658 Contributions to retirement benefits schemes 250 238
3,982 3,896
In previous years, certain directors were granted share options in respect of their services to Ageas, under the share option scheme of Ageas, further details of which are set out in note 43 to the financial statements.
There was no arrangement under which a director waived or agreed to waive any remuneration during the year (2011: HK$ Nil).
15. TAX
Hong Kong profits tax has been provided at the rate of 16.5% (2011: 16.5%) on the estimated assessable profits arising in Hong Kong where the Group operates for the year. The assessable profits of the Group are computed in accordance with the special provisions of the Hong Kong Inland Revenue Ordinance. Tax for the long term insurance business, as defined by the Inland Revenue Ordinance, is computed at a rate of 16.5% (2011: 16.5%) of 5% of net premiums (gross premiums received less reinsurance premiums ceded) of the life insurance business in accordance with Section 23(1)(a) of the Inland Revenue Ordinance rather than on taxable profits.
48
F-46 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
15. TAX (continued)
Taxes on profits assessable have been calculated at the rates of tax prevailing in the jurisdictions in which the Group operates, based on existing legislation, interpretations and practices in respect thereof. Group 2012 2011 HK$’000 HK$’000 Current - Hong Kong Provision for the year 34,277 28,581 Under-provision in prior years 439 -
Total tax charge for the year 34,716 28,581
A reconciliation of the tax expense applicable to profit before tax using the statutory rate to the tax expense at the effective tax rate is as follows: 2012 2011 HK$’000 % HK$’000 % Profit before tax 414,417 223,498
Tax at the statutory rate 68,379 16.5 36,877 16.5 Tax on 5% of net premium of life insurance business 33,910 8.2 28,882 12.9 Under-provision in prior years 439 0.1 -- Results of life insurance business and other businesses not taxable at the statutory rate (68,012) (16.4) (37,178) (16.6)
Tax charge at the Group’s effective rate 34,716 8.4 28,581 12.8
The Group has tax losses arising in Hong Kong of HK$57,554,000 (2011: HK$55,394,000) that are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they have arisen in certain subsidiaries that have been loss-making for some time and it is not considered probable that taxable profits will be available against which the tax losses can be utilised.
As at 31 December 2012, there were no significant unrecognised deferred tax liabilities (2011: HK$ Nil) for taxes that would be payable on the unremitted earnings of certain of the Group’s subsidiaries as the Group had no liability to additional tax should such amounts be remitted.
49
F-47 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
16. PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS
The consolidated profit attributable to equity holders for the year ended 31 December 2012 includes a profit of HK$379,544,000 (2011: HK$191,755,000) which has been dealt with in the financial statements of the Company (note 44(b)).
17. PROPERTY, PLANT AND EQUIPMENT
Group and Company
Furniture, Computer fixtures and equipment equipment Total 31 December 2012 HK$’000 HK$’000 HK$’000
At 1 January 2012: Cost 120,609 121,993 242,602 Accumulated depreciation (85,298) (96,286) (181,584)
Net carrying amount 35,311 25,707 61,018
At 1 January 2012, net of accumulated depreciation 35,311 25,707 61,018 Additions 37,016 13,487 50,503 Depreciation provided during the year (16,249) (10,598) (26,847)
At 31 December 2012, net of accumulated depreciation 56,078 28,596 84,674
At 31 December 2012: Cost 156,397 135,480 291,877 Accumulated depreciation (100,319) (106,884) (207,203)
Net carrying amount 56,078 28,596 84,674
50
F-48 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
17. PROPERTY, PLANT AND EQUIPMENT (continued)
Group and Company (continued)
Furniture, Computer fixtures and equipment equipment Total 31 December 2011 HK$’000 HK$’000 HK$’000
At 1 January 2011: Cost 96,927 106,536 203,463 Accumulated depreciation (73,842) (80,418) (154,260)
Net carrying amount 23,085 26,118 49,203
At 1 January 2011, net of accumulated depreciation 23,085 26,118 49,203 Additions 26,761 15,637 42,398 Disposals (102) - (102) Depreciation provided during the year (14,433) (16,048) (30,481)
At 31 December 2011, net of accumulated depreciation 35,311 25,707 61,018
At 31 December 2011: Cost 120,609 121,993 242,602 Accumulated depreciation (85,298) (96,286) (181,584)
Net carrying amount 35,311 25,707 61,018
51
F-49 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
18. INTERESTS IN SUBSIDIARIES AND AMOUNTS DUE TO SUBSIDIARIES
Company 2012 2011 HK$’000 HK$’000
Unlisted shares, at cost 650 650 Amounts due from subsidiaries 4,786 4,588 Provision for impairment (84) (84)
5,352 5,154
Amounts due to subsidiaries (1,217,638) (1,094,328)
Included in amount due to subsidiaries, HK$767,278,000 (2011: HK$768,911,000) is unsecured, interest-bearing at 5.875% per annum and repayable on demand by the Company in an amount equal to one of the three conditions: (a) on the scheduled maturity date of 17 December 2014, the redemption amount payable in respect of the interest-bearing notes; (b) on the tax redemption date, the amount payable on the tax redemption date; or (c) on the date the subsidiary elects to pay an amount to the Fiscal Agency in accordance with section 8 (Defeasance and Discharge) of the Fiscal Agency Agreement dated 17 December 2004, the amount payable by the subsidiary in accordance with section 8, or as otherwise agreed between the subsidiary and the Company from time to time.
Except for the above, the amounts due from/to subsidiaries are unsecured, interest-free and are not repayable within the next twelve months. The carrying amounts of these amounts due from/to subsidiaries approximate to their fair values.
52
F-50 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
18. INTERESTS IN SUBSIDIARIES AND AMOUNTS DUE TO SUBSIDIARIES (continued)
Particulars of the principal subsidiary are as follows:
Percentage Place of Nominal value of equity incorporation of issued attributable to Principal Name and operations share capital the Company activities Direct Indirect
Ageas Capital (Asia) British Virgin Ordinary 100 - Bond Limited Islands US$1 issuance
The above table lists the subsidiary of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.
19. DEFERRED ACQUISITION COSTS Group and Company 2012 2011 HK$’000 HK$’000
At 1 January 2,237,874 1,993,736 Additions: New businesses 847,541 538,478 Experience written back 138 737 Less: Amortisation (note 13) (355,821) (295,077)
Change in deferred acquisition costs (“DAC”) 491,858 244,138
At 31 December 2,729,732 2,237,874
53
F-51 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
19. DEFERRED ACQUISITION COSTS (continued)
The sensitivity analysis for DAC is stated as below:
2012 (Decrease)/ increase in (Decrease)/ Assumption profit increase in change before tax equity HK$’000 HK$’000
Mortality +10% (826) (826)
Investment return -0.5% 456 456
2011 (Decrease)/ increase in (Decrease)/ Assumption profit increase in change before tax equity HK$’000 HK$’000
Mortality +10% (588) (588)
Investment return -0.5% 918 918
20. INVESTMENT PROPERTIES Group 2012 2011 HK$’000 HK$’000
Carrying amount at 1 January 7,680 6,133 Revaluation gain 707 1,547
Carrying amount at 31 December 8,387 7,680
The investment property had a fair value of HK$8,387,000 as at 31 December 2012 (2011: HK$7,680,000) according to valuations performed by an independent, professionally qualified valuer, based on an open market, existing use basis. The valuer valued the investment property by reference to the rental and sales evidence as available on the market and where appropriate on the basis of capitalisation of the net rental income. The investment property is leased to a third party under operating leases, further summary details of which are included in note 48(a) to the financial statements.
54
F-52 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
20. INVESTMENT PROPERTIES (continued)
The Group’s investment property is situated in Mainland China and is held under the following lease terms:
Group 2012 2011 HK$’000 HK$’000 Mainland China: Short term leases 8,387 7,680
21. FINANCIAL ASSETS Group and Company Notes 2012 2011 HK$’000 HK$’000
Financials assets: Policy loans 22 400,253 394,402 Loans to agents 23 38,255 39,260 Available-for-sale financial assets 24 16,494,213 14,240,232
Total financial assets 16,932,721 14,673,894
22. POLICY LOANS
The policy loans are made to policyholders and are secured by the policies’ cash surrender value. Policy loans are repayable at the discretion of the policyholders as long as the interest plus the principal of the loans do not equal or exceed the cash value or until the policy matures. The policy loans bear interest at a rate of 9% per annum. The directors consider that the fair value of the loans approximately equals to the corresponding carrying value.
55
F-53 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
23. LOANS TO AGENTS
The Group provides loans to agents which bear interest at the prevailing bank lending rates, one of which is secured by the underlying property and some are repayable by monthly instalments.
Group and Company 2012 2011 HK$’000 HK$’000 Loans to agents: Loans to agents 79,425 80,154 Impairment (41,170) (40,894)
Total loans to agents, net of impairment 38,255 39,260
The movements in provision for impairment of loans to agents are as follows:
Group and Company 2012 2011 HK$’000 HK$’000
At 1 January 40,894 20,882 Impairment losses recognised (note 11) 5,348 6,159 Amount written off as uncollectible (4,377) - Amount reclassified from advances to agents (note 27) - 15,951 Reversal of impairment losses (note 11) (695) (2,098)
At 31 December 41,170 40,894
56
F-54 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
23. LOANS TO AGENTS (continued)
The above provision is for individually impaired loans related to agents in default or delinquency in repayments.
For those loans to agents that are not considered to be impaired, an ageing analysis is as follows:
Group and Company 2012 2011 HK$’000 HK$’000
Neither past due nor impaired 32,391 32,101 More than one month past due 5,864 7,159
Total loans to agents 38,255 39,260
Loans that were neither past due nor impaired relate to a large number of agents for whom there was no recent history of default.
Based on past experience, the directors of the Company are of the opinion that no provision for impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold any collateral or other credit enhancements over these balances.
The directors consider that the fair value of the loans to agents approximately equals the corresponding carrying value.
57
F-55 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
24. AVAILABLE-FOR-SALE FINANCIAL ASSETS
Group and Company 2012 2011 HK$’000 HK$’000
Fixed rate bonds, at market value: Listed - government bonds 3,898,966 3,769,288 Listed - others 8,262,428 6,829,964 Unlisted 3,654,400 2,848,695
15,815,794 13,447,947
Variable rate bonds, at market value: Listed - government bonds 26,019 27,918 Listed - others 147,369 289,332
173,388 317,250
Total bonds 15,989,182 13,765,197
Unit trusts and equities, at fair value Listed 114,430 84,695 Unlisted 390,601 390,340
Total unit trusts and equities 505,031 475,035
Total available-for-sale financial assets 16,494,213 14,240,232
The fair value of bonds and unlisted unit trusts are based on quoted market prices unless fair value can be more reliably estimated using valuation techniques.
58
F-56 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
24. AVAILABLE-FOR-SALE FINANCIAL ASSETS (continued)
A maturity profile of the bonds as at the balance sheet date is as follows:
Group and Company 2012 2011 HK$’000 HK$’000
With a residual maturity of: One year or less 426,373 125,020 Two years or less but over one year 338,670 435,855 Three years or less but over two years 367,030 344,446 Four years or less but over three years 788,697 360,676 Five years or less but over four years 992,482 736,150 Over five years 13,075,930 11,763,050
Total bonds 15,989,182 13,765,197
Details for the movements in available-for-sale investment revaluation reserve being recognised in other comprehensive income are as follows:
Group and Company 2012 2011 HK$’000 HK$’000
Net movement in fair value during the year recognised in other comprehensive income 595,417 1,196,184 Realised gains included in profit and loss (note 7) 16,054 29,734
611,471 1,225,918
59
F-57 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
25. INVESTMENTS RELATED TO UNIT-LINKED CONTRACTS
Group and Company 2012 2011 HK$’000 HK$’000
Financial assets at fair value through profit or loss: Unlisted unit trusts, at fair value 5,649,481 3,936,809 Prepayments, deposits and other debtors 325 54 Cash and cash equivalents 145,667 93,524
Total unit-linked assets 5,795,473 4,030,387
26. PREMIUMS RECEIVABLE
An ageing analysis of the premiums receivable that are not considered to be impaired is as follows:
Group and Company 2012 2011 HK$’000 HK$’000
Less than one month past due 78,703 81,168 More than one month past due 17,768 17,619
96,471 98,787
60
F-58 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
27. PREPAYMENTS, DEPOSITS AND OTHER DEBTORS
Group 2012 2011 HK$’000 HK$’000
Prepayments (note (i)) 427,033 412,186 Accrued interest income on bonds, swaps, loans and cash and cash equivalents and dividend receivables on unit trusts and equities 224,186 172,116 Deposits 36,868 28,599 Reinsurance asset 117,177 48,483 Other debtors 214,172 85,176
1,019,436 746,560
Company 2012 2011 HK$’000 HK$’000
Prepayments (note (i)) 427,011 412,164 Accrued interest income on bonds, swaps, loans and cash and cash equivalents and dividend receivables on unit trusts and equities 224,186 171,702 Deposits 36,850 28,581 Reinsurance asset 117,177 48,483 Other debtors 214,172 85,175
1,019,396 746,105
61
F-59 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
27. PREPAYMENTS, DEPOSITS AND OTHER DEBTORS (continued)
Note: (i) Included in prepayments are advances to agents of HK$418,347,000 (2011: HK$404,966,000)
Group and Company 2012 2011 HK$’000 HK$’000
Advances to agents 433,031 440,659 Impairment (14,684) (35,693)
Advances to agents, net of impairment 418,347 404,966
The movements in provision for impairment of advances to agents are as follows:
Group and Company 2012 2011 HK$’000 HK$’000
At 1 January 35,693 51,644 Reversal of impairment losses (note 11) (1,749) - Amount written off as uncollectible (19,260) - Amount reclassified to loans to agents (note 23) - (15,951)
At 31 December 14,684 35,693
The above provision is for individually impaired advances related to agents in default or delinquency in repayments.
62
F-60 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
27. PREPAYMENTS, DEPOSITS AND OTHER DEBTORS (continued)
Note (continued): (i) (continued)
For those advances to agents that are not considered to be impaired, an ageing analysis is as follows:
Group and Company 2012 2011 HK$’000 HK$’000
Neither past due nor impaired 390,951 378,176 Within one month past due - 743 More than one month past due 27,396 26,047
Advances to agents 418,347 404,966
Advances to agents that were past due but not impaired relate to a number of agents that have a good track record with the Group. Based on past experience, the directors of the Company are of the opinion that no provision for impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold any collateral or other credit enhancements over these balances.
The directors consider that the fair value of the advances to agents approximately equals the corresponding carrying value.
63
F-61 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
28. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS
Group 2012 2011 HK$’000 HK$’000
Cash and bank balances 382,247 467,074 Time deposits 548,818 732,729 931,065 1,199,803 ------Less:Provision for impairment of
cash and bank balances ------(11,162) ------(12,066) Less:Time deposits with original maturity
more than three months ------(80,676) Less:Pledged deposits: Time deposits pledged for a bank guarantee (note (i)) (10,000) (10,000) Cash and bank balances pledged for an early terminated cross currency swap agreement - (2,128) Cash and bank balances pledged for cross currency swap agreements (note 30) (41,270) (39,352) (51,270) (51,480) ------
Cash and cash equivalents 868,633 1,055,581
64
F-62 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
28. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS (continued)
Company 2012 2011 HK$’000 HK$’000
Cash and bank balances 377,618 463,863 Time deposits 548,818 607,384
------926,436 ------1,071,247 Less:Provision for impairment of
cash and bank balances ------(11,162) ------(12,066) Less:Pledged deposits: Time deposits pledged for a bank guarantee (note (i)) (10,000) (10,000) Cash and bank balances pledged for an early terminated cross currency swap agreement - (2,128) Cash and bank balances pledged for cross currency swap agreements (note 30) (41,270) (39,352) (51,270) (51,480) ------
Cash and cash equivalents 864,004 1,007,701
65
F-63 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
28. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS (continued)
A maturity profile of the time deposits as at the balance sheet date is as follows:
Group 2012 2011 HK$’000 HK$’000
With a residual maturity of: Three months or less 538,818 722,729 One year or less but over three months 10,000 10,000
548,818 732,729
Company 2012 2011 HK$’000 HK$’000
With a residual maturity of: Three months or less 538,818 597,384 One year or less but over three months 10,000 10,000
548,818 607,384
Cash at bank earns interest at floating rates based on daily bank deposit rates. Other than pledged deposits, short term time deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group and the Company, and earn interest at the respective short term time deposit rates. The bank balances and pledged deposits are deposited with creditworthy banks with no recent history of default. The carrying amounts of the cash and cash equivalents and the pledged deposits approximate to their fair values.
Note: (i) As at 31 December 2012, a deposit of HK$10,000,000 (2011: HK$10,000,000) was pledged to a bank for the bank guarantee given in respect of a rental deposit for a tenancy agreement entered into by the Group. The tenancy agreement will expire on 31 July 2014.
66
F-64 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
(a) Regulatory framework
The operations of the Group are subject to local regulatory requirements in Hong Kong. The regulator requires the Group to maintain an appropriate solvency position to meet unforeseen liabilities arising from economic shocks and/or natural disasters.
(b) Capital management framework
The Group has an internal risk management framework for identifying risks to which each of its business units and the Group as a whole are exposed. The internal framework estimates indicate how much capital is needed to mitigate the risk of insolvency to a selected remote level of risk applied to a number of tests on the capital position of the business.
The Company always maintains a solvency position higher than 150% of the solvency margin required by the Office of the Commissioner of Insurance Hong Kong (“OCI”) to ensure an adequate surplus position. Further objectives are set by the Group to maintain a strong credit rating and healthy capital ratios in order to support its business.
The Group manages its capital requirements by assessing probable shortfalls between reported and required capital levels on a regular basis. Adjustments to current capital levels are made in light of changes in economic conditions and risk characteristics of the Group’s activities.
The Group fully complied with capital requirements imposed by the OCI during the reported financial periods and no changes were made to its capital base, objectives, policies and processes from the previous year.
(c) Asset liability management (“ALM”) framework
Financial risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The main risks that the Group faces due to the nature of its investments and liabilities are interest rate risk and duration risk. The Group manages these positions within an ALM framework that has been developed to achieve long term investment returns in excess of its obligations under insurance and investment contracts. The principal technique of the Group’s ALM is to match assets to the liabilities arising from insurance and investment contracts by reference to the type of benefits payable to contract holders.
The Group’s ALM also forms an integral part of the insurance risk management policy, to ensure in each period sufficient cash flows are available to meet liabilities arising from insurance and investment contracts.
67
F-65 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(d) Insurance risk
The Group is in the business of insuring against the risk of mortality, morbidity, disability, critical illness, accidents and related risks. The Group retains a maximum of US$150,000 for each risk it insures, with the excess being reinsured through surplus treaties, coinsurance treaties, facultative reinsurance and catastrophe treaties with reputable international reinsurers. Consequently, total claims payable in any given year can be predicted with a higher degree of precision. Over the last five years, the actual claims in average have been less than expected. As part of the Group’s quality control process, the Group regularly invites reinsurers to audit its underwriting and claim practices and procedures, to ensure that the Group meet the highest industry standards.
The Group offers some products with explicit investment guarantees. One product is Invest-a-surance, an unbundled product with separate insurance and investment benefits and offers a minimum interest credit of 4% per annum. Invest-a-surance is a closed block. Another two products are both two-pay five-year endowment plans, Easy Goal is US dollar denominated with guaranteed return of 3.3% per annum at maturity and Dynasty is Renminbi denominated with maximum guaranteed return of 2.3% per annum at maturity. Due to Renminbi investment restriction, Dynasty is 99% coinsured so that the investment risk is transferred to the reinsurer. Elite Choice is an universal life launched in 2012 and offers soft-guarantee every 5 year period. Current guarantee return is 1.0%/0.5%/3.0%/2.0% per annum for USD/HKD/AUD/CNY respectively. The investment funds as at 31 December 2012 for Invest-a-surance amounted to HK$67,088,000 (2011: HK$66,238,000). The investment fund for Elite Choice amounted to HK$1,719,000. The reserve for Easy Goal amounted to HK$122,945,000 (2011: HK$111,143,000) and the net reserve for Dynasty amounted to HK$1,165,000 (2011: HK$470,000). The reserve held for the investment guarantee amounted to HK$3,884,000 (2011: HK$3,869,000) for Invest-a-surance. The reserve held for the Elite Choice guarantee return amounted to HK$64,000. No guarantee reserve was set up for Easy Goal and Dynasty since Easy Goal is backed by a matching asset portfolio yielding higher than 3.3% and the net reserve for Dynasty is immaterial.
68
F-66 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(d) Insurance risk (continued)
Group and Company 2012 2011 Reinsurers’ Reinsurers’ Gross share of Net Gross share of Net liabilities liabilities liabilities liabilities liabilities liabilities HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
F-67 Type of products Whole life 10,765,623 (116,439) 10,649,184 9,808,312 (47,751) 9,760,561 Term 61,068 (417) 60,651 57,798 (403) 57,395 Dread disease 342,659 (166) 342,493 213,913 (172) 213,741 Medical 115,143 - 115,143 96,789 - 96,789 Disability 14,424 (84) 14,340 13,108 (86) 13,022 Accident 17,458 (49) 17,409 16,802 (53) 16,749
At 31 December 11,316,375 (117,155) 11,199,220 10,206,722 (48,465) 10,158,257
Coinsurance liabilities 163,500 - 163,500 157,708 - 157,708
Insurance liabilities (note 39) 11,479,875 (117,155) 11,362,720 10,364,430 (48,465) 10,315,965
69 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(d) Insurance risk (continued)
(i) Key assumptions
Liabilities on insurance contracts offered by the Group are predominantly conventional whole life insurance for which premiums are paid for a limited period of time or the whole of life, with fixed benefits paid upon death and surrender benefits increasing with the duration of policy.
Some plans provide for guaranteed periodic payments. Most of the whole life insurance products are entitled to annual dividends and some with terminal dividend upon policy termination. For this block of policies and also for endowment and level term products, the assumptions used for the determination of future liabilities for most products are:
Mortality rate: 80% 2001 Hong Kong Assured Life Mortality table for males, 75% 2001 Hong Kong Assured Life Mortality table for females, with selection factor 60% at year 1 and 85% at year 2. (2011: 85% 2001 Hong Kong Assured Life Mortality table for males, 80% 2001 Hong Kong Assured Life Mortality table for females, with selection factor 60% at year 1 and 85% at year 2)
Interest rate: 4.0% for most policies (2011 : 4.0% for most policies)
Lapse rate: Based on Company’s experience
Expense: Based on Company’s experience
The method of calculating the liabilities is the net level premium reserve, with an adjustment to remove premium deficiency.
For unit-linked funds, the liabilities are the fund account values.
For insurance with pure risk coverage such as accident benefit, dread disease, medical insurance and disability insurance, the liabilities are the unearned gross premiums.
Most of the policyholders of the insurance contracts issued by the Group are residents of Hong Kong.
70
F-68 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(d) Insurance risk (continued) (i) Key assumptions (continued)
The Group’s investment returns on the investment assets backing the insurance fund, including realised and unrealised gains and losses, for the past five years are: 2008 6.80% 2009 -0.06% 2010 6.59% 2011 13.02% 2012 7.56%
The Group’s actual claims compared to the mortality experience assumed in the calculation of the future insurance contract liabilities for the past five years are: 2008 102% 2009 89% 2010 97% 2011 78% 2012 101% (ii) Sensitivities 2012 (Decrease)/ increase in (Decrease)/ Assumption profit increase in change before tax equity HK$’000 HK$’000
Mortality +10% (124,880) (124,880)
Discount rate -50 basis points (809,334) (809,334)
Expense +10% (42,187) (42,187)
Lapse rate +20% 40,125 40,125
71
F-69 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(d) Insurance risk (continued) (ii) Sensitivities (continued)
2011 (Decrease)/ increase in (Decrease)/ Assumption profit increase in change before tax equity HK$’000 HK$’000
Mortality +10% (111,381) (111,381)
Discount rate -50 basis points (681,733) (681,733)
Expense +10% (26,602) (26,602)
Lapse rate +20% 6,864 6,864
72
F-70 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(e) Credit risk
Investment securities Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The Group limits its exposure by setting minimum limits of its portfolio mix in bonds and maximum limits of portfolio mix in equities and other investments. The Group also sets limits on currency, maturity and credit limit on its fixed income portfolios. The Group only deals with institutions with high creditworthiness.
The table below shows the maximum exposure to credit risk for the components of certain financial instruments of the balance sheet of the Group:
2012 General and shareholders’ Unit- fund linked Total HK$’000 HK$’000 HK$’000
Amount due from an intermediate holding company 804,425 - 804,425 Amount due from fellow subsidiary 5,275 - 5,275 Pledged deposits 51,270 - 51,270 Financial assets: Policy loans 400,238 15 400,253 Loans to agents 38,255 - 38,255 Available-for-sale financial assets - Bonds 15,989,182 - 15,989,182 - Unit trusts and equities 505,031 - 505,031 Investments related to unit-linked contracts - 5,795,473 5,795,473 Derivative financial instruments 9,142 - 9,142 Premiums receivable 96,471 - 96,471 Prepayments, deposits and other debtors 860,269 159,167 1,019,436 Cash and cash equivalents 868,633 - 868,633
At 31 December 2012 19,628,191 5,954,655 25,582,846
73
F-71 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(e) Credit risk (continued)
2011 General and shareholders’ Unit- fund linked Total HK$’000 HK$’000 HK$’000
Amount due from an intermediate holding company 810,967 - 810,967 Amount due from fellow subsidiary 5,078 - 5,078 Pledged deposits 51,480 - 51,480 Financial assets: Policy loans 394,387 15 394,402 Loans to agents 39,260 - 39,260 Available-for-sale financial assets - Bonds 13,765,197 - 13,765,197 - Unit trusts and equities 475,035 - 475,035 Investments related to unit-linked contracts - 4,030,387 4,030,387 Premiums receivable 98,787 - 98,787 Prepayments, deposits and other debtors 696,810 49,750 746,560 Time deposits with original maturity more than three months 80,676 - 80,676 Cash and cash equivalents 1,055,581 - 1,055,581
At 31 December 2011 17,473,258 4,080,152 21,553,410
74
F-72 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(e) Credit risk (continued)
Credit exposure by credit rating
The table below provides information regarding the credit risk exposure of the Group by classifying certain financial instruments according to the Group’s credit ratings of counterparties.
2012 Non- Investment investment Unit- grade grade linked Total HK$’000 HK$’000 HK$’000 HK$’000
Amount due from an intermediate holding company 804,425 - - 804,425 Amount due from fellow subsidiary - 5,275 - 5,275 Pledged deposits 51,270 - - 51,270 Financial assets: Policy loans - 400,238 15 400,253 Loans to agents - 38,255 - 38,255 Available-for-sale financial assets - Bonds 15,861,155 128,027 - 15,989,182 - Unit trusts and equities 505,031 - - 505,031 Investments related to unit-linked contracts - - 5,795,473 5,795,473 Derivative financial instruments 9,142 - - 9,142 Premiums receivable - 96,471 - 96,471 Prepayments, deposits and other debtors 223,619 636,650 159,167 1,019,436 Cash and cash equivalents 868,633 - - 868,633
At 31 December 2012 18,323,275 1,304,916 5,954,655 25,582,846
75
F-73 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(e) Credit risk (continued)
2011 Non- Investment investment Unit- grade grade linked Total HK$’000 HK$’000 HK$’000 HK$’000
Amount due from an intermediate holding company 810,967 - - 810,967 Amount due from fellow subsidiary - 5,078 - 5,078 Pledged deposits 49,352 2,128 - 51,480 Financial assets: Policy loans - 394,387 15 394,402 Loans to agents - 39,260 - 39,260 Available-for-sale financial assets - Bonds 13,658,593 106,604 - 13,765,197 - Unit trusts and equities 475,035 - - 475,035 Investments related to unit-linked contracts - - 4,030,387 4,030,387 Premiums receivable - 98,787 - 98,787 Prepayments, deposits and other debtors 169,726 527,084 49,750 746,560 Time deposits with original maturity more than three months 80,676 - - 80,676 Cash and cash equivalents 1,055,581 - - 1,055,581
At 31 December 2011 16,299,930 1,173,328 4,080,152 21,553,410
Aaa and AAA are the highest credit ratings in the Moody’s and Standard and Poor’s credit rating systems, respectively. The Group classifies its bonds below ratings Baa3 and BBB - in the Moody’s and Standard and Poor’s credit rating systems respectively as non-investment grade bonds.
It is the Group’s investment policy to invest in investment grade bonds to limit exposure to credit risk. The Group allows a maximum of 5% of invested assets to be invested in non-investment grade bonds. As at 31 December 2012, the amount of the non- investment grade bonds held by the Group was approximately 0.69% of its invested assets (2011: 0.64%).
76
F-74 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(e) Credit risk (continued)
Premium receivables The credit risk in respect of customer balances, incurred on the non-payment of premiums or contributions, will only persist during the grace period specified in the policy documents or trust deed on the expiry of which either the premium is paid or the policy will be terminated or changed to reduced paid-up or term cover according to the provision of the policy.
Advances to agents and loans to agents For the credit risk in respect of the advances to agents and loans to agents, the ageing analysis of these two items are included in note 27 and note 23 to the financial statements, respectively.
(f) Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet cash commitments associated with financial instruments. Liquidity risk may result from either the inability to sell financial assets quickly at their fair values; or counterparty failing to repay contractual obligations; or insurance liability falling due for payment earlier than expected; or inability to generate cash inflows as anticipated.
The major liquidity risks the Group confronts are the daily calls on its available cash resources in respect of claims arising from insurance and investment contracts and the maturity of debt securities.
The Group manages liquidity through its liquidity risk policy which includes determining what constitutes liquidity risk for the Group and the minimum proportion of funds to meet emergency calls; the setting up of contingency funding plans; specifying the sources of funding and the events that would trigger the plan; specifying the concentration of funding sources; the reporting of liquidity risk exposures and breaches to the monitoring authority; monitoring the compliance with liquidity risk policy and the reviewing of the Group’s liquidity risk policy for pertinence and changing environment.
77
F-75 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(f) Liquidity risk (continued) (i) The table below analyses certain financial liabilities of the Group as at 31 December 2012 into their relevant maturity groups based on their contractual undiscounted cash flows.
2012 Contractual undiscounted cashflows
2 years or less 3 years or less 4 years or less 5 years or less Carrying
F-76 1 year or less but >1 year but >2 years but >3 years but >4 years > 5 years Unit-linked Total amount HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Liabilities related to unit-linked contracts ------5,795,473 5,795,473 5,795,473 Derivative financial instruments 7,671 7,671 7,671 7,671 7,587 12,815 - 51,086 35,209 Interest-bearing loans 118,670 892,363 64,860 57,078 51,979 103,275 - 1,288,225 1,130,690 Payables to policyholders 347,114 - - - - - 26,971 374,085 374,085 Accrued expenses and other creditors 519,383 12,441 277 - - - 10,957 543,058 543,058 Tax payable 73,346 ------73,346 73,346
1,066,184 912,475 72,808 64,749 59,566 116,090 5,833,401 8,125,273 7,951,861
78 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(f) Liquidity risk (continued) (i) (continued) 2011 Contractual undiscounted cashflows
2 years or less 3 years or less 4 years or less 5 years or less Carrying 1 year or less but >1 year but >2 years but >3 years but >4 years > 5 years Unit-linked Total amount
F-77 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Liabilities related to unit-linked contracts ------4,030,387 4,030,387 4,030,387 Derivative financial instruments - - - - - 39,595 - 39,595 39,595 Interest-bearing notes 45,641 45,641 822,501 - - - - 913,783 773,383 Payables to policyholders 256,514 - - - - - 12,351 268,865 268,865 Accrued expenses and other creditors 404,324 3,561 3,059 - - - - 410,944 410,944 Tax payable 58,515 ------58,515 58,515
764,994 49,202 825,560 - - 39,595 4,042,738 5,722,089 5,581,689
79 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(f) Liquidity risk (continued) (ii) The table below presents the estimated amounts (on a discounted basis) and timing of cash flows arising from liabilities under insurance and investment contracts. The Group has to meet daily calls on its cash resources, notably from claims arising on its insurance and investment contracts and early surrender of policies for surrender value. There is therefore a risk that cash will not be available to settle liabilities when due at a reasonable cost. The Group manages this risk by monitoring and setting an appropriate level of cash position to settle these liabilities.
F-78 2012 2 years or less 3 years or less 4 years or less 5 years or less 1 year or less but >1 year but >2 years but >3 years but >4 years > 5 years Unit-linked Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Insurance contract liabilities 2,559,980 91,890 151,132 97,483 20,987 10,197,450 - 13,118,922 Investment contract liabilities - ----9,294-9,294
2,559,980 91,890 151,132 97,483 20,987 10,206,744 - 13,128,216 2011 2 years or less 3 years or less 4 years or less 5 years or less 1 year or less but >1 year but >2 years but >3 years but >4 years > 5 years Unit-linked Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Insurance contract liabilities 2,213,943 158,625 91,097 113,001 33,002 9,263,799 - 11,873,467 Investment contract liabilities - ----10,780-10,780
2,213,943 158,625 91,097 113,001 33,002 9,274,579 - 11,884,247
80 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(g) Market risk
Market risk is the risk of changes in fair value of financial instruments from fluctuation in foreign exchange rates (currency risk), market interest rates (interest rate risk) and market prices (price risk), whether such changes in price are caused by factors specific to individual instruments or their issuers or factors affecting all instruments traded in the market. These risks are discussed in the following sections:
(i) Currency risk
It is the Group’s policy to match its assets and liabilities by currency to minimise its exposure to currency risk. The Group sells policies denominated in Hong Kong dollars and United States dollars and its assets are appropriately invested to meet these liabilities. The Hong Kong dollar is pegged to the United States dollar. Management believes that this peg will continue in the near future. Nevertheless, management will monitor the situation closely and take appropriate actions when necessary. As at the balance sheet date, the Group had 0.38% of its investments denominated in foreign currencies, other than the United States dollar (2011: 0.23%). The Group believes that the currency risk in equities is reflected in their share price and therefore its exposure to the foreign currencies has not been hedged.
(ii) Interest rate risk
Interest rate risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
The Group’s interest risk policy requires it to manage the interest rate risk by maintaining an appropriate mix of fixed and variable rate instruments. The policy also requires it to manage the maturities of interest-bearing financial assets and interest-bearing financial liabilities.
(Decrease)/ increase (Decrease)/ in net increase (Decrease)/ assets in profit increase in Change in variables (note(a)) before tax equity HK$’000 HK$’000 HK$’000 31 December 2012
+50 basis points (823,955) (823,955) (823,955) -50 basis points 823,955 823,955 823,955
81
F-79 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(g) Market risk (continued)
(ii) Interest rate risk (continued) (Decrease)/ increase (Decrease)/ in net increase in (Decrease)/ assets profit increase in Change in variables (note (a)) before tax equity HK$’000 HK$’000 HK$’000 31 December 2011
+50 basis points (662,117) (662,117) (662,117) -50 basis points 662,117 662,117 662,117
Note (a): Assume all changes in assets value are realised.
(iii) Price risk
The Group’s price risk exposure relates to financial assets and liabilities whose values will fluctuate as a result of changes in market prices, principally investment securities not held for the account of unit-linked business.
Such investment securities are subject to price risk due to changes in market values of instruments arising either from factors specific to individual instruments or their issuers or factors affecting all instruments traded in the market.
The Group’s price risk policy requires it to manage such risk by setting and monitoring objectives and constraints on investments and diversification plans, and to limit the investment in each country, sector and market.
The Group has actively refined its investment model to measure portfolio risks and performance.
82
F-80 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
29. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)
(g) Market risk (continued)
(iii) Price risk (Decrease)/ increase (Decrease)/ Change in in profit increase in Type of assets variables before tax equity HK$’000 HK$’000 Year 2012
Market indices (note (b)) +10% 20,761 20,761 Market indices (note (b)) -10% (20,761) (20,761)
Investment properties +7% 587 587 Investment properties -7% (587) (587)
(Decrease)/ increase (Decrease)/ Change in in profit increase in Type of assets variables before tax equity HK$’000 HK$’000 Year 2011
Market indices (note (b)) +10% 19,425 19,425 Market indices (note (b)) -10% (19,425) (19,425)
Investment properties +7% 538 538 Investment properties -7% (538) (538) Note (b): Assume all changes in equity values are realised.
83
F-81 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
30. DERIVATIVE FINANCIAL INSTRUMENTS Group and Company 2012 2011 HK$’000 HK$’000 Unlisted cross currency swap agreements, at fair value: Assets 9,142 -
Liabilities (35,209) (39,595)
Cross currency swap agreements – cash flow hedges for bond investments From November 2009 onwards, the Group entered into certain cross currency swap agreements designated as cash flow hedges against its foreign currency risk in respect of cash flows from certain bond investments of US$428.1 million (2011: US$161.5 million) with maturities ranging from 2016 to 2022. These cross currency swap agreements are entered with several counterparties over the counter. The terms of the cross currency swap agreements have been negotiated to match the terms of the underlying bond investments. The cash flow hedge was assessed to be highly effective and a net loss of HK$31,268,000 was included in the hedging reserve in other comprehensive income (2011: HK$39,132,000).
Details for the hedging reserve being recognised in other comprehensive income are as follows: Group and Company 2012 2011 HK$’000 HK$’000 Net movement in hedging reserve during the year recognised in other comprehensive income 7,864 (18,016)
31. PAYABLES TO POLICYHOLDERS
Group and Company 2012 2011 HK$’000 HK$’000
Claims payable (note 32) 136,937 110,653 Premium deposits (note 33) 221,740 153,695 Other payables 15,408 4,517
374,085 268,865
The carrying amounts disclosed above reasonably approximated to their fair values at the balance sheet date.
84
F-82 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
32. CLAIMS PAYABLE Group and Company 2012 2011 HK$’000 HK$’000
Life and annuity 134,194 108,646 Linked long term 2,743 2,007
136,937 110,653
The movements in the provision for claims reported by policyholders and claims incurred but not reported are analysed as follows:
Group and Company 2012 2011 HK$’000 HK$’000
At 1 January 110,653 99,292 Provided during the year 189,657 159,070 Utilised during the year (163,261) (147,681) Exchange realignment (112) (28)
At 31 December 136,937 110,653
Claims incurred but not reported amounted to HK$32,933,000 as at 31 December 2012 (2011: HK$29,777,000), which are included in claims payable.
33. PREMIUM DEPOSITS
Premium deposits are amounts that are left in deposits with the Group for the payment of future premiums. Group and Company 2012 2011 HK$’000 HK$’000
At 1 January 153,695 106,639 Received during the year 5,024,826 4,105,716 Utilised during the year (4,956,698) (4,058,628) Exchange realignment (83) (32)
At 31 December 221,740 153,695
85
F-83 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
34. ACCRUED EXPENSES AND OTHER CREDITORS
Group 2012 2011 HK$’000 HK$’000
Commission payable 264,481 197,072 Other payables and accruals 278,577 213,872
543,058 410,944
Company 2012 2011 HK$’000 HK$’000
Commission payable 264,481 197,072 Other payables and accruals 276,685 211,928
541,166 409,000
The carrying amounts disclosed above approximate to their fair values. Accrued expenses and other creditors are non-interest bearing.
35. AMOUNTS DUE FROM A FELLOW SUBSIDIARY/(TO) FELLOW SUBSIDIARIES
The amounts due from a fellow subsidiary/(to) fellow subsidiaries are unsecured, interest-free and not repayable within the next twelve months. The carrying amounts reasonably approximate to their fair values at the balance sheet date.
36. AMOUNTS DUE FROM INTERMEDIATE HOLDING COMPANIES
Amounts due from intermediate holding companies comprised the following:
(a) A loan of US$101,288,000 (2011: US$101,893,000) due from Ageas Insurance International N.V. (formerly known as “Fortis Insurance International N.V.”), which is unsecured, interest-bearing at 5.875% per annum and will mature on 17 December 2014. For details, please refer to note 50(a)(i) to the financial statements
(b) The other loan which is unsecured, interest-free and not repayable within the next twelve months.
The carrying amounts reasonably approximate to their fair values at the balance sheet date.
86
F-84 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
37. AMOUNT DUE TO AN IMMEDIATE/INTERMEDIATE HOLDING COMPANY
The amount due to an immediate/intermediate holding company are unsecured, interest-free and not repayable within the next twelve months. The carrying amount reasonably approximates to its fair value at the balance sheet date.
38. INTEREST-BEARING LOANS
Group 2012 2011 HK$’000 HK$’000
Interest-bearing notes (note (i)) 772,755 773,383 Financing received under a financial reinsurance arrangement (note (ii)) 357,935 -
1,130,690 773,383
Company 2012 2011 HK$’000 HK$’000
Financing received under a financial reinsurance arrangement (note (ii)) 357,935 -
Notes: (i) On 17 December 2004, a direct wholly-owned subsidiary of the Company, Ageas Capital (Asia) Limited (“Ageas Capital”), issued an aggregate principal amount of US$100 million (approximately HK$780 million) of guaranteed bonds with a coupon rate of 5.875% (the “Bonds”) due 17 December 2014 to independent third party investors, whereby Ageas Capital raised approximately HK$767,186,000 (US$98,648,000), net of expenses.
Interest on the Bonds is payable on 17 June and 17 December of each year, beginning on 17 June 2005. The Bonds are fully and unconditionally guaranteed by the Company. The Company’s guarantee is an unsecured and unsubordinated obligation which ranks equally with all of the Company’s other existing and future unsecured and unsubordinated obligations. As required by the insurance laws of Hong Kong and Bermuda, the Company’s guarantee is effectively junior to the liabilities of its long term business, to the extent of the assets maintained by the Company in respect of its long term business. The Bonds are listed on the Main Board of the Singapore Exchange Securities Trading Limited and under the provisions of Rule 144A of the United States Securities Act.
87
F-85 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
38. INTEREST-BEARING LOANS (continued)
Notes: (continued) (i) (continued)
The Bonds will fully mature on 17 December 2014 and thus are not repayable within the next twelve months. The effective interest rate of the Bonds is 6.12% per annum. The amortisation value of the interest-bearing notes was HK$772,755,000 as at 31 December 2012 (2011: HK$773,383,000).
At 31 December 2012, the fair value of the interest-bearing notes is HK$767,358,900 (2011: HK$769,091,400).
(ii) During 2012, the Company had entered into a financial reinsurance arrangement with a reinsurer. Under the financial reinsurance arrangement, the Company had received an up-front of US$45 million at a finance cost of 90-day LIBOR plus 5.4%.
The financing could be analysed into: Company 2012 2011 HK$’000 HK$’000
Short-term: repayable within a year 71,571 -
Long-term: repayable after a year 286,364 -
88
F-86 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
39. INSURANCE CONTRACT LIABILITIES
Insurance contract liabilities are composed of liabilities for guaranteed benefits, liabilities for coinsurance payments and a provision for policyholders’ dividends earned. Liabilities for guaranteed benefits take into account future guaranteed benefit payments and premium receipts.
Liabilities for coinsurance payments are set aside to fund future payments on coinsurance arrangements. The provision for dividends represents half of the expected annual policyholders’ dividends payable in 2012 as this is considered to have been earned in 2012. The dividend policy is at the discretion of the Company’s board. During 2012, the Group paid out total annual dividends of HK$128.8 million (2011: HK$114.0 million).
Group and Company 2012 2011 HK$’000 HK$’000
Liabilities for guaranteed benefits 11,259,836 10,153,850 Liabilities for coinsurance payments 163,500 157,708 Provision for annual dividends 56,539 52,872
Insurance contract liabilities (note 29(d)) 11,479,875 10,364,430 Policyholders’ dividends and bonuses (note 40) 1,639,047 1,509,037
Total insurance contract liabilities 13,118,922 11,873,467
Insurance contract liabilities, net of the unexpired reinsurance risk, are as below.
Group and Company 2012 2011 HK$’000 HK$’000
Insurance contract liabilities (note 29(d)) 11,479,875 10,364,430 Unexpired reinsurance risk (note 29(d)) (117,155) (48,465)
Insurance contract liabilities, net of unexpired reinsurance risk (note 29(d)) 11,362,720 10,315,965
89
F-87 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
39. INSURANCE CONTRACT LIABILITIES (continued)
Group and Company 2012 2011 Insurance Reinsurers’ Insurance Reinsurers’ contract Coinsurance share of Net contract Coinsurance share of Net liabilities liabilities liabilities liabilities liabilities liabilities liabilities liabilities HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 At 1 January 10,206,722 157,708 (48,465) 10,315,965 9,160,362 150,728 (1,881) 9,309,209 Premiums received 2,099,090 (51,525) (147,556) 1,900,009 1,923,036 (47,389) (116,424) 1,759,223
F-88 Liabilities incurred for death, surrender and maturity (893,802) 29,593 56,132 (808,077) (788,515) 28,246 34,767 (725,502) Benefit and claim experience variations (484,383) 6,360 33,825 (444,198) (446,089) 3,194 35,477 (407,418) Investment income variations (385,934) 6,744 (2,113) (381,303) (194,874) - - (194,874) Investment income 782,521 - - 782,521 556,018 6,482 (405) 562,095 Financing cost for coinsurance - 14,620 - 14,620 - 16,447 - 16,447 Adjustment due to change in reserve assumptions 2,825 - (8,608) (5,783) - -- - Exchange realignment (10,664) - (370) (11,034) (3,216) - 1 (3,215)
At 31 December 11,316,375 163,500 (117,155) 11,362,720 10,206,722 157,708 (48,465) 10,315,965
90 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
40. POLICYHOLDERS’ DIVIDENDS AND BONUSES Group and Company 2012 2011 HK$’000 HK$’000
At 1 January 1,509,037 1,359,640 Provided during the year 319,247 321,434 Utilised during the year (187,181) (171,498) Exchange realignment (2,056) (539)
At 31 December 1,639,047 1,509,037
41. INVESTMENT CONTRACT LIABILITIES
Movements in investment contract liabilities are as follows: Group and Company 2012 2011 HK$’000 HK$’000
At 1 January 10,780 13,808 Withdrawals (1,893) (3,749) Interest, bonus credited and fair value movement 411 721 Exchange realignment (4) -
At 31 December 9,294 10,780
42. LIABILITIES RELATED TO UNIT-LINKED CONTRACTS
Group and Company 2012 2011 HK$’000 HK$’000
Insurance contract liabilities 316,990 244,048 Investment contract liabilities 5,478,483 3,786,339
Liabilities related to unit-linked contracts 5,795,473 4,030,387
91
F-89 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
43. SHARE CAPITAL 2012 2011 US$’000 US$’000 Authorised: 180,000,000 (2011: 180,000,000) ordinary shares of US$1 each 180,000 180,000 9,000,000 (2011: 9,000,000) Class A redeemable preference shares of US$1 each (note (i)) 9,000 9,000 11,000,000 (2011: 11,000,000) Class B redeemable preference shares of US$1 each (note (ii)) 11,000 11,000
200,000 200,000
HK$’000 HK$’000 Issued and fully paid: 121,000,000 (2011: 121,000,000) ordinary shares of US$1 each 939,824 939,824 9,000,000 (2011: 9,000,000) Class A redeemable preference shares of US$1 each (note (i)) 69,955 69,955 10,000,000 (2011: 10,000,000) Class B redeemable preference shares of US$1 each (note (ii)) 77,945 77,945
1,087,724 1,087,724
Notes: (i) The Class A redeemable preference shares contain the following terms: (a) The Class A redeemable preference shares may, subject to the provisions of the Companies Act 1981 of Bermuda (as amended), be redeemed at the option of the Company only; (b) Upon redemption, the holders of the Class A redeemable preference shares shall be entitled to receive the par value thereof in priority to the holders of any other issued shares in the capital of the Company including Class B redeemable preference shares; and (c) Subject only to the provisions in the Schedule attached to the Company’s bye-laws (the “Schedule”), the Class A redeemable preference shares shall rank pari passu with and have all the rights attaching to the ordinary shares of the Company.
92
F-90 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
43. SHARE CAPITAL (continued)
Notes (continued): (ii) The Class B redeemable preference shares contain the following terms: (a) the Class B redeemable preference shares shall be entitled to a dividend payable at a fixed rate of 8.5% p.a. on a non-cumulative basis, subject to the applicable laws; (b) the Class B redeemable preference shares shall be redeemable only after five years from the date of issuance of Class B redeemable preference shares at the option of the Company provided that prior written consent is obtained from the Office of the Commissioner of Insurance of the Government of the Hong Kong Special Administrative Region for the redemption, and a redemption price of US$10 per share (premium of US$9) shall be payable by the Company to the shareholder upon redemption subject to the Companies Act 1981 of Bermuda (as amended); (c) Upon redemption, the holders of the Class B redeemable preference shares shall be entitled to receive the full redemption price thereof in priority to the holders of ordinary shares of US$1.00 par value each in the capital of the Company; (d) Subject only to the provisions in the Schedule, the Class B redeemable preference shares shall rank pari passu with and have all the rights attaching to the ordinary shares of the Company; and (e) Upon agreement by the Company and the holder of Class B redeemable preference shares, to convert all Class B redeemable preference shares to ordinary shares on the basis of one ordinary share for each Class B redeemable preference share held.
Share option schemes Share option schemes of the ultimate holding company ageas SA/NV (“Ageas”), the ultimate holding company, offered options on Ageas shares to senior managers in order to strengthen their commitment to Ageas and to align their interests. The features of the option plans may vary from country to country depending on local tax regulations. There is a difference between conditional and unconditional options. Unconditional options are granted to employees who work in countries where options are subject to taxation directly upon being granted. Conditional options are granted to employees in countries where the options are taxed upon exercise. Conditional options become vested if the employee is still employed after a period of five years. In general, options may not be exercised until five years after they are granted, regardless of whether they are conditional or unconditional. No new options were granted since 2009.
93
F-91 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
43. SHARE CAPITAL (continued)
Share option schemes (continued) Share option schemes of the ultimate holding company (continued) In previous years, share options were granted to Mr. Jozef G. De Mey, Mr. Bart Karel August De Smet, Mr. Damis Jacobus Ziengs (resigned during the year), Mr. Charles Stuart Fraser, Mr. Gary Lee Crist and Mr. Filip A. L. Coremans under the share option schemes of Ageas. During the year, no share options granted were exercised (2011: Nil) and 58,855 (2011: 66,541) of the share options granted were expired, lapsed or cancelled. As at the balance sheet date, there were 153,717 share options (2011: 212,572 share options) outstanding in respect of the options granted by Ageas to the directors of the Company.
Restricted shares of the ultimate holding companies (a) In conformity with the rules of the restricted shares plans from 2003 to 2008 (the “Restricted Shares”), shares of Ageas have been granted to the members of the executive committee and management committees of several Ageas companies. The Restricted Shares are a form of long term incentive to the executive managers of Ageas, which consists of commitment, taken by Ageas, to grant a number of Ageas shares at the end of a three year period, provided the professional relationship with Ageas has not been terminated prematurely, unless the Board of Directors of Ageas decides otherwise. At the date of grant, the executive managers of Ageas will be allowed to sell, at a maximum, 50% of those shares within 10 days in order to finance the tax liabilities associated with the grant. The unsold shares remain unsalable until six months after termination of the professional relationship between Ageas and the executive managers. Ageas did not commit to grant restricted shares to the members of the executive committee and the management committees of Ageas companies since 2009.
During the year, the Extraordinary General Meetings of Ageas N.V. and Ageas SA/NV, parent companies of the Company, approved on 28 and 29 June respectively the merger by absorption by Ageas SA/NV of Ageas N.V.. Subsequently, one new Ageas SA/NV share has been issued to replace every 10 Ageas units. As such, the number of shares previously attributed to Mr. Bart Karel August De Smet in 2011 under the restricted shares plan 2008 were adjusted from 2,770 to 277 during the year.
As at the balance sheet date, there was no outstanding commitment to grant any restricted shares to the directors of the Company under the restricted shares plans from 2003 to 2008.
94
F-92 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
43. SHARE CAPITAL (continued)
Share option schemes (continued) Restricted shares of the ultimate holding companies (continued) (b) In 2011, Ageas created a restricted share programme for its senior management. Dependent on the relative performance of the Ageas share in relation to a peer group over the next three years and some additional conditions, the senior managers will be awarded existing Ageas shares for free on 1 April 2014.
In 2011, restricted shares were granted to Mr. Charles Stuart Fraser, Mr. Gary Lee Crist and Mr. Filip A. L. Coremans under the restricted share programme. During the year, no further restricted shares were granted to the Company’s directors. As at the balance sheet date, there were 25,000 restricted shares (2011: 25,000 restricted shares) outstanding in respect of the restricted shares granted by Ageas to the directors of the Company.
(c) In 2012, Ageas created another restricted share programme for its senior management. Dependent on the relative performance of the Ageas share in relation to a peer group over the next three years and some additional conditions, the senior managers will be awarded existing Ageas shares for free on 1 April 2015.
Mr. Charles Stuart Fraser, Mr. Filip A. L. Coremans and Mr. Frank Johan Gerard van Kempen were entitled to receive restricted shares under the restricted share programme. During the year, these directors were entitled to receive 14,000 restricted shares.
(d) During the year, the units underlying all the above programmes have been replaced by Ageas SA/NA shares in the proportion of one Ageas SA/NV share for 10 Ageas units.
44. RESERVES
(a) Group
The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity on page 10 of the financial statements.
95
F-93 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
44. RESERVES (continued)
(b) Company
Available- for-sale Share Share investment premium Contributed option Hedging revaluation Retained account surplus reserve reserve reserve profits Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Balance at 1 January 2011 701,505 - 20,615 (21,116) 298,716 1,352,906 2,352,626
Changes in equity for 2011: Profit for the year - - - - - 191,755 191,755 Other comprehensive income for the year - - - (18,016) 1,196,184 - 1,178,168 Capital injections - 1,011,121 - - - - 1,011,121 Dividend paid - - - - - (66,209) (66,209)
Balance at 31 December 2011 and 1 January 2012 701,505 1,011,121 20,615 (39,132) 1,494,900 1,478,452 4,667,461
Changes in equity for 2012: Profit for the year - - - - - 379,544 379,544 Other comprehensive income for the year - - - 7,864 595,417 - 603,281
At 31 December 2012 701,505 1,011,121 20,615 (31,268) 2,090,317 1,857,996 5,650,286
45. DIVIDENDS
Dividend payable to equity shareholders of the Company attributable to the previous financial year, approved and paid during the year:
Group and Company 2012 2011 HK$’000 HK$’000 Final dividend in respect of the previous financial year, approved and paid during the year, of US$Nil (2011: US$0.85) per class B redeemable preference share - 66,209
96
F-94 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
46. FINANCIAL INSTRUMENTS BY CATEGORY
The carrying amounts of each of the categories of financial instruments as at the balance sheet date are as follows:
2012 Group
Financial assets Financial assets at fair value Available- through Loans for-sale profit or and financial loss receivables assets Total HK$’000 HK$’000 HK$’000 HK$’000
Amount due from an intermediate holding company - 804,425 - 804,425 Amount due from a fellow subsidiary - 5,275 - 5,275 Pledged deposits - 51,270 - 51,270 Policy loans - 400,253 - 400,253 Loans to agents - 38,255 - 38,255 Available-for-sale financial assets - - 16,494,213 16,494,213 Investments related to unit-linked contracts 5,649,481 145,992 - 5,795,473 Derivative financial instruments 9,142 - - 9,142 Premiums receivable - 96,471 - 96,471 Prepayments, deposits and other debtors - 1,019,436 - 1,019,436 Cash and cash equivalents - 868,633 - 868,633
At 31 December 2012 5,658,623 3,430,010 16,494,213 25,582,846
Group Financial liabilities Financial liabilities at Financial fair value liabilities through at profit or amortised loss cost Total HK$’000 HK$’000 HK$’000
Investment contract liabilities 9,294 - 9,294 Liabilities related to unit-linked contracts 5,795,473 - 5,795,473 Derivative financial instruments 35,209 - 35,209 Amount due to an immediate holding company - 81,502 81,502 Amount due to an intermediate holding company - 21,125 21,125 Amount due to an fellow subsidiaries - 34,230 34,230 Interest-bearing loans - 1,130,690 1,130,690 Payables to policyholders - 374,085 374,085 Accrued expenses and other creditors - 543,058 543,058
At 31 December 2012 5,839,976 2,184,690 8,024,666
97
F-95 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
46. FINANCIAL INSTRUMENTS BY CATEGORY (continued)
2011 Group
Financial assets Financial assets at fair value Available- through Loans for-sale profit or and financial loss receivables assets Total HK$’000 HK$’000 HK$’000 HK$’000
Amount due from an intermediate holding company - 810,967 - 810,967 Amount due from a fellow subsidiary - 5,078 - 5,078 Pledged deposits - 51,480 - 51,480 Policy loans - 394,402 - 394,402 Loans to agents - 39,260 - 39,260 Available-for-sale financial assets - - 14,240,232 14,240,232 Investments related to unit-linked contracts 3,936,809 93,578 - 4,030,387 Premiums receivable - 98,787 - 98,787 Prepayments, deposits and other debtors - 746,560 - 746,560 Time deposits with original maturity more than three months - 80,676 - 80,676 Cash and cash equivalents - 1,055,581 - 1,055,581
At 31 December 2011 3,936,809 3,376,369 14,240,232 21,553,410
Group Financial liabilities Financial liabilities at Financial fair value liabilities through at profit or amortised loss cost Total HK$’000 HK$’000 HK$’000
Investment contract liabilities 10,780 - 10,780 Liabilities related to unit-linked contracts 4,030,387 - 4,030,387 Derivative financial instruments 39,595 - 39,595 Amount due to an immediate holding company - 127,073 127,073 Amount due to an intermediate holding company - 24,661 24,661 Amount due to an fellow subsidiaries - 36,589 36,589 Interest-bearing notes - 773,383 773,383 Payables to policyholders - 268,865 268,865 Accrued expenses and other creditors - 410,944 410,944
At 31 December 2011 4,080,762 1,641,515 5,722,277
98
F-96 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
46. FINANCIAL INSTRUMENTS BY CATEGORY (continued)
2012 Company
Financial assets Financial assets at fair value Available- through Loans for-sale profit or and financial loss receivables assets Total HK$’000 HK$’000 HK$’000 HK$’000
Amounts due from an intermediate holding company - 804,425 - 804,425 Amount due from fellow subsidiary - 5,275 - 5,275 Pledged deposits - 51,270 - 51,270 Policy loans - 400,253 400,253 Loans to agents - 38,255 - 38,255 Available-for-sale financial assets - - 16,494,213 16,494,213 Investments related to unit-linked contracts 5,649,481 145,992 - 5,795,473 Derivative financial instruments 9,142 - - 9,142 Premiums receivable - 96,471 - 96,471 Prepayments, deposits and other debtors - 1,019,396 - 1,019,396 Cash and cash equivalents - 864,004 - 864,004
At 31 December 2012 5,658,623 3,425,341 16,494,213 25,578,177
Company Financial liabilities Financial liabilities at Financial fair value liabilities through at profit or amortised loss cost Total HK$’000 HK$’000 HK$’000
Investment contract liabilities 9,294 - 9,294 Liabilities related to unit-linked contracts 5,795,473 - 5,795,473 Derivative financial instruments 35,209 - 35,209 Amount due to an immediate holding company - 81,502 81,502 Amount due to an intermediate holding company - 21,125 21,125 Amount due to an fellow subsidiaries - 34,230 34,230 Interest-bearing loans - 357,935 357,935 Payables to policyholders - 374,085 374,085 Accrued expenses and other creditors - 541,166 541,166
At 31 December 2012 5,839,976 1,410,043 7,250,019
99
F-97 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
46. FINANCIAL INSTRUMENTS BY CATEGORY (continued)
2011 Company
Financial assets Financial assets at fair value Available- through Loans for-sale profit or and financial loss receivables assets Total HK$’000 HK$’000 HK$’000 HK$’000
Amounts due from an intermediate holding company - 810,967 - 810,967 Amount due from fellow subsidiary - 5,078 - 5,078 Pledged deposits - 51,480 - 51,480 Policy loans - 394,402 - 394,402 Loans to agents - 39,260 - 39,260 Available-for-sale financial assets - - 14,240,232 14,240,232 Investments related to unit-linked contracts 3,936,809 93,578 - 4,030,387 Premiums receivable - 98,787 - 98,787 Prepayments, deposits and other debtors - 746,105 - 746,105 Cash and cash equivalents - 1,007,701 - 1,007,701
At 31 December 2011 3,936,809 3,247,358 14,240,232 21,424,399
Company Financial liabilities Financial liabilities at Financial fair value liabilities through at profit or amortised loss cost Total HK$’000 HK$’000 HK$’000
Investment contract liabilities 10,780 - 10,780 Liabilities related to unit-linked contracts 4,030,387 - 4,030,387 Derivative financial instruments 39,595 - 39,595 Amount due to an immediate holding company - 127,073 127,073 Amount due to an intermediate holding company - 24,661 24,661 Amount due to an fellow subsidiaries - 36,589 36,589 Payables to policyholders - 268,865 268,865 Accrued expenses and other creditors - 409,000 409,000
At 31 December 2011 4,080,762 866,188 4,946,950
100
F-98 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
46. FINANCIAL INSTRUMENTS BY CATEGORY (continued)
The financial instruments measured at fair value are further analysed as below.
Group and Company Valuation Valuation techniques techniques Quoted for which all for which any prices significant significant in active inputs are input is market based on not based for the same observable on observable instrument market data market data Total (Level 1) (Level 2) (Level 3) HK$’000 HK$’000 HK$’000 HK$’000 2012 Assets Available-for-sale financial assets: - Bonds 15,989,182 11,706,363 4,282,819 - - Unit trusts and equities 505,031 504,861 - 170 Financial instruments related to unit-linked contracts 5,649,481 5,649,481 - - Derivative financial instruments 9,142 - 9,142 -
At 31 December 2012 22,152,836 17,860,705 4,291,961 170
Liabilities
Investment contract liabilities 9,294 9,294 - - Liabilities related to unit-linked contracts 5,795,473 5,795,473 - - Derivative financial instruments 35,209 - 35,209 -
At 31 December 2012 5,839,976 5,804,767 35,209 -
101
F-99 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
46. FINANCIAL INSTRUMENTS BY CATEGORY (continued)
The financial instruments measured at fair value are further analysed as below. (continued)
Group and Company Valuation Valuation techniques techniques Quoted for which all for which any prices significant significant in active inputs are input is market based on not based for the same observable on observable instrument market data market data Total (Level 1) (Level 2) (Level 3) HK$’000 HK$’000 HK$’000 HK$’000 2011 Assets Available-for-sale financial assets: - Bonds 13,765,197 10,647,156 3,118,041 - - Unit trusts and equities 475,035 474,253 - 782 Financial instruments related to unit-linked contracts 3,936,809 3,936,809 - -
At 31 December 2011 18,177,041 15,058,218 3,118,041 782
Liabilities
Investment contract liabilities 10,780 10,780 - - Liabilities related to unit-linked contracts 4,030,387 4,030,387 - - Derivative financial instruments 39,595 - 39,595 -
At 31 December 2011 4,080,762 4,041,167 39,595 -
102
F-100 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
46. FINANCIAL INSTRUMENTS BY CATEGORY (continued)
During the year, there were no significant transfers between instruments in Level 1 and Level 2.
The movement during the year in the balance of Level 3 fair value measurements is as follows: Group and Company HK$’000 Available-for-sale financial assets - Unit trusts At 1 January 2012 782 Proceeds (406) Total gains in other comprehensive income (206)
At 31 December 2012 170
Group and Company HK$’000 Available-for-sale financial assets - Unit trusts At 1 January 2011 1,571 Proceeds (1,292) Total gains in other comprehensive income 503
At 31 December 2011 782
47. CONTINGENT LIABILITIES
As at 31 December 2012, the Group and the Company had no material contingent and contingencies arising from the ordinary course of the Group’s long term insurance business (2011: HK$ Nil).
103
F-101 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
48. OPERATING LEASE ARRANGEMENTS
(a) As lessor
As at 31 December 2012, the Group had total future minimum lease receivables under non-cancellable operating leases with its tenants falling due as follows:
Group 2012 2011 HK$’000 HK$’000
Within one year - 43
(b) As lessee
The Group leases certain of its office properties under operating lease arrangements. Leases for properties are negotiated for terms ranging from one to five years.
As at 31 December 2012, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows: Group and Company 2012 2011 HK$’000 HK$’000
Within one year 107,647 96,834 In the second to fifth years, inclusive 155,862 130,294
263,509 227,128
104
F-102 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
49. COMMITMENTS
In addition to the operating lease commitments detailed in note 48(b) above, the Group and the Company had the following capital commitments as at the balance sheet date:
Group 2012 2011 HK$’000 HK$’000
Contracted, but not provided for, in respect of several ongoing projects 7,137 2,995 Authorised, but not contracted for, in respect of several ongoing projects 7,850 1,067
50. MATERIAL RELATED PARTY TRANSACTIONS
(a) Details of the material transactions with companies related to the Group were as follows:
Group and Company Notes 2012 2011 HK$’000 HK$’000
Interest income from Ageas Insurance International N.V. (i) 40,879 41,254 Amount due from Ageas Insurance International N.V. (i) 785,091 791,563
Note: (i) In 2008, the Company signed a loan agreement (the “Loan Agreement I”) with an intermediate holding company, Ageas Insurance International N.V. (“AII”). Pursuant to the Loan Agreement I, the Company lent a loan of US$100,000,000 to AII on 13 May 2008. Fixed interest is charged at 5.875% per annum. AII will repay the principal in full on 17 December 2014 and interest is settled on every 17 June and 17 December of each year.
105
F-103 AGEAS INSURANCE COMPANY (ASIA) LIMITED
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2012
50. MATERIAL RELATED PARTY TRANSACTIONS (continued)
(b) The Group and Company have provided loans to agents which bear interest at the prevailing bank lending rates, one of which is secured by the underlying property and some are repayable on a monthly instalment basis. Details of these loans are included in note 23 to the financial statements. The Group and Company have also provided advances to agents which is interest-free, details of these advances are included in note 27 to the financial statements.
(c) Compensation of key management personnel of the Group: 2012 2011 HK$’000 HK$’000
Short term employee benefits 14,124 13,253 Post-employment benefits 1,098 1,087
Total compensation paid to key management personnel 15,222 14,340
Further details of directors’ emoluments are included in note 14 to the financial statements.
106
F-104 F-105 F-106 F-107 F-108 F-109 F-110 F-111 F-112 F-113 F-114 F-115 F-116 F-117 F-118 F-119 F-120 F-121 F-122 F-123 F-124 F-125 F-126 F-127 F-128 F-129 F-130 F-131 F-132 F-133 F-134 F-135 F-136 F-137 F-138 F-139 F-140 F-141 F-142 F-143 F-144 F-145 F-146 F-147 F-148 F-149 F-150 F-151 F-152 F-153 F-154 F-155 F-156 F-157 F-158 F-159 F-160 F-161 F-162 F-163 F-164 F-165 F-166 F-167 F-168 F-169 F-170 F-171 F-172 F-173 F-174 F-175 F-176 F-177 F-178 F-179 F-180 F-181 F-182 F-183 F-184 F-185 F-186 F-187 F-188 F-189 F-190 F-191 F-192 F-193 F-194 F-195 F-196 F-197 F-198 F-199 F-200 F-201 F-202 F-203 F-204 F-205 F-206 F-207 F-208 F-209 ISSUER
Ageas Capital (Asia) Limited Craigmuir Chambers P.O. Box 71 Road Town, Tortola British Virgin Islands
GUARANTOR
Ageas Insurance Company (Asia) Limited 28th Floor, Wing On Centre 111 Connaught Road Central Hong Kong
FISCAL AGENT, PAYING AND TRANSFER AGENT AND REGISTRAR
BNP Paribas Securities Services, Luxembourg Branch 33, rue de Gasperich Howald - Hesperange L-2085 Luxembourg
LEGAL ADVISERS
To the Issuer and the Guarantor To the Issuer and the Guarantor as to British Virgin Islands and Bermuda law as to English law
Conyers Dill & Pearman Allen & Overy 2901 One Exchange Square 9th Floor 8 Connaught Place, Central Three Exchange Square, Central Hong Kong Hong Kong
To the Joint Lead Managers and Joint Bookrunners as to English law
Clifford Chance 28th Floor, Jardine House One Connaught Place Central Hong Kong
INDEPENDENT AUDITOR
KPMG 8th Floor, Prince’s Building 10 Chater Road Central Hong Kong IMPORTANT NOTICE
NOT FOR DISTRIBUTION TO ANY PERSON OR ADDRESS IN THE UNITED STATES
IMPORTANT: You must read the following before continuing. The following applies to the offering circular (the Offering Circular) following this page, and you are therefore advised to read this carefully before reading, accessing or making any other use of the Offering Circular. In accessing the Offering Circular, you agree to be bound by the following terms and conditions, including any modifications to them any time you receive any information from us as a result of such access.
NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN THE UNITED STATES OR ANY OTHER JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES, EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS.
THIS OFFERING CIRCULAR MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER, AND IN PARTICULAR, MAY NOT BE FORWARDED TO ANY ADDRESS IN THE UNITED STATES. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS.
Confirmation of your Representation: This Offering Circular is being sent at your request and by accepting the electronic mail and accessing this Offering Circular, you shall be deemed to have represented to us that the electronic mail address that you gave us and to which this electronic mail has been delivered is not located in the United States and that you consent to delivery of such Offering Circular by electronic transmission.
You are reminded that this Offering Circular has been delivered to you on the basis that you are a person into whose possession this Offering Circular may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorised to, deliver this Offering Circular to any other person.
The materials relating to the offering of securities to which this Offering Circular relates do not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or dealer and the managers or any affiliate of the managers is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by the underwriters or such affiliate on behalf of us in such jurisdiction.
IN ORDER TO BE ELIGIBLE TO VIEW THE ATTACHED DOCUMENT OR MAKE AN INVESTMENT DECISION WITH RESPECT TO THE SECURITIES, INVESTORS MUST BE OUTSIDE THE UNITED STATES AND COMPLY WITH THE FOLLOWING PROVISIONS. YOU HAVE BEEN SENT THE ATTACHED DOCUMENT ON THE BASIS THAT YOU HAVE CONFIRMED TO BNP PARIBAS, HONG KONG BRANCH, THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED AND STANDARD CHARTERED BANK (THE JOINT LEAD MANAGERS) THAT YOU AND ANY CUSTOMER YOU REPRESENT ARE OUTSIDE THE UNITED STATES AND, TO THE EXTENT YOU PURCHASE THE SECURITIES DESCRIBED IN THE ATTACHED DOCUMENT, YOU WILL BE DOING SO IN AN OFFSHORE TRANSACTION, AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT, IN COMPLIANCE WITH REGULATION S.
This Offering Circular has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently neither the Joint Lead Managers nor any person who controls the Joint Lead Managers, nor any director, officer, employee or agent of the Joint Lead Managers, or affiliate of any such person accepts any liability or responsibility whatsoever in respect of any difference between the Offering Circular distributed to you in electronic format and the hard copy version available to you on request from the Joint Lead Managers.
You are responsible for protecting against viruses and other destructive items. Your use of this electronic mail is at your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature.