Hansard Regulatory News (HSD)

23 February 2012

Hansard Global plc

Results for the six months ended 31 December 2011

Hansard Global plc ("Hansard" or "the Group"), the specialist long-term savings provider, issues its results for the six months ended 31 December 2011 ("H1 2012").

The Group has had a positive start to the financial year that is reflected in improved regular premium new business flows, increased contribution from new business and continued positive operating cash flows. The level of assets under administration and IFRS profits have been adversely impacted by global economic uncertainty.

Summary

* Payment date - 29 March 2012

Leonard Polonsky, Chairman of Hansard Global plc, commented:

"Our continued investment in distribution infrastructure and focus on particular markets such as the Far East and Latin America has delivered strong growth in regular premium business and increased new business margins, despite volatile economic conditions.

The Group's confidence in its future prospects is reflected in the Board's decision to increase the interim dividend by 2.6% to 5.9p per share.

Even though we face economic uncertainty, we aim to continue to deliver excellent service to Independent Financial Advisors and their clients, maintain profitable growth and generate value for our shareholders."

For further information

Chairman's Statement

I am pleased to report that Hansard's performance in the first six months of the financial year (H1 2012) demonstrates success from the Group's investment in distribution infrastructure and its focus on regular premium business sourced from growth markets.

Despite turmoil in all major stock markets in the period, new business flows are 8.9% higher than those of H1 2011, on the Group's internal measure. We are pleased that a large number of intermediaries have used Hansard OnLine functionality to introduce business to us electronically and that we have continued to generate positive operating cash flows to fund new business.

While the Group's business is resilient and new business profitability has increased, we are not immune from market forces. Results under both EEV and IFRS reflect the impact of market falls during the period and reactions to the uncertainties in the Eurozone.

NEW BUSINESS

Continued investment in Hansard OnLine and distribution infrastructure, investment in fast-growing markets in the Far East and Latin America, and the growing level of interest in Hansard's products among independent financial advisors and their clients have contributed to an increased flow of regular premium new business sales, despite prolonged market volatility in the period. New business flows in H1 2012 are 8.9% higher than those of H1 2011, on the Group's internal metric, Compensation Credit.

New business margins for H1 2012 of 10.4% (H1 2011: 7.4%) on the Present Value of New Business Premiums ("PVNBP") basis are market leading.

New business flows are summarised as follows:

The Group's market-driven focus is producing results. Regular premium flows, particularly from the Far East and Latin America, have increased by 41%, compared with H1 2011. The flow of single premium new business is however constrained by market conditions and current regulatory complexity. Total single premium business sales have fallen by £44m from H1 2011, mainly as a result of a small number of large single premium cases in that period.

The Group's investment in strategic projects to develop Hansard OnLine, including the implementation of new business initiatives, is bearing fruit. Over 1,000 policies were introduced electronically in the period, which represents almost 76% of regular premium policies.

FINANCIAL PERFORMANCE FOR THE SIX MONTHS ENDED 31 DECEMBER 2011

Throughout the period we have continued to generate positive operating cash flows to fund new business flows and have increased Embedded Value Operating profit after tax by 5.2% to £10.2m (H1 2011: £9.7m). Despite this growth, the combined impact of market falls and economic assumption changes has led to an EEV loss of £2.6m in the period (H1 2011: £27.0m gain).

The EEV of the Group, following the payment of a dividend of £11m in November 2011, is £243.4m, a decrease of £13.6m from the value at 30 June 2011.

The growth of the Group's profits under IFRS has been dampened by market falls, weaknesses in the Euro exchange rate against sterling, continued investment in infrastructure and new business strain. Under these circumstances IFRS profits have reduced to £5.2m after tax (H1 2011: £8.4m).

ASSETS UNDER ADMINISTRATION

Despite continued regular premium flows, the value of assets under administration has been impacted adversely by declines in capital market levels. As at 31 December 2011, assets under administration were £1.1bn, having fallen by 14.6% since 30 June 2011.

CAPITALISATION AND SOLVENCY

The Group continues to be substantially capitalised to satisfy operational, regulatory and policyholder expectations.

The Group's capital is held with a wide range of deposit institutions and in highly-rated money market liquidity funds to protect against capital market volatility. The Group had cash of £67.4m at the balance sheet date.

DIVIDENDS

The Board has resolved to increase the interim dividend by 2.6% to 5.90p per share (31 March 2011: 5.75p). This will be paid on 29 March 2012. On 18 November 2011 the Company paid a final dividend of 8.0p per share. Including the interim dividend referred to above, this will result in amounts totaling 13.90p per share, or £19m being paid as dividends during this financial year.

DIRECTORATE

I was pleased to welcome Philip Gregory to the Board with effect from 1 October 2011, and saddened that we will lose the benefit of Uwe Eymer's wise counsel as he has retired. Uwe left the Board on 31 December 2011.

EMPLOYEES AND INTERMEDIARIES

The continued development of the Group's proposition and the improved level of new business are a tribute to head office and field staff and the independent financial advisors who introduce that business to us. On behalf of the Board and shareholders I thank everyone connected with Hansard for their dedication and contribution during these turbulent times.

OUTLOOK

We continue to face economic uncertainty and we remain determined to grow in volume and profitability.

Dr L S Polonsky

Chairman

22 February 2012

MANAGING DIRECTOR'S REPORT

STRATEGY

Throughout the period Hansard has continued to invest in distribution infrastructure; to improve support to Independent Financial Advisors (IFAs) in our target markets, and to reduce our exposure to operational and business model risk. I believe that the success of our strategy is reflected in an increased flow of new business and in increasing development of functionality for Hansard OnLine.

RESULTS

New business flows in the period ended 31 December 2011 (H1 2012) have increased by approximately 9% over the levels of H1 2011 in Compensation Credit terms. Regular premium sales continue to drive growth in profitability and the Group's new business profits have increased by 9.4% over H1 2011, under EEV. Commentary on new business is contained in the report of the Chief Distribution Officer.

We are pleased, particularly, with the progress of increased functionality developed for Hansard OnLine to allow intermediaries and policyholders to more efficiently transact with us, and which demonstrates further the value of the insurance wrapper. As is reported in section 3, below, a large number of regular premium policies are delivered to us electronically, as are instructions for investment transactions within policy wrappers.

Despite the volatile economic conditions enduring throughout the period, the Group has continued to:

·; Generate positive cashflows to fund new business and dividends;

·; Invest in distribution infrastructure, Hansard OnLine and other IT developments, and

·; Enhance its risk management frameworks.

These and other factors are disclosed in this interim management report.

RISKS

As I have reported in the past, there are many impacts of the extreme financial and market circumstances encountered over the last few years that will continue to have a disproportionate effect on our activities. Like other financial service institutions, we continue to adapt to this.

The principal risks that impact on our strategy and results, and which are set out in section 4 below, are those flowing from regulatory interpretation, policyholder and intermediary behaviour and economic conditions. Our business model is such that the assets linked to policies, and which determine the policy values, are selected by policyholders or their advisors yet, as has been reported in the past, a significant portion of the complaints received by the Group relate to the selection and performance of assets. This is particularly true of more complex structured products distributed throughout Europe that have been selected by policyholders and / or their advisors for inclusion in policies.

As is reported in note 15 to the financial statements, a Group company has been served with writs totalling approximately £7m arising from such complaints and other asset-related issues. The Group does not provide investment advice and, accordingly, the Board is of the view that these complaints have no merit. The Group intends to defend itself against all such claims strenuously. An initial hearing in relation to the majority of these claims is scheduled for the latter part of April 2012.

FINANCIAL PERFORMANCE FOR THE SIX MONTHS ENDED 31 DECEMBER 2011

The success of our endeavours is not immediately apparent under IFRS reporting. New business flows will contribute to income streams over many years, but continued investment in systems and other resources will outweigh the initial growth in income. Our business is long term in nature, and for this reason we present the results on an EEV basis, which better reflects the true profitability of new business, in addition to the statutory IFRS basis, which are set out later in the report.

To provide additional clarity on the financial performance of the Group, we have again presented abridged financial information. An abridged consolidated income statement, balance sheet and cash flow statement is set out below, together with commentary on salient figures.

1. IFRS Results

The performance of the Group under IFRS for H1 2012 remained resilient in difficult economic conditions. Fees and commissions receivable have increased marginally despite significant falls in asset values that have restrained the flow of asset-based income. The continued investment in new business, in Hansard OnLine and other functionality has contributed to increased expenses.

The IFRS results reflect continuing investment of the Group's capital in profitable contracts, funded by positive cashflows. During the period, £13.8m (H1 2011: £12.3m) was invested in the acquisition of new business with a value (under EEV) of £21.6m (H1 2011: £19.4m). 

Volatility in foreign exchange markets as a result of the Eurozone crisis has contributed to unrealised losses of £0.7m on translation of net operating assets held in Euro (principally regulatory capital of Hansard Europe Limited). This compares with a gain of a similar amount in H1 2011.

The Group's profits arising from its Isle of Man-based operations continue to be taxable at zero percent. Profit after taxation for the period is £5.2m (H1 2011: £8.4m). Earnings per share are 3.8p (H1 2011: 6.1p).

1.1 Abridged consolidated income statement

The consolidated income statement presented under IFRS which is presented within these half-year results reflects the financial results of the Group's activities during the period. This income statement however, as a result of its method of presentation, incorporates a number of features that might affect a clearer understanding of the results of the Group's underlying transactions. This relates principally to:

·; investment income, gains and losses relating to the assets administered by the Group to back its liability to policyholders. These assets are selected by the policyholder or an authorised intermediary and the policyholder bears the investment risk arising from the performance of the asset. As a result of the market corrections in the summer months, investment losses during the period attributable to policyholder assets were £152.5m (H1 2011: gains of £152.2m; FY 2011: gains of £109.2m).

·; fund management fees paid by the Group to third parties having a relationship with the underlying contract. While fund management fees paid are properly recorded in the Group's income statement under IFRS, this 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 third party fund management fees attributable to policyholder assets was £2.1m (H1 2011: £2.3m; FY 2011: £4.8m). These are reflected in both income and expenses under the IFRS presentation.

An abridged consolidated income statement is presented below, excluding the items of income and expenditure indicated above.

1.1.1 Fees and commissions

A summary of fees and commissions attributable to Group activities is set out below:

Fees and commissions for the half-year have increased marginally to £25.2m, compared to £25.1m in H1 2011.

Elements of contract fee income are largely fixed in nature, representing both the smoothing of up-front income required under IFRS, and policy servicing charges applied to the policy book annually or as required by the policy terms and conditions. Consistent levels of contract fee income reflects the strength of the existing book of business, as the significantly increased levels of new business in this financial year will be reflected in fee income in future financial years.

The composition of contract fee income in the period under review reflects both the continued acquisition of profitable new business and policyholder concerns over economic conditions. Contract fees based on policyholder activity, such as transaction charges, lapse and surrender profits are all below those of H1 2011 while deferred fees, such as actuarial funding, have increased and will be amortised to income over the life of the contract, as can be seen in Section 1.3.3.

Approximately 30% of the Group's fees and commissions, being fund management fees and commissions receivable from third parties, are related directly to the value of assets under administration ("AuA") and are thus exposed to market movements and valuation judgements.

The Group's own fund management fee income, which is based on the level of AuA has reduced by 14% since H1 2011 as AuA has reduced by just over £250m (19.4%) since 31 December 2010.

1.1.2 Investment income attributable to the Group

An analysis of investment income is set out below:

Volatility in foreign exchange markets has contributed to unrealised losses on translation of net operating assets held in Euro (principally regulatory capital of Hansard Europe Limited) and unrealised gains on translation of assets held in US dollar (principally contract fee debtors). A summary of the currency exposures at the balance sheet date is set out in note 14 to the condensed consolidated financial statements. Any continued strengthening of Sterling against these currencies over the remainder of this financial year will cause additional losses.

1.1.3 Origination costs

Origination costs represent the Group's investment in acquiring new business in the period and include new business commissions, intermediary incentives and other distribution-related expenditure.

Origination costs and other directly attributable incremental costs incurred on the issue of a policy are deferred and amortised over the life of the relevant contract. This accounting policy reflects that the Group will continue to earn income over the long term from policies issued in a given financial year. The impact on current year earnings of contracts issued this year is minimal.

Other origination costs incurred, for example recruitment costs and initial payments to new Account Executives, which reflect investment in distribution resources in line with our strategy are expensed as incurred.

The continuation of the Group's strategy to increase profitable new business volumes is reflected in an increase of 13.9% in the direct costs of new business to £12.3m. This is principally commissions and other payments to advisors and is deferred to match the longer-term income streams expected to accrue from those policies issued this year. Amounts totalling £8.3m (H1 2011: £7.5m) have been expensed to match contract fee income earned this year from policies issued in previous financial years.

1.1.4 Administrative expenses

We continue to invest in the Group's sales and distribution infrastructure, responding to increasing regulatory requirements and better linking employee incentives with investor interests.

The Group is continuing to invest for future growth in the business. Strategic projects to develop Hansard OnLine, develop new business initiatives,streamline administrative processes and reduce operational risk have continued in the period. Progress on these key developments is discussed in detail in section 3.

The Group continues to focus on maintaining high levels of customer service while addressing regulatory and other complexities brought about, in large part, by the global financial crisis. Although there is no significant increase in net headcount from 30 June 2011, recent recruitment has focused on senior people to help cope with the changing nature of our business landscape.

Professional fees have increased by £0.2m over the comparative period, mainly legal fees as discussed elsewhere, and also include amounts totalling £0.3m (H1 2011: £0.3m) for administration, custody, dealing and other charges paid to Capital International Limited under the terms of the outsourcing arrangement that commenced in November 2009.

Reflecting the issues referred to above, administrative and other expenses attributable to Group activities are £10.7m, an increase of £1.2m from H1 2011.

A summary of administrative and other expenses attributable to the Group is set out below:

1.1.5 Taxation

As a result of the uncertain economic environment the stability of the tax regimes and rates that impact directly upon the Group's profitability have been challenged from many directions. We were pleased to note that steps taken by the Isle of Man Government to clarify its taxation regime to the EU have proven successful and therefore the Group's profits arising from its Isle of Man-based operations remain taxable at zero percent.

Similarly, the rate of corporation tax for the Republic of Ireland is expected to be retained at 12.5%.

1.2 Abridged consolidated cash flow statement

Operating cash flows in the year continue to be strongly positive. The operational surplus of £16.3m (fees deducted from contracts and commissions received, less operational expenses) has reduced by £1.1m over the comparative period. The change in the mix of new business has changed the profile of the income collected from policies, with initial fees taken as premiums are received on regular premium policies, rather than upfront as with single premium contracts.

Cash inflow has increased over the comparative period as explained below and has funded the increased investment in new business in the period.

This demonstrates that the in-force policy book continues to generate the cash required to support the Group's main business objectives of investing in new business, and enhancing distribution and other infrastructure.

Positive operating cash flows in the period allowed the Group to fund new business from its own resources and continue to invest in its sales force and support teams.

The following summarises the Group's own cash flows in the period:

The continued application of the Group's progressive dividend record, given the significantly increased investment in new business in the year, has reduced the Group's own cash and deposits since 30 June 2011.

1.3 Abridged consolidated balance sheet

The condensed consolidated balance sheet presented under IFRS elsewhere in this report reflects the financial position of the Group at 31 December 2011. As a result of its method of presentation, the consolidated balance sheet incorporates the value of assets under administration held to back the Group's liability to policyholders, and also incorporates the equivalent liability to policyholders of £1.1bn (31 December 2010: £1.3bn; 30 June 2011: £1.2bn). Additionally, some elements of the Group's own capital resources of £67.4m are disclosed in different positions based on maturity date of bank deposits.

The abridged consolidated balance sheet presented below, excluding those assets and liabilities, allows a better understanding of the Group's own capital position and reflects continued investment in profitable new business. The successful implementation of the Group's strategy to focus on regular premium new business results in an increase of deferred origination costs ("DOC"), and a smaller increase in the deferred income reserve ("DIR") since 30 June 2011.

The continued application of the Group's progressive dividend record, given recent reductions in IFRS profit, has resulted in the dividend of £11.0m paid during the period exceeding IFRS profit, and has therefore caused a reduction in Shareholders' equity since 30 June 2011.

1.3.1 Deferred origination costs

As mentioned above, deferral of origination costs reflect that the Group will continue to earn income over the long-term from policies issued in a given financial year. 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 of £4m in value since 30 June 2011 reflects continuing investment of the Group's capital in profitable policy contracts funded by positive cashflows, net of amounts amortised. Direct distribution costs of £13.8m (H1 2011: £12.3m) were invested in the acquisition of new business in the period.

The movement in value of DOC over the period is summarized below.

1.3.2 Cash and bank deposits

In the current low interest rate environment the Group feels that the best use of its capital is to ensure continued investment in profitable regular premium contracts. These investments earn a return of at least 15% p.a. As can be seen above, the Group invested £12.3m in new business during the year which was funded by cash flows from the existing policy book. While the construction of the Group's products means that this investment will be recouped within 3 years, continued investment in profitable regular premium contracts produces a short term cash strain as a result of the commission and other costs incurred at inception of a contract.

Following this investment in new business and a continuation of the Group's progressive dividend record, cash at 31 December 2011 stood at £67.4m. This is a decrease of £5.7m from the value of £73.1m reported at 30 June 2011, despite the payment of a dividend of £11m during the period. This further reflects the Group's continued cash generative capability.

Despite this reduction, the Group is well capitalized to meet the requirements of regulators, intermediaries, policyholders and other stakeholders. 

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.

1.3.3 Deferred income reserve

Consistent with the treatment of deferred origination costs, the treatment of deferred income ensures that initial fees are taken to the consolidated income statement in equal instalments over the longer-term, reflecting the services provided over the period of the contract. The deferred income reserve represents the unamortised balance of accumulated initial fees collected on new business.

The proportion of income deferred in any one year is dependent upon the mix and volume of business flows; the Group's focus on profitable regular premium business over the last 2 years means that these fees are received over the initial period of the contract, rather than being received up front, as is typically the case with single premium contracts.

The majority of initial fees collected during the period relates to charges taken from policies issued in prior financial years demonstrating the cash generative nature of the business. Policies issued in this financial period will generate the majority of their initial fees over the next 18 months on average. The movement in value of DIR over the period is summarized below:

1.4 Dividends

A final dividend of 8.0p per share in relation to the previous financial year was paid in November 2011. This amounted to £11.0m.

The Board has considered the results for H1 2012 and the Group's continued cash flow generation and has resolved to increase the interim dividend by 2.6% to 5.90p per share (31 March 2011: 5.75p). This will be paid on 29 March 2012.

1.5 Assets under Administration

In the following paragraphs, assets under administration ("AuA") refers to net assets held to cover financial liabilities as analysed in note 10 to the condensed consolidated financial statements presented under IFRS.

Despite market conditions, the Group has retained positive cash flows from the large number of regular premium contracts that the Group administers on behalf of policyholders around the world. Notwithstanding this cash flow, the value of AuA has been eroded by the market falls in Q1 2012. While positioning of policyholder assets and reduced confidence in timing of investment decisions have meant that AuA levels have not benefitted from the market recovery in Q2, the level of £1.1bn at 31 December 2011 remains only marginally below the level reported at 30 September 2011. This represents a decrease of 14.6% since 30 June 2011.

Although the changing mix of business towards regular premium contracts has significantly affected the value of net policyholder cash flows in H1 2012, when compared with H1 2011, we believe that increasing the level of regular premium contracts (with more stable, recurring cash inflows) will be value enhancing in the longer term.

The flexible nature of our products, allowing policyholders the ability to determine the investment mix held within policy contracts has, we believe, helped maintain benefits paid out on those contracts at the previous year's levels and further emphasises the value of the insurance wrapper.

Included in the market movements for H1 2012 are amounts totalling £21m representing the book value of a number of assets that ceased trading on normal terms in the period and have therefore been written down in accordance with our normal practice. In common with assets similarly treated in prior periods, this write-down results in a reduction in the Group's asset-based fee income. 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.

Deposits to investment contracts in H1 2011 included 3 large single premium cases, totalling £20m, reported previously.

1.6 Policyholder complaints

The assets linked to policies, and which determine the policy values, are selected by policyholders or their advisors. 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.

Notwithstanding the above, financial services institutions are increasingly drawn into disputes in cases where the value and performance of assets selected by or on behalf of policyholders fails to meet their expectations. This is particularly true of more complex structured products distributed throughout Europe that have been selected for inclusion in policies. At the balance sheet date a number of those fund structures remain affected by liquidity or other issues that hinder their sales or redemptions on normal terms with a consequent adverse impact on policy transactions. 

A Group company has been served with a number of writs arising from such disputes and other asset-related issues, and believes that other writs might be served in the next few months. Claims under writs served to date total approximately £7m.

The Group does not provide investment advice and, accordingly, the Board is of the view that these complaints have no merit and no provisions have been made. The Group intends to defend all claims strenuously. Any court hearings linked to these writs are not anticipated to take place before April 2012.

1.7 Capitalisation and Solvency

The Group continues to be substantially capitalised to satisfy the requirements of regulators, intermediaries and policyholders. The required minimum solvency margins are covered 13.9 times (31 December 2010: 13.4 times; 30 June 2011: 13.4 times) by the Group's capital resources.

The solvency position is well insulated against the difficult investment markets, as the Group invests its excess capital resources in a wide range of deposit institutions and in highly-rated money market liquidity funds. The in-force portfolio has no material investment options or guarantees that could cause capital strain. This policy continues to immunise the Group's capital base from stock market falls.

The relatively low minimum solvency requirement reflects the fact that the Group does not have options or guarantees on its investment portfolio, is not exposed to longevity risk through an annuity book and uses a prudent reassurance programme to manage the mortality and morbidity risks of the life businesses.

The introduction of Solvency II will see a fundamental change in the way EU-based insurers assess their capital requirements and risk management standards. Based on current guidance we do not expect additional capital requirements as a result of these legislative changes. While it seems possible that the implementation of Solvency II may be deferred beyond 1 January 2013, the Group will have developed its requirements by that date.

2. Embedded Value Results

EEV results for the period reflect the fact that the Group has increased the level of new business over that of H1 2011 by 8.9% as measured by its internal metric, Compensation Credit (CC) and, reflecting the strategy to source increased levels of more profitable regular premium new business, has grown the contribution from new business by 9.4% to £9.3m (H1 2011: £8.5m). Although new business as measured by PVNBP has fallen in H1 2012 as a result of fewer single premium cases the increase in the new business margin has more than compensated for the fall in this metric.

New business margins of 10.4% are market-leading and are the highest level earned by the Group since its listing. The Group continuesto generate positive cash flows to fund new business.

The operating profit performance of the Group in H1 2012 has improved relative to H1 2011, despite volatile markets and the uncertain economic outlook.  EEV operating profit after tax has increased by 5.2% to £10.2m (H1 2011: £9.7m).

Falls in major stock market levels since 30 June 2011, which will impact on future asset-based income streams, gave rise to EEV investment return losses of £15.0m in the period (H1 2011: £17.8m profit).

The EEV at 31 December 2011 is £243.4m, a decrease of £13.6m or 5.3% since 30 June 2011 following a dividend payment of £11.0m in the period.

2.1 EEV Profit

EEV profit provides a measure of the Group's performance over the period. While EEV operating profit has grown by 5.2% over H1 2011, there was an EEV loss for the period of £2.6m (H1 2011: £27.0m profit) largely due to the negative investment return variance.

The components of EEV profit after tax are as follows. 

2.1.1 Operating profit performance - new business

Despite market conditions the Group has retained its focus on profitability and has earned £9.3m from new business activities in the period (H1 2011: £8.5m).

The new business margin for the period, calculated as being the contribution from new business expressed as a percentage of PVNBP, has increased to 10.4%, as compared to 7.4% in H1 2011. This is primarily as a result of increased volumes of regular premium (RP) business, which typically have a higher margin than single premium products.

As a result of the introduction of Hansard OnLine new business functionality for regular premium products and the relative scaleability of the Group's systems, the increase in RP new business volumes in the period has been achieved without sacrificing new business margin.The underlying profitability of new business written by the Group remains consistently above levels enjoyed by a majority of competitors. The Internal Rate of Return of new business written during the period remains in excess of 15% per annum, while initial capital invested in underwriting new business is returned, on average, within three years.

2.1.2 Operating profit performance - in-force business

Operating profit for in-force business in the period was £0.9m (H1 2011: £1.2m) which was lower than expected. This was influenced, primarily, by changes in the behaviour of policyholders, and higher than expected expenses.

Throughout the period the Group experienced a lower rate of partial surrenders, a higher proportion of policyholders requesting premium reductions and a higher rate of regular premium policies ceasing their premiums. As mentioned earlier in this document, there was also a lower rate of other policyholder activity that has adversely affected the transaction-based charges. The net effect has reduced EEV operating profit by £1.7m (H1 2011: £0.2m profit).

The Group incurred expenses of £0.9m higher than expected. A portion of these costs related to continued additional investment in governance, risk management and administration resources. There were no material changes in operating assumptions over the period.

2.1.3 Investment returns

Investment performance is a key driver of the EEV profit as it reflects income from charges during the period and future expectations of asset-based income streams. Falling markets leading to disappointing investment returns on policyholder assets under administration have contributed to an EEV loss of £15.1m (H1 2011: £16.1m profit). Assets under administration have reduced by 14.6% since 30 June 2011 to £1.1bn. The components of the investment return variances are shown below.

2.2 EEV balance sheet

Despite the growth in EEV operating profit, the Group's embedded value has been significantly impacted by the negative investment returns over the period. The EEV balance sheet reflects the EEV profit and dividends in the period.

The following table provides a summarised breakdown of the EEV at the reporting dates:

Net worth is the market value of shareholders' funds, determined on an IFRS basis, adjusted to exclude certain assets recognised in the value of future profits. At the balance sheet date the net worth of the Group is represented by liquid cash balances.

2.3 Profit emergence

In general, the faster that future cash flows (recognised in the VIF) are expected to emerge into net worth, the more confidence there is that those cash flows will be received at their anticipated levels and hence the more confidence there is about the EEV itself.

As at 31 December 2011, the VIF is £190.6m. Over a quarter of these profits are expected to convert into net worth within 2 years, half within 5 years and three quarters within 9 years. Relative to most life insurance companies, this reflects a fast conversion of future cash flows to net worth, as required by the Group's pricing methodology.

2.4 Net Asset Value per share

The net asset value per share ("NAV") at 31 December 2011, on the EEV basis, is 177.3p. This represents a fall of 5.3% from the NAV at 30 June 2011. The NAV is based upon the EEV at the balance sheet date divided by the number of shares in issue at that date.

3. Online Systems

Since its launch in 1999, the Group has continued to invest in Hansard OnLine, client sites and other functionality to support intermediaries who introduce business to us. By extending and refining function based on observation and user feedback, this has resulted in a platform that is, today, widely and independently regarded as the best in class.

3.1 Hansard OnLine

Functionally rich and backed by a wide and comprehensive data set, Hansard OnLine has been designed from the ground up to provide first-class service and sales support to the intermediary user base that use it every day to conduct their business activities around the world. Always up-to-date and available 24/7, Hansard OnLine is a secure and reliable cloud-based platform that serves intermediaries with a wide range of client reports, alerts, reviews and information at any time of the day, in any part of the world and in any of the 11 languages currently supported.

The Group's strategic decision to build its own systems has been a major contributing factor to the success of Hansard OnLine. A deep understanding of both the technical and business goals of the organization, developed and refined over time, has created a highly efficient development resource capable of delivering sophisticated and targeted systems much more quickly and cost effectively than would otherwise have been possible.

The scope and quality of the data set that underlies Hansard Online has made it possible to build applications that not only provide intermediaries with accurate and up-to-the-minute reports but also capture and validate incoming instructions with a high degree of accuracy and confidence resulting in a faster, more streamlined service for the intermediary and corresponding reduction in manual processing and operational risk at head office.

Investment in Hansard OnLine, the Group's cloud based platform for intermediaries and fund advisors, has continued throughout this financial period resulting in significant advances in servicing speed and efficiencies, and a corresponding reduction in operational risk.

Foremost among these advancements is the continued development of the online new business application to include both personal portfolio and Hansard Europe product ranges, following the introduction of this functionality for regular premium contracts in the last financial year.

Over 1,000 policies were introduced electronically to the Group in H1 2012, representing some 76% of regular premium policies.

Online new business ensures clean and speedy submission of business while limiting the requirement for paper and allows speedier conclusion to all sales made.

A closely related development that also continues to evolve is the secure document upload service that allows intermediaries and administrators to upload documents that would otherwise need to have been sent by post. Documents submitted through this service arrive at head office almost instantly and are transferred into back office systems, ready for processing. The speed and efficiency savings, coupled with a reduction in administration and postal costs are significant with over 51,000 documents having been processed through this service in the last 12 months alone.

For the most part, Hansard OnLine has served as a critical communications hub, securely relaying information, alerts and reports to intermediaries to support their day-to-day business needs in a timely manner. Over the past 12 months development activity has focused on building robust systems infrastructure, controls and applications to facilitate the movement of core back office functions to the Internet.

The first two Internet-capable processes to emerge from this activity are fund switching, which facilitates the reconfiguration of contract asset exposures, and personal portfolio dealing, which allows authorised fund advisors to place deal instructions on personal portfolio contracts.

By design, switch and dealing instructions will be processed 'straight-through', with a full audit trail allowing progress to be tracked in real time.

All contract fund switching is now carried out using the Hansard OnLine functionality, with the original back office system having now effectively been retired. A pilot scheme is currently underway to extend this facility beyond head office to selected fund advisors.

Another recent change to Hansard Online that is currently being piloted extends the reach of the platform through the addition of configurable SMS and email alerts that keep intermediaries informed of important changes to the status of their clients' contracts. It is anticipated that this will be a popular feature so the choice of triggers for alerting is being thoroughly reviewed before wider release.

3.2 Client sites

Client sites are personalised sites designed for policyholder access that deliver up-to-date information and communications relating to the product or products in which the client has invested. The sites are hosted by Hansard, but made available to the client by the intermediary who has control over the branding and range of features each client has access to.

Client sites are typically issued when new business is first received, but can be set up at any time subsequent to this.

Intermediaries are informed when a client visits their Client site and, through a dashboard built around Google Maps, are able to drill down to see how each client has been interacting with their Client site, including the location of each logged-in session and the reports and policies they have been viewing. The activity information places the intermediary in a better position to provide relevant and time-sensitive support to his clients.

There are currently over 10,000 active Client sites.Work to support the Group's plans to extend the reach, functionality and penetration of Client sites continues to make good progress. Recent developments in this area include the ability for a client to sign up for a Client site online, manage their logon credentials and keep their contact details up to date.

4. Risks relating to the Group's financial and other exposures

Hansard's business model involves the controlled acceptance and management of risk exposures. The steps taken to minimise those exposures include the operation of unit-linked insurance business by Group subsidiary companies. 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 those funds.

The Group's exposure on this unit-linked business is limited to the extent that income arising from asset management charges and commissions is generally based on the value of assets in the funds, and any sustained falls in value will reduce earnings. The Group's exposure to financial risks is addressed within note 14 of these condensed consolidated financial statements. Additionally, the EEV Information includes a summary of the sensitivity of the Group's EEV results to economic and other factors.

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. The Group has designed its products, distribution methods and cost base with a view to reducing operational and financial risk, and has in place a risk management framework that is continually being refreshed to better support our objectives and to recognise regulatory and legislative change.

While the Group's business model has served to minimise the principal risks facing the Group, the responses to the extreme financial and market circumstances encountered over the last few years continues to impact on the Group's strategic objectives, profitability or capital requirements.

A comprehensive review of the principal risks and uncertainties facing the business, and the Group's approach to managing these risks and uncertainties, are outlined on pages 38 to 41 of the 2011 Annual Report. These principal risks and uncertainties have not changed materially since the 2011 Annual Report was published.

A summary of those principal key risks and uncertainties which could impact the Group for the remainder of the current financial year are outlined below. Where necessary the Group will develop alternative strategies to minimise the impact of any changes to its risk profile.

G S Marr

Managing Director

22 February 2012

Report of the Chief Distribution Officer 

The growing level of interest in Hansard's products among Independent Financial Advisors and their clients, together with our continued investment in Hansard OnLine and distribution infrastructure, has contributed to an increased flow of new business. I believe that this is a recognition, in uncertain market conditions, of our ability to develop a proposition that meets the needs of policyholders and intermediaries, and of the efforts of those intermediaries. I would like to record my thanks to all members of the Group's distribution force and to all those IFAs and intermediaries who have introduced business to us.

Through the continued application of our strategy to develop increased flows of more profitable regular premium new business, particularly in the growth markets of the Far East and Latin America, the Group has harnessed momentum leading to increased profitability. This is demonstrated in increased new business margins of 10.4% that are market-leading.

New business levels in H1 2012 have increased by 8.9%, on the Group's internal metric, over H1 2011. We are confident that our strategy to source regular premium new business is appropriate in the prevailing economic conditions, and this is reflected in a growth of 41% in regular premium new business flows.

New business for the six months ended 31 December 2011

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").

A summary of new business flows on each metric is set out below. Comparisons against the corresponding period are on an actual currency basis. 

At first glance, the indicated fall in total new business levels under PVNBP and APE would appear problematic, however we are well aware that one impact of the uncertain market conditions that we continue to experience is to cause deferrals in certain financial planning and, therefore, in single premium business.

To allow better comparison with results published by other companies the following commentary relates to new business flows calculated on the basis of PVNBP.

Throughout the period we continued to direct our market development and other resources to attract sources of regular premium new business flows. This is reflected in regular premiums of £67.6m which is 41.1% above the flows of H1 2011 and represents some 75% of total new business premiums (H1 2011: 42%). More particularly, this is reflected in the continuing growth in flows from the Far East and Latin America regions which, at £58.7m, are approximately 18% above the combined total for those regions for H1 2011.

The flow of single premium business in certain parts of the EU and EEA regions remains restrained as a result of volatile market conditions and current regulatory complexity. Single premium flows of £22.1m have fallen by £44.5m from H1 2011, (although the comparative reflects some exceptionally large cases from the Rest of the World regions in Q1 2011. Five contracts accounted for approximately £20m.)

We receive business from a well-diversified network of financial advisors around the world, which results in new business being received in a range of currencies. Approximately 37% (as a percentage of PVNBP) of new business premiums in the period were denominated in US Dollar, 27% in Japanese Yen, 19% in Euro and 13% in Sterling.

New business margins

The Group continues to issue new business on terms that meet target returns and contribute to profit. The new business margin is sensitive to volumes and the product mix: as a result of the substantial value of regular premium business issued, which is more profitable to the Group than single premium business, the overall new business margin for H1 2012 is 10.4% (H1 2011: 7.4%).

Hansard OnLine

The Group continues to invest in Hansard OnLine to allow financial advisors to provide a better service to their clients.

A wide range of financial advisors use online new business functionality that we have developed. Since the launch of the facility in November 2009, some 3,000 regular premium policies have been introduced electronically by financial advisors using the online new business facilities. This allows a significant reduction in paper flows and in turnaround time, and a significant increase in data security and efficiency. These facilities continue to be enhanced and are being extended to allow online delivery of certain types of single premium contracts.

We believe that all aspects of the lifecycle of a Hansard policy should be capable of online transaction (although we conduct rigorous due diligence as required) and we are currently piloting functionality to support OnLine investment transactions.

Market development

We continue to look to position market development resource in our target markets. In the first half of this financial year the Group increased its exposure to the growth markets of South-East Asia and to North Africa.While we continue to develop new business opportunities in Western Europe, we do not believe that we need to increase distribution resource at this time.

Selective recruitment of distribution resourcescontinues, in line with the Group's policy of expanding its reach amongst suitable financial advisorsin the Group's target markets, and we look to extend the management pool.

It is generally accepted that a regular premium-based investment approach is appropriate in uncertain economic conditions. We believe that extending the Group's proposition will allow a continued flow of regular premium business from growth markets, barring dramatic changes in economic circumstances through the remainder of this financial year.

Joseph Kanarek

22 February 2012

Condensed consolidated financial statements for the half-year ended 31 December 2011

(Unaudited)

The Group has no other items of Comprehensive Income and as such has not presented a separate consolidated Statement of Comprehensive Income.

The notes on pages 26 to 34 form an integral part of these condensed consolidated half-yearly financial statements.

The notes on pages 26 to 34 form an integral part of these condensed consolidated half-yearly financial statements.

The notes on pages 26 to 34 form an integral part of these condensed consolidated half-yearly financial statements.

The notes on pages 26 to 34 form an integral part of these condensed consolidated half-yearly financial statements.

 Notes to the Condensed Consolidated Financial Statements

1 General information

The principal activity of the Company is to act as the holding company of the Hansard Group of companies. The activities of the principal operating subsidiaries include the transaction of life assurance business and related activities.

The Company has its primary listing on the London Stock Exchange.

These condensed consolidated half-yearly financial statements were approved for issue on 22 February 2012.

These condensed consolidated half-yearly financial statements do not comprise statutory financial statements and are unaudited. The board of directors approved the statutory financial statements for the year ended 30 June 2011 on 21 September 2011. The report of the auditor on those financial statements was unqualified and did not contain an emphasis of matter paragraph.

2 Basis of presentation

These condensed consolidated half-yearly financial statements for the half-year ended 31 December 2011 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority ("DTR") and with IAS 34 "Interim Financial Reporting" as adopted by the European Union ("EU"). The condensed consolidated half-yearly financial statements should be read in conjunction with the annual financial statements for the year ended 30 June 2011, which were prepared in accordance with International Financial Reporting Standards as adopted by the EU.

Except where otherwise stated, all figures included in the condensed consolidated half-yearly financial statements are stated in pounds sterling, which is also the functional currency of the Company, rounded to the nearest hundred thousand pounds.

3 Accounting policies

The significant accounting policies applied are consistent with those of the annual financial statements for the year ended 30 June 2011 and can be accessed on the Company's website: www.hansard.com.

4 Segmental information

In the opinion of the Group's Executive Committee, deemed to be the Chief Operating Decision Maker (CODM), the Group operates in a single reportable segment, that of the distribution and servicing of long-term investment products through the Group's subsidiaries.

The Group's Executive Committee uses two principal measures when appraising the performance of the business: net issued compensation credit (NICC) and expenses. NICC is a measure of the value of new in-force business and top-ups on existing single premium contracts. NICC is the total amount of basic initial commission payable to intermediaries for business sold in a period and is calculated on each piece of new business. It excludes override commission paid to intermediaries over and above the basic level of commission. The Group maintains a close control over the margins realised on new business, which are consistent across the Group's products and, hence, NICC is a reliable indicator of income.

The following table analyses NICC geographically and reconciles NICC to origination costs during the period:

Revenues and expenses allocated to geographical locations contained in sections 4.1 to 4.4 below reflect the revenues and expenses generated in or incurred by the legal entities in those locations.

4.1 Geographical analysis of fees and commissions by origin

4.2 Geographical analysis of profit before taxation

4.3 Geographical analysis of gross assets

4.4 Geographical analysis of gross liabilities

5 Fees and commissions

7 Taxation

The Group's profits arising from its Isle of Man-based operations are taxable at zero percent.

Corporation tax for the Republic of Ireland-based operations is based on the effective annual rate for taxable income of 12.5%, applied to the expected taxable profits for the period.

8 Earnings per share

Earnings per share is based upon the profit for the period after taxation divided by the average number of shares in issue throughout the period. There is no significant difference between earnings per share and fully-diluted earnings per share.

9 Dividends

The Board have resolved to pay an interim dividend of 5.90p per share. This amounts to £8.1m and will be paid on 29 March 2012 to shareholders on the register at 2 March 2012.

10 Financial investments held to cover liabilities under investment contracts

The following investments, 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.

11 Called up share capital

12 Foreign exchange rates

The closing exchange rates used by the Group for the translation of balance sheet items from US$ and € to Sterling were as follows:

13 Related party transactions

Intra-Group transactions are eliminated on consolidation and are not disclosed separately here.

There have been no significant related party transactions in the period nor changes to related parties. Related party transactions affecting the results of previous periods and an understanding of the Group's financial position at previous balance sheet dates are as disclosed in the Annual Report & Accounts for the year ended 30 June 2011.

There have been no significant awards during the period under the Save As You Earn (SAYE) share-save programme for employees, nor the long-term incentive plans in existence at the balance sheet date. The estimated fair value of the schemes and the imputed cost for the period under review is not material to these financial statements.

14 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 business, whereby the policyholder bears the financial risk relating to the financial assets and liabilities arising from such contracts.

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 Group's exposure is limited to the extent that certain fees and commission income are based on the value of assets in the unit-linked funds.

Information concerning the operation of the frameworks to manage financial and other risks is contained within the Report & Accounts for the year ended 30 June 2011, and particularly in note 22 thereto, "Financial risk management". There have been no significant changes to the frameworks in the period to 31 December 2011.

The more significant financial risks to which the Group is exposed, and an estimate of the potential financial impact of each on the Group's IFRS earnings, are set out below. For each category of risk, the Group determines its risk appetite and sets its investment, treasury and associated policies accordingly.

14.1 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% pa, are based on the market value of assets under administration. Similarly, due to the fact that some of these charges may be deducted from policies in foreign 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 the Group's profits and equity of a 10% change in unit-linked fund values, either as a result of price or currency fluctuations, is £1.6m (H1 2011: £1.6m) in a financial year.

(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 has mitigated its exposure to cash flow interest rate risk by placing a proportion of its cash holdings on longer-term fixed deposits.

Taking into account the proportion of Group funds held on longer-term, fixed-rate deposits, a change of 1% p.a. in interest rates will result in an increase or decrease of approximately £0.7m (H1 2011: £0.8m) in the Group's equity and annual investment income.

(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 net operating assets that it holds to the extent that they do not match liabilities in those currencies. The Group's currency risk is minimised by frequent repatriation of excess foreign currency funds to sterling. At the balance sheet date the Group had exposures in the following currencies: