This commentary is about the performance of the Participating Fund,
as well as bonuses and dividends allocated to policies for the accounting
period ending 31st December 2021, which were recommended by the
Appointed Actuary and approved by the AIA Board of Directors. Annual bonuses and dividends were sent to
client policies at the policy anniversary from 1st July 2022. Terminal bonus and dividend rates, if
applicable to the policy, applied from 1st July 2022 onwards.
Key Statistics of the Participating Fund, 2021
Bonuses and dividends declared: S$548 million. Investment returns: 1.9% overall in Singapore
Dollars, 4.0% overall in US Dollars, and 0.2% overall in Australian
Dollars. Total assets as of 31st
December 2021: S$30,642 million. Total
expense ratio: 1.4%. Total benefits
paid: S$1,216 million, a substantial, ongoing return of value to policyholders
regardless of short-term market noise.
Insurance claims and expenses were in line with company expectations
in 2021, meaning the fund’s core operations performed precisely as planned,
with no unwelcome surprises weighing on results. Short-term fluctuations of non-investment
performance, of which insurance claims and expenses are key factors, are not
expected to significantly affect future bonuses.
The Year in Context
The global economy continued its spirited recovery in the first
half of 2021, driven by accommodative monetary and fiscal policies designed to
introduce financial liquidity and stability, limiting the social and financial
impact of the COVID-19 pandemic. This
was at the back of buoyant economic data as countries worked to return to
normal by dialling back border restrictions and controls. Sentiments of a complete recovery to
pre-pandemic levels moderated in the latter half of 2021 as the world grappled
with a resurgence of COVID-19 variants, leading to renewed restrictions. There were pressures on global supply chains
as demand rose while economies emerged stronger post-vaccination, and key
manufacturing locations struggled with reduced labour productivity amid
escalating input costs. As inflation
concerns flared with higher energy and raw material costs rippling through the
economy, several central banks acknowledged the scale and longevity of
inflationary pressures, and the US Federal Reserve declared its intention for
several interest rate hikes, a stark contrast to its previous policy stance.
Global equity markets continued to climb higher in 2021 on the back
of stronger economic resilience and robust corporate earnings, with the S&P
500 Index ending near record levels.
Overall, investment performance was positive in 2021, navigating uncertainty
and volatility that are likely to remain a feature of markets going forward.
Why Steady Bonuses Matter More Than a Single Year’s Return
As of 31st December 2021, the market value of total
Participating Fund assets was S$30,642 million, supporting Singapore Dollar, US
Dollar, and Australian Dollar plans, with an asset strategy tailored to the
currency of each. Unlike a pure
investment account fully exposed to whatever the market delivers in any given
twelve months, a participating policy is engineered to smooth returns across
decades, precisely so a policyholder never has to absorb the full force of a
single volatile year, or watch bonuses evaporate the moment markets
wobble. AIA tries to provide stable
returns over the life of a participating policy by adopting the smoothing
concept, spreading profits and losses across the life of clients’ plans. If Participating Fund performance is
particularly strong in one year, a portion of the earnings may be held back
specifically to maintain bonuses in years when performance is weaker,
protecting policyholders through the kind of turbulence 2021 and early 2022
delivered.
Facing 2022 with Discipline, Not Retreat
2021 was a challenging year filled with momentous events carrying
global repercussions. These headwinds
persisted into 2022, with the Russia-Ukraine conflict spiralling in the first
quarter, adding further pressure to a fragile global recovery, generating an
adverse supply shock for energy, agriculture, and fertilisers, and raising the
risk of further inflationary consequences.
AIA’s response to that environment was not retreat. It was to increase bonus rates for some
policies while holding others steady, focusing on quality assets with durable
structural growth drivers, strengthening portfolio resilience, and working to
deliver sustainable long-term investment returns across different economic
regimes.
Bonuses or dividends allocated for a policy depend on the
performance of the plan it belongs to, based on past and projected future
investment returns, and past and projected future experience, including claims,
surrenders, and expenses. Any changes to
bonus or dividend rates for a plan apply to all policies within that plan. The Participating Fund achieves
diversification across fixed income securities, listed equities, private
equities, properties and property funds, with roughly 36% of the portfolio held
in growth-oriented risk assets as of end-2021, and the majority held in
lower-risk fixed income, a deliberate balance between long-term growth and the
security policyholders signed up for.
Alignment between AIA and Its Policyholders
Based on regulatory requirements, the ratio of bonuses given to
policyholders against the maximum amount AIA shareholders can receive from the
Participating Fund is fixed at 9:1, for every S$9 given to policyholders, S$1
can be given to shareholders. This means
AIA’s own shareholders only benefit when policyholders do, giving the company a
direct, built-in incentive to manage the fund conservatively and in
policyholders’ long-term interest. Our
aim is for the long-term cost of smoothing to be broadly neutral across
generations of policy owners, ensuring fairness between clients who joined
decades ago and those joining today.
Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1%
Playbook: The Billionaire Cheat Code
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