Last checked at 24 Sep 2009 07:00
Hansard Global plc
("Hansard" or the "Group")
Full year results for the twelve months ended 30 June 2009
Hansard Global plc, the specialist long-term savings provider, today announces its results for the twelve months ended 30 June 2009.
SUMMARY
IFRS profit before tax of £20.8m (2008: £23.6m);
EEV operating profit after tax of £11.3m (2008: £47.9m);
Industry-leading new business margins of 6.1% in difficult markets;
Embedded value at 30 June 2009 of £236.6m (2008 £243.1m);
Recommended final dividend of 7.35p per share (2008: 7.0p);
Strong balance sheet with increased cash balances. Shareholder cash of £75.9m at 30 June (2008: £69.5m);
Assets under Administration down only 12% to £1.0bn (30 June 2008: £1.13bn) despite a fall of 28% in MSCI World Index over the year;
Continued investment in distribution infrastructure and Hansard OnLine;
Gordon Marr appointed as Managing Director on 1 July 2009.
Leonard Polonsky, Chief Executive of Hansard Global, commented:
"Despite the adverse market conditions experienced during the financial year, the Hansard business model continues to be robust, and we have delivered a resilient performance. IFRS profits remain buoyant, but external factors have caused some reduction in Embedded Value and in Assets under Administration.
Throughout the year the Group has continued to invest in the business and in its distribution infrastructure. We believe that this policy, together with the Group's strong balance sheet, positions us better to support the activity of financial intermediaries in our target markets and to achieve growth in volume and profitability when the environment improves.
The Group remains very strongly capitalised and has no borrowings. We have increased cash balances and, in recognition of this, the Board has recommended the payment of a final dividend of 7.35p per share, payable on 20 November 2009 to shareholders on the register on 2 October 2009. This represents a full-year dividend of 12.6p per share, an increase of 5% over the full-year dividend for 2008.
Despite continued market uncertainty and unfavourable economic indicators in the short-term, we believe that the longer-term conditions remain positive for the Group's business."
For further information
Hansard Global plc 01624 688000
Leonard Polonsky, Chief Executive
Gordon Marr, Managing Director
Vince Watkins, Chief Financial Officer
Bell Pottinger 020 7861 3232
Ben Woodford
Dan de Belder
Notes to editors:
Hansard Global plc is the holding company of the Hansard Group of companies. The Company was listed on the London Stock Exchange on 18 December 2006. The Group is a specialist long-term savings provider, based in the Isle of Man.
The Group offers a range of flexible and tax-efficient investment products within a life assurance policy wrapper, designed to appeal to affluent, international investors.
The Group operates a low-cost distribution model by selling policies exclusively through a network of financial services intermediaries, independent financial advisers and the retail operations of certain financial institutions (collectively "Intermediaries"), who provide access to their clients in more than 170 countries. The Group's distribution model is supported by an award-winning, multi-language internet platform, and is scaleable.
The principal geographic markets in which the Group currently services Intermediaries and policyholders are the Far East, the Middle East, and Latin America in the case of Hansard International Limited, and Western Europe in the case of Hansard Europe Limited, the Group's two life assurance companies.
The Group's objective is to grow its business by attracting new business and positioning itself to adapt rapidly to market trends and conditions. The scaleability and flexibility of the Group's operations allow it to enter or develop new geographic markets and exploit growth opportunities within existing markets without the need for significant further investment.
Forward-looking statements:
This announcement may contain certain forward-looking statements with respect to certain of Hansard Global plc's plans and its current goals and expectations relating to future financial condition, performance and results. By their nature forward-looking statements involve risk and uncertainties because they relate to future events and circumstances which are beyond Hansard Global plc's control. As a result, Hansard Global plc's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in Hansard Global plc's forward-looking statements. Hansard Global plc does not undertake to update forward-looking statements contained in this announcement or any other forward-looking statement it may make. No statement in this announcement is intended to be a profit forecast or be relied upon as a guide for future performance.
Chairman's Statement
I am pleased to present the Annual Report of Hansard Global plc for the financial year ended 30 June 2009. It has been an extremely challenging year, which has seen every participant in the financial services sector, and almost everyone around the world, affected by the global credit crisis. The global economic landscape has changed almost beyond recognition in the year since I delivered my Chairman's statement in the Group's Report & Accounts for the year ended 30 June 2008. You will be pleased to hear that the Hansard business model remains robust in these turbulent market conditions, and we have delivered a resilient performance across the business.
Despite the adverse conditions, the Group has continued to invest in the business and in its distribution infrastructure. We
believe that this policy positions us better to support the activities of financial Intermediaries in our target markets.
The Group remains very strongly capitalised. We have increasing cash balances and no borrowings. Turbulent external factors of a global nature since 30 June 2008 have, nevertheless, combined to cause some reductions in embedded value and in Assets under Administration.
Financial performance
The financial results are presented in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"). Additionally, certain information relating to embedded value is presented using the European Embedded Value ("EEV") methodology. The EEV Information, read in conjunction with the other financial information produced by the Group, is more meaningful than the information presented under IFRS alone in relation to the financial performance of the Group, year on year.
Despite the impacts of the credit crisis and other factors causing uncertainty among intermediaries and investors, I am pleased to report that a strong underlying profit performance has continued. Reductions in the Group's asset-based income streams following declines in global market values have contributed to a reduction in the IFRS profit before tax for the year to £20.8 million (US$34m), compared with the profit of £23.6m earned in the previous financial year. Earnings per share for the year are 14.7p (US 24.3 cents), compared with 17.0p (US 28c).
Following the payment of dividends totaling £16.8m during the year, the EEV of the Group is £236.6m (US$391m), (2008: £243.1m US$ 401m). EEV operating profit after tax was £11.3m (US$19m), (2008: £47.9m US$ 79m).
The comparison with the previous year is distorted by a surplus of £15.7m from model changes in that year and reduced new business flows in the current year.
Dividends
Ordinary dividends totaling 12.25p per share (£16.8m US$ 27.7m) have been paid to shareholders during the year. This represents an increase of 11.3% over the ordinary dividends of 11p per share paid during the previous financial year. These dividends are fully covered by operating cash-flows in the financial year. In accordance with the Board's stated dividend policy, the Company intends to pay dividends of at least 70% of the IFRS consolidated profit after tax for each financial year.
The Board has resolved to pay a final dividend of 7.35 p per share on 20 November 2009 subject to approval at the Annual General Meeting. If approved, this will represent an increase of 5% over the final dividend of 7p per share paid in November 2008.
New business
The new business performance of the Group for the year is in line with our expectations, with new business levels reflecting continuing tough market conditions. As expected, lower volumes have an exaggerated effect on new business metrics, but we believe that this will reverse when volumes recover.
Against the backdrop of volatile market conditions and global economic concerns affecting investor confidence, new business for the year is approximately 32% below the levels of the previous financial year. Initiatives continue to further develop intermediary relationships in our target markets. Hansard OnLine, which has been used by intermediaries for over ten years, continues to be developed to meet their needs and those of their clients.
At 6.1% on the Present Value of New Business Premiums ("PVNBP") basis, new business margins remain well above industry average, principally owing to our efficient operating model and our focus on the value of new business and the maintenance of margins. Reduced new business volumes and continued investment in distribution infrastructure have contributed to a narrowing of margins from those enjoyed in prior years (2008: 7.8%).
Assets under Administration
Retention of policyholders' Assets under Administration ("AUA") remains strong. Despite the significant declines in global capital markets over the year ended 30 June 2009, the value of AUA at that date, at £1.0 billion (US$1.65bn), has declined only 12%
since 30 June 2008, compared with a fall of 28% in the MSCI World Index over that period and a 21% decline in the FTSE All-Share index.
Directorate changes
With effect from 1 July 2009 Gordon Marr has been appointed as Managing Director of Hansard Global plc. I congratulate Gordon on his appointment. With a background of 20 years with the Group in senior positions, Gordon is the natural person to fill this new role and will be working closely with me in continuing to drive the strategic direction of the business. Robert Hall retired from his position as a director with effect from 30 June 2009. I thank Robert for his work over 14 years, particularly for his valued judgment during this time, and wish him a happy and fulfilling retirement.
Employees
The progress that we have made, despite the impacts of the credit crisis, is a reflection of the skill and enthusiasm of our employees, who have all agreed to participate in initiatives to reduce the Group's expense base. On behalf of the Board and shareholders I thank them all for their continued commitment to the success of Hansard.
I am pleased to record that your Board has developed a Long-term Incentive Plan, designed to align the interests of employees with those of shareholders and to enable employees to participate further in the success of the Group. The plan will be presented for consideration at the Annual General Meeting on 19 November 2009. I believe that this plan deserves the support of all shareholders.
Significant shareholdings
I continue to have the largest shareholding in the Company, approximately 42% of the issued capital. The Polonsky Foundation, a UK registered charity, holds a further 5.2%. The Company has a free float of approximately 47% of the issued capital.
Details of other significant shareholdings are contained within the Directors' Report. We are very pleased with the range and quality of institutional shareholders that have chosen to invest in us and grateful for the long-term loyalty of individual shareholders.
Outlook
Despite continued stock market uncertainty and unfavourable economic indicators in the short-term, we believe that the longer-term social and demographic conditions remain positive for the Group's business.
Hansard receives business from a well-diversified range of intermediaries around the world. Continued investment in these relationships and our proposition, together with the Group's robust balance sheet, mean that Hansard has the strength to continue to withstand current market conditions and is well positioned for growth in volume and profitability when the environment improves.
Dr Leonard Polonsky
23 September 2009
Business Review
Business
The Group is a specialist long-term savings provider that has been based in the Isle of Man since 1987 and has operated in the Republic of Ireland since 1995. It offers a range of flexible, tax-efficient investment products within life assurance policy wrappers, developed to appeal to affluent international investors.
The Group has designed its products, distribution methods and cost base with a view to reducing operational and financial risks. An Enterprise-wide Risk Management ("ERM") programme has been implemented to identify, assess and manage risks.
The Company's principal office is in Douglas, Isle of Man, and its principal subsidiaries operate from the Isle of Man, and Dublin, Republic of Ireland. During the year, Hansard International Limited, the regulated life assurer based in the Isle of Man, established a branch in Labuan as part of the Group's strategy to expand and diversify its business in the Far East region. This further positions the Group as a leading provider of investment solutions to intermediaries.
The Group's location on the Isle of Man allows it freedom to flourish within a highly-regarded regulatory framework, with a zero rate of corporation tax, and with access to an educated workforce and a robust telecommunications infrastructure. The Policyholder Protection legislation enacted by the Isle of Man Government provides security of up to 90% of the liability to policyholders.
Uncertainties over the status of the Isle of Man as an "Offshore Tax Haven" have been clarified by the Organisation for Economic Co-operation and Development ("OECD"). The Island's inclusion on the OECD "white list" of countries complying with the global standard for tax co-operation and exchange of information represents an endorsement of the Isle of Man Government and its long-term regulatory strategy, and presents further opportunities for the Group.
Hansard Europe Limited, a regulated life assurer based in Dublin, allows the Group's products access to the European Union marketplace under the "freedom of services" provisions of the EU Life Directives.
Products
The Group's products are unit-linked investment contracts, issued by Hansard International and Hansard Europe. The life assurance policy, or wrapper, is a tax-efficient method of offering policyholders exposure to a wide range of investment opportunities whose returns are linked to the return on specified assets that suit their individual risk appetite. Policyholders bear the investment risk arising from the contracts as the policy benefits are directly linked to the value of the assets. The Group does not offer investment advice.
These contracts are distributed utilising the Group's low-cost distribution model exclusively through financial services intermediaries, independent financial advisers or the retail operations of financial institutions (together, ''Intermediaries''), supported by our award winning, multi-language internet platform, Hansard OnLine. The Group has established a network of Account Executives providing local language and other support services to Intermediaries in a number of areas around the world.
The Group's products can be configured in a large number of different combinations to provide bespoke solutions for specific Intermediary and policyholder requirements. In addition, they can also be presented as branded products of a specific Intermediary, underwritten by the relevant Group life assurance company.
The Group's products do not include any policies with material options and/or guarantees regarding investment performance and, hence, unlike the situation faced by many other life assurers, the Group carries no guarantee risk that can cause capital strain.
The margins on, and the capital efficiency of, the Group's products mean the Group's operations are profitable and cash generative.
Despite global economic conditions, the Group has retained its focus on profitability. While new business margins on the basis of the Present Value of New Business Premiums ("PVNBP") have narrowed to approximately 6.1% from 7.8% at 30 June 2008, largely as a result of reduced business volumes and continued investment in distribution infrastructure, they remain well above the industry average. The average Internal Rate of Return on new business written during the year is in excess of 15% per annum, and capital invested in a product is typically returned within 3 years. These returns are significantly ahead of those of competitor products.
The nature of the Group's products, the functionality of Hansard OnLine and the ability of the policyholder to reposition assets within a portfolio contribute to the persistency of assets under administration.
Despite the significant declines in global capital markets over the year ended 30 June 2009, the value of assets under administration at that date, at £1.0 bn, has fallen by only 12% since 30 June 2008, compared with a decline of 28% in the MSCI World Index over that period and a 21% decline in the FTSE All-Share Index.
Workforce
The senior management team, collectively, has an aggregate of approximately 200 years' experience in the long-term savings and life assurance industry, including some 150 years within the Group.
The Group has a dedicated dynamic workforce in the Isle of Man, the Republic of Ireland and other locations. The Group has a commitment to service and quality at the highest level in relation to the development of successful products, administration, distribution mechanisms and Hansard OnLine.
During the year the Group introduced a number of cost-saving initiatives, incorporating agreements from the senior management team to a salary reduction and to a waiver of pension contributions across the Group's workforce. This waiver will be reviewed in June 2010 or as market conditions allow.
Incentive plans have been implemented to align employee rewards with shareholder interest. Additionally, a proposal will be placed before the company's shareholders at the Annual General Meeting in November 2009 to consider the implementation of a Long-term Incentive Plan.
Hansard OnLine
The Group's award-winning internet platform, Hansard OnLine, is pivotal to the success of the Group's business. It has been used by Intermediaries for over ten years, allowing them access to real-time information relating to the investments of policyholders whom they have introduced to the Group, and providing them with a valuable sales and administration tool.
Hansard OnLine is continually developed to meet the needs of Intermediaries, policyholders and the Group. A Secure Upload facility has recently been introduced to allow intermediaries to upload business process related documents directly to Head Office, considerably reducing the time and cost of processing instructions. Through reductions in printing, postage and communication costs the use of Hansard OnLine also reduces the Group's cost base.
Within Hansard OnLine, the Group has developed a range of functionality that allows intermediaries to provide their clients with real-time access to information relating to their investments through Client sites hosted by the Group, often in the policyholder's preferred language. Approximately 11,000 policyholders utilise this functionality. During the year policyholders were provided with access to information in nine languages. Client sites are available in the majority of languages preferred by the Group's policyholders. These languages are English, Dutch, French, Mandarin, Norwegian, Swedish, Spanish, Portuguese, and Japanese.
Capitalisation and solvency
The Group is well capitalised, with capital in excess of 16 times its aggregate minimum solvency requirements as at 30 June 2009. The solvency position is well insulated against the difficult investment markets, with the excess capital resources being invested in a wide-range of deposit institutions and in highly-rated money market liquidity funds. The in-force portfolio has no investment options or guarantees that could cause capital strain.
Solvency II
The first stage of the Solvency II project, the legislative exercise which will ultimately determine the level of economic capital required by any EU-based insurer to support its activities, reached a conclusion in May 2009, with the "Level 1 Framework Directive" formally adopted by the European Parliament. Full implementation of Solvency II will be required in October 2012.
The Group participates actively in the Quantitative Impact Studies relating to Solvency II. Based on the Studies and the draft legislation the Group will not be required to hold economic capital in addition to existing levels.
Dividend policy
The Directors intend that the Company will pay dividends of at least 70% of the Group's IFRS profit after tax for each financial year.
Strategy
The Group continues to operate its existing business model, which is designed to reduce operational and financial risk, and to grow its business through:
developing and enhancing Intermediary relationships;
developing profitable relationships with financial institutions and other wealth management groups;
increasing the functionality of Hansard OnLine to continue to meet the needs of Intermediaries and policyholders, and
increasing the number of Account Executives to 25 by December 2012.
Key Performance Indicators
The Group has established a range of Key Performance Indicators ("KPIs"), both financial and non-financial, that are designed to ensure that performance against targets and expectations is monitored and variances explained.
Cash and cash equivalents - Bank balances and significant movements on balances are reported weekly. The Group's liquid funds at the balance sheet date were £76.1m, an increase of £6.5m or 9.3% from the balances at 30 June 2008, despite the payment of £16.8m in dividends during the year. This illustrates the cash generative capacity of the Group.
Expenses - The Group maintains rigorous focus on expense levels. The objective is to restrain increases in Administrative expenses to the rates of inflation incurred across the Group. The increase in expenses over the previous year reflects additional investment in staff and infrastructure to improve customer service in the context of the significant growth in our book of business over the past 3 years. Significant systems development work is planned over the next 18 months to further streamline our processes and to ensure we continue to meet our strategic expense management targets.
New Business - The Group has developed a measure of calculating new business production, called Compensation Credit ("CC"), which is designed to indicate the relative value of each piece of new business. Growth of new business during the year has been restrained by extreme global economic circumstances. As is outlined elsewhere in this review, new business flows were approximately 32% less than in the previous year on this measure. The Group's objective is to grow new business at a rate of 10% - 15% per annum over the medium term.
Risk profile - The factors impacting on the Group's risk profile are kept under continual review. During the year the Group continued to monitor and develop its Enterprise-wide Risk Management programme and implemented a process to enable Group companies to apply a consistent rating to all principal risks and to report movements to the holding company.
Business continuity - Maintenance of continual access to data via Hansard Online is critical to the Group's operations and this has been ensured through a robust infrastructure with inbuilt surplus. The Group is pro-active in its consideration of threats to data, data security and data integrity. Business continuity testing is carried out regularly by internal and external parties.
Risks relating to the Group
The Board believes that the principal risks facing the Group are those relating to the operation of the Group's business model and to the environment within which the Group operates. An Enterprise-wide Risk Management programme is in place to identify, assess and manage the significant risks faced by the Group, details of which are included in this report.
Financial performance
Despite the impact of severe economic conditions on asset values, new business volumes and policyholders' investment risk appetite, the Group's business model has delivered robust results in the financial year ended 30 June 2009.
Financial results are presented under International Financial Reporting Standards as adopted by the European Union ("IFRS"). Additionally, certain information relating to embedded value is presented using the European Embedded Value ("EEV") methodology. The Board believes that publishing EEV Information in conjunction with IFRS results provides more meaningful information on the financial position and performance of the Group than that provided by IFRS reporting alone. A comparison of EEV results to those of the prior year is, however, significantly distorted by market conditions that have had an exaggerated effect on new business metrics.
Strong positive cashflows generated from the existing book of business have funded new business production and the payment of dividends during the year.
While global economic conditions have contributed to a reduction in the Group's asset-based income streams, the Group's income from servicing investment contracts remains resilient. Continued investment in the Group's distribution infrastructure and in its online platform has been maintained, while initiatives have been taken to constrain expenditure on administrative activity. The Group is confident that its business model and prospects remain strong and expects continued profitability in the future.
The following commentary sets out to provide additional information to that disclosed within the other sections of this report.
Results for the year under IFRS
The profit for the year before tax is £20.8m, compared with a profit before tax for the prior year of £23.6m. Earnings per share are 14.7p (2008: 17.0p).
The profit reflects increased income streams from contracts under administration, offset by reductions in asset-based income. Investment income and revaluation gains on holdings of Euro deposits reflected within investment income have reduced significantly from the previous year, as a result of market conditions.
In recognition of the continued decline in investor confidence and the impact on new business levels, the Group implemented initiatives during the year to reduce administrative and other expenses while continuing to invest in distribution infrastructure.
Abridged consolidated income statement
The Consolidated income statement under IFRS reflects the financial results of the Group's activities during the year. This income statement however, as a result of its method of presentation, incorporates a number of features that distort the understanding of the results of the Group's underlying transactions. This relates principally to:
Investment income relating to the assets administered by the Group to back its liability to policyholders. These assets are generally selected by the policyholder or an authorised intermediary and the policyholder is entitled to the gains and bears the investment risk. The income statement also incorporates the transfer of those benefits to the policyholder. Investment losses during the year attributable to policyholder assets were £146.6m (2008: gains £2.5m).
Fund management fees paid by the Group to third parties having a relationship with the underlying contract. While this expenditure is properly recorded in the Group's income statement under IFRS, it distorts results compared with an understanding of the Group's own entitlement to fund management fees and any requirement to pay such fees for services rendered in respect of the Group's own assets. In the current year fund management fees attributable to policyholder assets was £3.9m (2008: £3.7m).
An abridged consolidated income statement is presented below, excluding the items indicated above. While this abridged presentation is not presented under IFRS, the Board is content that this table is an appropriate, alternative, representation of the Group's income and expenditure during the year.
Abridged consolidated income statement
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| Fees and commissions | 47.5 | 49.6 |
| Investment income attributable to the Group | 6.0 | 7.4 |
| Other operating income | 0.7 | 0.5 |
| 54.2 | 57.5 | |
| Origination costs | (16.4) | (18.1) |
| Administrative and other expenses attributable to the Group | (17.0) | (15.8) |
| Profit for the year before taxation | 20.8 | 23.6 |
Fees and commissions
Fees and commissions for the year under IFRS are £51.4m, compared with the prior year of £53.3m.
A summary of fees and commissions is set out below:
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| Contract fee income | 35.6 | 35.4 |
| Fund management fees | 12.4 | 13.0 |
| Commissions receivable | 3.4 | 4.9 |
| Fees and commissions in consolidated income statement | 51.4 | 53.3 |
| Less: Fund management fees paid to third parties and | ||
| recovered from contracts | 3.9 | 3.7 |
| Fees and commissions attributable to Group activities | 47.5 | 49.6 |
Contract fee income of £35.6m has increased marginally over the level of £35.4m received in the previous financial year. This reflects the strength of the existing book of business. The amount of fixed policy servicing fees and transactional charges totalling £13.5m reflected within contract fee income has increased by approximately £2.5m over the previous year, which has helped to offset the effect of the reduction in asset-based fee streams flowing from declines in the value of assets under administration since 30 June 2008.
Fund management fees charged by the Group, net of amounts totalling £3.9m paid to third parties, totalled £8.5m. This is a reduction of 8.6% from the prior year as a result of reduced levels of assets under administration.
Commissions receivable, totalling £3.4m, have fallen by £1.5m compared with the previous year. This reflects not only the decline in asset values experienced in the early part of the financial year, but also the impact of policyholder investment activity. The ability of the policyholder to reposition assets within a portfolio to manage investment risk resulted in a reduced allocation during the year to equity-based structures and an increase in exposure to cash, deposits and bond structures, from which the Group receives proportionally less commission from fund houses.
Investment income attributable to the Group
Investment income attributable to the Group during the year totalled £6.0m, compared with £7.4m in the previous year. An analysis of this is set out below:
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| Income from investments | 4.3 | 5.1 |
| Realised and unrealised gains/(losses)on Group holdings | 0.9 | (0.2) |
| Foreign exchange gains on revaluation of net operating assets | 0.8 | 2.5 |
| 6.0 | 7.4 |
Interest income on the Group's increasing capital balances has been restrained by the reductions in bank interest rates experienced from October 2008. Those reductions did, however, provide a positive impact on the valuation of the UK Treasury Stock held by a subsidiary company and which was sold during the year, generating a realised gain of £0.9m. Investment income for the year includes foreign exchange gains totalling £0.8m on foreign currency assets and liabilities held by the Group, principally contract fees receivable and Euro balances held by Hansard Europe to support regulatory capital requirements. The reduction from the prior year is as a result of the translation of a significant proportion of Euro deposits to Sterling in the year, eliminating some of our exposure to foreign currency rate fluctuations.
Expenses
Expenses for the year reflect continued investment in the Group's distribution infrastructure and in its online platform, and management's commitment to maintain desired service levels to intermediaries and policyholders.
Total origination, administrative and other expenses reflected within the abridged consolidated income statement for the year are £33.4m, a decrease of 1.4% over the level of those expenses incurred in the previous financial year.
Set out below is a summary of expense performance during the year:
i) Origination costs
Origination costs are the cost to the Group of maintaining the infrastructure to acquire and support new business activities. New business commissions, together with the directly attributable incremental costs incurred on the issue of a policy, are deferred and amortised over the life of the relevant contract. Other elements of the Group's new business costs are fixed in nature and are expensed as incurred.
The life of a typical single premium contract is 15 years. The life of a regular premium contract is deemed to be the term of the individual policy. Typical terms range between 10 years and 25 years.
Origination costs incurred in new business activities in the year are:
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| Origination costs - deferred | 15.5 | 23.0 |
| Origination costs - expensed as incurred | 2.5 | 3.0 |
| Origination costs incurred | 18.0 | 26.0 |
| Net amortisation of deferred origination costs | (1.6) | (7.9) |
| Origination costs | 16.4 | 18.1 |
New business commissions, having reduced by approximately 33% from last year, are largely as expected having regard the Group's new business performance. Origination costs expensed as incurred include £0.4m representing an investment in the Group's distribution infrastructure, particularly to support the Labuan operation established by Hansard International during the year.
ii) Administrative and other expenses
A summary of administrative and other expenses attributable to the Group for the year is set out below:
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| Employee costs | 9.3 | 8.6 |
| Investment management fees | 3.9 | 3.7 |
| Other expenses and professional fees | 7.7 | 7.2 |
| IFRS Administrative and other expenses | 20.9 | 19.5 |
| Less: Investment management fees paid to third parties | (3.9) | (3.7) |
| Administrative and other expenses attributable to Group activities | 17 | 15.8 |
The increase in employee costs is as a result of a full year's costs arising from recruitment during the 2008 financial year of a number of actuarial, product development and technical development personnel. Average administrative and other headcount during the year was 191 (2008: 182).
During the year the Group implemented initiatives to reduce targeted costs by approximately £1m by 30 June 2010. These initiatives related primarily to a freeze on administrative and other headcount, salary reductions agreed by a number of senior management with effect from 1 February 2009 and to a waiver of pension contributions across the Group's workforce for the period from 1 March 2009 to 30 June 2010, or as market conditions allow. The Group believes it is on track to achieve the target reduction over the period. In addition, there has been no general pay increase to employees at 1 July 2009.
At 30 June 2009, administrative and other headcount is 184 compared with 203 at 30 June 2008.
Incentive plans have been implemented with effect from 1 July 2009 to align employee rewards with shareholder interest. An equity-based Long-Term Incentive Plan has been developed and is proposed for consideration at the Annual General Meeting to be held in November 2009. The cost of these incentive plans is not expected to exceed 5% of IFRS profits for the year ending 30 June 2010.
Abridged consolidated balance sheet
The Consolidated balance sheet under IFRS reflects the financial position of the Group at 30 June 2009. As a result of its method of presentation, the balance sheet incorporates the financial assets held to back Group's liability to policyholders, and incorporates the liability to policyholders of £1.0bn (2008: £1.1bn).
The abridged consolidated balance sheet presented below, excluding those assets and liabilities allows a better understanding of the Group's own capital position:
| As at 30 June | 2009 | 2008 |
| £m | £m | |
| Assets | ||
| Deferred origination costs | 104.1 | 102.5 |
| Other assets | 11.6 | 13.9 |
| Cash and cash equivalents | 75.9 | 69.5 |
| 191.6 | 185.9 | |
| Liabilities | ||
| Deferred income reserve | 125.2 | 116.5 |
| Other payables | 10.7 | 17.0 |
| 135.9 | 133.5 | |
| 55.7 | 52.4 | |
| Shareholders' equity | ||
| Share capital and reserves | 55.7 | 52.4 |
Deferred origination costs
Deferred origination costs represent the unamortised balance of accumulated origination costs. These costs are recoverable out of future net income from the relevant contract and are charged to the income statement on a straight-line basis over the life of each contract.
The increase in value since 30 June 2008 reflects the continued acquisition of profitable contracts, net of amounts amortised.
Deferred income reserve
Deferred income reserve represents the unamortised balance of accumulated, initial amounts received on new business, which exceeds the level of expected annual fees for that contract. These amounts are released to the income statement on a straight-line basis over the life of each contract. This ensures that fees are taken to the consolidated income statement in equal instalments, reflecting the services provided over the period.
The increase in value since 30 June 2008 reflects the persistency of new business written in the last two years.
Cash and cash equivalents
The Group's cash and cash equivalent balances, excluding those held to cover liabilities under investment contracts, at 30 June 2009 stood at £75.9m. This is an increase of £6.4m from the value of £69.5m reported at 30 June 2008, despite dividends of £16.8m paid during the year. This further reflects the Group's continued cash generative capability.
The Group's liquid assets at the balance sheet date are held with a wide range of deposit institutions and in highly-rated money market liquidity funds. The Group had no borrowings during the year or at the year end (30 June 2008: £Nil).
Cash flows
Operating cash flows in the year were strongly positive, allowing the Group to fund new business from its own resources and pay dividends of £16.8m.
The following summarises the Group's own cash flows, net of investment dealing, in the year:
Abridged consolidated cash flow statement
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| Net cash inflow | 20.0 | 14.6 |
| Foreign exchange differences | 0.8 | 2.2 |
| Interest on investments | 4.2 | 4.8 |
| Cash inflow | 25.0 | 21.6 |
| Purchase of plant and equipment | (0.7) | (0.6) |
| Corporation tax paid | (1.1) | - |
| Dividends paid | (16.8) | (22.0) |
| Cash outflow | (18.6) | (22.6) |
| Net cash inflow / (outflow) | 6.4 | (1.0) |
Dividends
The following dividends have been paid during the year. Ordinary dividends have been funded by operating cash flows in the financial year.
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| Final ordinary dividend paid 27 November | ||
| 2008 (7p per share) (2008: 6p per share) | 9.6 | 8.2 |
| Interim ordinary dividend paid 1 April 2009 | ||
| (5.25p per share) (2008: 5p per share) | 7.2 | 6.9 |
| Special dividend paid 23 November 2007 | ||
| (5p per share) | - | 6.9 |
| 16.8 | 22.0 |
In accordance with the Board's stated dividend policy, the Company intends to pay dividends of at least 70% of the IFRS profit after tax for each financial year.
Results for the year under EEV
EEV PROFIT
EEV operating profit for the year reflects that the Group has continued to write profitable new business, despite market conditions that have caused reduced sales volumes. Existing business continues to generate strong positive cash flows, even though a number of policyholders have changed their behaviour as a result of those market conditions. Management has responded to this by making more cautious assumptions about certain future cash flows. EEV operating profit after tax is £11.3m (2008: £47.9m).
Difficult market conditions have led to lower levels of new business, with the value added from new business of £10.1m being approximately half of last year's level (2008: £20.3m). While the Group has consistently maintained its target returns on new business written, reduced volumes and continued investment in distribution infrastructure have, in part, led to a reduced level of new business contribution during the year.
In addition, the recessionary conditions experienced over the year have led to a 6% reduction in regular premium levels, together with increased numbers of policies becoming paid-up. We anticipate a continuation of this situation for a number of years and have recognised this by revising assumptions accordingly. This has reduced EEV operating profit by £7.8m.
When comparing EEV operating profit year-on-year, note that the profit for 2008 included a one-off benefit of £15.7m from the introduction of wide-scale modelling enhancements.
Extreme market conditions during the year caused declines in market values of policyholder assets under administration, leading to a reduction of £25.2m (2008: £12.7m loss) in EEV profit through lower than expected levels of fund-based income. The Group's diversified exposure to different currencies together with a general weakening of Sterling over the year has led to a profit of £24.9m (2008: £11.4m profit). In aggregate, investment conditions together with economic assumption changes have reduced EEV profit by £1.0m (2008: £0.8m loss).
EEV profit after tax is £10.3m (2008: £47.1m), a return on EEV of 4.2% (2008: 21.6%).
The components of EEV profit after tax are set out in the table below:
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| New business contribution | 10.1 | 20.3 |
| Expected return on existing business | 9.7 | 9.4 |
| Experience variances | (5.3) | (3.1) |
| Operating assumption changes | (8.0) | 2.8 |
| Expected return on net worth | 2.8 | 2.8 |
| Model changes | 2.0 | 15.7 |
| EEV operating profit after tax | 11.3 | 47.9 |
| Investment return variances | (2.1) | (0.2) |
| Economic assumption changes | 1.1 | (0.6) |
| EEV profit after tax | 10.3 | 47.1 |
Additional analysis of EEV profit is contained within the EEV Information.
EEV BALANCE SHEET
Following the payment of dividends totalling £16.8m, the Group's EEV has fallen by £6.5m to £236.6m (2008: £243.1m).
The table below provides a summarised breakdown of the EEV at the reporting dates:
| As at 30 June | 2009 | 2008 |
| £m | £m | |
| Net worth | 68.2 | 56.9 |
| Value of future profits | 168.4 | 186.2 |
| EEV | 236.6 | 243.1 |
Net worth is the market value of shareholders' funds, determined on an IFRS basis, adjusted to exclude certain assets such as deferred origination costs and liabilities such as deferred income reserve. The increase in net worth reflects the continued generation of cash flows from the existing book of business. At the balance sheet date the net worth of the Group is represented by liquid cash balances.
In extreme market conditions, the Group's embedded value has proved resilient. As market volatility may persist for some time, attention is drawn to the sensitivity of the Group's EEV to various factors as set out on within the EEV Information.
NEW BUSINESS MARGIN
Despite market conditions, the Group has retained its focus on profitability. The new business margin for the year, being the contribution from new business expressed as a percentage of PVNBP, is 6.1%, down from 7.8% last year. The reduction in the margin is due to significantly reduced new business flows, continued investment in the Group's distribution infrastructure to improve its sales proposition, and intermediary incentive arrangements. Even at this historically low level, the margin remains well above the industry average.
A proportion of the Group's cost base is relatively fixed in nature, so this year's fall in sales, together with the abovementioned investment in its distribution infrastructure, has contributed to an acquisition expense overrun of £2.8m in the year. This has reduced the contribution from new business and hence the new business margin.
Conversely, the Group is positioned to support at least a 50% growth in sales back to last year's level (2008 PVNBP: £261.8m) without a correspondingly large increase in acquisition expenses.
A return to last year's level of sales would be expected to eliminate the acquisition expense overrun, deliver a contribution from new business of £20m and a new business margin of 7.6%, similar to the new business margin earned in the previous financial year.
NET ASSET VALUE
The net asset value per share ("NAV") at 30 June 2009, on the basis of IFRS, is 40.6p. This represents an increase of 6.3% from the NAV of 38.2p at 30 June 2008, reflecting the continued growth in the Group's capital base, despite payment of 12.25p per share (or £16.8m) in dividends during the year. The NAV is based upon the consolidated shareholders' equity at the balance sheet date divided by the number of shares in issue at that date, being 137,281,202 ordinary shares.
On the EEV basis, the NAV at 30 June 2009 is 172.3p compared with 177.1p at 30 June 2008.
CAPITALISATION AND SOLVENCY
The Group continues to be very strongly capitalised to satisfy operational, regulatory and policyholder expectations. The Group had no borrowings at the balance sheet date (2008: £nil), nor at any time during the year.
At the balance sheet date the Group's capital position in relation to the regulatory requirements of subsidiary companies is as set out below:
| | 2009 | 2008 |
| | £m | £m |
| Shareholder cash and cash equivalents | 75.9 | 56.6 |
| UK Government Stock (disclosed in financial investments) | - | 12.9 |
| Other | (0.9) | 2.4 |
| Total capital available to meet regulatory capital requirements | 75.0 | 71.9 |
| Aggregate minimum regulatory margin | 4.6 | 4.4 |
| Capital coverage of minimum regulatory margin | 16.3 times | 16.3 times |
The increase in the aggregate minimum regulatory margin is largely as a result of the strengthening of the Euro against Sterling during the year and the increase in the statutory requirement in the EU that will take effect in December 2009.
During the year the Company's regulated subsidiaries conducted a rigorous assessment of their economic capital needs using guidelines developed for Solvency II (proposed EU legislation which places importance on effective internal governance and risk management practices) and other techniques. As a result of that exercise the extent of "excess" capital held under various scenarios was identified and dividends totalling £30m were paid to the Company in June 2009.
POLICYHOLDER ASSETS UNDER ADMINISTRATION
In the following paragraphs, Assets under Administration ("AUA") refers to net assets held to cover financial liabilities as analysed in note 16 to the consolidated financial statements under IFRS.
Despite market conditions, the Group has retained net positive cash flows from the large number of regular premium contracts that the Group administers on behalf of policyholders around the world.
Positive net cash flows into investment contracts throughout the financial year have underpinned AUA, while the ability of policyholders to rotate assets held within those contracts has maintained the consistent level of AUA. This contrasts favourably with the levels of withdrawals experienced by a number of retail funds over the course of the year and further emphasises the strength of the life insurance wrapper.
We continue to monitor the impact of the global credit crisis on assets selected by policyholders. While a significant number of fund structures have suspended redemptions or are restructuring to counter illiquidity, the value of AUA has not been materially affected. Write-downs of such assets totalling £44m are included within "investment contract benefits" in note 16 to reflect the reductions in value in the year.
Under the terms of the unit-linked contracts issued by the Group, the policyholder bears the financial risk attaching to assets to which the contracts are linked. Any continued reductions in AUA will cause declines in the Group's future asset-based income streams but will not affect the Group's capital position.
NEW BUSINESS
New business sales volumes are expressed in terms of the Group's internal metric, Compensation Credit ("CC"), and two bases generally made available to the market, Present Value of New Business Premiums ("PVNBP") and Annualised Premium Equivalent ("APE"). CC is the Group's prime indication of new business activity and is a proxy for new business contribution under the PVNBP basis. CC is an appropriate measure of new business that indicates the relative value of each piece of new business to allow the Group to monitor acceptability of margins and protect capital, and it is a measure aligned to the interests of the intermediaries that provide business to the Group. PVNBP is an appropriate measure of value of new business flows. APE, by comparison, is an indication of the volume of new business flows, not value.
NEW BUSINESS PERFORMANCE DURING THE YEAR
Against the backdrop of volatile market conditions and global economic concerns affecting investor confidence, new business for the year is approximately 32% below the level of the previous financial year measured on the Group's primary metric, Compensation Credit. In common with industry peers, market conditions continued to restrain new business flows during the year. The reported value of new business premiums and new business margins have also been impacted by changes in EEV assumptions concerning policyholder behaviour experienced during the year.
Despite the impact of the global credit crisis on investor confidence, the Group has achieved solid new business flows throughout the year, benefitting from the geographical spread of the intermediaries with whom we deal, and the diversity of their client base.
The Group continues to generate the majority of its new business cases from Latin America and the Far East. These are predominantly Regular Premium policies. Regular premium products accounted for 53.6% (2008: 54.9%) of the Group's APE in the year, underpinning profitability of new business.
However, the severe economic conditions prevailing during the year led to a reduction in single premium flows, particularly from Europe and Scandinavia. Despite this, initiatives to further develop intermediary relationships in each of those areas were successful and we are confident that further growth in those markets, particularly Benelux, Germany, Italy and Scandinavia is achievable when markets stabilize.
In the last two months of the financial year the Group issued new business totalling £1.9m CC (£34m PVNBP; £4.1m APE), including two particular contracts with combined single premiums totalling approximately €16m (£13.75m). This illustrates both the continuing level of interest in Hansard's products among intermediaries and their clients, as well as the sensitivity of the Group's results to very large single premium cases. (The reported flows for the year ended 30 June 2008 include the effect of a contract issued in June 2008 that accounted for £21.7m PVNBP (or 8% of total PVNBP in that financial year), or £2.2m APE).
Recruitment and other activity continues to provide new distribution capability for the Group in new markets, strengthen existing relationships and expand the range of investment opportunities for policyholders.
New business flows for the year ended 30 June 2009 are summarised as follows (comparisons on actual currency basis).
| 2009 | 2008 | % | |
| Basis | £m | £m | change |
| Compensation Credit | 11.6 | 17.0 | (31.8) |
| Present Value of New Business Premiums | 166.2 | 261.8 | (36.5) |
| Annualised Premium Equivalent | 22.4 | 33.7 | (33.5) |
Despite the turmoil in global financial markets, and the impact this has had on new business margins, the Group's margins remain industry-leading.
(i) Compensation Credit
New business on the CC basis during the year totalled £11.6m. This represents a decrease of 31.8% compared with £17.0m in the last financial year
(ii) Present Value of New Business Premiums
New business premiums on the PVNBP basis during the year totalled £166.2m. This represents a decrease of 36.5% compared with £261.8m in the last financial year. Single premium contracts totalled £103.8m or 62.4% of new business flows on this basis (2008: 58%).
The Group has achieved continued strong regular premium new business flows, particularly from the Far East and Latin America, reflecting continued willingness within those markets to better protect wealth and family needs.
Single premium business was down 31.7% from the £103.8m achieved last year. The reduced flow of single premium business, principally from Europe, reflects continued investor uncertainty resulting from the current difficult capital market climate and investment reticence in the Group's target markets.
The following tables provide a summary of PVNBP for the year (with comparisons on an actual currency basis) analysed between single and regular premium cases, and also by residence of policyholder:
| Year ended 30 June | 2009 | 2008 | % |
| £m | £m | change | |
| Regular | 62.4 | 109.9 | (43.2) |
| Single | 103.8 | 151.9 | (31.7) |
| 166.2 | 261.8 | (36.5) | |
| EU and EEA | 80.1 | 122.6 | (34.7) |
| Far East | 31.0 | 71.0 | (56.3) |
| Rest of World | 28.1 | 33.2 | (15.4) |
| Latin America | 27.0 | 35.0 | (22.9) |
| 166.2 | 261.8 | (36.5) |
The value of new business premiums is influenced, among other factors, by the Group's expectations of future premium collections on regular premium contracts issued during the year. The Group's experience of premium reductions during the year, relating to policy contracts issued in previous financial years, has been incorporated into the estimate of value from that business, causing a total reduction in PVNBP for this year of £7m, or 4%, compared with the assumptions used in the previous year.
Hansard receives business from a well-diversified portfolio of intermediaries around the world, which results in new business being received in a range of currencies. The principal currency receipts (as a percentage of PVNBP for the year) are set out below:
| 2009 | 2008 | |
| Currency | % | % |
| US Dollars | 37.0 | 42.0 |
| Euro | 37.0 | 37.0 |
| Sterling | 18.0 | 8.0 |
(iii) Annualised Premium Equivalent
New business premiums on an APE basis during the year totalled £22.4m, compared with £33.7m APE in the previous year.
The calculation of APE is in accordance with the life assurance industry convention of adding the annualised amount of new regular premiums and one tenth of single premiums.
DISTRIBUTION INFRASTRUCTURE
Hansard International Limited
During the year Hansard International opened a branch in Malaysia - a new territory for our distribution operations which we believe has considerable growth potential. Our access to this market is an important strategic step. This is the first branch established by Hansard International.
Account Executive recruitment
Recruitment of Account Executives continues, in line with the Group's policy of expanding its reach amongst suitable intermediaries by providing local language and other support to intermediaries in the Group's target markets. This will extend distribution capability for the Group in new markets, and strengthen existing relationships. Over the year ended 30 June 2009, six Account Executives have been appointed, principally in the Far East and Latin America. As at 30 June 2009 the Group had a total of 19 Account Executives, including two individuals supporting the Group's operations in Malaysia. Despite current global market conditions, selective recruitment is continuing.
This recruitment is in accordance with the Group's strategy of having approximately 25 Account Executives by December 2012.
New business outlook
The increased levels of global capital markets over the last few months coupled with the decline in the level of the VIX volatility index over that period, have contributed to an increased level of interest in Hansard's products among intermediaries and we have indications of optimism in Latin America and Europe. However, levels of new business issued in the period since the financial year end, traditionally a quieter period for new business flows, remain below those of the corresponding period of the previous financial year. We expect this pattern, particularly in relation to single premiums, to continue in the near term.
Having invested in its distribution infrastructure and online platform, Hansard is confident that its business model and prospects remain strong. The Group expects continued profitability and maintains a positive outlook for resumption in new business growth in the longer term.
RISK MANAGEMENT AND INTERNAL CONTROL
In support of its accountabilities to operate a sound system of internal control, and in accordance with Turnbull Guidance to the Combined Code the Board has developed and maintains an enterprise-wide risk management (ERM) programme. The ERM programme recognises the value to be achieved from ensuring that risk management and internal control are embedded as continuous and developing processes within strategy setting, programme level functions and day-to-day operating activities and are not treated as discrete activities, performed at certain points in time. The ERM programme also acknowledges the significance of the organisation's operating culture and underlying values in relation to risk management and their impact on the overall effectiveness of the control framework in its ultimate goal of achieving sustained benefit across the entire span of organisational activities.
The systems of internal control which make up the ERM programme are designed to:
Safeguard assets;
Maintain proper accounting records;
Provide reliable financial information;
Identify and manage business risks;
Maintain compliance with appropriate legislation and regulation; and
Identify and adopt best practice.
The key features of the ERM system of internal control include:
Terms of reference for the Board and each of its committees;
A clear organisational structure, with documented delegation of authority from the Board to executive management; Defined procedures for the approval of major transactions;
Committees of senior executives responsible for reviewing the Group's financial and non-financial risks;
Risk management and internal control frameworks for the Group's operations. Each subsidiary company board is required to attest to its adherence to these control frameworks on a quarterly basis.
Corporate Governance Report
The ERM programme and its frameworks are designed to support the identification, assessment, monitoring, management and reporting of risks which may prevent or limit the achievement of key business objectives. The ERM programme has been in place throughout the year and up to the date of this report.
The ERM programme also recognises that the achievement of business objectives is, in large part, the reward of successful, managed risk taking. In accordance with this recognition, the main objectives of the ERM programme can be categorised as follows:
(a) Performance Objectives: the efficiency and effectiveness of activities, use of assets and other resources and protecting the Business from loss. The ERM programme seeks to ensure that personnel throughout the Group are working to achieve business objectives with efficiency and integrity, without unintended or excessive cost or placing other interests before those of the Group.
(b) Information Objectives: the preparation and provision of timely, reliable and relevant reports needed for substantive, informed decision-making and to ensure the information received by management, the board of directors, shareholders and regulators is of sufficient quality and integrity.
(c) Compliance Objectives: to ensure that all organisational activities and outputs comply with applicable laws and regulations, supervisory requirements and internal policies and procedures.
These overarching objectives combine five interrelated elements, which enable the management of risk at strategic, programme and operational levels to be integrated, so that the levels of activity support each other.
These five elements are defined as: -
Management oversight and the control culture
Risk recognition and assessment
Control activities and segregation of duties
Information and communication
Monitoring activities and correcting deficiencies
This configuration and integration, and the methods of implementation via the ERM programme, ensures that all staff are made aware of the relevance of risk management to achievement of their individual objectives and accountabilities. The result is a risk management strategy, which is led from the top whilst being embedded in the Group's business systems, strategy and policy setting processes and the normal working routines and activities of the organisation. In this way risk management becomes an intrinsic part of the way business is conducted within the Group.
Risk Appetite
As part of the ERM programme, the board of directors has established a formal Risk Appetite Framework, which specifies the level of risk that may be assumed by the Group's operating subsidiary companies in order to achieve the Group's strategic objectives.
Risks to objectives are continuously assessed by management according to their potential impact and likelihood. A Risk Profile Score, independently generated using these assessments, is reviewed by subsidiary company boards to indicate if objectives are likely to be achieved, and whether the risks entailed are appropriate. These profiles are aggregated and considered by the Company board at each meeting.
Risk identification and assessment
The ERM programme requires all subsidiary companies to identify risks to business objectives, and to maintain a record of this on a Risk Register. The content of the Risk Register is addressed by the agenda of each subsidiary company board meeting, and confirmation that it is conducted on an ongoing and consistent basis is reported to the Company board.
All Risk Register content is rated according to the impact and likelihood of risk events, and these ratings are continuously re-assessed in response to the business environment. This aspect of the configuration and integration of the ERM programme ensures that all staff are made aware of the relevance of risk management to the achievement of their individual objectives and accountabilities.
Risk Monitoring and Management
As well as regular management monitoring activities, the senior management team meet on a weekly basis to discuss emergent strategic and operational risks. A number of Key Performance Indicators are circulated to inform these meetings.
Risk Reporting
All subsidiary company boards receive qualitative reporting from the assigned owners of the content of their Risk Registers, in addition to a selection of relevant Key Performance Indicators. A quarterly Risk Report is also considered before the boards are asked to attest to the effective functioning of the internal control framework and the ongoing identification and evaluation of risk within the subsidiary. These attestations are then presented to the board of the Company in order to obtain the same comfort at Group level.
Risks relating to the Group
Under the terms of the unit-linked investment contracts issued by the Group, the policyholder bears the investment risk on the assets in the unit-linked funds, as the policy benefits are directly linked to the value of the assets in the funds. These assets are managed in a manner consistent with the expectations of the policyholders. By definition, there is a precise match between the investment assets and the policyholder liabilities, and so the market risk and credit risk lie with policyholders. The shareholders' exposure on this business is limited to the extent that income arising from asset management charges is generally based on the value of assets in the funds.
Flowing from the nature of the Group's business, the Board believes that the principal risks facing the Group are those relating to the operation of the Group's business model and to the environment within which the Group operates.
Using the risk categories developed by the Group, the following table provides examples of the principal Strategic, Operational, Legal and Regulatory risks faced by the Group and the controls exercised continually by management to limit exposure to those risks. The Group's exposure to financial risks is addressed within note 22 to the consolidated financial statements.
Where necessary, the Group will develop alternative strategies to minimise the impact of any changes.
| Risk Category | Risk Event Examples | Control Detail Examples |
| Strategic | Distribution Strategy compromised | The Group closely monitors competitor activity and marketplaces for signs of any potential new entrants or threats to forecast new business levels. Actual new business production is monitored continually |
| | Corporate Governance failures | Effective application of the Group's governance, risk management and internal control frameworks is attested quarterly by all group companies. |
| | External environmental impacts | All Group companies continuously monitor national and international developments which may adversely affect markets and impact the Group's financial position. |
| | Hansard OnLine development and availability | We closely monitor technological developments in relation to the functioning of the internet and we will develop alternative strategies to minimise the impact of any changes. |
| Operational | Control exceptions | We investigate exceptions to expected results, behaviour and parameters, and investigate the root causes. All instances are recorded and reported. Corrective actions are implemented in accordance with the impact and likelihood of recurrence. |
| | Fraud | Recruitment and retention policies allow for appropriate vetting of staff to be conducted to determine their suitability and integrity. |
| | Infrastructure failure | Business Continuity Plans, including full data replication at an independent recovery centre, can be invoked when required. Testing is conducted frequently. |
| | Key Staff loss | Succession planning is enshrined in Group recruitment and selection policies for all roles. |
| Legal and Regulatory | Tax jurisdictional risk | We maintain dialogue with the Tax authorities of the Isle of Man Government and of the Republic of Ireland to identify any proposed or potential changes that may affect the Group’s exposure. We monitor the Group’s exposure to all taxes. |
| | Non-Compliance with corporate and product regulations | We maintain dialogue with the Insurance & Pensions Authority of the Isle of Man Government, the Irish Financial Regulator and other regulators on proposed or potential changes that may affect the design of the Group’s products or its business model. The Group’s business model is rigorously applied in all circumstances and continually reinforced contractually. Any claims of advice being provided are strenuously resisted. |
FINANCIAL REPORTING PROCESS
The Group has a system of planning, incorporating Board approval of forecast financial and other information. Performance against the forecasts is subsequently monitored and reported to the Board each time it meets. Operational management reports quarterly to the Executive Committee on a wide range of key performance indicators and other significant matters and the Board receives regular representations from the senior executives.
Performance against financial information is reported to the Board quarterly through a review of the Company's results based on accounting policies that are applied consistently throughout the Group. The draft financial statements for the financial year and for the half-year are prepared by the Chief Financial Officer ("CFO"). The members of the audit committee review the draft financial statements and meet with the CFO to discuss and challenge the presentation and disclosures therein. Once the draft document is approved by the audit committee, it is reviewed by the other Board members before final approval at a Board meeting.
EFFECTIVENESS OF RISK MANAGEMENT AND INTERNAL CONTROL
The identification and evaluation of risks to key business objectives is conducted on an ongoing and consistent basis as indicated above. These are managed and monitored by executive management.
In accordance with the policy and procedural requirements of the Group ERM programme, the Hansard Global plc Board has sought positive assurance, and is satisfied that risk management and internal controls are functioning effectively and are operating as intended within the Group.
Consolidated Income Statement for the year ended 30 June 2009
| Year End | Year End | ||
| 30-Jun-09 | 30-Jun-08 | ||
| Note | £m | £m | |
| Fees and commissions | 4 | 51.4 | 53.3 |
| Investment income | 5 | (140.6) | 9.9 |
| Other operating income | 0.7 | 0.5 | |
| (88.5) | 63.7 | ||
| Investment contract benefits | 146.6 | (2.5) | |
| Origination costs | 6 | (16.4) | (18.1) |
| Administrative and other expenses | 7 | (20.9) | (19.5) |
| 109.3 | (40.1) | ||
| Profit before taxation | 20.8 | 23.6 | |
| Taxation | 9 | (0.7) | (0.3) |
| Profit for the year after taxation | 20.1 | 23.3 | |
Earnings per share
| 2009 | 2008 | ||
| Note | (p) | (p) | |
| Basic | 10 | 14.7 | 17.0 |
| Diluted | 10 | 14.7 | 17.0 |
Consolidated Statement of Changes in Equity for the year ended 30 June 2009
| Share capital | Other reserves | Retained earnings | Total | ||
| Note | £m | £m | £m | £m | |
| Balance at 30 June 2007 | 68.6 | (48.5) | 31.0 | 51.1 | |
| Profit for the financial year, being | |||||
| total recognised income for the year | - | - | 23.3 | 23.3 | |
| Dividends | 11 | - | - | (22.0) | (22.0) |
| Balance at 30 June 2008 | 68.6 | (48.5) | 32.3 | 52.4 | |
| Share | Other | Retained | |||
| capital | reserves | earnings | Total | ||
| Note | £m | £m | £m | £m | |
| Balance at 30 June 2008 | 68.6 | (48.5) | 32.3 | 52.4 | |
| Profit for the financial year, being | |||||
| total recognised income for the year | - | - | 20.1 | 20.1 | |
| Dividends | 11 | - | - | (16.8) | (16.8) |
| Balance at 30 June 2009 | 68.6 | (48.5) | 35.6 | 55.7 |
Consolidated Balance Sheet as at 30 June 2009
| 30-Jun-09 | 30-Jun-08 | ||
| Note | £m | £m | |
| Assets | |||
| Plant and equipment | 12 | 1.1 | 0.9 |
| Deferred origination costs | 13 | 104.1 | 102.5 |
| Financial investments | |||
| Equity securities | 147.9 | 50.6 | |
| Investments in collective investment schemes | 642 | 920.2 | |
| Fixed income securities | 32.2 | 63.3 | |
| 822.1 | 1,034.1 | ||
| Other receivables | 14 | 22.3 | 21.7 |
| Cash and cash equivalents | 15 | 246.5 | 166.2 |
| Total assets | 1,196.1 | 1,325.4 | |
| Liabilities | |||
| Financial liabilities under investment contracts | 16 | 1,002.1 | 1,137.4 |
| Deferred income reserve | 125.2 | 116.5 | |
| Amounts due to investment contract holders | 9.2 | 11.0 | |
| Other payables | 17 | 3.9 | 8.1 |
| Total liabilities | 1,140.4 | 1,273.0 | |
| Net assets | 55.7 | 52.4 | |
| Shareholders' equity | |||
| Called up share capital | 18 | 68.6 | 68.6 |
| Other reserves | 20 | (48.5) | (48.5) |
| Retained earnings | 35.6 | 32.3 | |
Consolidated Cash Flow Statement for the year ended 30 June 2009
| Year ended | Year ended | |
| 30-Jun-09 | 30-Jun-08 | |
| £m | £m | |
| Cash flow from operating activities | ||
| Profit before tax for the year | 20.8 | 23.6 |
| Adjustments for: | ||
| Depreciation | 0.5 | 0.5 |
| Dividends receivable | (3.1) | (3.1) |
| Interest receivable | (5.8) | (7.2) |
| Foreign exchange gains | (0.8) | (2.5) |
| Profit on sale of investments | (1.0) | - |
| Unrealised loss on shareholder investments | 0.1 | 0.2 |
| Changes in operating assets and liabilities | ||
| (Increase)/decrease in debtors | (0.1) | 0.7 |
| Dividends received | 3.1 | 3.1 |
| Interest received | 6.2 | 6.9 |
| Increase in deferred origination costs | (1.6) | (7.9) |
| Increase in deferred income reserve | 8.7 | 6.6 |
| Decrease in creditors | (5.7) | (0.1) |
| Decrease in financial investments | 199.2 | 31.7 |
| Decrease in financial liabilities | (144.8) | (0.1) |
| Cash generated from operations | 75.7 | 52.4 |
| Corporation tax paid | (1.1) | - |
| Net cash generated from operations | 74.6 | 52.4 |
| Cash flows from investing activities | ||
| Purchase of plant and equipment | (0.7) | (0.6) |
| Proceeds from sale of investments | 14 | - |
| Purchase of investments | (0.1) | (13.2) |
| Net cash flows from investing activities | 13.2 | (13.8) |
| Cash flows from financing activities | ||
| Dividends paid | (16.8) | (22) |
| Net increase in cash and cash equivalents | 71 | 16.6 |
| Cash and cash equivalents at beginning of year | 166.2 | 140.9 |
| Effect of exchange rate changes | 9.3 | 8.7 |
| Cash and cash equivalents at year end | 246.5 | 166.2 |
1 Principal accounting policies
These consolidated financial statements incorporate the assets, liabilities and the results of Hansard Global plc ("the Company") and of its subsidiary undertakings ("the Group").
The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied, unless otherwise stated.
1.1 Basis of presentation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"), International Financial Reporting Interpretations Committee ("IFRIC") interpretations and with the Isle of Man Companies Acts 1931 to 2004. The financial statements have been prepared under the historical cost convention as modified by the revaluation of financial investments and financial liabilities at fair value through profit or loss.
The Group has applied all IFRS standards adopted by the European Union and effective at 30 June 2009. The following relevant new standards, interpretations and amendments to existing standards adopted by the EU but not mandatory at the balance sheet date have not been applied in the preparation of these financial statements.
Amendments to IFRS 2, 'Share based payments': Vesting conditions and cancellations. The amendment provides clarity on the definition of vesting conditions and the accounting treatment for cancellations of granted equity instruments.
IFRS 8, 'Operating Segments': IFRS 8 requires the Group to disclose such information to enable the user of the financial statements to understand the nature and financial effects of the business activities in which it engages and, where appropriate, the economic environments.
IAS 1, 'Presentation of financial statements (revised)': the revision requires a statement of comprehensive income, in one- or two-statements format. The latter format separates the detailed income statement from the statement of comprehensive income. The revision also prohibits the inclusion of items of income and expenditure from the statement in changes in equity.
IFRS 7, 'Financial instruments disclosures': the amendment requires enhanced disclosures regarding fair value measurements and liquidity risks. Specifically, the amendment introduces a three-level hierarchy for reporting movements in fair values, from quoted prices in active markets through to valuation techniques for which there is no observable market data.
The effect of these changes will not be material to the results of the Group, once implemented. All 4 are effective for accounting periods commencing on or after 1 January 2009.
The financial statements are presented in millions of pounds sterling rounded to the nearest one hundred thousand pounds.
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. 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 year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years.
The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 2.
1.2 Basis of consolidation
The consolidated financial statements incorporate the assets, liabilities and the results of the Company and of its subsidiary undertakings. Subsidiaries are those entities in which the Company directly or indirectly has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Where necessary, accounting policies applied by subsidiary companies have been adjusted to present consistent disclosures on a consolidated basis.
Intra-group transactions, balances and unrealised gains and losses arising from intra-group transactions, are eliminated in preparing these consolidated financial statements.
1.3 Product classification
The Directors have determined that the products issued by the Company's subsidiaries are classified for accounting purposes as investment contracts, as they do not transfer significant insurance risk.
1.4 Investment contracts
1.4.1 Investment contract liabilities
Investment contracts consist of unit-linked contracts written through subsidiary companies in the Group. Unit-linked liabilities are measured at fair value by reference to the value of the underlying net asset value of the Group's unitised investment funds, determined on a bid basis, at the balance sheet date.
The decision by the Group to designate its unit-linked liabilities at fair value through profit or loss reflects the fact that the liabilities are calculated with reference to the fair value of the underlying assets.
1.4.2 Investment contract premiums
Investment contract premiums are not included in the income statement but are reported as deposits to investment contracts and are included in financial liabilities in the balance sheet. On existing business, a liability is recognized at the point the premium falls due. The liability for premiums received on new business is deemed to commence at the acceptance of risk.
1.4.3 Fees from investment contracts
Fees are charged to investment contracts for policy administration services, investment management services, payment of benefits and other services related to the administration of investment contracts. Fees are recognised as revenue as the services are provided. Initial fees that exceed the level of recurring fees and relate to the future provision of services are deferred in the balance sheet and amortised on a straight-line basis over the life of the relevant contract. These fees are accounted for on the issue of a contract and on receipt of incremental premiums on existing single premium contracts.
Regular fees charged to contracts are recognised on a straight-line basis over the period in which the service is provided. Transactional fees are recorded when the required action is complete.
1.4.4 Benefits paid
Withdrawals from policy contracts and other benefits paid are not included in the income statement but are deducted from financial liabilities under investment contracts in the balance sheet. Benefits are deducted from financial liabilities on the basis of notifications received, when the benefit falls due for payment or, on the earlier of the date when paid or when the contract ceases to be included within those liabilities.
1.4.5 Origination costs
Origination costs include commissions, intermediary incentives and other distribution-related expenditure. Origination costs which vary with, and are directly related to, securing new contracts and incremental premiums on existing Single Premium contracts are deferred to the extent that they are recoverable out of future net income from the relevant contract. Deferred origination costs are amortised on a straight-line basis over the life of the relevant contracts. Origination costs that do not meet the criteria for deferral are expensed as incurred.
1.5 Revenue
Revenue consists principally of fees from the administration of investment contracts (see 1.4.3 above), commission income and investment income.
1.5.1 Commissions
Commissions receivable arise principally from fund houses with which investments are held. Commissions are recognised on an accruals basis in accordance with the substance of the relevant agreement.
1.5.2 Investment income
Investment income comprises dividends, interest and other income receivable, realised gains and losses on investments and unrealised gains and losses. Dividends are accrued on the date notified. Interest is accounted for on a time proportion basis using the effective interest method.
1.6 Employee benefits
1.6.1 Pension costs
Group companies contribute to employees' individual defined contribution pension plans. Contributions are charged to the income statement as they become payable under the terms of the relevant employment contract. The Group has no further payment obligations once pension contribution requirements have been met.
1.6.2 Share-based payments
The Company has established an equity-based share save programme for eligible employees. The fair value of expected equity-settled share-based payments under this programme is calculated at date of grant using a standard option-pricing model and is amortised over the vesting period on a straight-line basis through the income statement. A corresponding amount is credited to equity over the same period.
At each balance sheet date, the Group reviews its estimate of the number of options expected to be exercised. The impact of any revision in the number of such options is recognised in the income statement so that the charge to the income statement is based on the number of options that actually vest. A corresponding adjustment is made to equity.
1.7 Operating leases
Operating leases are defined as leases in which the lessor retains a significant proportion of the risks and rewards. Costs in respect of operating leases, less any incentives received from the lessor, are charged to the income statement on a straight-line basis over the lease term.
1.8 Dividends payable
Interim dividends payable to shareholders are recognised in the year in which the dividends are paid. Final dividends payable are recognised as liabilities when approved by the shareholders at the annual general meeting.
1.9 Financial assets and fair value of financial assets
The Group recognises two categories of financial assets: financial investments and loans and receivables. Financial investments consist of units in collective investment schemes, listed investments, fixed income securities and deposits with credit institutions. All financial investments are designated at fair value through profit or loss.
The decision by the Group to designate its financial investments at fair value through profit or loss reflects the fact that the investment portfolio is managed, and its performance evaluated, on a fair value basis.
The Group recognises purchases and sales of investments on trade date. Investment transaction costs are written off in administration expenses as incurred.
All gains and losses derived from financial investments, realised or unrealised, are recognised within investment income in the income statement, in the period in which they arise.
The value of financial assets at fair value through profit or loss that are traded in active markets (such as trading securities) is based on quoted market prices at the balance sheet date. The quoted market price for financial assets held by the Group is the current bid price. Investments in funds and certain other unquoted securities are valued at the latest available net asset valuation provided by the administrators or managers of the funds and companies, unless the directors are aware of good reasons why such valuations would not be the most appropriate or indicative of fair value, in which case the fair value is determined by the directors using valuation techniques. The directors use a variety of methods and make assumptions that are based on market conditions existing at each balance sheet date.
Loans and receivables are financial assets with fixed or determinable payments that are not quoted on an active market. Loans and receivables consist, primarily, of contract fees receivable and cash and cash equivalents. An analysis of current and non-current contract fees receivable is provided in the notes to the consolidated financial statements.
1.10 Plant and equipment
Plant and equipment is stated at historical cost less depreciation and any impairment. The historical cost of plant and equipment is the purchase cost, together with any incremental costs directly attributable to the acquisition. Depreciation is calculated so as to write off the cost of the assets, less their estimated residual values, on a straight-line basis over the expected useful economic lives of the assets concerned, as follows:
Computer equipment and software 3 years
Fixtures and fittings 4 years
Depreciation is included in administrative and other expenses in the income statement.
The carrying amount, residual value and useful life of the Group's plant and equipment is reviewed annually to determine whether there is any indication of impairment, or a change in residual value or expected useful life. If there is any indication of impairment, the asset's carrying value is revised.
1.11 Impairment policy
Formal reviews to assess the recoverability of deferred origination costs ("DOC") on investment contracts and the carrying amount of the Group's other assets that are not carried at fair value are carried out at each balance sheet date to determine whether there is any indication of impairment. If there is any indication of irrecoverability or impairment, the asset's recoverable amount is estimated.
Impairment losses are reversed through the income statement if there is a change in the estimates used to determine the recoverable amount. Such losses are reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of amortisation where applicable, if no impairment loss had been recognised.
1.12 Other receivables
Other receivables are initially recognised at fair value and subsequently measured at amortised cost.
1.13 Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less, net of short term overdraft positions where a right of set-off exists.
1.14 Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events such that it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made.
Provisions, where necessary, are calculated at the present value of the estimate of the expenditure required to settle the obligation utilising a rate that reflects the expected time value of money at the creation date of the provision. Any increase in the value of provisions due to the passage of time is recognised as an interest expense.
1.15 Other payables
Other payables are initially recognised at fair value and subsequently measured at amortised cost. They are recognised at the point where service is received but payment is due after the balance sheet date.
1.16 Foreign currencies
The Group's presentational and functional currency is pounds sterling, being the currency of the primary economic environment in which the Group operates.
Foreign currency transactions are translated into sterling using the applicable exchange rate prevailing at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange prevailing at the balance sheet date, and the gains or losses on translation are recognised in the income statement.
Non-monetary assets and liabilities that are held at historical cost are translated using exchange rates prevailing at the date of transaction; those held at fair value are translated using exchange rates ruling at the date on which the fair value was determined.
1.17 Segmental reporting
The Group does not segment its operations by line of business, as there are no material segments other than the life assurance business. Separate geographical segmental information is provided as the Group operates its life assurance business principally through two locations. Revenues and expenses allocated to those locations reflect the revenues and expenses generated in or incurred by the legal entities in those locations.
1.18 Taxation
Taxation is based on profits and income for the period as determined with reference to the relevant tax legislation in the countries in which the Company and its subsidiaries operate. Tax payable is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Tax is recognised in the income statement except to the extent that it relates to items recognised in equity. Tax on items relating to equity is recognised in equity.
2 Critical accounting estimates and judgments in applying accounting policies
Estimates, assumptions and judgments are used in the application of accounting policies in these financial statements. Critical accounting estimates are those which involve the most complex or subjective judgments or assessments. Estimates, assumptions and judgments are evaluated continually and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual outcomes may differ from assumptions and estimates made by management.
2.1 Accounting estimates and assumptions
The principal areas in which the Group applies accounting estimates and assumptions are in deciding the amount of management expenses that are treated as origination costs and the period of amortisation of deferred origination costs ("DOC") and deferred income ("DIR"). Estimates are also applied in determining the recoverability of deferred origination costs.
2.1.1 Origination costs
Management expenses have been reviewed to determine the relationship of such expense to the issue of an investment contract. Certain expenses vary with the level of new business production and have been treated as origination costs. Other expenses are written off as incurred.
2.1.2 Amortisation of DOC and DIR
Deferred origination costs and deferred income are amortised on a straight-line basis over the life of the underlying investment contract. The life of a contract is either the contractual term thereof or the expected life of a single premium contract. This is calculated in a manner consistent with the assumptions used in the calculation of European Embedded Value.
2.1.3 Recoverability of DOC
Deferred origination costs are tested annually for recoverability by reference to expected future income levels from the relevant contracts.
2.2 Judgments
The primary areas in which the Group has applied judgment in applying accounting policies are:
the classification and unbundling of contracts between insurance and investment business. All contracts are treated as investment contracts. The Group has also elected to treat all financial investments as at fair value through profit or loss and;
the assessment of fair value of certain financial investments.
3 Segmental information
In the opinion of the directors, the Group operates in a single business segment, that of the distribution and servicing of long-term investment products through the Group's life assurance subsidiaries.
A summary of Present Value of New Business Premiums ("PVNBP") by region is contained in the business review. Other segmental information is provided below. Revenues and expenses allocated to those locations reflect the revenues and expenses generated in or incurred by the legal entities in those locations.
i) Geographical analysis of fees and commissions by origin
| 2009 | 2008 | |
| £m | £m | |
| Isle of Man | 38 | 41.8 |
| Republic of Ireland | 13.4 | 11.5 |
| 51.4 | 53.3 |
ii) Geographical analysis of profit before taxation
| 2009 | 2008 | |
| £m | £m | |
| Isle of Man | 15.9 | 18.3 |
| Republic of Ireland | 4.9 | 5.3 |
| 20.8 | 23.6 |
Included in profit before taxation in the Republic of Ireland is a loss on foreign exchange of £0.1m (2008: £1.7m gain) primarily relating to the translation of euro deposits held to back regulatory capital requirements.
iii) Geographical analysis of gross assets
| 2009 | 2008 | |
| £m | £m | |
| Isle of Man | 804.4 | 873.0 |
| Republic of Ireland | 391.7 | 452.4 |
| 1,196.1 | 1,325.4 |
iv) Geographical analysis of gross liabilities
| 2009 | 2008 | |
| £m | £m | |
| Isle of Man | 763.4 | 833.5 |
| Republic of Ireland | 377.0 | 439.5 |
| 1,140.4 | 1,273.0 |
v) Geographical analysis of gross deposits on investment contracts
| 2009 | 2008 | |
| £m | £m | |
| Europe | 89.7 | 136.0 |
| Asia and the Far East | 53.1 | 56.1 |
| Latin America and the Caribbean | 28.0 | 19.2 |
| Middle East | 9.7 | 7.5 |
| Africa | 6.8 | 4.8 |
| Other | 1.3 | 1.1 |
| 188.6 | 224.7 |
4 Fees and commissions
| 2009 | 2008 | |
| £m | £m | |
| Contract fee income | 35.6 | 35.4 |
| Fund management charges | 12.4 | 13.0 |
| Commissions receivable | 3.4 | 4.9 |
| 51.4 | 53.3 |
5 Investment income
| 2009 | 2008 | |
| £m | £m | |
| Interest income | 5.8 | 7.2 |
| Dividend income | 3.1 | 3.1 |
| (Losses)/gains on realisation of investments | (39.6) | 34.4 |
| Movement in unrealised gains/(losses) on investments | (109.9) | (34.8) |
| (140.6) | 9.9 |
6 Origination costs
| 2009 | 2008 | |
| £m | £m | |
| Amortisation of deferred origination costs | 13.9 | 15.1 |
| Other origination costs | 2.5 | 3.0 |
| 16.4 | 18.1 |
7 Administrative and other expenses
| 2009 | 2008 | |
| £m | £m | |
| Auditors' remuneration: | ||
| - Fees payable to the Company's auditor for the audit of the Company's | ||
| annual accounts | 0.1 | 0.2 |
| - Fees payable for the audit of the Company's subsidiaries pursuant to legislation | 0.3 | 0.2 |
| - Other services provided to the Company's subsidiaries | - | 0.2 |
| Employee costs | 9.3 | 8.6 |
| Directors' fees | 0.2 | 0.2 |
| Renewal and other commission | 1.5 | 1.5 |
| Investment management fees | 3.9 | 3.7 |
| Depreciation of plant and equipment | 0.5 | 0.5 |
| Licences and maintenance fees | 0.5 | 0.5 |
| Insurance costs | 0.6 | 0.6 |
| Communications | 0.4 | 0.7 |
| Operating lease rentals | 0.7 | 0.6 |
| Professional and other fees | 1.1 | 1.1 |
8 Employee costs
8.1 The aggregate remuneration in respect of employees, including executive directors, was as follows:
| 2009 | 2008 | |
| £m | £m | |
| Wages and salaries | 10.4 | 9.3 |
| Social security costs | 0.9 | 0.8 |
| Pension costs | 0.5 | 0.6 |
| 11.8 | 10.7 |
The Group operates a defined contribution group personal pension scheme that is open to all Group employees based on the Isle of Man aged between 25 and 65 years of age, with two years of service with the Group. Employees based in the Republic of Ireland with one year of service are eligible to be members of a personal retirement savings account scheme.
During the year the Group contributed to the relevant pension scheme in relation to each employee at a defined percentage rate of annual salary. The Group suspended such contributions with effect from 1 March 2009. The Group continues to meet the costs of all staff consultations with financial intermediaries in relation to the pension schemes of employees.
8.2 The average number of employees during the year, including executive directors, was as follows:
| 2009 | 2008 | |
| No. | No. | |
| Administration | 176 | 169 |
| Distribution and marketing | 31 | 28 |
| IT development | 15 | 13 |
| 222 | 210 |
The above table includes staff on open ended long-term contracts.
8.3 Share-based payments
Details of the costs attributed to the share-based payments programme implemented by the Company can be found in note 19.
8.4 Other benefits
Certain employees of the Group were party to an incentive scheme ("the Scheme") established in 1999 by and settled by the then controlling shareholder of the Group, Dr Leonard Polonsky. Under the Scheme notional units were granted to eligible employees as compensation for services rendered to the Group. The Company acted as administrative agent for Dr Polonsky in the settlement of his liabilities under the Scheme.
The benefit payable to each individual under the Scheme crystallised on the listing of the Company on the London Stock Exchange on 18 December 2006. This totalled £14.8m. The final payments under the Scheme were made on behalf of Dr Polonsky during the year.
9 Taxation
The Group's profits arising from its Isle of Man-based operations are taxable at zero percent. Profits in the Republic of Ireland, less allowance for any losses carried forward from previous years, are taxed at 12.5%. Tax losses in the Republic of Ireland were fully utilised against taxable income in the year ended 30 June 2008.
There is no material difference between the current tax charge in the income statement and the current tax charge that would result from applying standard rates of tax to the profit before tax.
10 Earnings per share
The calculation for earnings per share is based on the profit for the year after taxation divided by the weighted average number of shares in issue throughout the year.
| 2009 | 2008 | |
| Profit after tax (£m) | 20.1 | 23.3 |
| Weighted average number of shares in issue | 137,281,202 | 137,281,202 |
| Basic earnings per share in pence | 14.7 | 17 |
|
|
| |
| Weighted average number of shares in issue | 137,281,202 | 137,281,202 |
| Dilution of shares due to share save scheme | 9,500 | 4,133 |
| Weighted average number of shares for diluted earnings per share | 137,290,702 | 137,285,335 |
| Diluted earnings per share in pence | 14.7 | 17.0 |
11 Dividends paid
| 2009 | 2008 | |
| £m | £m | |
| Final ordinary dividend paid 27 November 2008 (7p per share) | ||
| (23 November 2007: 6p per share) | 9.6 | 8.2 |
| Interim ordinary dividend paid 1 April 2009 (5.25p per share) | ||
| (4 April 2008: 5p per share) | 7.2 | 6.9 |
| Special dividend paid 23 November 2007 (5p per share) | - | 6.9 |
| 16.8 | 22.0 |
The Board has resolved to pay a final dividend of 7.35 p per share on 20 November 2009 subject to approval by the Company in general meeting. If approved, this will represent an increase of 5% over the final dividend of 7p per share paid in November 2008.
12 Plant and equipment
The cost of plant and equipment at 30 June 2009 is £5.9m (2008: £5.3m; 2007: £4.7m), following the purchase of assets totalling £0.7m in the year (2008: £0.6m; 2007: £0.6m), and write-offs of £0.1m. Depreciation at 30 June 2009 is £4.8m (2008: £4.4m; 2007: £3.9m), leaving plant and equipment with a net book value of £1.1m at the balance sheet date (2008: £0.9m; 2007: £0.8m).
13 Deferred origination costs
| 2009 | 2008 | |
| Carrying value | £m | £m |
| At 1 July | 102.5 | 94.6 |
| Origination costs during the year | 15.5 | 23.0 |
| Origination costs amortised during the year | (13.9) | (15.1) |
| At 30 June | 104.1 | 102.5 |
14 Other receivables
| 2009 | 2008 | |
| £m | £m | |
| Contract fees receivable | 8.6 | 9.4 |
| Outstanding investment trades | 11.9 | 8.8 |
| Commissions receivable | 1.1 | 1.5 |
| Other debtors | 0.7 | 2.0 |
| 22.3 | 21.7 |
At the balance sheet date none of these receivables are overdue but not impaired (2008: £nil) or impaired (2008: £nil).
| Expected to be settled within 12 months | 18.1 | 16.4 |
| Expected to be settled after 12 months | 4.2 | 5.3 |
| 22.3 | 21.7 |
Due to the short-term nature of these assets the carrying value is considered to reflect fair value.
15 Cash and cash equivalents
| 2009 | 2008 | |
| £m | £m | |
| Money market funds | 60.3 | 14.9 |
| Deposits with credit institutions | 15.6 | 41.7 |
| Shareholders' cash and cash equivalents | 75.9 | 56.6 |
| Investment contract holder cash and cash equivalents | 170.6 | 109.6 |
| 246.5 | 166.2 |
16 Financial liabilities under investment contracts
| 2009 | 2008 | |
| £m | £m | |
| Deposits on investment contracts | 188.6 | 224.7 |
| Deductions from contracts | (177.3) | (220.0) |
| Investment contract benefits | (146.6) | 2.5 |
| Movement in year | (135.3) | 7.2 |
| At 1 July | 1,137.4 | 1,130.2 |
| At 30 June | 1,002.1 | 1,137.4 |
Investment contract benefits comprise of dividend and interest income and net realised and unrealised gains and losses on financial investments held to cover financial liabilities.
| Expected to be settled within 12 months | 14.2 | 14.3 |
| Expected to be settled after 12 months | 987.9 | 1,123.10 |
| | 1,002.1 | 1,137.40 |
Financial liabilities under investment contracts are contractually due for payment on demand.
The following investments, cash and cash equivalents, other assets and liabilities are held to cover financial liabilities under investment contracts. They are included within the relevant headings on the consolidated balance sheet.
| 2009 | 2008 | |
| £m | £m | |
| Equity securities | 147.9 | 50.6 |
| Investment in collective investment schemes | 641.8 | 920.1 |
| Fixed income securities | 32.2 | 50.4 |
| Cash and cash equivalents | 170.6 | 109.6 |
| Other receivables | 11.9 | 8.8 |
| Total assets | 1,004.4 | 1,139.5 |
| Other payables | (2.3) | (2.1) |
| Net assets | 1,002.1 | 1,137.4 |
17 Other payables
| 2009 | 2008 | |
| £m | £m | |
| Commission payable | 1.5 | 2.7 |
| Corporation tax payable | - | 0.3 |
| Taxation and social security | 0.1 | 0.2 |
| Other creditors and accruals | 2.3 | 4.9 |
| 3.9 | 8.1 | |
All payable balances, including amounts due to contract holders, are deemed to be current. Due to the short-term nature of these payables the carrying value is considered to reflect fair value.
18 Called up share capital
| 2009 | 2008 | |
| £m | £m | |
| Authorised: | ||
| 200,000,000 ordinary shares of 50p | 100 | 100 |
| Issued and fully paid: | ||
| 137,281,202 ordinary shares of 50p | 68.6 | 68.6 |
As can be seen in note 19 below, the shareholders approved a Save as You Earn (SAYE) share save programme for eligible employees at the Annual General Meeting held on 19 November 2007.
The Company has received clearance from the London Stock Exchange to list a maximum of 500,000 shares necessary to meet its obligations to employees under the terms of the scheme.
19 Equity settled share-based payments
Shareholders approved a Save as You Earn (SAYE) share save programme for employees at the Annual General Meeting held on 19 November 2007. This is a standard SAYE plan, approved by the Revenue Authorities in the Isle of Man and the Republic of Ireland and is available to eligible employees. Under the terms of the scheme, individuals can invest up to £250 or €500 per month respectively for a three- or five-year period for the option to purchase shares at a price not less than 80% of the market price on the date of the invitation to participate.
Movements of the SAYE plans are as follows:
|
| Year ended 30 June | |||
| 2009 | 2008 | |||
| Weighted | Weighted | |||
| average | average | |||
| exercise | exercise | |||
| No. of | price in | No. of | price in | |
| options | pence | options | pence | |
| Outstanding at the start of year | 495,398 | 153 | 0 | - |
| Granted | 336,035 | 124 | 504,682 | 153 |
| Forfeited | (410,191) | 151 | (9,284) | 153 |
| Outstanding at end of year | 421,242 | 132 | 495,398 | 153 |
Options to acquire 336,035 shares were granted to eligible employees on 26 March 2009 ("the 2009 scheme").
The fair values of the share options granted during the year have been calculated using the following assumptions:
| 2009 award assumptions | 3-year | 5-year |
| Date of grant | 26 February 2009 | 26 February 2009 |
| Fair value (pence) | 31 | 29 |
| Exercise price (pence) | 124 | 124 |
| Share price (pence) | 155 | 155 |
| Expected volatility | 35% | 35% |
| Expected dividend yield | 8.40% | 4% |
| Risk-free rate | 2.80% | 2.80% |
2009 award details
Date of grant 26 February 2009
No. of shares awarded 336,035
Vesting conditions 3- or 5-year savings term
Exercise period - 3-year 1 May 2012 - 31 October 2012
Exercise period - 5-year 1 May 2014 - 31 October 2014
At the date of this report a total of 307,341 options remain outstanding under the 2009 scheme and 113,901 options (at 30 June 2008: 495,398) remain outstanding under the 2008 scheme.
The fair value expense has been based on the fair value of the options granted, as calculated using the Black Scholes pricing model. Expected volatility is based on an analysis of the Group's share price volatility since listing on the London Stock Exchange on 18 December 2006.
The estimated fair value of the schemes and the imputed cost for the period under review is not material to these financial statements.
20 Other reserves
Other reserves comprise the merger reserve arising on the acquisition by the Company of its subsidiary companies on 1 July 2005.
21 Capital position statement
The capital position statement sets out the financial strength of the businesses of the Group, measured on the basis of the presentation within the financial statements of the Company's life assurance subsidiaries. These are located in the Isle of Man and the Republic of Ireland. As both entities provide unit-linked contracts only, the majority of surplus can be distributed to shareholders subject to meeting the capital and other requirements of each business. Management policy is to hold surplus funds in excess of the minimum regulatory requirements of each of the life assurance entities.
The capital, defined as total shareholders' funds, is available to meet the regulatory capital requirements without any restrictions.
| 2009 | 2008 | |
| £m | £m | |
| Consolidated shareholders' equity | 55.7 | 52.4 |
| Adjustment arising from change in GAAP basis* | 19.3 | 19.5 |
| 75.0 | 71.9 |
Comprising shareholders' funds of:
| Non-life assurance Group companies | 42.6 | 15.3 |
| Life assurance subsidiary companies | 32.4 | 56.6 |
| Total capital available to meet regulatory capital requirements | 75.0 | 71.9 |
* The consolidated financial statements have been prepared in accordance with the requirements of IFRS whilst the regulatory capital of the life assurance subsidiaries is calculated based on local regulatory requirements under applicable GAAP. The financial statements of these subsidiary companies are prepared under the insurance accounting requirements of the relevant jurisdiction. The adjustment referred to above arises out of the treatment of initial fees and costs relating to new business under the different accounting codes. IFRS smoothes these fees and costs over the life of the relevant policies, whereas under the GAAP applicable to the subsidiary undertakings, fees are recognised when received and the relevant costs of new business are deferred, where applicable, to match these income streams.
Regulatory Minimum Solvency Margin
For both the Isle of Man and the Irish businesses, the relevant capital requirement is the required minimum margin under the locally applicable regulatory regimes. The required minimum margins of the regulated entities at each balance sheet date were as set out below:
| 2009 | 2008 | |||
| £m | £m | |||
| Aggregate minimum margin | 4.6 | 4.4 |
As the financial liabilities of the unit-linked business held by the Company's subsidiary companies are based on the fair value of the unit funds backing those contracts, unit-linked business assets and liabilities move together in line with changes in investment market conditions.
The Group's other assets are largely cash and cash equivalents.
Capital management
The Group's objectives in managing its capital are to:
match the profile of its assets and liabilities, taking account of the risks inherent in the business;
maintain financial strength to support new business growth;
satisfy the requirements of its policyholders and regulators;
retain financial flexibility by maintaining strong liquidity and access to a range of capital markets; and
generate operating cash flows to meet the stated dividend policy.
22 Financial risk management
The Group's operations expose it to a variety of financial risks. The Group's objective in the management of financial risk is to minimise, where practicable, its exposure to such risk, except when necessary to support other objectives. The principal method by which the Group seeks to manage risk is through the operation of unit-linked businesses, whereby the policyholder bears the financial risk relating to the financial assets and liabilities arising from such contracts.
Overall responsibility for the management of the Group's exposure to risk is vested in the Board. To support it in this role, an enterprise-wide risk management framework is in place comprising risk identification, risk assessment, control and reporting processes. The framework provides assurance that risks are being appropriately identified and managed. Additionally, the Board and the Boards of subsidiary companies have established a number of Committees with defined terms of reference. These are the Audit, Actuarial Review, Credit Control, Executive and Investment Committees. Additional information concerning the operation of the Board Committees is contained in the Corporate Governance section of this Report & Accounts.
Under the unit-linked investment contracts that are written by the Group, policyholders bear the investment risk on the assets in the unit-linked funds, as the policy benefits are directly linked to the fair value of the assets. These assets are managed consistent with the expectations of the policyholders. By definition, there is a precise match between the investment assets and the policyholder liabilities, and so the market risk and credit risk lie with policyholders.
The shareholders' exposure is limited to the extent that certain contract income is based on the value of assets in the funds.
The more significant financial risks to which the Group is exposed are set out below. For each category of risk, the Group determines its risk appetite and sets its investment, treasury and associated policies accordingly.
22.1 Market risk
This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices, analysed between price, interest rate and currency risk.
(a) Price risk
An overall change in the market value of the unit-linked funds would affect the annual management charges accruing to the Group since these charges, which are typically 1% p.a., are based on the market value of funds under management. Similarly, due to the fact that these charges are deducted from policies in policy currency, a change in foreign exchange rates relative to sterling can result in fluctuations in management fee income and expenses reflected in these financial statements. The approximate impact on shareholder profits and equity of a 10% change in fund values, either as a result of price or currency fluctuations, is £1.4m (2008: £1.6m).
(b) Interest rate risk
Interest rate risk is the risk that the Group is exposed to lower returns or loss as a direct or indirect result of fluctuations in the value of, or income from, specific assets arising from changes in underlying interest rates.
The Group is primarily exposed to interest rate risk on the balances that it holds with credit institutions and in money market funds. The Group controls its exposure to interest rate risk by managing its treasury balances on a short-term basis.
A change of 1% p.a. in interest rates will result in an increase or decrease of approximately £0.8m (2008: £0.5m) in the Group's equity and annual investment income.
A summary of the Group's liquid assets at the balance sheet date is set out in note 22.3 below.
(c) Currency risk
Currency risk is the risk that the Group is exposed to higher or lower returns as a direct or indirect result of fluctuations in the value of, or income from, specific assets and liabilities arising from changes in underlying exchange rates.
The sensitivity of the Group to the currency risk inherent in investments held to cover financial liabilities under investment contracts is incorporated within the analysis set out in (a) above.
(c) (i) Group foreign currency exposures
The Group is exposed to currency risk on the foreign currency denominated bank balances and other liquid assets that it holds to the extent that they do not match liabilities in those currencies. The impact of the Group's currency risk is minimized by frequent repatriation of excess foreign currency funds to sterling. At the balance sheet date the Group had exposures in the following currencies:
| 2009 | 2009 | 2008 | 2008 | |
| US$m | €m | US$m | €m | |
| Gross assets | 13.5 | 15.8 | 12.6 | 25.5 |
| Matching currency liabilities | (5.4) | (3.4) | (8.5) | (3.8) |
| 8.1 | 12.4 | 4.1 | 21.7 |
Amounts totalling €7.2m held at the balance sheet date (2008: €13.2m) represent amounts held by Hansard Europe Limited to cover regulatory capital commitments. The approximate impact on shareholder profits and equity of a 10% change in currency exchange rates against sterling is £1.6m (2008: £2.0m).
(c) (ii) Financial investments by currency
Certain fees and commissions are earned in currencies other than sterling, based on the value of financial investments held in those currencies from time to time.
At the balance sheet date the analysis of financial investments by currency denomination is as follows:
| Currency | 2009 | 2008 |
| % | % | |
| US Dollars | 42 | 38 |
| Euro | 34 | 33 |
| Sterling | 16 | 18 |
| Others | 8 | 11 |
| 100 | 100 |
22.2 Credit risk
Credit risk is the risk that the Group is exposed to lower returns or loss if another party fails to perform its financial obligations to the Group.
The Group's main exposure to credit risk is in relation to deposits with credit institutions. Deposits are made, in accordance with established policy, with credit institutions having a short-term rating of at least F1 and P1 from Fitch IBCA and Moody's respectively and a long term rating of at least A and A3. Additionally funds are invested in AAA rated unitized money market funds.
At the balance sheet date, an analysis of the Shareholders' cash and cash equivalent balances and liquid investments was as follows:
| 2009 | 2008 | |
| £m | £m | |
| Deposits with credit institutions | 15.6 | 14.9 |
| Money market funds | 60.3 | 41.7 |
| 75.9 | 56.6 | |
| UK Government stock | - | 12.9 |
| 75.9 | 69.5 |
Maximum counterparty exposure limits are set both at an individual subsidiary company level and on a Group wide basis. There are no significant concentrations of credit risk at the balance sheet date.
22.3 Liquidity risk
Liquidity risk is the risk that the Group, though solvent, does not have sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure them at excessive cost.
The Group's objective is to ensure that there is sufficient liquidity over short- (up to one year) and medium-term time horizons to meet the needs of the business. This includes liquidity to cover, amongst other things, new business costs, planned strategic activities, servicing of equity capital as well as working capital to fund day-to-day cash flow requirements.
Liquidity risk is principally managed in the following ways:
Assets of a suitable marketability are held to meet policyholder liabilities as they fall due;
Forecasts are prepared regularly to predict required liquidity levels over both the short and medium term.
The Group's exposure to liquidity risk is considered to be low since it maintains a high level of liquid assets to meet its liabilities.
Set out below is a summary of the undiscounted contractual maturity profile of the Group's assets.
| 2009 | 2008 | |
| £m | £m | |
| Maturity within 1 year | ||
| Deposits and money market funds | 75.9 | 56.6 |
| Other assets | 4.6 | 4.1 |
| 80.5 | 60.7 | |
| Maturity from 1 to 5 years | ||
| UK Government stock | - | 12.9 |
| Other assets | 4.2 | 5.3 |
| 4.2 | 18.2 | |
| Shareholder assets with maturity values | 84.7 | 78.9 |
| Other shareholder assets | 107.2 | 107.0 |
| Gross assets held to cover financial liabilities | ||
| under investment contracts | 1,004.2 | 1,139.5 |
| Total assets | 1,196.1 | 1,325.4 |
Maturity analyses of financial and other liabilities are included in the relevant notes to the consolidated balance sheet.
23 Financial commitments
The total of future minimum lease payments under non-cancellable operating leases is as follows:
| 2009 | 2008 | |
| £m | £m | |
| Amounts due: | ||
| Within one year | 0.7 | 0.6 |
| Between one and five years | 2.0 | 2.2 |
| After five years | 0.7 | 1.0 |
| 3.4 | 3.8 |
24 Related party transactions
i) Intra-group transactions
Various subsidiary companies within the Group perform services for other Group companies in the normal course of business. The financial results of these activities are eliminated in the consolidated financial statements.
ii) Key management personnel compensation
Key management consists of executive directors of the Company, executive directors of subsidiary companies, the appointed actuary of the Group's regulated insurance entities and the Company solicitor. The aggregate remuneration paid to key management is as follows:
| 2009 | 2008 | |
| £m | £m | |
| Salaries and wages | 2 | 1.9 |
| Benefits under share save programme | - | - |
| Charged to the income statement | 2 | 1.9 |
| Other payments | 0.7 | 0.6 |
| Total related party payments | 2.7 | 2.5 |
The other payments of £0.7m (2008: £0.6m) relate to the incentive scheme established in 1999 by and settled by Dr Polonsky.
| 2009 | 2008 | |
| £m | £m | |
| Payments during the year by key management in respect of policies | ||
| issued by the Group | - | 8.5 |
| Payments during the year to key management in respect of policies | ||
| issued by the Group | 0.2 | 3.7 |
| The sum assured or fund balance of those policies at 30 June | 16.2 | 13.8 |
All these transactions were completed on terms available to staff in general.
iii) Other
Further information relating to transactions between the Group, its employees and Dr Leonard Polonsky is provided in note 8.4.
25 Foreign exchange rates
The closing exchange rates used by the Group for the conversion of balance sheet items from US$ and € to sterling were as follows:
| 30-Jun | 30-Jun | |
| 2009 | 2008 | |
| US Dollar | 1.65 | 2.00 |
| Euro | 1.18 | 1.26 |
26 NON STATUTORY ACCOUNTS
The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 June 2009 or 2008, but is derived from those accounts.
27 ANNUAL REPORT
The Company's annual report and accounts for the year ended 30 June 2009 is expected to be posted to shareholders by 16 October 2009. Copies of both this announcement and the annual report and accounts will be available to the public at the Company's registered office at Harbour Court, Lord Street, PO Box 192, Douglas, Isle of Man, IM99 1QL and through the Company's website at www.Hansard.com
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL FINANCIAL REPORT
The consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit for the Group and the undertakings included in the consolidation taken as a whole; and pursuant to Disclosure and Transparency Rules, Chapter 4, the Directors' Report of the Company's annual report includes a fair review of the development and performance of the business and the position of the Group, and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties faced by the business.
Dr L S Polonsky G S Marr
Director Director
On behalf of the Board
23 September 2009 EEV INFORMATION
1. INTRODUCTION
The European Embedded Value ("EEV") is an estimate of the value of the shareholders' interest in the Group. It comprises net worth and the value of future profits from business in-force at the valuation date, 30 June 2009. Net worth is the market value of shareholder funds, determined on an IFRS basis, adjusted to exclude deferred origination costs and deferred income reserve. The value of future profits is the present value of those profits expected to arise from assets backing the liabilities of the covered business.
EEV covers the entire business of the Group, including its life assurance companies and subsidiaries providing administration, distribution and other services. It excludes the value of any future new business that the Group may write after the valuation date. All results are calculated net of corporation tax. The Group does not have any debt or financial reinsurance arrangements in place at the valuation date.
The Group's EEV methodology complies fully with the set of EEV Principles published by the CFO Forum in May 2004 and extended in October 2005. It has been calculated using market consistent economic assumptions and best estimate operating assumptions having regard for the Group's own past, current and expected future experience. The methodology used is consistent with the methodology used in the consolidated financial statements for the year ended 30 June 2008.
2. EEV PROFIT
EEV profit provides a measure of the Group's performance over the year.
The components of EEV profit after tax are set out in the table below.
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| New business contribution | 10.1 | 20.3 |
| Expected return on existing business | 9.7 | 9.4 |
| Experience variances | (5.3) | (3.1) |
| Operating assumption changes | (8.0) | 2.8 |
| Expected return on net worth | 2.8 | 2.8 |
| Model changes | 2.0 | 15.7 |
| EEV operating profit after tax | 11.3 | 47.9 |
| Investment return variances | (2.1) | (0.2) |
| Economic assumption changes | 1.1 | (0.6) |
| EEV profit after tax | 10.3 | 47.1 |
A description of each component of EEV profit is as follows:
EEV operating profit
EEV operating profit for the year reflects that the Group has continued to write profitable new business, despite market conditions that have caused reduced sales volumes. Existing policyholders have also changed their behaviour as a result of the market conditions and management has responded to this by making more cautious assumptions about the future. EEV operating profit after tax is £11.3m (2008: £47.9m), a return on EEV of 4.6% (2008: 22.0%). Market conditions that have had an exaggerated effect on new business metrics have distorted a comparison of EEV results with those of the prior year.
Difficult market conditions have led to lower levels of new business, with the value added from new business of £10.1m being approximately half of last year's level (2008: £20.3m). While the Group has met its target returns on new business written, reduced volumes and continued investment in distribution infrastructure have, in part, led to a reduced level of new business contribution during the year. In addition, the recessionary conditions experienced over the year have led to a 6% reduction in regular premium levels, together with increased numbers of policies becoming paid-up. We anticipate a continuation of this situation for a number of years and have recognised this by revising assumptions accordingly, which has reduced EEV operating profit by £7.8m.
When comparing EEV operational profit year-on-year, note that the profit for 2008 included a significant one-off modelling boost of £15.7m from the introduction of wide-scale modelling enhancements.
EEV profit after tax
Extreme market conditions during the year caused declines in market values of policyholder assets under administration, leading to a reduction of £25.2m (2008: £12.7m loss) in EEV profit through lower than expected levels of fund-based income. The Group's diversified exposure to different currencies together with a general weakening of sterling over the year has led to a profit of £24.9m (2008: £11.4m profit). In aggregate, investment conditions together with economic assumption changes have reduced EEV profit by £1.0m (2008: £0.8m loss). EEV profit after tax is £10.3m (2008: £47.1m), a return on EEV of 4.2% (2008: 21.6%).
New Business Contribution ("NBC")
NBC represents the value of new business written in the year. It is calculated at point of sale, including any acquisition expense overrun, and is net of corporation tax. NBC for the year is £10.1m (2008: £20.3m). The effect of the recession on the insurance long-term savings market has impacted on sales activity and the Group has reported a substantial decline in new business premiums. This has also contributed to an acquisition expense overrun of £2.8m in the year, which has reduced NBC accordingly.
Expected return on existing business
The expected return on existing business of £9.7m (2008: £9.4m) is the increase in the value of future profits over the year and in new business between the point of sale and the end of the year due to the time value of money. It is based on the 5.0% assumption for the risk discount rate at the previous financial year-end.
Experience variances
Experience variances arise where the Group's actual experience in areas such as expenses, policy persistency, premium persistency, mortality and fees from policyholder activity differ during the year from the assumptions used to calculate the EEV at the previous year-end.
Experience variances gave rise to an EEV loss of £5.3m in the year (2008: £3.1m loss). This loss arose mainly from policyholders reducing their premiums on regular premium products and more policies becoming paid-up in the period than expected. However, lapse experience was stable over the year, with slightly fewer policyholders surrendering their policies than expected. This is, in part, due to good product design and has helped to bolster the existing book of business. Mortality experience was positive with fewer than expected deaths in the year. Maintenance expense experience was marginally better than expected which resulted in a small renewal expense underrun.
Operating assumption changes
A review of operating assumptions was conducted at the year end, as normal. Changes were made to the EEV assumptions to reflect current expectations about future levels of premiums, expenses, mortality, lapses and other operating matters. These operating assumption changes reduced the EEV by £8.0m (2008: £2.8m profit), reflecting a loss in EEV compared with previous year assumptions. The bulk of this loss related to changes to reflect lower than previously expected levels of premium persistency, which accounts for a loss of £7.8m. As a one-off gesture to policyholders, the Group waived its July 2009 contractual increase in policy servicing charges, at an EEV cost of £2.2m. Other operating assumption changes for future levels of expenses, mortality, lapses and policyholder activity had a small overall positive effect on EEV operating profit.
Expected return on net worth
The expected return on net worth of £2.8m (2008: £2.8m) reflects the anticipated increase to shareholder assets over the period due to the time value of money and its calculation is based on the 5.0% risk discount rate at the previous financial year-end.
Model changes
During the year, a number of minor improvements made to the model resulted in a small increase to EEV of £2.0m (2008: £15.7m). This is a one-off adjustment and is not expected to recur in future years.
Investment return variances
The impact of market and other external conditions gave rise to EEV investment return losses of £2.1m in the year (2008: £0.2m). Large losses arising from poor investment performance of policyholder assets were mostly mitigated by gains arising from the diversified exposure to different currencies together with the weakening of sterling over the year.
The main elements contributing to this loss are as follows:
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| Investment performance of policyholder funds | (25.2) | (12.7) |
| Exchange rate movements | 24.9 | 11.4 |
| Commissions receivable | (0.7) | 1.3 |
| Other | (1.1) | (0.2) |
| Investment return variances | (2.1) | (0.2) |
Economic assumption changes
Economic assumption changes resulted in an EEV profit of £1.1m (2008: £0.6m loss). Lower interest rates have led to a reduction in the rate used to discount future cash flows and hence an increase to EEV of £3.7m. Commissions received from fund houses in the year have fallen compared with the previous year. Although we expect these receipts to return to previous levels when markets and investor confidence recover, we have taken a more cautious approach in the EEV calculation by assuming that only a partial recovery of this income will happen. This has reduced EEV by £2.6m.
A detailed analysis of EEV profit is presented within section 5 of the Notes to the European Embedded Value Information.
3. EMBEDDED VALUE
3.1 EEV BALANCE SHEET
Following the payment of dividends totalling £16.8m, the Group's EEV has fallen by £6.5m to £236.6m (2008: £243.1m). The EEV balance sheet is presented below.
| At 30 June | 2009 | 2008 |
| £m | £m | |
| Free surplus | 53.3 | 45.6 |
| Required capital | 14.9 | 11.3 |
| Net worth | 68.2 | 56.9 |
| Value of in-force business ("VIF") | 174.6 | 192.0 |
| Reduction for non-market risk | (5.5) | (5.3) |
| Frictional costs | (0.7) | (0.5) |
| Value of future profits | 168.4 | 186.2 |
| EEV | 236.6 | 243.1 |
3.2 RECONCILIATION OF EEV
The following table provides a reconciliation of the opening and closing EEV:
| Financial year | 2009 | 2008 | ||||||||
| EEV | Net | VIF | Non- | Frictional | EEV | Net | VIF | Non- | Frictional | |
| worth | market | costs | worth | market | costs | |||||
| risk | risk | |||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| Opening | 243.1 | 56.9 | 192.0 | (5.3) | (0.5) | 218.0 | 56.5 | 166.8 | (5.0) | (0.3) |
| EEV profit after tax | 10.3 | 28.1 | (17.4) | (0.2) | (0.2) | 47.1 | 22.4 | 25.2 | (0.3) | (0.2) |
| 253.4 | 85.0 | 174.6 | (5.5) | (0.7) | 265.1 | 78.9 | 192.0 | (5.3) | (0.5) | |
| Dividends paid | (16.8) | (16.8) | 0.0 | 0.0 | 0.0 | (22.0) | (22.0) | 0.0 | 0.0 | 0.0 |
| Closing | 236.6 | 68.2 | 174.6 | (5.5) | (0.7) | 243.1 | 56.9 | 192.0 | (5.3) | (0.5) |
3.3 RECONCILIATION OF NET WORTH
EEV net worth is the market value of the shareholders' funds, determined on an IFRS basis, adjusted to exclude certain assets such as the deferred origination costs and other debtor assets recognised in the VIF, and certain liabilities such as the deferred income reserve. The following table provides a link between the EEV and IFRS net worth:
| At 30 June | 2009 | 2008 |
| £m | £m | |
| IFRS net asset value | 55.7 | 52.4 |
| IFRS deferred origination costs | (104.1) | (102.5) |
| IFRS deferred income reserve | 125.2 | 116.5 |
| IFRS debtor recognised in VIF | (8.6) | (9.5) |
| EEV net worth | 68.2 | 56.9 |
IFRS deferred origination costs are accounting assets, which affect the timing of IFRS profit but do not have any economic value. They are removed so as to avoid any double counting of future margins recognised in the VIF. IFRS deferred income reserve is an accounting liability that spreads fees on premiums received, for example establishment fees charged to policyholder funds in the period after policy inception. It affects the timing of IFRS profit and does not have any economic value and is removed so as to avoid any double counting of future margins recognised in the VIF. IFRS debtor relates to future establishment fees and since they are incurred after the valuation date are recognised in the VIF. They are not included in the EEV net worth.
3.4 PROFIT EMERGENCE
In general, the faster the speed at which future cash flows recognised in the VIF are expected to emerge into net worth, the more certainty there is that those cash flows will be received at their anticipated levels and hence the more certainty there is about the EEV itself. As at 30 June 2009, the value of future profits is £168.4m. Over a quarter of these profits are expected to convert into net worth within 2 years, half within 5 years and three quarters within 10 years, as can be seen below. This illustrates a fast conversion of future cash flows to net worth, as required by the Group's pricing methodology. This is significantly quicker than competitor products.
4. NEW BUSINESS PROFITABILITY
The Group continues to write profitable new business. The following metrics attempt to provide an indication of the profitability of the Group's new business written in the year.
4.1 NEW BUSINESS MARGIN
New business margin is defined as New Business Contribution ("NBC") divided by Present Value of New Business Premiums ("PVNBP").
NBC for the year is £10.1m (2008: £20.3m). This represents the present value of the expected stream of shareholder cash flows after tax from new business written in the year, and is calculated at the point of sale.
PVNBP for the year is £166.2m (2008: £261.8m) and represents the total single premium sales in the year plus the discounted value of regular premiums expected to be received over the term of new regular premium policies, and is calculated at the point of sale. PVNBP was reduced by £6.4m from assumption changes to reflect lower levels of premium persistency.
The new business margin for the year is 6.1% on a PVNBP basis, down from 7.8% last year. This is due to significantly reduced new business flows and continued investment in the Group's distribution infrastructure to improve its sales proposition. Even at this historically low level, the margin remains relatively strong against our competitors.
A proportion of the Group's cost base is relatively fixed in nature, so this year's fall in sales, together with the abovementioned investment in its distribution infrastructure, has contributed to an acquisition expense overrun of £2.8m (2008: £0.5m overrun) in the year, which has reduced the contribution from new business and hence the new business margin.
Conversely, the Group is positioned to support at least a 50% growth in sales back to last year's level (2008 PVNBP: £261.8m) without a correspondingly large increase in acquisition expenses. A return to last year's level of sales would be expected to eliminate the acquisition expense overrun, deliver a contribution from new business of £20m and a new business margin of 7.6%.
| Year ended 30 June | 2009 | 2008 |
| £m | £m | |
| PVNBP | 166.2 | 261.8 |
| NBC (net of corporation tax) | 10.1 | 20.3 |
| New business margin | 6.1% | 7.8% |
NBC and PVNBP have been calculated using the same economic assumptions as those used to determine the EEV as at the start of the year and the same operating assumptions used to determine the EEV as at the end of the year. So, the components of the new business margin are calculated on a consistent basis. No credit is taken in the calculation of NBC for returns in excess of risk-free returns. NBC is shown after allowing for the cost of required capital, calculated on the same basis as for in-force business.
4.2 INTERNAL RATE OF RETURN ("IRR")
New business requires initial capital investment to cover set-up costs, commission payments, statutory reserves and solvency capital requirements. IRR is a measure of the post tax shareholder return on this initial capital invested. It is defined as the discount rate at which the present value of expected cash flows over the life of the new business written in the year is equal to the total capital invested to support the writing of that business. The assumptions for future investment and operating performance are the same as those used in the calculation of the NBC and hence no credit is taken for real returns in excess of risk-free returns. The average IRR on new business written during the year is in excess of 15% per annum (2008: in excess of 15% per annum).
4.3 BREAK EVEN POINT ("BEP")
BEP indicates how quickly shareholders can expect new business to repay its capital support. In effect, it is defined as the point at which initial capital invested to support the writing of new business in the year (including its share of overhead expenses) is recouped from revenue from that same business. BEP is calculated ignoring the time-value of money. The assumptions for future investment and operating performance are the same as those used in the calculation of the NBC and hence no credit is taken for real returns in excess of risk-free returns. The average BEP for new business written during the year is 2.9 years (2008: 2.2 years). This increase is due to reduced new business flows, together with the fixed nature of elements of the Group's acquisition cost base.
5. EEV SENSITIVITY ANALYSIS
Sensitivities provide an indication of the impact of changes in particular assumptions on the EEV at 30 June 2009 and the NBC for the year then ended.
In each sensitivity calculation, all other assumptions remain unchanged, except where indicated. There is a natural correlation between many of the sensitivity scenarios tested, so the impact of two occurring together is likely to be less than the sum of the individual sensitivities. No changes to statutory valuation bases, pricing bases and required capital have been included. No future management action has been modelled in reaction to the changing assumptions. For new business, the sensitivities reflect the impact of a change immediately after inception of the policy.
| Impact on: | EEV | NBC |
| £m | £m | |
| Central assumptions | 236.6 | 10.1 |
| Operating sensitivities | ||
| 10% increase in expenses | (5.2) | (0.5) |
| 100bp increase in expense inflation | (3.5) | (0.3) |
| 100bp increase in charge inflation | 2.9 | 0.2 |
| 100bp increase in expense & charge inflation | (0.6) | (0.1) |
| 10% decrease in lapse rates | 3.6 | 0.3 |
| 10% increase in paid-up rates | (1.1) | (0.2) |
| 10% decrease in mortality rates | 0.4 | 0.0 |
| 10% increase in partial withdrawals | (1.4) | (0.1) |
| 10% increase in premium reductions | (0.5) | (0.1) |
| 10% increase in premium holidays | (0.3) | 0.0 |
| Economic sensitivities | ||
| 100bp decrease in risk discount rate | 9.0 | 1.2 |
| 100bp decrease in investment return rate | (6.5) | (0.6) |
| 100bp decrease in risk discount rate & investment return rate | 1.9 | 0.5 |
| 10% decrease in the value of equities and property | (8.9) | 0.0 |
| 10% increase in sterling exchange rates | (15.5) | (1.3) |
| 10% decrease in commissions receivable | (2.6) | (0.2) |
| Reduce required capital to minimum requirement | 0.0 | 0.0 |
The sensitivity analysis indicates that the Group is primarily exposed to economic factors. In particular, it is exposed to movements in equity, property and currency values, through the impact on the level of future fund-based management income. The Group's exposure to operating factors is more limited, largely as a result of product design.
1. BASIS OF PREPARATION OF EEV
EEV Principles
The Group's EEV methodology complies fully with the set of EEV Principles published by the CFO Forum in May 2004 and extended in October 2005. It has been calculated using market consistent economic assumptions and best estimate operating assumptions having regard for the Group's own past, current and expected future experience.
MCEV Principles©
In June 2008, the CFO Forum published the European Insurance CFO Forum Market Consistent Embedded Value Principles (MCEV Principles) (Copyright© Stichting CFO Forum Foundation 2008) with a view to bringing greater consistency and improved disclosure to the European insurance industry's embedded value disclosures. However, in April 2009, following much debate, the CFO Forum announced that it was to delay their implementation of the MCEV Principles until 2011. We have decided not to adopt the MCEV Principles while they remain under review by the CFO Forum.
That said, the Group's EEV is already calculated on a market-consistent bottom-up basis using interest swap rates to determine the risk discount rate. Therefore, adoption of the MCEV Principles as currently proposed is not expected to have a material financial impact on the embedded value results, although it will necessitate formatting and disclosure changes.
Covered business
EEV covers the entire business of the Group, including its life assurance companies and subsidiaries providing administration, distribution and other services. It excludes the value of any future new business that the Group may write after the valuation date. All results are calculated net of corporation tax. The Group does not have any debt or financial reinsurance arrangements in place at the valuation date.
New business premiums
The following premiums are included in the calculation of the NBC, PVNBP, IRR and BEP:
Premiums arising from the sale of new policies during the period, including Contractual premiums, and Non-contractual recurrent single premiums where the level of premium is pre-defined and reasonably predictable.
Non-contractual top-up premiums received during the period on existing single premium policies.
Timing of cash flows
The EEV has been calculated using economic and operating assumptions as at the end of the financial year (i.e. the valuation date). The NBC, PVNBP, IRR and BEP have been calculated using economic assumptions as at the start of the year and operating assumptions as at the end of the year.
Real world returns
No credit is taken in the calculation of EEV, NBC, PVNBP, IRR or BEP for returns in excess of risk-free returns. This approach may differ, particularly with regards to the calculation of IRR and BEP, from that used by some of our competitors, who include an asset risk premium.
2. METHODOLOGY
Overview
The methodology used to derive the EEV results at the valuation date is consistent with the EEV methodology used in relation to the consolidated financial statements for the year ended 30 June 2008. Under EEV methodology, profit is recognised as margins are released from policy related balances over the lifetime of each policy within the Group's in-force covered business. The total profit recognised over the lifetime of a policy under EEV methodology is the same as reported under IFRS, but the timing of recognition is different.
Embedded value
Embedded value is a measure of the value of the shareholders' interest in the life and related businesses of the Group, represented by the total of the net worth of the Group and the value of in-force covered business written by the Group as at the relevant valuation date. The embedded value is calculated on the Group's entire in-force covered business and is shown net of corporation tax. It ignores the value of any future new business.
Net worth
Net worth is the market value of the shareholders' funds, determined on an IFRS basis, adjusted to exclude certain assets such as the deferred origination costs and liabilities such as the deferred income reserve, and to add back any non-admissible assets. The net worth consists of required capital and free surplus.
Required capital
Required capital is the market value of assets, attributed to the covered business over and above that required to back liabilities for covered business, whose distribution to shareholders is restricted. It comprises the prudential non-unit reserves calculated on a statutory valuation basis plus the regulatory solvency margin of the Group's two life assurance companies, plus an internal margin held in excess of these statutory requirements.
Free surplus
Free surplus is the market value of assets allocated to, but not required to support, the in-force covered business at the valuation date. In effect, it is the excess of net worth over required capital.
Present value of future profits
The present value of future profits is calculated as:
value of in-force covered business (VIF)
less frictional cost of required capital
less a reduction for non-market risk.
Value of in-force covered business ("VIF")
The VIF is determined by calculating, on a best estimate basis, the stream of future shareholder cash flows expected to arise from assets backing the liabilities of the covered business, and then calculating the present value of the cash flows using an appropriate risk discount rate. On the Isle of Man and in the Republic of Ireland, future shareholder cash flows are deemed to arise when they are released from policyholder funds, following an actuarial valuation by the appointed actuary. The VIF is calculated on a 'look through' basis whereby it includes the value of profits and losses arising from subsidiary companies providing administration, distribution and other services.
Frictional cost of required capital
Though the present value of future profits assumes that in future years any capital in excess of the Group's capital requirements is transferred to shareholders, some assets are not immediately transferable, as they are needed to satisfy regulatory capital requirements and provide working capital. An allowance is made for the frictional cost of required capital in order to reflect that there is a cost to shareholders of delaying the distribution of such assets, for example, taxation on interest on required capital. This cost is explicitly deducted from the VIF in the calculation of the present value of future profits.
Non-market risk
Allowance is made for the cost of non-market risks not already covered in the VIF. The main risks covered are mortality, persistency, expense and other operating risks. In choosing best estimate assumptions, directors have already made some allowance for risk. However, best estimate assumptions may fail to represent the full impact on shareholder value where adverse experience has a higher impact on shareholder value than favourable experience.
Cost of financial options and guarantees
The Group's business does not include any policies with material options and/or guarantees regarding investment performance and, hence, unlike the situation faced by many other life assurers, the Group's cost of financial options and guarantees is zero.
3. OPERATING ASSUMPTIONS
The EEV was calculated using best estimate operating assumptions (e.g. expenses, mortality, lapses, premium persistency, partial withdrawals and policyholder activity) having regard for the Group's own past, current and expected future experience, together with other relevant data.
The Group's in-force covered business is unit-linked in nature, and consists mainly of investment-type products with minimal life cover and no options or guarantees. The three main product groups are regular premium, single premium and recurrent single premium. Variations in experience between the product classes have been considered and, where appropriate, separate assumptions have been used.
All assumptions were based on the business being part of a going concern.
Expense assumptions
A realistic estimate of the Group's future expenses is allowed for in the EEV calculations, based on actual recent expense levels and the directors' estimate of realistic future expense levels. This estimate includes the future costs associated with obligations from being a listed entity and recognises the level of activity arising from expected business volumes.
Some costs incurred by the Group, for example those associated with managing policyholder funds and costs charged by external fund managers, are charged directly against policyholder funds. These costs in turn reduce the net rate of growth assumed for the relevant policyholder funds rather than being reflected in the future per policy expense levels.
Overhead expenses have been allocated between new business, existing business and development projects in an appropriate way that is consistent with past allocations, current business plans and future expectations. Holding company and subsidiary company expenses, including overhead expenses, have been allocated to the expense assumptions on a 'look through' basis.
The allocation of expenses between acquisition and maintenance is consistent with the allocation used to derive the pricing and reserving bases.
Development costs to enable future new business have been allocated to new business and are fully reflected in the calculation of the NBC. Other non-recurring development costs and any other expenditure of an exceptional nature are generally charged as incurred, and hence will be reflected as a profit or loss in the year. Such costs amounted to £0.7m in the year ended 30 June 2009 (2008: £0.7m).
Expected future productivity gains have not been included in the expense assumptions.
A proportion of the Group's cost base (e.g. its servicing infrastructure, policy administration function and elements of its sales and marketing functions) is relatively fixed in nature, so growth in sales and the level of in-force business generates additional value through a corresponding growth in charges. Conversely, this year's fall in sales, together with continued investment in the Group's distribution infrastructure to improve its sales proposition, has contributed to an acquisition expense overrun of £2.8m (2008: £0.5m overrun) in the year, which has been fully reflected in the NBC.
Demographic assumptions
Assumptions for future rates of mortality, lapses, partial withdrawals, policies being made paid-up, premium reductions and premium holidays have been derived from investigations of the Group's own recent experience and having regard for expected future experience and relevant market data. Separate assumptions have been set for each product class, where appropriate.
Taxation
After considering current and expected future tax legislation, regulation and the company's own tax position, the tax rate assumptions have remained unaltered as follows:
| 30-Jun-09 | 30-Jun-08 | |
| Isle of Man | 0% | 0% |
| Republic of Ireland | 12.50% | 12.50% |
Non-market risk
The directors have established an allowance of £5.5m (2008: £5.3m) to account for the cost of non-market risks. This amount is equivalent to an increase of 0.6% (2008: 0.6%) per annum in the risk discount rate assumption at the valuation date. It has been assessed after considering past experience, the operational characteristics of the business and market information. The suitability of this allowance is continually kept under review.
Other operating assumptions
Assumptions for the rate of policyholder activity, such as fund switching, have been derived from investigations of the Group's own recent experience and having regard for expected future experience.
4. ECONOMIC ASSUMPTIONS
The principal economic assumptions used in the EEV calculations are actively reviewed at each reporting date and are internally consistent.
Risk-free rate
In line with EEV Principles, the risk-free rate is based on the bid swap yield curve appropriate to the currency of the cash flows. This risk-free rate is then used to derive the risk discount rate and investment return assumptions.
There are difficulties in valuing each individual cash flow with a different risk-free rate. So for practical reasons a single equivalent risk-free rate is derived (using the term and currency of individual cash flows) that would produce similar results to those using individual cash flow risk-free rates.
In order to determine the appropriate single equivalent risk-free rate, the weighted-average term of cash flows is derived from all projected cash flows on the in-force book of covered business. This process resulted in an average cash flow term of 6 years at the valuation date. Bid swap yield curves are then collated for each of the major currencies in which the Group's cash flows are denominated, including sterling, US$ and €. The 6-year yield is determined from each yield curve and a weighted average yield is calculated based on the currency profile of the Group's in-force book of business. The risk-free rate is set equal to this single weighted-average swap yield.
| 30-Jun-09 | 30-Jun-08 | |
| Risk-free rate p.a. | 3.3% | 5.0% |
Risk discount rate
The risk discount rate is set equal to the risk-free rate. The EEV calculation uses the risk-free rate applicable at the end of the year (i.e. at the valuation date), while the calculation of NBC, PVNBP, IRR and BEP uses the risk-free rate applicable at the start of the year (i.e. at the previous year-end date).
| Year ended | Year ended | |||
| 30-Jun-09 | 30-Jun-09 | 30-Jun-08 | 30-Jun-08 | |
| EEV | NBC | EEV | NBC | |
| Risk discount rate p.a. | 3.3% | 5.0% | 5.0% | 5.0% |
Investment returns
All investments are assumed to provide a return equal to the risk-free rate less external fund manager investment charges and any other investment expenses charged directly against policyholder funds.
Risk premium
No credit is taken in the calculation of EEV, NBC, PVNBP, IRR or BEP for returns in excess of risk-free returns i.e. a cautious approach is adopted by assuming an asset risk premium of zero.
Inflation rates
In setting the expense inflation assumption, consideration is given to price and salary inflation rates in both the Isle of Man and the Republic of Ireland, to the risk-free rate described above and to the Group's own expense experience and expectations. For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life assurance companies.
By design, contractual monetary-charge inflation is broadly matched to expense inflation and in some cases is subject to a minimum level of inflation. This correlation between expense inflation and charge inflation dampens the impact of inflation on the embedded value results.
Inflation assumptions are as follows:
| 30-Jun-09 | 30-Jun-08 | |
| Expense inflation p.a. | 5.0% | 5.0% |
| Charge inflation p.a. | 5.0% | 5.0% |
Exchange rates
A proportion of the Group's income and expenditure is contracted in currencies other than sterling, in particular US$ and €. In respect of EEV calculations, historic transactions that occurred prior to the valuation date are converted to sterling using the exchange rate applicable on the day the transaction occurred, whilst projected future transactions are converted to sterling using the exchange rate applicable on the valuation date.
The principal valuation date exchange rates used are as follows:
| 30-Jun-09 | 30-Jun-08 | |
| US Dollar | 1.65 | 2.00 |
| Euro | 1.18 | 1.26 |
5. DETAILED ANALYSIS OF EEV PROFIT
The table below shows an analysis of EEV profit after tax split between net worth, the value of in-force covered business (VIF), non-market risk and frictional costs. The analysis illustrates the ability of the opening VIF to be turned into net worth quickly.
| Year ended 30 June | 2009 | 2008 | ||||||||
| Movement In | Movement In | |||||||||
| EEV | Net | VIF | Non- | Frictional | EEV | Net | VIF | Non- | Frictional | |
| worth | market | costs | worth | market | costs | |||||
| risk | risk | |||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| New business contribution | 10.1 | 0.0 | 10.1 | 0.0 | 0.0 | 20.3 | 0.0 | 20.3 | 0.0 | 0.0 |
| Expected return on existing business | 9.7 | 30.4 | (20.5) | (0.2) | 0.0 | 9.4 | 25.3 | (15.6) | (0.3) | 0.0 |
| Experience variances | (5.3) | (4.3) | (0.8) | 0.0 | (0.2) | (3.1) | (8.0) | 4.9 | 0.0 | 0.0 |
| Operating assumption changes | (8.0) | 0.0 | (8.0) | 0.0 | 0.0 | 2.8 | 0.0 | 2.8 | 0.0 | 0.0 |
| Expected return on net worth | 2.8 | 2.8 | 0.0 | 0.0 | 0.0 | 2.8 | 2.8 | 0.0 | 0.0 | 0.0 |
| Model changes | 2.0 | 0.0 | 2.0 | 0.0 | 0.0 | 15.7 | 0.0 | 15.9 | 0.0 | (0.2) |
|
| ||||||||||
| EEV operating profit after tax |
11.3 |
28.9 |
(17.2) |
(0.2) | (0.2) | 47.9 | 20.1 | 28.3 | (0.3) | (0.2) |
| Investment return variances | (2.1) | (0.8) | (1.3) | 0.0 | 0.0 | (0.2) | 2.3 | (2.5) | 0.0 | 0.0 |
| Economic assumption changes | 1.1 | 0.0 | 1.1 | 0.0 | 0.0 | (0.6) | 0.0 | (0.6) | 0.0 | 0.0 |
| EEV profit after tax | 10.3 | 28.1 | (17.4) | (0.2) | (0.2) | 47.1 | 22.4 | 25.2 | (0.3) | (0.2) |
EEV reconciliation by component
The analysis, when combined with the reconciliation of EEV in section 3.2 of the European Embedded Value Information, provides a reconciliation of the EEV between the start and the end of the year. The detailed level of the analysis allows the reconciliation to be performed separately for each of the four components: net worth, VIF, non-market risk and frictional costs.
Link to IFRS accounts
The analysis, when combined with the reconciliation of net worth in section 3.3, of the European Embedded Value Information, provides a reconciliation of EEV profit and IFRS profit. Note that the total profit recognised over the lifetime of a policy under EEV methodology is the same as reported under IFRS, but the timing of recognition is different.
Movement between VIF and net worth
The analysis illustrates, in particular, the movement of cash flows between VIF and net worth during the year. This element of the analysis is discussed in more detail below:
(i) VIF is increased directly by the point-of-sale new business contribution of £10.1m.
(ii) The expected return on existing business of £9.7m is made up of five components:
1) on the existing book of business: the release of cash flows anticipated in the opening VIF (increases net worth by £44.5m; reduces VIF by £44.5m)
2) on new business written in the year: Group capital resources are reduced by the amounts required to invest in new business during the year
(increases VIF by £14.1m; reduces net worth by £14.1m)
3) the increase in the value of future profits over the year due to the time value of money (increases VIF by £9.6m; no change to net worth)
4) the increase in the value of new business between the point of sale and the end of the year due to the time value of money (increases VIF
by £0.3m; no change to net worth)
5) the increase in non-market risk over the year by £0.2m due to the time value of money.
These cash flows are summarised in the following table:
| Expected return cash flows | EEV £m | Net worth £m | VIF £m | Non-market risks £m | Frictional costs £m |
| 1) Existing business cash flows | 0.0 | 44.5 | (44.5) | 0.0 | 0.0 |
| 2) New business cash flows | 0.0 | (14.1) | 14.1 | 0.0 | 0.0 |
| 3) Time value of existing business | 9.6 | 0.0 | 9.6 | 0.0 | 0.0 |
| 4) Time value of new business | 0.3 | 0.0 | 0.3 | 0.0 | 0.0 |
| 5) Time value of non-market risk | (0.2) | 0.0 | 0.0 | (0.2) | 0.0 |
| Total expected return | 9.7 | 30.4 | (20.5) | (0.2) | 0.0 |
(iii) Adverse operating experience over the year gave rise to £4.3m lower than expected net worth at the end of the year due to lower than expected profits received in the year. It also had the indirect effect of reducing the VIF by £0.8m as, for example, more policies becoming paid up than expected reduces both anticipated future profits as well as profits in the year.
(iv) The review of operating assumptions was, as usual, conducted at the end of the year and as such only affects anticipated future profits (reduces VIF by £8.0m; no change to net worth).
(v) The expected increase in net worth of £2.8m due to the time value of money only affects the net worth element.
(vi) Model changes were introduced at the end of the year and as such only affect anticipated future profits (increases VIF by £2.0m; no change to net worth).
(vii) Adverse investment experience over the year gave rise to £0.8m lower than expected net worth at the end of the year due to lower than expected profits received in the year. It also had the indirect effect of reducing the VIF by £1.3m as, for example, lower than expected market values reduces both anticipated future fund-based income as well as fund-based income in the year.
(viii) The review of economic assumptions was conducted at the end of the year and as such only affects anticipated future profits (increases VIF by £1.1m; no change to net worth).