19 June 2003, Singapore - American International Assurance Co.,Ltd ("AIA") today announced its plans for affected policyholders with the critical year feature. AIA has a continuing obligation to take care of all its policyholders and will honour the terms and obligations of its policies.

The critical year (CY) feature is appplicable to some of AIA's policies. The CY refers to the year in the life insurance policy when the policy has accumulated enough dividends so that a policyholder could enjoy full life insurance coverage therreafter without having to pay any more premiums. There is no guarantee that the CY will arrive on a fixed date from the date the policy was purchased.

The majority of sales using the critical year feature were made with the AIA Financial Guardian policy. This policy is a participating whole life policy, with premium payments required to age 88, but the policy matures at age 100. For all companies selling participating policies a par fund has to be maintained which must be invested wisely to generate reasonable rates of returns. The way the insurance companies can invest their funds has to be in line with the guidelines set out by the regulatory body. These returns are “given back” to policyholders by way of bonuses or dividends along the way, and when a yearly bonus or dividend is declared, 90 per cent of what is declared from the par fund has to be returned to the policyholders. The remaining 10 per cent would be considered the return to the insurer, which means that a company can only realize this return if a bonus or dividend is declared.

The amount of bonuses and dividends declared is dependent on the investment performance of the par fund, which is not guaranteed. The performance of the par fund again is dependent on the investment climate. The investment climate as well as interest rates had been in decline for some years. For example, the average Singapore Fixed Deposit rate had declined from 4.01 per cent in 1995 to 2.46 per cent in 1999 (source: MAS website). Bank interest rates today have gone down to below one per cent!

Unfortunately, some policyholders believed that the CY, which was simply an illustration, was guaranteed and they, therefore, need not pay any more premiums. With the slowdown in the economy, AIA fully understands the plight of some of the affected policyholders. AIA assures all affected policyholders that they have the choice to stop paying premiums when the critical year shown on their original sales illustration is reached. These policyholders will still continue to have insurance coverage, which may be reduced, even though they choose to stop paying premiums. Under such circumstances, the surrender value or the insured sum could be at a reduced amount, dependent upon dividends declared over time.

Alternatively, the affected policyholders may want to have the insurance coverage for the original Sum Assured to remain intact to continue to accumulate dividends. Under such circumstances, the policyholders may have to continue paying premiums for a number of years beyond the original sales illustration, which will be advised by AIA. The actual period will be dependent upon the dividends declared over time.

Finally, the policyholder may elect to continue paying premiums for the full duration of the policy as stipulated in the policy contract. In so doing, these policyholders will enjoy the full benefits for the Financial Guardian policy as well as the value of the dividends that will accumulate over time.

Mr Ralph J Gaudio, Senior Vice President and General Manager of AIA said, “Whichever option the policyholder chooses, the policy has value and AIA will continue to provide insurance coverage. I would like to assure all AIA policyholders that no policyholder with the critical year feature has lost any money. Besides the guaranteed cash value, the policyholder receives dividends and the value of the policy actually continues to grow. Therefore, it becomes an individual decision.

“The insurance industry is now experiencing unprecedented investment times. Even during the crash of 1997, interest rates had not gone down to today’s historic lows. This is the reason why all insurance companies have had to cut the bonuses and the critical year has to be extended. On the other hand, when the investment climate improves, the policyholders will stand to gain if they continue to pay their premiums.”

AIA is aware that many policyholders who have the critical year feature have indicated that they have no intention to give up their policies and want to continue to pay premiums as they understand the benefits of doing so. There are also those policyholders who feel they should not be required to continue paying premium after the original CY date, as shown on their original sales illustration, is reached. For any policyholder who took out a policy before May 1994 with a CY illustration, AIA has devised a range of support offers for them such as:

a)AIA will allow some of these policyholders who received agency illustrations at the relevant times to cease paying premiums while AIA will continue to offer insurance coverage equal to 100 per cent of their original Sum Assured.

b)As a gesture of goodwill, AIA will offer a compromised payment solution to those policyholders who may be affected by the way in which policies were sold by its agents at the relevant times. Even though these policyholders had company illustrations they need not pay premiums for more than several years to again enjoy 100 per cent of the original Sum Assured. In addition, AIA, as a gesture of goodwill, will offer to these affected policyholders additional accidental death benefit and SARS insurance coverage for free.

The Company will process these policies, reviewing the details of each policyholder, so it can come to a decision regarding the applicability of this gesture to the policyholder.