REG - Hansard Global plc - Results for the six months ended 31 December 2014 <Origin Href="QuoteRef">HSD.L</Origin> - Part 2
26/02/2015 07:11
- Part 2: For the preceding part double click ID:nRSZ8997Fa
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 contracts issued in prior financial
years demonstrating the cash generative nature of the business. Regular premium contracts issued in this financial year
will generate the majority of their initial fees over the next 18 months on average.
The movement in value of deferred income over the period is summarised below.
31 December 30 June
2014 2013 2014
£m £m £m
At beginning of financial year 141.2 137.6 137.6
Initial fees collected in the period and deferred 9.5 13.9 24.9
Income amortised during the period to fee income (10.3) (10.6) (21.3)
140.4 140.9 141.2
8. Embedded Value Results
Our business is long term in nature and therefore we present our results on a European Embedded Value ("EEV") basis as well
as a statutory IFRS basis. Our EEV is determined on the EEV principles published by the Chief Financial Officers ("CFO")
Forum in 2004 and subsequently updated. The EEV is a discounted valuation of the future profits expected on best estimate
assumptions, with proper allowance for the timing of receipt of those profits.
EEV and IFRS are different approaches to recognising the (same) ultimate profit from an insurance contract:
· The EEV approach recognises profit from new insurance contracts as a lump sum addition to the Value of In-force
("VIF") equal to the discounted value of future profits (called the New Business Contribution or "NBC"). The VIF is
converted to cash (then included in "Net Worth") as the business progresses. The NBC reflects the shareholder value added
from new business at point of sale: the change in EEV reflects the cash impact of writing new business as well as other
changes within the business and its environment.
· The IFRS approach smoothes the recognition of profit from new insurance contracts by spreading the initial revenues
and corresponding costs evenly over their expected lives. The IFRS new business result therefore reflects neither the
shareholder value added from writing new business, nor its cash impact.
Results for H1 2015 under European Embedded Value
The Group's EEV results primarily reflect the earnings forecast from value of policyholder assets at 31 December 2014 and
dividends paid since 30 June 2014. The reduced new business level has had a significant impact on results reported under
EEV, which areprimarily driven by the levels of new business received, and by investment returns.Reduced volumes of new
policies in the period (and the subsequent spreading of acquisition expenses over fewer policies) gave rise to a negative
contribution from new business. The weakness of sterling in the period against the currencies favoured by our policyholders
has combined with market valuation gains related to assets under administration to produce an EEV profit of £6.6m which
compares favourably to a loss of £2.2m in H1 2014.
The EEV Operating Loss, at £(0.4)m (H1 2014: £5.5m profit) reflects lower new business volumes as our revised strategy and
new products are being rolled out to Independent Financial Advisors and contract holders around the world. We are confident
that our newly introduced products are well tailored to the requirements of our target market. We have recently extended
our range of single premium products through the launch of a new Universal Personal Portfolio product and believe that the
product developments will contribute to additional new business in the latter part of this financial year and beyond.
To support the Group's strategic plans we have continued to identify and recruit skilled distribution capacity. We believe
that we now have appropriate resources to deliver our strategy.
Headline results for the EEV performance are shown in the table below:
Six-Month Period ended 31 December H1 2015 H1 2014
£m £m
Opening Embedded Value 203.8 225.7
EEV Operating (Loss) / Profit after tax (0.4) 5.5
Investment Return Variances & Economic Assumption Changes 7.0 (7.7)
EEV Profit / (Loss) after tax 6.6 (2.2)
EEV before dividends 210.4 223.5
Dividends paid during the financial year (6.9) (6.5)
Closing Embedded Value 203.5 217.0
There was an Operating Loss of £0.4m (H1 2014: £5.5m profit), reflecting a negative new business contribution of (£1.1m)
(H1 2014: £4.1m), expected return of £0.9m (H1 2014: £0.6m) and experience variances of (£0.2m) (H1 2014: £nil). The table
shows a 'below the line' impact of £7.0m (H1 2014: (£7.7m)) which is comprised of positive investment return and economic
assumption variance.
The EEV is £203.5m which is fractionally below the EEV at 30 June 2014 of £203.8m having paid dividends of £6.9m (H1 2014:
£217.0m after dividends of £6.5m). This demonstrates the resilience of the Group's EEV.
Sales Metrics
New business comparatives are shown below:
Six-Month Period ended 31 December H1 2015 H1 2014
New business sales (PVNBP basis) £29.4m £55.2m
New Business Contribution ("NBC") (£1.1m) £4.1m
New Business Margin ("NBM") (3.9)% 7.5%
Sales volumes for Hansard International (in PVNBP terms) have fallen to £29.4m from £55.2m in H1 2014 as reported earlier
in this Review. The NBC has reduced to (£1.1m) (H1 2014: £4.1m) having allowed for a new business expense overrun of
£2.2m.
Regular premium business is 60% (H1 2014: 80%) of total PVNBP.
EEV balance sheet
The EEV of £203.5m at the balance sheet date is fractionally below the EEV at 30 June 2014 of £203.8m having paid dividends
of £6.9m (H1 2014: £217.0m after dividends of £6.5m). This demonstrates the resilience of the Group's EEV.
That said, the composition of the EEV has changed compared to the previous half year. Through careful product design the
Value of Future Profits converts speedily to cash, or Net Worth, to repay the capital invested in prior periods. At the
balance sheet date almost 28% of EEV is represented by the Net Worth (H1 2014: 23%).
This demonstrates that the conversion to Net Worth from existing business is progressing as expected. The Net Worth of the
Group, which underpins solvency capital requirements and future investment, has increased by 15% to £57.9m as shown below.
Net Worth is typically held in a wide range of deposit institutions and in highly-rated money market liquidity funds. This
prudent investment policy has removed much of the market risk and provided a stable and resilient solvency position over
recent years.
The high-level components of EEV are shown in the table below:
H1 2015 H1 2014
£m £m
Free surplus 31.5 24.4
Required Capital 26.4 25.9
Net Worth 57.9 50.3
VIF 152.7 173.8
Other (7.1) (7.1)
Value of Future Profits 145.6 166.7
EEV 203.5 217.0
The change in the VFP reflects sterling exchange rates on 31 December 2014, new business, the conversion of VFP to Net
Worth and the impact of policyholder behaviour.
Net Worth has grown from £50.3m to £57.9m after dividend payments of £6.9m (H1 2014: £6.5m) as profits are earned from the
existing business. Free Surplus has grown by almost 30% to £31.5m from £24.4m.
The Required Capital has increased marginally: it includes around £11.6m (H1 2014: £10.8m) of Hansard Europe capital.
Management estimates that the use of this is constrained for three years and so this amount is treated as Required Capital
in the analysis above, as distinct from Free Surplus.
The Other component of VFP is the reduction for non-market risk and frictional costs, neither of which have changed over
the year.
Change in Net Worth
The change in the Net Worth over the year shows the cash-generative capacity of the Group's operations and its use of cash
in the period. The business has generated net cash of £18.4m (H1 2014: £23.0m), of which £7.0m (H1 2014: £10.8m) relates to
costs involved in acquiring new business in the period shown as New Business Strain below.
Six Month Period ended 31 December H1 2015 H1 2014
£m £m
Opening Net Worth 53.4 44.6
Expected conversion to Net Worth from existing business 18.6 24.2
Time value 0.5 0.1
Net Worth Variance (0.7) (1.3)
Cash Generated 18.4 23.0
Dividends paid (6.9) (6.5)
New Business Strain (7.0) (10.8)
Closing Net Worth 57.9 50.3
The conversion to Net Worth from existing business is progressing as expected: this conversion has two aspects: the receipt
of charges to meet initial expenses and the receipt of charges to meet continuing expenses.
EEV Profit / (Loss) after tax
Notwithstanding the low EEV Operating Profit, the Group's EEV Profit after tax is higher than last year at £6.6m (H1 2014:
(£2.2m)). This primarily reflects the positive Exchange Rate Variance of £3.4m (H1 2014 (£(14.5m)). The components are
shown in the table below:
H1 2015 H1 2014
£m £m
New Business Contribution (1.1) 4.1
Expected Return on new and existing business 0.7 0.5
Expected Return on Net Worth 0.2 0.1
Model Changes 0.0 0.8
Experience Variances (0.2) 0.0
EEV Operating Profit after tax (0.4) 5.5
Investment Performance 4.6 (8.1)
Economic Assumption Changes 2.4 0.4
EEV (loss) / profit after tax 6.6 (2.2)
Experience Variances
H1 2015 H1 2014
£m £m
Ongoing expenses (0.7) 0.6
Premium reductions & underpayments 0.4 0.3
Policies made paid up 0.3 (0.1)
Partial encashments 0.1 0.2
Full encashments (0.9) (1.2)
One-off expenses (0.3) (0.1)
Other 0.9 0.3
Experience Variances (0.2) 0.0
Experience variances arise when the behaviour of the existing book differs from that assumed. The experience variance at
(£0.2m) is small and shows that the existing book is behaving overall as assumed. The ongoing expense variance is negative
at (£0.7m) (H1 2014: £0.6m) this reflects ongoing expenses picking up a larger share of group overheads in the period due
to lower than expected new business volumes, partly offset by the deferral of some one-off strategic and IT expenditure.
Operating Assumption Changes
There have been no operating assumption changes in the period: management has the view that the experience variances do not
indicate a need for assumptions to change at this time. A review of operating assumptions is conducted annually towards the
year-end.
Investment Performance
Investment performance principally reflects the investment choices, by nature and currency, made by policyholders. It is
largely outside the Group's control.
H1 2015 H1 2014
£m £m
Investment performance of policyholder funds 1.1 6.6
Exchange rate movements 3.4 (14.5)
Other 0.1 (0.2)
Investment Performance 4.6 (8.1)
The exchange rate movements arise because most premiums are paid, and the greater proportion of policyholder-selected
assets are denominated, in currencies other than sterling, yet the reporting is in sterling, based on exchange rates on the
last day of the financial period.
Economic Assumption Changes
There was a positive variance of £2.4m (H1 2014: £0.4m) from Economic Assumption Changes reflecting changes in government
bond yields for the currencies in which policyholder assets are denominated.
9. Assets under administration
In the following paragraphs, assets under administration ("AuA") refers to net assets held to cover financial liabilities
as analysed in note 12 to the condensed consolidated financial statements presented under IFRS.
The Group enjoys a stream of cash flows from the large number of regular premium contracts administered on behalf of
clients around the world. The majority of premium contributions are designated in currencies other than sterling,
reflecting the wide geographical spread of those policyholders.
These flows are offset by charges and withdrawals, by premium holidays affecting regular premium policies and by market
valuation movements. Certain assets held within contracts at the year-end remain impacted by the global financial crisis.
While we have seenefforts in this financial year to resolve uncertainty over asset values, we have also seen a small number
of funds held within contracts being affected by liquidity or other issues that hinder their sales or redemptions on normal
terms. While the directors have exercised their judgement in relation to the fair value of these assets the cumulative
impact on the balance sheet is immaterial.
The following table summarises Group AuA performance for H1 2015. Deposits to investment contracts includes additional
contributions of approximately £2.9m (H1 2014: £4m) relating to single and regular premium contracts issued by Hansard
Europe in prior years, while deductions from investment contracts reflects surrenders of contracts during the period, as a
result of that company ceasing to accept new business with effect from 30 June 2013.
31 December 30 June
2014 2013 2014
£m £m £m
Deposits to investment contracts - regular premiums 39.3 46.9 85.4
Deposits to investment contracts - single premiums 11.8 10.8 19.3
Deductions from investment contracts (104.2) (101.9) (196.5)
Effect of market movements 8.6 30.5 87.7
Effect of currency movements 24.6 (28.5) (80.4)
Decrease in period (19.9) (42.2) (84.5)
Opening balance 943.6 1,028.1 1,028.1
Closing balance 923.7 985.9 943.6
Taken with the effects of limited net valuation gains in H1 2015, AuA of £0.92bn as at 31 December 2014 is some 2% below
the position at 30 June 2014. An analysis by company indicates that the AuA of Hansard International is resilient,
underpinned by regular premium flows and a strengthening of US Dollar. Conversely, the impact of surrenders and the
weakening Euro on the AuA of Hansard Europe has caused reduced sterling values when compared to prior balance sheet dates.
The Euro has weakened further against sterling since the balance sheet date.
31 December 30 June
2014 2013 2014
£m £m £m
Hansard International 701.0 725.7 704.6
Hansard Europe 222.7 260.2 239.0
923.7 985.9 943.6
The value of AuA is based upon the assets selected by or on behalf of policyholders to meet their needs from time to time.
Reflecting the wide geographical spread of the Group's policyholders, the majority of AuA are designated in currencies
other than sterling. The currency denomination of AuA is similar to that of H1 2014. At the balance sheet date 58% of AuA
is denominated in US Dollars, with a further 22% denominated in Euro and 16% in sterling, as reflected in note 4 to the
condensed consolidated financial statements.
10. CAPITALISATION AND SOLVENCY
The Group's authorised life insurance subsidiaries continue to be well capitalised with free assets well in excess of the
regulatory requirements in each relevant jurisdiction. There has been no material change in the Group's management of
capital during the period.
Solvency capital is a combination of future margins, where permitted by regulation, and capital. Where future margins are
denominated in non-sterling currencies, it is vulnerable to the weakening of those currencies relative to sterling. All of
the Group's excess capital is invested in a wide range of deposit institutions and highly-rated money market liquidity
funds, predominantly in sterling. This approach immunises the Group's capital base from stock market falls.
The in-force portfolio has no material investment options or guarantees that could cause capital strain and retains very
little of the mortality risk that it has accepted (the balance being reinsured with premium reinsurers). There is no
longevity risk exposure.
Policy on capital maintenance
It is the Group's policy to maintain a strong capital base inRecent news on Hansard Global
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