REG - Hansard Global plc - Results for the year ended 30 June 2017 <Origin Href="QuoteRef">HSD.L</Origin> - Part 4
28/09/2017 07:07
- Part 4: For the preceding part double click ID:nRSb0302Sc
serving
staff, where sales targets are met. At the date of this Report and Accounts, the Trust holds 803,949 shares (2016: 760,521
shares), following the purchase of 43,428 shares in the year. There were no awards paid by the Trust during the year as
the performance targets were not met (2016: £nil).
25.5 Other related party transactions
The Company entered into a contract in July 2011 with Mr. Gordon Marr, the Group Chief Executive Officer, to purchase a
residential property for the sum of £481,000, exercisable at his discretion. Mr. Marr purchased the property in July 2011
for £501,000. The contract has not been exercised at the date of this Report and Accounts.
26 Contingent liabilities
The Group does not give any investment advice. Investment decisions are taken either by the contract holder directly or
through a professional intermediary appointed by the contract holder. Contract holders bear the financial risk relating to
the investments underpinning their contracts, as the policy benefits are linked to the value of the assets. Notwithstanding
the above, financial services institutions are frequently drawn into disputes in cases where the value and performance of
assets selected by or on behalf of contract holders fails to meet their expectations. At the balance sheet date a number
of fund structures remain affected by liquidity or other issues that hinder their sales or redemptions on normal terms with
a consequent adverse impact on transactions.
As reported previously, the Group has been subject to a number of complaints in relation to the selection and performance
of assets linked to contracts. Hansard Europe has been served with a number of writs arising from such complaints and
other asset-related issues.
As at 30 June 2017, there were outstanding writs served upon Hansard Europe totalling E16.9m, or £14.8m in sterling terms
(30 June 2016: E15.7m, or £13.1m).
During the year, the Group successfully defended net claims of approximately £0.3m which affirms confidence in the Group's
legal arguments. Two cases have subsequently been appealed.
While it is not possible to forecast or determine the final results of pending or threatened legal proceedings, based on
the pleadings and advice received from the Group's legal representatives, the Directors believe that the Group has strong
defences to such claims. Notwithstanding this, there may be circumstances where in order to avoid the expense and
distraction of protracted litigation the Group may consider it in the best interests of the Group and its shareholders to
reach a commercial resolution with regard to certain of these claims. There were no such settlements made or provided for
during the year (2016: nil). It is not possible at this time to make any further estimates of liability.
27 Foreign exchange rates
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 statement of
comprehensive income.
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.
The closing exchange rates used by the Group for the conversion of significant balance sheet items to sterling were as
follows:
2017 2016
US Dollar 1.30 1.33
Japanese Yen 146.5 137.4
Euro 1.14 1.20
28 Non statutory accounts
The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 June
2017 or 2016, but is derived from those accounts. The auditor has reported on those accounts; their report was (i)
unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis
without qualifying their report.
29 Annual report
The Company's annual report and accounts for the year ended 30 June 2017 is expected to be posted to shareholders by 13
October 2017. 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 Directors confirm to the best of their knowledge that:
· The financial statements have been prepared in accordance with International Reporting Financial Standards as
adopted by the EU and give a true and fair view of the assets, liabilities, financial position and profit for the Company
and the undertakings included in the consolidation as a whole as required by the Disclosure and Transparency Rules Chapter
4.2.4;
· The EEV Information has been prepared in accordance with the EEV Principles and;
· Pursuant to Disclosure and Transparency Rules Chapter 4, the Directors' report of the Company's annual report
and accounts includes a fair review of the development and performance of the business and the position of the Company 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.
On behalf of the Board
G S Marr T N Davies
Director Director
On behalf of the Board
27 September 2017
EUROPEAN EMBEDDED VALUE INFORMATION
1 INTRODUCTION
The European Embedded Value ("EEV") measure is an estimate of the value of the shareholders' interest in the Group. The EEV
covers the entire business of the Group, including its life assurance companies and subsidiaries providing administration,
distribution and other services.
The EEV comprises Net Worth and the Value of Future Profits ("VFP") i.e. future profits from business in-force at the
valuation date, 30 June 2017. 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's EEV methodology complies fully with the set of EEV Principles published by the CFO Forum in May 2004 and most
recently extended in April 2016. It has been calculated using market-consistent economic assumptions and best estimate
operating assumptions having regard for the Group's experience and its assessment of future experience. A description of
the EEV methodology is set out in the Notes to the EEV Information. There have been no significant changes in the EEV
methodology from that used in the previous financial year.
2 EEV PROFIT PERFORMANCE FOR THE YEAR
2.1 EEV profit / (loss)
EEV profit / (loss) is a measure of the performance over the year. It is derived as follows:
2017 2016
£m £m
New Business Contribution 1.3 0.2
Experience variances (4.7) (3.8)
Operating assumption changes (5.9) (0.1)
Model changes 0.3 1.1
Expected return on new and existing business 0.6 1.0
Expected return on Net Worth 0.2 0.5
EEV operating loss after tax (8.2) (1.1)
Investment return variances 16.8 18.8
Economic assumption changes 3.1 (4.6)
EEV profit after tax 11.7 13.1
2.1.1 New Business Contribution
New Business Contribution ("NBC") was £1.3m for the year (2016: £0.2m). The positive NBC reflects the increase in new
business volumes during 2017 and the existence of a greater number of insurance contracts to spread initial expenses over.
2.1.2 Experience variances
Experience variances arise where actual experience differs from that assumed in the prior year's EEV. Major contributors to
the experience variances this year include worse than assumed encashment and premium persistency (both of which were
substantially affected by issues experienced with a problematic broker during the year), lower than assumed charge
inflation and changes to the expense base.
2017 2016
£m £m
Full encashments (2.0) (1.2)
Premium reductions and underpayments (1.7) (0.8)
Charges (0.7) (0.6)
One-off expenses (0.5) (0.3)
Policies made paid up (0.4) (0.1)
Ongoing expenses (0.2) (1.3)
Other 0.8 0.5
(4.7) (3.8)
2.1.3 Operating assumption changes
The operating assumption changes reflect changes in management's view of the behaviour of the existing business. These
changes decreased the EEV by £5.9m, (2016: decrease of £0.1m), as shown below.
Operating assumptions are generally management's best estimate, having regard to recent experience. Management has
strengthened the partial encashment and contract holder activity margin assumptions, while weakening the expense, premium
persistency and full encashment assumptions.
The adverse expense assumption reflects increased expenses assumed to be borne by each in-force contract. This reflects a
lengthier period being taken by the Group to achieve the scale assumed in its long-term assumptions, impacted also by the
closure to new business of Hansard Europe in 2013.
The premium persistency assumption change is primarily driven by issues experienced with a problematic broker during the
year.
2017 2016
£m £m
Ongoing expenses (5.3) 1.0
Premium persistency (2.1) 0.9
Full encashment (0.6) 0.6
Partial encashment 0.7 (2.5)
Contract holder activity margins 1.4 -
Other - (0.1)
(5.9) (0.1)
2.1.4 Model changes
The Group continues to develop its modelling functionality. In particular, this year, a revised approach to calculating
Hansard Europe's cost of capital and a revised approach to projecting future partial encashments. As a result of these
model changes, the EEV increased by £0.3m (2016: £1.1m).
2.1.5 Expected return on new and existing business
Under EEV methodology, it is a convention to assume that the value of the business grows at 'start of period' assumptions.
The expected return is therefore based on assumptions determined at 30 June 2016. These assumptions are applied to give the
expected conversion from VFP to Net Worth in the year, and the time value of both existing business and non-market risk.
No assumptions are made about the level of future new business. New Business Strain is the initial capital needed to fund
new sales. This is calculated using end of period operating assumptions (i.e. assumptions determined at 30 June 2017).
2017 2016
EEV Net VIF* EEV Net VIF*
worth worth
£m £m £m £m £m £m
Cash generated from VFP - 27.9 (27.9) - 24.0 (24.0)
New Business Strain - (20.8) 20.8 - (18.6) 18.6
Time value of existing business 0.6 0.1 0.5 1.0 0.5 0.5
Time value of new business - - - - (0.1) 0.1
0.6 7.2 (6.6) 1.0 5.8 (4.8)
* Value of In-Force
The expected value of cash generated was £27.9m (2016: £24.0m) and New Business Strain was £20.8m (2016: £18.6m). These
reflect higher levels of new business during the year. The time value figures use economic assumptions at 30 June 2016.
2.1.6 Expected return on Net Worth
The expected return on Net Worth of £0.2m (2016: £0.5m) reflects the anticipated increase in shareholder assets over the
period due to the time value of money. In line with the EEV, its calculation is based on the 30 June 2016 year one risk
discount rate for sterling which was 0.4% (2016: 0.7%).
2.1.7 Investment return variance
Investment performance principally reflects the investment choices, by nature and currency, made by contract holders. It is
therefore largely outside the Group's control.
2017 2016
£m £m
Investment performance of contract holder funds 14.9 (7.6)
Exchange rate movements 1.1 26.1
Other 0.8 0.3
16.8 18.8
2.1.8 Economic assumption changes
There was a positive variance of £3.1m (2016: negative variance of £4.6m) from economic assumption changes: this variance
follows the application of the EEV Principles and reflects changes to swap yields for the currencies to which the Group is
exposed.
2017 2016
£m £m
Contract holder activity margins 3.8 (4.7)
Risk discount rates and unit growth (0.7) 0.1
3.1 (4.6)
2.2 Analysis of EEV profit / (loss) by component
The table below shows a detailed analysis of EEV profit after tax for the year ended 30 June 2017.
2017 2016
Movement in Movement in
EEV Net Worth VIF EEV Net Worth VIF
£m £m £m £m £m £m
New Business Contribution 1.3 - 1.3 0.2 - 0.2
Experience variances (4.7) (3.5) (1.2) (3.8) (3.0) (0.8)
Operating assumption changes (5.9) - (5.9) (0.1) - (0.1)
Model changes 0.3 - 0.3 1.1 - 1.1
Expected return on new and existing business 0.6 7.2 (6.6) 1.0 5.8 (4.8)
Expected return on Net Worth 0.2 0.2 - 0.5 0.5 -
EEV operating profit / (loss) after tax (8.2) 3.9 (12.1) (1.1) 3.3 (4.4)
Investment return variances 16.8 2.0 14.8 18.8 0.8 18.0
Economic assumption changes 3.1 - 3.1 (4.6) - (4.6)
EEV profit after tax 11.7 5.9 5.8 13.1 4.1 9.0
3 EMBEDDED VALUE AT 30 JUNE 2017
Following the payment of dividends of £12.2m (2016: £12.2m), the Group's EEV has remained at a level similar to last year
of £195.5m (2016: £195.9m). The EEV balance sheet is presented below.
2017 2016
£m £m
Free surplus 21.4 27.9
Required Capital 27.8 27.6
Net Worth 49.2 55.5
VIF 152.6 147.8
Frictional costs (0.1) (1.2)
Reduction for non-market risk (6.2) (6.2)
Value of Future Profits ("VFP") 146.3 140.4
EEV 195.5 195.9
At the balance sheet date, the Net Worth of the Group is represented by liquid cash and money market balances. Given the
uncertainties inherent in the ultimate outcome of the litigation against Hansard Europe, we believe the extraction of any
capital by the parent company will be constrained for up to three years.
The VFP is based on the value of contract holder funds under administration at 30 June 2017.
4 NEW BUSINESS PROFITABILITY
The Group has written business on a profitable basis. The following metrics illustrate the profitability of the Group's new
business.
4.1 New business margin
2017 2016
New business sales ("PVNBP") £148.5m £119.5m
New business contribution ("NBC") £1.3m £0.2m
New business margin ("NBM") 0.9% 0.2%
The New Business Margin for the year is 0.9% (2016: 0.2%). The change is primarily due to the increase in new business
volumes over the period and the existence of a greater number of insurance contracts to spread initial expenses over. New
Business Margin is also impacted by the mix of business written, with regular premium business having a larger margin than
single premium business. During 2017, a higher proportion of single premium business was written than in 2016.
5 EEV SENSITIVITY ANALYSIS
Sensitivities provide an indication of the impact of changes in particular assumptions on the EEV at 30 June 2017 and the
NBC for the year then ended.
The sensitivities will be affected by the change in the Group's business mix: different product types are sensitive to
different assumptions in particular. Unless otherwise indicated, the sensitivities are broadly symmetrical.
The sensitivity analysis indicates that the Group's exposure to operating factors is limited, largely as a result of
product design. A change in the level of expenses is the main operating exposure of the Group, although the VIF has become
proportionately less sensitive to the changes in expense assumptions as a result of Hansard Europe being closed to new
business. The largest sensitivities for the Group are related to economic factors. In particular, as a result of the
diversified portfolio of assets under administration, it is exposed to movements in exchange rates and asset values through
the impact on the level of future fund-based management income.
2017
Impact on: EEV NBC
£m £m
Central assumptions 195.5 1.3
Operating Sensitivities
10% decrease in expenses 9.2 1.7
1% increase in expense inflation (6.0) (0.8)
1% increase in charge inflation 3.7 0.2
1% increase in expense and charge inflation (2.1) (0.6)
10% decrease in full encashment rates 1.8 0.3
5% decrease in mortality 0.1 -
Economic sensitivities
1% increase in risk discount rate (7.0) (0.7)
1% decrease in investment return rate (7.0) (0.5)
1% increase in risk discount rate and investment return rate - (0.2)
1% decrease in risk discount rate and investment return rate - 0.2
10% decrease in the value of equities and property (11.1) -
10% strengthening of sterling (16.5) (1.2)
In each sensitivity calculation, all other assumptions remain unchanged, except those being tested. There is a natural
correlation between many of the sensitivity scenarios tested, so the impact of two occurring together is likely to be
different from the sum of the individual sensitivities.
No changes to statutory valuation bases, pricing bases and Required Capital have been allowed for. No future management
action has been modelled in reaction to the changing assumptions. For new business, the sensitivities reflect the impact of
a change from inception of the contract.
NOTES TO THE EUROPEAN EMBEDDED VALUE INFORMATION
1 BASIS OF PREPARATION OF EEV
1.1 EEV Principles
The Group's EEV methodology complies fully with the set of EEV Principles published by the CFO Forum in May 2004 and most
recently extended in April 2016. 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.
1.2 Covered business
EEV covers the entire business of the Group.
1.3 New business premiums
The following premiums are included in the calculation of the NBC and PVNBP:
· Premiums arising from the sale of new policies during the period, including:
o Contractual premiums;
o Non-contractual recurrent single premiums where the level of premium and period of payment is pre-defined and reasonably
predictable.
· Non-contractual top-up premiums received during the period on existing policies.
1.4 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 and PVNBP where applicable have been calculated using economic assumptions as at the start of the
year and operating assumptions as at the end of the year.
1.5 Real world returns
No credit is taken in the calculation of EEV, NBC or PVNBP where applicable for returns in excess of risk-free returns.
This approach may differ from that used by some of our competitors who include an asset risk premium.
2 METHODOLOGY
2.1 Overview
The methodology used to derive the EEV results at the valuation date is consistent with the IFRS methodology used in
relation to the consolidated financial statements for the year ended 30 June 2017. Under EEV methodology, profit is
recognised as margins are released from contract related balances over the lifetime of each contract within the Group's
in-force business. The total projected profit recognised over the lifetime of a contract under EEV methodology is the same
as reported under IFRS, but the timing of recognition is different.
2.2 European Embedded Value
The Group's European Embedded Value is calculated on its covered business and is shown net of corporation tax. The Group
does not have any debt or financial reinsurance arrangements in place at the valuation date. The EEV comprises the Net
Worth and the Value of Future Profits, which can be further categorised as shown in the table below:
Components Of The EEV
Component Sub-component
Net Worth Required Capital
Free Surplus
Value Of Future Profits Value of In-Force
Reduction for Non-market Risk
Frictional Cost of Required Capital
Cost of Financial Options & Guarantees
Each component is determined separately, as follows:
2.2.1 Required Capital
Required Capital is determined by the Board, bearing in mind the requirements of regulators of the Group's life insurance
subsidiaries and the working capital required by the Boards of the Group's subsidiaries.
Given the uncertainties inherent in the ultimate outcome of the litigation against Hansard Europe, we believe the
extraction of any capital by the parent company will be constrained for up to three years.
2.2.2 Free surplus
The Free Surplus is the difference between the Net Worth and the Required Capital.
2.2.3 Value of In-Force covered business ("VIF")
The VIF is determined by projecting, 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.
Future shareholder cash flows are deemed to arise when they are released from contract holder funds, following an actuarial
valuation by the Appointed Actuary / Head of Actuarial Function.
VIF is calculated on a 'look through' basis whereby it includes all net cash flows arising from the products supported by
the subsidiary companies providing administration, distribution and other services. The projections are performed using a
proprietary actuarial modelling tool called Prophet.
2.2.4 Reduction for non-market Risk
The Directors make an annual assessment of the cost of non-market risks that are not covered in the VIF projections and
determine an allowance to be deducted from VFP to meet these risks.
This year, the Directors have established an allowance of £6.2m (2016: £6.2m). This is equivalent to an increase of 0.9% in
the risk discount rate assumption at the valuation date. The allowance has been assessed after considering past experience,
the operational characteristics of the business and market information.
2.2.5 Frictional Cost of Required Capital
The cost of holding the Required Capital is, for the Group, the cost of tax on interest on the capital retained in Hansard
Europe. The expected interest is projected, the tax calculated and then discounted to the valuation date.
2.2.6 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 is calculated using best estimate operating assumptions having regard for the Group's recent experience and
management's best estimate of future behaviour, together with other relevant data.
The covered business is unit-linked: it comprises mainly investment-type products with minimal life cover and no financial
options or guarantees. The three main product groups are regular premium, personal portfolio and recurrent single premium.
Variations in experience between the product groups have been considered and, where appropriate, separate assumptions have
been used.
The EEV assumptions are based on an assessment of the business as a going concern.
3.1 Expense assumptions
The allocation of expenses between acquisition and maintenance and the assumption setting process are generally consistent
with prior years.
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 are generally charged as incurred, and hence will be
reflected as a profit or loss in the year.
The number of contracts in-force has been falling over the last few years, partially as a result of the closure to new
business of Hansard Europe in 2013. This trend is expected to continue for a period before the number of contracts in-force
is assumed to return to the current level. We have made an allowance for this feature in the EEV calculation. In
quantifying the impact we have assumed the continuation of significant growth in new business levels into the future.
Exceptional items are generally charged as incurred and hence are reflected as a variance in the year. Their value in 2017
was a charge of £0.5m (2016: £0.3m).
3.2 Demographic & contract holder experience assumptions
The assumption setting process is consistent with prior years.
3.3 Taxation
Current and expected future tax legislation, regulation and the Group's own tax position were considered in setting the
assumptions. The tax rate assumptions for this year have remained unaltered as follows:
Corporation tax rates 2017 2016
Isle of Man 0% 0%
Republic of Ireland 12.5% 12.5%
3.4 Other operating assumptions
The process for setting assumptions for the impact of contract holder activity, such as fund switching, is generally
consistent with prior years.
4 ECONOMIC ASSUMPTIONS
Under EEV principles, the economic assumptions used in the EEV calculations are actively reviewed at each valuation date
and are internally consistent. The assumption setting process is generally consistent with prior years.
4.1 Risk discount rate
The risk discount rates are set equal to the risk-free rates based on the bid-swap yield curve for the applicable currency
and term, sourced from the European Insurance and Occupational Pensions Authority (EIOPA). The EEV calculation uses the
risk-free rates at the end of the year (i.e. at the valuation date), while the calculation of NBC and PVNBP uses the
risk-free rate at the start of the year (i.e. at the previous year-end date).
4.2 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 contract holder funds.
4.3 Risk premium
No credit is taken in the calculation of EEV, NBC or PVNBP for returns in excess of risk-free returns i.e. a cautious
approach is adopted by assuming an asset risk premium of zero.
4.4 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, and to the Group's own expense experience and expectations. Future price inflation is
derived from the yields of UK inflation linked bonds, appropriate for the duration and nature of the cash flows. 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: in Hansard Europe, the charge
inflation is subject to a minimum increase of 5% per annum. The correlation between expense inflation and charge inflation
dampens the impact of inflation on the embedded value results.
Inflation assumptions are as follows:
Inflation rates 30 June 2017 30 June 2016
Expense inflation per annum 2.9% 2.6%
Charge inflation per annum - Hansard Europe 5.0% 5.0%
Charge inflation per annum - Hansard International - Year 1 2.4% 1.9%
Charge inflation per annum - Hansard International - Year 2 2.6% 2.4%
Charge inflation per annum - Hansard International - Year 3+ 2.9% 2.6%
The 5% charge inflation rate for Hansard Europe reflects the terms of the products. The three-year stepped approach to charge inflation for Hansard International reflects the terms of the products, trending towards a long-term inflation rate of 2.9% per annum.
This information is provided by RNS
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