Regulatory Filings • Mar 14, 2016
Regulatory Filings
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THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt about the Proposed Merger, the contents of this Circular, or as to the action you should take, you are recommended to seek your own independent financial advice immediately from your stockbroker, bank, solicitor, accountant, fund manager or other appropriate independent financial adviser authorised under the Financial Services and Markets Act 2000 (as amended) if you are resident in the United Kingdom or, if not, from another appropriately authorised independent professional adviser in the relevant jurisdiction.
If you sell, have sold or otherwise transferred all of your Just Retirement Shares you should send this Circular, together with any accompanying documents (but not the personalised Form of Proxy), as soon as possible to the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or transfer was effected for delivery to the purchaser or the transferee. However, the distribution of this Circular and/or the accompanying documents into certain jurisdictions other than the United Kingdom may be restricted by law. Therefore, persons into whose possession this Circular and any accompanying documents come should inform themselves about, and observe, any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. If you have sold or otherwise transferred only part of your holding of Just Retirement Shares, please consult the bank, stockbroker or other agent through which such sale or transfer was effected.
This Circular should be read in conjunction with the Prospectus relating to Just Retirement, the Proposed Merger and the New Just Retirement Shares dated 28 September 2015, as supplemented by the Supplementary Prospectus dated 14 March 2016 published by Just Retirement, both of which are available on Just Retirement's website (www.justretirementgroup.com). This Circular does not constitute or form part of any offer or invitation to purchase, otherwise acquire, subscribe for, sell, otherwise dispose of or issue, or any solicitation of any offer to sell, otherwise dispose of, issue, purchase, otherwise acquire or subscribe for, any security.
The existing Just Retirement Shares are currently listed on the premium listing segment of the Official List and traded on the London Stock Exchange's main market for listed securities. Applications will be made to the FCA for the New Just Retirement Shares to be issued in connection with the Proposed Merger, to be admitted to the premium listing segment of the Official List and to the London Stock Exchange for the New Just Retirement Shares to be admitted to trading on its main market for listed securities. It is expected that Admission will become effective and that dealings in the New Just Retirement Shares will commence at 8.00 a.m. on the Effective Date which, subject to the satisfaction or waiver (if capable of waiver) of certain Conditions (other than those Conditions which relate to Admission), is currently expected to occur on 4 April 2016. The New Just Retirement Shares will, when issued, rank pari passu in all respects with the existing Just Retirement Shares. No application will be made for the New Just Retirement Shares to be admitted to listing or dealt with on any other exchange.
(Incorporated under the Companies Act and registered in England and Wales with registered number 08568957)
RECOMMENDED ALL-SHARE MERGER OF JUST RETIREMENT AND PARTNERSHIP ASSURANCE
Circular to Just Retirement Shareholders and Notice of Just Retirement General Meeting
Your attention is drawn to the letter from the Chairman of Just Retirement Group plc which is set out on pages 6 to 24 of this Circular and which contains the unanimous recommendation of the Just Retirement Directors that you vote in favour of each of the resolutions to be proposed at the Just Retirement General Meeting referred to below. Please read the whole of this Circular and, in particular, the risk factors set out in Part II (Risk Factors) of this Circular.
Notice of the Just Retirement General Meeting to be held at 10.00 a.m. at Reigate Town Hall, Castlefield Road, Reigate, Surrey RH2 0SH on 30 March 2016 is set out at the end of this Circular. A Form of Proxy for use in connection with the Just Retirement General Meeting is enclosed with this Circular. Whether or not you intend to be present at the Just Retirement General Meeting, you are requested to complete and sign the Form of Proxy in accordance with the instructions printed on it so as to be received by Just Retirement's Registrars, Equiniti, at Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA, as soon as possible, and in any event, no later than 10.00 a.m. on 24 March 2016 (or, in the case of an adjournment, not later than 48 hours (excluding non-working days) before the time fixed for the holding of the adjourned meeting). If you hold Just Retirement Shares in CREST, you may appoint a proxy by completing and transmitting a CREST Proxy Instruction to Just Retirement's Registrars, Equiniti. Alternatively, you may give proxy instructions by logging on to www.sharevote.co.uk and following the instructions. Proxies sent electronically must be sent as soon as possible and, in any event, so as to be received by not later than 10.00 a.m. on 24 March 2016 (or, in the case of an adjournment, not later than 48 hours (excluding non-working days) before the time fixed for the holding of the adjourned meeting). The completion and return of a Form of Proxy (or the electronic appointment of a proxy) will not preclude you from attending and voting in person at the Just Retirement General Meeting or any adjournment thereof, if you wish to do so and are so entitled.
This Circular is a circular relating to the Proposed Merger which has been prepared in accordance with the Listing Rules. This Circular has been approved by the FCA.
Just Retirement Shareholders should only rely on the information contained in this Circular, the Prospectus (as supplemented by the Supplementary Prospectus) and the documents (or parts thereof) incorporated herein by reference. No person has been authorised to give any information or make any representations other than those contained in this Circular, the Prospectus (as supplemented by the Supplementary Prospectus) and the documents (or parts thereof) incorporated by reference herein and, if given or made, such information or representation must not be relied upon as having been so authorised by the Company, the Just Retirement Directors, Barclays, Fenchurch, Deutsche Bank, Nomura or Evercore. In particular, the contents of the Company's and Partnership Assurance's websites do not form part of this Circular and Just Retirement Shareholders should not rely on them. Without prejudice to any legal or regulatory obligation on the Company to publish a supplementary prospectus pursuant to section 87G of FSMA and Prospectus Rule 3.4 and/or a supplementary circular pursuant to 10.5.4R of the Listing Rules, neither the delivery of this Circular nor Admission shall, under any circumstances, create any implication that there has been no change in the business or affairs of the Just Retirement Group or the Combined Group taken as a whole since the date of this Circular or that the information in it is correct as of any time after the date of this Circular.
Persons into whose possession this Circular comes should inform themselves about and observe any applicable restrictions and legal, exchange control or regulatory requirements in relation to the distribution of this Circular and the Proposed Merger. Any failure to comply with such restrictions or requirements may constitute a violation of the securities laws of any such jurisdiction. The contents of this Circular should not be construed as legal, business or tax advice.
The distribution of this Circular and any accompanying documents and the allotment and issue of the New Just Retirement Shares in jurisdictions other than the United Kingdom may be restricted by law. Persons outside the United Kingdom into whose possession this Circular and any accompanying documents come should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of the relevant jurisdiction. No action has been taken by Just Retirement or its advisers to obtain any approval, authorisation or exemption to permit the allotment or issue of the New Just Retirement Shares or the possession or distribution of this Circular (or any other publicity material relating to the New Just Retirement Shares) in any jurisdiction other than the United Kingdom.
The New Just Retirement Shares have not been, and will not be, registered under the US Securities Act, or under any laws of any state, district or any other jurisdiction of the United States, nor have clearances been, nor will they be, obtained from the securities commission or similar authority of any province or territory of Canada and no prospectus has been, or will be filed, or registration made, under any securities law of any province or territory of Canada, nor has a prospectus in relation to the New Just Retirement Shares been, nor will one be, lodged with or registered by, the Australian Securities and Investments Commission, nor have any steps been taken, nor will any steps be taken, to enable the New Just Retirement Shares to be offered in compliance with applicable securities laws of Japan and no regulatory
clearances in respect of the New Just Retirement Shares have been, or will be, applied for in any other jurisdiction.
Accordingly, the New Just Retirement Shares may not be offered, sold or otherwise transferred, directly or indirectly, in or into the United States absent registration under the US Securities Act or an exemption from such act. The New Just Retirement Shares to be issued to Partnership Assurance Shareholders pursuant to the terms of the Scheme are expected to be issued in reliance upon an exemption from the registration requirements of the US Securities Act provided by section 3(a)(10) thereof. Partnership Assurance Shareholders (whether or not US persons (as defined in the US Securities Act)) who are affiliates of Just Retirement after the Effective Date will be subject to certain US transfer restrictions relating to the New Just Retirement Shares received pursuant to the terms of the Proposed Merger.
None of the securities referred to in this Circular have been approved or disapproved by the SEC, any state securities commission in the United States or any other US regulatory authority, nor have such authorities passed upon or determined the adequacy or accuracy of the information contained in this Circular. Any representation to the contrary is a criminal offence in the United States.
Barclays, which is authorised in the United Kingdom by the Prudential Regulation Authority and regulated in the United Kingdom by the Financial Conduct Authority and the Prudential Regulation Authority, is acting as sponsor and lead financial adviser exclusively for Just Retirement and no one else in connection with the Proposed Merger, the contents of this Circular and Admission of the New Just Retirement Shares. Barclays will not regard any other person (whether or not a recipient of this Circular) as its client in relation to the Proposed Merger, the contents of this Circular and Admission of the New Just Retirement Shares and will not be responsible to anyone other than Just Retirement for providing the protections afforded to its clients or for providing advice in connection with the Proposed Merger, the contents of this Circular, Admission of the New Just Retirement Shares or any other transaction or arrangement referred to in this Circular.
Fenchurch, which is authorised and regulated by the Financial Conduct Authority, is acting for Just Retirement and no one else in connection with the contents of this Circular and will not be responsible to anyone other than Just Retirement for providing the protections afforded to its clients or for providing advice in connection with the Proposed Merger, the contents of this Circular and Admission of the New Just Retirement Shares. Fenchurch will not regard any other person (whether or not a recipient of this Circular) as its client in relation to the Proposed Merger, the contents of this Circular and Admission of the New Just Retirement Shares.
Deutsche Bank is authorised under German Banking Law (competent authority: European Central Bank) and, in the United Kingdom, by the Prudential Regulation Authority. It is subject to supervision by the European Central Bank and by BaFin, Germany's Federal Financial Supervisory Authority and is subject to limited regulation in the United Kingdom by the Prudential Regulation Authority and the Financial Conduct Authority. Details about the extent of its authorisation and regulation by the Prudential Regulation Authority and regulation by the Financial Conduct Authority are available on request. Deutsche Bank is acting as a corporate broker to Just Retirement and no other person in connection with this Circular or its contents. Deutsche Bank will not be responsible to any person other than Just Retirement for providing any of the protections afforded to its clients, nor for providing any advice in relation to any matter referred to herein.
Nomura, which is authorised in the United Kingdom by the Prudential Regulation Authority and registered in the United Kingdom by the Financial Conduct Authority and the Prudential Regulation Authority, is acting for Just Retirement and no one else in connection with the matters referred to in this Circular and will not be responsible to anyone other than Just Retirement for providing the protections afforded to clients of Nomura, or for giving advice in connection with the matters referred to in this Circular or any matter referred to herein.
Barclays, Fenchurch, Deutsche Bank, Nomura and any of their respective affiliates may have engaged in transactions with, and provided various investment banking, financial advisory and other services for, the Just Retirement Shareholders and the Company for which they would have received customary fees.
Evercore, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting for Partnership Assurance and no one else in connection with the matters referred to in this Circular and will not be responsible to anyone other than Partnership Assurance for providing the protections afforded to clients of Evercore, or for giving advice in relation to the matters referred to in this Circular, the contents of this Circular or any matter referred to herein.
Apart from the responsibilities and liabilities, if any, which may be imposed on Barclays, Fenchurch, Deutsche Bank, Nomura or Evercore by FSMA or the regulatory regime established thereunder, or under the regulatory regime of any jurisdiction where the exclusion of liability under the relevant regulatory regime would be illegal, void or unenforceable, Barclays, Fenchurch, Deutsche Bank, Nomura and Evercore do not accept any responsibility whatsoever for, or makes any representation or warranty, express or implied, as to the contents of this Circular or for any other statement made or purported to be made by it, or on its behalf, in connection with the Company, the New Just Retirement Shares or the Proposed Merger and nothing in this Circular will be relied upon as a promise or representation in this respect, whether or not to the past or future. Barclays, Fenchurch, Deutsche Bank, Nomura and Evercore accordingly disclaim all and any responsibility or liability, whether arising in tort, contract or otherwise (save as referred to above), which they might otherwise have in respect of this Circular or any such statement.
Just Retirement Shareholders acknowledge that: (i) they have not relied on Barclays, Fenchurch, Deutsche Bank, Nomura, Evercore or any person affiliated with Barclays, Fenchurch, Deutsche Bank, Nomura or Evercore in connection with any investigation of the accuracy of any information contained in this Circular or their investment decision; and (ii) they have relied only on the information contained in this Circular and the documents (or parts thereof) incorporated herein by reference. No person has been authorised to give any information or make any representations other than those contained in this Circular and, if given or made, such information or representations must not be relied on as having been so authorised.
Dated: 14 March 2016
Unless otherwise indicated, all references in this Circular to ''sterling'', ''pounds sterling'', ''£'', or ''pence'' are to the lawful currency of the United Kingdom. The Company prepares its financial statements in pounds sterling.
Certain data in this Circular, including financial, statistical, and operating information has been rounded. As a result of the rounding, the totals of data presented in this Circular may vary slightly from the actual arithmetic totals of such data. Percentages in tables have been rounded and accordingly may not add up to 100 per cent.
No person has been authorised to give any information or make any representation other than those contained in this Circular and, if given or made, such information or representation must not be relied upon as having been so authorised. Neither the delivery of this Circular nor any subscription or sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date of this Circular or that the information in this Circular is correct as of any time subsequent to the date hereof.
This Circular includes forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the Company's, Partnership Assurance's and/or the Combined Group's control and all of which are based on the current beliefs and expectations of the Just Retirement Directors about future events. Forward-looking statements are sometimes indentified by the use of forward-looking terminology such as ''believe'', ''expects'', ''may'', ''will'', ''could'', ''should'', ''shall'', ''risk'', ''intends'', ''estimates'', ''aims'', ''plans'', ''predicts'', ''continues'', ''assumes'', ''positioned'' or ''anticipates'' or the negative thereof, other variations thereon or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Circular and include statements regarding the intentions, beliefs or current expectations of the Just Retirement Directors or the Just Retirement Group concerning, among other things, the results of operations, financial condition, prospects, growth, strategies, and dividend policy of the Just Retirement Group, the Partnership Assurance Group and/or the Combined Group and the industry in which they operate.
Just Retirement Shareholders should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are in many cases beyond the control of the Company, Partnership Assurance and/or the Combined Group. By their nature, forwardlooking statements involve risks and uncertainties because such statements relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not indicative of future performance and the actual results of operations and financial condition of the Just Retirement Group, the Partnership Assurance Group and/or the Combined Group, and the development of the industry in which the Just Retirement Group, the Partnership Assurance Group and/or the Combined Group operate, may differ materially from those made in or suggested by the forward-looking statements contained in this Circular. Important risk factors which may cause actual results to differ include, but are not limited to, those described in Part II (Risk Factors) of this Circular. The cautionary statements set out above should be considered in connection with any subsequent written or oral forward-looking statements that Just Retirement, Partnership Assurance and/or the Combined Group, or persons acting on their behalf, may issue.
These forward-looking statements reflect Just Retirement's and Partnership Assurance's judgement at the date of this Circular and are not intended to provide any representations, assurances or guarantees as to future events or results. To the extent required by the Listing Rules, the Prospectus Rules, the Disclosure and Transparency Rules and other applicable regulation, Just Retirement will update or revise the information in this Circular. Otherwise, Just Retirement undertakes no obligation to update or revise any forward-looking statements or other information, and will not publicly release any revisions it may make to any forward-looking statements or other information that may result from events or circumstances arising after the date of this Circular. Just Retirement Shareholders should note that this paragraph is not
intended to qualify the statement as to working capital set out in Part IX (Additional Information) of this Circular.
No statement in this Circular (including any information incorporated by reference into this Circular from the Prospectus) is intended to constitute a profit forecast or profit estimate for any period, nor should any statement be interpreted to mean that earnings or earnings per share will necessarily be greater or lesser than those for the relevant preceding financial periods for either Just Retirement or Partnership Assurance, as appropriate.
No statement in the Quantified Financial Benefits Statement, or this Circular generally, should be construed as a profit forecast or interpreted to mean that the Combined Group's earnings in the first full year following the Effective Date of the Scheme, or in any subsequent period, would necessarily match or be greater than or be less than those of Just Retirement and/or Partnership Assurance for the relevant preceding financial period or any other period. For the purposes of Rule 28 of the Code, the Quantified Financial Benefits Statement contained in this Circular is the responsibility of Just Retirement and the Just Retirement Directors.
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| Page | |
|---|---|
| EXPECTED TIMETABLE OF PRINCIPAL EVENTS | 2 |
| JUST RETIREMENT DIRECTORS, PROPOSED DIRECTORS, COMPANY SECRETARY, | |
| REGISTERED AND HEAD OFFICE AND ADVISERS |
4 |
| Part I: LETTER FROM THE CHAIRMAN OF JUST RETIREMENT | 6 |
| Part II: RISK FACTORS | 25 |
| Part III: PARTNERSHIP ASSURANCE FINANCIAL INFORMATION | 31 |
| Part IV: PARTNERSHIP ASSURANCE MARKET CONSISTENT EMBEDDED VALUE | |
| SUPPLEMENTARY INFORMATION . |
183 |
| Part V: RECONCILIATION OF PARTNERSHIP ASSURANCE FINANCIAL INFORMATION | |
| ON THE BASIS OF ACCOUNTING POLICIES OF JUST RETIREMENT . |
207 |
| Part VI: UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE COMBINED | |
| GROUP . |
210 |
| Part VII: QUANTIFIED FINANCIAL BENEFITS STATEMENT | 219 |
| Part VIII: INFORMATION ON THE SOLVENCY II CAPITAL POSITION ON JUST | |
| RETIREMENT AND PARTNERSHIP ASSURANCE | 221 |
| Part IX: ADDITIONAL INFORMATION | 223 |
| Part X: DEFINITIONS | 231 |
| NOTICE OF GENERAL MEETING . |
240 |
| NOTES TO NOTICE OF GENERAL MEETING | 242 |
| Event | Time and Date(1) |
|---|---|
| Publication of this Circular . |
14 March 2016 |
| Publication of the Supplementary Prospectus . |
14 March 2016 |
| Latest time for receipt of Just Retirement Forms of Proxy/ CREST Proxy Instructions for the Just Retirement General Meeting |
10.00 a.m. on 24 March 2016(2) |
| Voting record time for the Just Retirement General Meeting | 6.00 p.m. on 24 March 2016(3) |
| Just Retirement General Meeting |
10.00 a.m. on 30 March 2016 |
| Partnership Assurance Court Meeting |
12.00 p.m. on 30 March 2016 |
| Partnership Assurance General Meeting | 12.15 p.m. on 30 March 2016(4) |
| The following dates are subject to change(5) | |
| Scheme Court Hearing (to sanction the Scheme) . |
1 April 2016 |
| Last day of dealings in, and for registration of transfers of, and disablement in CREST of, Partnership Assurance Shares |
1 April 2016 |
| Dealings in Partnership Assurance Shares suspended | 5.00 p.m. on 1 April 2016 |
| Scheme Record Time |
6.00 p.m. on 1 April 2016 |
| Effective Date of the Scheme | 4 April 2016(6) |
| Cancellation of admission of and dealings in Partnership Assurance Shares |
By 8.00 a.m. on 4 April 2016 |
| Issue of New Just Retirement Shares | By 8.00 a.m. on 4 April 2016 |
| Admission and commencement of dealings in the New Just Retirement Shares |
8.00 a.m. on 4 April 2016 |
| CREST accounts credited with New Just Retirement Shares . |
As soon as possible after 8.00 a.m. on 4 April 2016 |
| Despatch of definitive share certificates for the New Just Retirement Shares, where applicable |
Within 14 days of the Effective Date |
| Despatch of cheques, or CREST accounts credited in respect of fractional entitlements to New Just Retirement Shares |
Within 14 days of the Effective Date |
| Long Stop Date . |
30 April 2016(7) |
All times are London times. Each of the times and dates in the above timetable is subject to change without further notice.
Notes:
(1) All times shown in this Circular are London times unless otherwise stated. The dates and times given are indicative only and are based on current expectations and may be subject to change. If any of the times and/or dates above change, the revised times and/or dates will be announced via a Regulatory Information Services.
(2) The Just Retirement Forms of Proxy/CREST Proxy Instructions for the Just Retirement General Meeting must be returned by no later than 10.00 a.m. on 24 March 2016 (or in the case of an adjournment of the Just Retirement General Meeting, not less than 48 hours (excluding non-working days) prior to the time set for the adjourned Just Retirement General Meeting) to be valid.
(3) Only those Just Retirement Shareholders registered on the register of members of Just Retirement as at 6.00 p.m. on 24 March 2016 (or in the case of an adjournment of the Just Retirement General Meeting, on the register of members of Just Retirement at 6.00 p.m. on the day which is two days (excluding non-working days) prior to the time set for the adjourned Just Retirement General Meeting) will be entitled to attend and/or vote at the Just Retirement General Meeting.
(4) Or, if later, as soon thereafter as the Partnership Assurance Court Meeting shall have concluded or been adjourned.
| Number of existing Just Retirement Shares in issue as at 11 March 2016 (being the Last | |
|---|---|
| Practicable Date) | 564,397,402 |
| Number of New Just Retirement Shares to be issued in connection with the Proposed | |
| Merger(1) | 369,893,501 |
| Number of JRP Group Shares in issue immediately following Admission(1)(2) | 934,290,903 |
| New Just Retirement Shares as a percentage of the total JRP Group Shares immediately | |
| following completion of the Proposed Merger(1)(2) | 39.6% |
Notes:
(1) Based on the number of Partnership Assurance Shares in issue as at 11 March 2016 (being the Last Practicable Date) and assumes that 3,385,266 Partnership Assurance Shares are issued as a result of the exercise of any options of, or awards vesting under, the Partnership Assurances Employee Share Plans between 11 March 2016 (being the Last Practicable Date) and Admission.
(2) Assumes that no new Just Retirement Shares are issued as a result of the exercise of any options of, or awards vesting under, the Just Retirement Employee Share Plans between 11 March 2016 (being the Last Practicable Date) and Admission.
| Just Retirement Directors | Tom Cross Brown Rodney Cook Kate Avery Michael Deakin Shayne Deighton James Fraser Steve Melcher Keith Nicholson Simon Thomas |
|---|---|
| Proposed Directors | Chris Gibson-Smith David Richardson Paul Bishop Peter Catterall Ian Cormack Clare Spottiswoode |
| Company Secretary | Martin Smith |
| Registered and head office of the Company | Vale House Roebuck Close Bancroft Road Reigate Surrey RH2 7RU |
| Sponsor and Lead Financial Adviser and, for the purposes of the Proposed Merger, Corporate Broker to |
|
| Just Retirement |
Barclays Bank PLC, acting through its Investment Bank 5 North Colonnade London E14 4BB |
| Financial Adviser to Just Retirement | Fenchurch Advisory Partners LLP Tower 42 25 Old Broad Street London EC2N 1HQ |
| Corporate Broker to Just Retirement | Deutsche Bank AG London Branch Winchester House 1 Great Winchester Street London EC2N 2DB |
| Corporate Broker to Just Retirement | Nomura International plc 1 Angel Lane London EC4R 3AB |
| English and US legal advisers to Just Retirement | Clifford Chance LLP 10 Upper Bank Street London E14 5JJ |
| English legal advisers to the Sponsor |
Davis Polk & Wardwell London LLP 5 Aldermanbury Square London EC2V 7HR |
| Reporting Accountants and Auditors | KPMG LLP 15 Canada Square London E14 5GL |
| Rule 3 Adviser to Partnership Assurance | Evercore Partners International LLP 15 Stanhope Gate London W1K 1LN |
|---|---|
| Auditors to Partnership Assurance |
Deloitte LLP Hill House 1 Little New Street London EC4A 3TR |
| Registrar to Just Retirement | Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA |
(Incorporated and registered in England and Wales under the Companies Act with registered number 08568957)
Tom Cross Brown (Independent Non-executive Chairman) Vale House, Roebuck Close, Rodney Cook (Chief Executive Officer) Bancroft Road, Reigate, Simon Thomas (Group Finance Director) Surrey RH2 7RU Shayne Deighton (Chief Group Actuary) Keith Nicholson (Senior Independent Non-executive Director) Kate Avery (Independent Non-executive Director) Michael Deakin (Independent Non-executive Director) James Fraser (Non-executive Director) Steve Melcher (Independent Non-executive Director)
14 March 2016
To Just Retirement Shareholders and, for information only, to persons with information rights
Dear Just Retirement Shareholder
On 11 August 2015, the Just Retirement Board and the Partnership Assurance Board announced that they had agreed the terms of a recommended all-share merger of the Company and Partnership Assurance to create JRP Group plc (the ''Firm Offer Announcement'').
The Proposed Merger is to be effected by means of a court-sanctioned scheme of arrangement of Partnership Assurance under Part 26 of the Companies Act.
Owing to its size, the Proposed Merger constitutes a class 1 transaction for Just Retirement for the purposes of the Listing Rules and therefore requires the approval of Just Retirement Shareholders. Accordingly, the Just Retirement General Meeting has been convened for 10.00 a.m. on 30 March 2016 at Reigate Town Hall, Castlefield Road, Reigate, Surrey RH2 0SH. Just Retirement Shareholders will be asked, among other things, to approve the Proposed Merger and the allotment of New Just Retirement Shares in connection with the Proposed Merger. The notice convening the Just Retirement General Meeting is set out at the end of this Circular and an explanation of each of the resolutions to be proposed at the meeting is set out in paragraph 27 below.
The Just Retirement Board considers the Proposed Merger and the resolutions to be proposed at the Just Retirement General Meeting to be in the best interests of Just Retirement and Just Retirement Shareholders as a whole and unanimously recommends that Just Retirement Shareholders vote in favour of the resolutions to be proposed at the Just Retirement General Meeting, as the Just Retirement Directors who hold or are beneficially entitled to Just Retirement Shares have irrevocably undertaken to do (or procure) in respect of their own beneficial holdings of Just Retirement Shares. The Proposed Merger has also been unanimously recommended by the Partnership Assurance Board.
I am writing to give you further details of the Proposed Merger, including the background to and reasons for it, to explain why the Just Retirement Board considers this to be in the best interests of Just Retirement and Just Retirement Shareholders as a whole, and to seek your approval of the resolutions to be proposed at the Just Retirement General Meeting. A Prospectus dated 28 September 2015, prepared in connection with the Proposed Merger and in accordance with the Prospectus Rules which contains further details of the Proposed Merger, and as supplemented by a Supplementary Prospectus dated 14 March 2016, have been published on Just Retirement's website (www.justretirementgroup.com).
Under the terms of the Proposed Merger, which is subject to the Conditions and certain further terms summarised below and set out in full in the Scheme Document dated 5 November 2015, Partnership Assurance Shareholders will be entitled to receive:
The Proposed Merger is expected to result in Just Retirement Shareholders owning approximately 60 per cent. of the Combined Group and Partnership Assurance Shareholders owning approximately 40 per cent. of the Combined Group.
Based on the Closing Price of Just Retirement Shares of 137.0 pence on 11 March 2016 (being the Last Practicable Date), the Proposed Merger represents an indicative value of 114.3 pence per Partnership Assurance Share and values the entire issued and to be issued ordinary share capital of Partnership Assurance at approximately £507 million.
The Proposed Merger is conditional on, amongst other things: (i) the Scheme becoming Effective no later than the Long Stop Date; and (ii) approval by the requisite majority of Just Retirement Shareholders at the Just Retirement General Meeting and of Partnership Assurance Shareholders at the Partnership Assurance Meetings.
The UK retirement income market has evolved significantly since the 2014 Budget. Until this date, as providers of annuities underwritten on the basis of medical and lifestyle factors, both Just Retirement and Partnership Assurance were able to achieve fast, profitable growth in the retirement income market by offering customers better value alternatives to the annuity products typically provided by the larger incumbent insurers.
The 2014 Budget, and the greater freedom for accessing pension savings that it entailed, represented the most fundamental reforms to the retirement income market since the 1920s. These reforms had an immediate impact on the sales of individual annuities, which fell by 42 per cent. from £11.9 billion in 2013 to £6.9 billion in 2014.
Just Retirement and Partnership Assurance responded promptly and effectively to the changes, reducing their respective cost bases and focusing on their defined benefit de-risking propositions. Today, defined benefit de-risking accounts for around half of the new business sales for both Just Retirement and Partnership Assurance (based on new business volumes for the 12-month period from 1 July 2014 to 30 June 2015).
The UK is one of the largest private defined benefit markets in the world, with aggregate liabilities of approximately £1.7 trillion across more than 6,000 pension plans. Each year a number of these plans decide to de-risk through a bulk annuity purchase. Bulk annuity sales were unaffected by the 2014 Budget and represent a significant growth segment in the UK life sector, with total defined benefit de-risking sales expected to reach £25 billion per annum by 2020.
In the retirement income market, key lead indicators now show early signs of a return to growth in Just Retirement's and Partnership Assurance's sales of annuities (e.g. Just Retirement's guaranteed income for life sales for the three months ended 30 September 2015 were 26 per cent. higher than the preceding quarter, and Partnership Assurance's quote volumes for individually underwritten annuities in September and October 2015 were approximately a third higher than in April 2015), with individuals appearing to recognise the value of a guaranteed income for life and the better value for money offered in many cases by guaranteed income for life solutions based on medical and/or lifestyle factors, which are more tailored to meet the individual needs of customers.
Given the recent changes in the retirement income market, notwithstanding early signs of an improvement in market outlook, the Just Retirement Board and the Partnership Assurance Board consider that through a combination of the two companies, the Combined Group will be better placed both to tackle the challenges that still remain and to take advantage of the opportunities that the current environment presents. Moreover, the Just Retirement Board believes that the combination creates the potential for substantial synergies resulting in significant value creation for both Just Retirement and Partnership Assurance Shareholders and better outcomes for both pension trustees and retail customers.
The Proposed Merger is expected to result in a Combined Group with £1.8 billion of new business premiums (based on the 12 months to 30 June 2015) serving over 60 defined benefit pension scheme customers and around 280,000 in-force customers. The Just Retirement Board believes that this increased scale will benefit the Combined Group in the defined benefit de-risking segment and retirement income markets, allowing it to compete with the larger incumbent players on equal terms.
The defined benefit de-risking segment is very important for the Combined Group, accounting for around half of Just Retirement and Partnership Assurance's new business volumes on a pro forma basis over the 12 months to 30 June 2015. The Combined Group would have a pro forma share of 5.2 per cent. (by value) of all UK bulk annuity deals in 2014.1
To date, Just Retirement and Partnership Assurance have been successful in targeting relatively small defined benefit schemes with up to £200 million of assets and up to 300 members, or specific cohorts of lives in larger schemes on an individually underwritten basis. The median size of the schemes transacted to date for Just Retirement is approximately £17 million and the average size of the schemes transacted to date for Partnership Assurance is approximately £18 million. Both companies have developed successful propositions in this area, and individual underwriting based on medical and/or lifestyle factors has become an established option for employee benefit consultants advising their pension scheme clients (including in particular mid-sized scheme clients) on de-risking. The Just Retirement Board sees a clear opportunity for the Combined Group in the provision of de-risking solutions for small to mid-sized defined benefit pension schemes.
In the defined benefit de-risking segment, scale and financial strength are necessary to be considered a credible counterparty for prospective pension fund clients. The Just Retirement Board and Partnership Assurance Board expect the Proposed Merger to give the Combined Group the critical mass to compete more credibly for ''top slicing'' or selective annuitisation of more sizeable defined benefit pension schemes and drive the growth of the business going forward.
In the retirement income market, there is enduring demand for individual retirement income products, with market studies indicating that around 70 per cent. of customers surveyed continue to prefer their pension to deliver a guaranteed income for life over any other option. Just Retirement and Partnership Assurance have achieved significant success in the retirement income market in recent years by providing better rates and more tailored solutions to customers with a reduced life expectancy than the larger incumbent providers. The Just Retirement Board believes that combining the two businesses will create a stronger retirement income specialist even better able to serve the changing demands of individual retail customers. The enhanced scale and capital position of the Combined Group is also expected to provide further security for retail customers.
In addition, the Just Retirement Board believes that the Combined Group will be better placed to invest in new technology, capabilities and geographic expansion, the latter building on existing initiatives in South Africa and the US. In a fast evolving retirement income market characterised by increased choice and freedom for customers, the ability of firms to innovate and augment their product proposition will be an essential requirement for success. By pooling their expertise, the combined specialist management teams of the two businesses expect to be able to accelerate product development.
Overall, it is expected that the Combined Group will be a ''consumer champion'' for both the defined benefit de-risking segment and the retirement income market, offering better outcomes for pension trustees and retail customers.
Extensive experience in individual underwriting based on medical and lifestyle factors, built up through hundreds of thousands of person-years of actuarial experience, is at the heart of the business models of Just Retirement and Partnership Assurance. Individual underwriting on the basis of medical and/or lifestyle data is increasingly important, both for the defined benefit de-risking segment and individual customers. It is expected that the significance of such individual underwriting will accelerate, both for healthy and impaired lives, as the open market option becomes increasingly accessible to customers.
1 Based on the value of UK bulk annuity deals of £13,185 million in 2014 extracted from a report titled ''UK life insurance: Bulk growth more than makes up for individual slowdown'' dated 22 April 2015 published by RBC Capital Markets.
The Proposed Merger will result in a combined group with extensive mortality data sets and underwriting expertise. The Just Retirement Board believes that the Combined Group will be able to utilise key features of each business, including Just Retirement's next generation PrognoSysTM underwriting system and Partnership Assurance's many years of fully developed mortality curves. The Combined Group will have around 280,000 in-force customers and an experienced medical team to support underwriting of complex cases.
This outstanding intellectual property will provide a number of clear commercial benefits. Enhanced data sets will allow improved risk selection, reserving accuracy and greater capital efficiency through individual underwriting based on medical and lifestyle factors. In addition, the Just Retirement Board believes that it will provide the ability to negotiate better reinsurance terms, with reinsurers taking comfort from the size and accuracy of the Combined Group's intellectual property. The Combined Group is also expected to have an improved ability to innovate and accelerate new product launches.
The Just Retirement Board therefore believes that this will allow the business to sustain its position in the rapidly developing retirement income market, delivering better outcomes for customers and enhanced returns for shareholders.
The Proposed Merger will allow Just Retirement and Partnership Assurance to combine their multichannel distribution networks within the UK, bringing together their long standing relationships with financial intermediaries and increasing penetration of emerging channels in order to anticipate the longer term changes in industry distribution.
Both Just Retirement and Partnership Assurance have historically operated primarily through the intermediary channel, reflecting a greater focus on individual business. However, with around 50 per cent. of new business volumes of the two companies now relating to defined benefit pension schemes, the employee benefit consultant channel is becoming increasingly important.
The Just Retirement Board believes that the Proposed Merger will improve the Combined Group's visibility and access to pension schemes through the employee benefit consultant channel. Pension scheme trustees rely on the advice of these consultants to secure appropriate and best value bulk annuity de-risking solutions for scheme members. The greater scale and financial resources of the Combined Group are expected to raise its profile with consultants and help in winning new de-risking mandates.
The two companies' intermediary relationships are also complementary and encompass national, regional and specialist independent financial advisers.
In addition to deepening core distribution channel relationships, the Proposed Merger will also be additive to distribution through corporate partners. Both Just Retirement and Partnership Assurance have relationships with a number of blue chip institutions, which the Just Retirement Board believes will be complementary.
Furthermore, the Just Retirement Board believes that the enhanced scale and resources of the Combined Group will aid the realisation of Just Retirement's and Partnership Assurance's international growth ambitions, expanding the Combined Group's proposition to new geographies. The success of the Combined Group's distribution channels, and in particular its emerging channels, will be aided by the development of a stronger combined brand with enhanced market recognition.
The combination of the two businesses is expected to create the potential for significant synergies supporting meaningful EPS accretion for Just Retirement Shareholders and Partnership Assurance Shareholders on a fully phased basis.2 The Just Retirement Directors also expect these synergies to have a positive impact on embedded value, new business margin, economic capital and Solvency II capital ratios over time.
The Just Retirement Board expects the Proposed Merger to result in pre-tax cost savings of at least £40 million per annum. These synergies are expected to be implemented following completion of the Proposed Merger with the full run-rate being achieved in 2018 (the third year following completion), and are expected to require one-off integration costs of approximately £60 million over two years.
2 Excluding any non-recurring items.
The cost savings represent approximately one third of the combined addressable cost base and are expected to be derived from the following key areas:
The identified synergies will accrue as a direct result of the Proposed Merger and would not be achieved on a standalone basis (together with the foregoing two paragraphs, the ''Quantified Financial Benefits Statement'').
These estimated synergies reflect both the beneficial elements and relevant costs of achieving them.
In addition to the targeted cost savings, the Just Retirement Directors believe there is the potential for additional financial benefits to be achieved over time.
These synergy estimates consider only costs and exclude any potential benefits from increasing operational gearing, improved commercial terms with business partners or access to financial markets.
Further information on the bases of belief supporting the Quantified Financial Benefits Statement, including the principal assumptions and sources of information, is set out in Part VII (Quantified Financial Benefits Statement) of this Circular.
These statements of identified synergies and estimated costs savings relate to future actions and circumstances which by their nature involve risks, uncertainties and contingencies. As a consequence, the identified synergies and estimated cost savings referred to may not be achieved, may be achieved later or sooner than estimated, or those achieved could be materially different from those estimated. For the purposes of Rule 28 of the Code, the Quantified Financial Benefits Statement is the responsibility of Just Retirement and the Just Retirement Directors.
The Quantified Financial Benefits Statement is not intended as a profit forecast and should not be interpreted as such. The Just Retirement Directors have confirmed that there have been no material changes to the Quantified Financial Benefits Statement since the date of the Firm Offer Announcement and the Quantified Financial Benefits Statement remains valid. KPMG and the Company's financial advisers, Barclays and Fenchurch, have also confirmed to Just Retirement that the reports they provided in connection with the Quantified Financial Benefits Statement continue to apply.
Additional synergies may be realised through further headcount reductions and other initiatives that cannot be quantified for reporting under the Code.
The Just Retirement Board is confident in the ability of the respective management teams of Just Retirement and Partnership Assurance to maximise the value from the Proposed Merger. A separate integration team will be established comprising executives from the Just Retirement Group and the Partnership Assurance Group to oversee integration matters. This team will aid the realisation of the synergies outlined above and ensure that other executives and senior managers are not distracted from the development and growth agenda.
The Just Retirement Board believes that the Combined Group will see high quality, stable cash generation from Just Retirement and Partnership Assurance's books of business. On a pro forma basis, the Combined Group's cash generation is balanced, with operating profits split broadly 50:50 between new business and in-force.
The relatively shorter duration of Partnership Assurance's in-force portfolio also provides a balance to Just Retirement's relatively longer duration book, reflecting the varying severity of the medical conditions on which the lives within the two portfolios have been underwritten.
In addition, Partnership Assurance's 20 years of mortality experience comprises a number of years where underwriting years are fully developed, enhancing the robustness and maturity of the cash generation from the in-force books. The Just Retirement Board believes that the cash generation ability of the Combined Group will be further enhanced by the targeted cost synergies, which will improve efficiency and increase the Combined Group's capacity for cash generation and, over time, support the Combined Group's dividend capacity.
On a pro forma basis and assuming that the Proposed Merger had become Effective on 1 January 2015, the Combined Group would have made a comprehensive loss of approximately £50.7 million (based on the comprehensive loss of the Just Retirement Group for the year ended 30 June 2015 and the comprehensive loss of the Partnership Assurance Group for the year ended 31 December 2015) as more fully described in Section A (Unaudited pro forma income statement) of Part VI (Unaudited pro forma financial information of the Combined Group) of this Circular.
On a pro forma basis and assuming that the Proposed Merger had become Effective on 31 December 2015, the Combined Group would have had total equity of approximately £1,590.0 million (based on the total equity of the Just Retirement Group and the Partnership Assurance Group as at 31 December 2015) as more fully described in Section B (Unaudited pro forma statement of net assets) of Part VI (Unaudited pro forma financial information of the Combined Group) of this Circular.
The Partnership Assurance Directors who beneficially hold Partnership Assurance Shares, being Chris Gibson-Smith, David Richardson, Douglas Ferrans, Ian Owen, Steve Groves, Ian Cormack and Richard Ward, have irrevocably undertaken to vote (or procure the voting) in favour of the Scheme at the Partnership Assurance Court Meeting and the special resolution relating to the Proposed Merger to be proposed at the Partnership Assurance General Meeting in respect of their (and their connected persons') Partnership Assurance Shares which amount in aggregate to 16,860,526 Partnership Assurance Shares, representing approximately 3.8 per cent. of the issued ordinary share capital of Partnership Assurance on 11 March 2016 (being the Last Practicable Date).3
The Cinven Funds have irrevocably undertaken to vote in favour of the Scheme at the Partnership Assurance Court Meeting and the special resolution relating to the Proposed Merger to be proposed at the Partnership Assurance General Meeting in respect of their entire beneficial holding of 218,800,152 Partnership Assurance Shares, representing approximately 49.7 per cent. of the issued ordinary share capital of Partnership Assurance on 11 March 2016 (being the Last Practicable Date).
As such, Just Retirement and Partnership Assurance have received irrevocable undertakings to vote in favour of the Scheme at the Partnership Assurance Court Meeting and the special resolution to be proposed at the Partnership Assurance General Meeting in respect of 235,660,678 Partnership Assurance Shares in aggregate, representing approximately 53.5 per cent. of the issued ordinary share capital of Partnership Assurance on 11 March 2016 (being the Last Practicable Date).
The Just Retirement Directors who beneficially hold Just Retirement Shares have irrevocably undertaken to vote (or procure the voting) in favour of the resolutions to be proposed at the Just Retirement General Meeting in respect of their own aggregate beneficial holdings of 5,863,267 Just Retirement Shares, representing approximately 1.0 per cent. of the issued ordinary share capital of Just Retirement on 11 March 2016 (being the Last Practicable Date).
Avallux (a company wholly owned by Permira IV Fund) has irrevocably undertaken to vote in favour of the resolutions to be proposed at the Just Retirement General Meeting in respect of its entire beneficial holding of 273,057,001 Just Retirement Shares, representing approximately 48.4 per cent. of the issued ordinary share capital of Just Retirement on 11 March 2016 (being the Last Practicable Date).
As such, Just Retirement and Partnership Assurance have received irrevocable undertakings to vote in favour of the resolutions to be proposed at the Just Retirement General Meeting in respect of 278,920,268 Just Retirement Shares in aggregate, representing approximately 49.4 per cent. of the issued ordinary share capital of Just Retirement on 11 March 2016 (being the Last Practicable Date).
The undertakings referred to in this paragraph 5 are in relation to all shares held by the persons giving the undertakings as at the Last Practicable Date and include shares issued pursuant to the Capital Raise, a
3 Steve Groves and Ian Owen may each dispose of up to 25 per cent. of the Partnership Assurance Shares held by them (or their respective connected persons) as at the Last Practicable Date and the irrevocable undertakings provided by each of them shall cease to apply to any such disposed Partnership Assurance Shares.
summary of which has been included at paragraph 6 of this Part I (Letter from the Chairman of Just Retirement).
Copies of the irrevocable undertakings given by Avallux, Cinven Funds, the Just Retirement Directors (who beneficially hold Just Retirement Shares) and the Partnership Assurance Directors (who beneficially hold Partnership Assurance Shares) are available on the Company's website at www.justretirementgroup.com and on Partnership Assurance's website at www.partnership-group.co.uk until the Scheme becomes Effective.
On 11 August 2015, the Just Retirement Board and the Partnership Assurance Board announced their intention to raise equity capital amounting, in aggregate, to £150 million.
On 16 October 2015, Just Retirement completed a placing and open offer of 63,525,672 Just Retirement Shares at a price of 159 pence per Just Retirement Share, raising net proceeds of approximately £96.9 million (the ''Just Retirement Placing and Open Offer''). Under the Just Retirement Placing and Open Offer, Avallux subscribed for 11,268,744 Just Retirement Shares for a total consideration of approximately £17.9 million.
Separately, on 29 September 2015, Partnership Assurance completed a placing of 39,995,997 Partnership Assurance Shares, representing approximately 9.99 per cent. of Partnership Assurance's issued ordinary share capital prior to the placing, at a price of 135 pence per share, raising net proceeds of approximately £52.9 million (the ''Partnership Assurance Placing'', together with the Just Retirement Placing and Open Offer, the ''Capital Raise''). Under the Partnership Assurance Placing, the Cinven Funds subscribed for 11,206,585 Partnership Assurance Shares for a total consideration of approximately £15.1 million.
The Just Retirement Placing and Open Offer and the Partnership Assurance Placing raised, in aggregate, net proceeds of approximately £150 million. The proceeds of the Capital Raise will allow the Combined Group to cover expected non-recurring integration and transaction costs, provide further comfort over the transition to Solvency II, and support future growth initiatives and product development. In line with Just Retirement's previously stated strategy, the Combined Group will explore, on an on-going basis, a range of balance sheet options (including accessing the debt capital markets) with a view to providing further financial strength and supporting future growth against the backdrop of the changing solvency regime applicable to the sector.
In the event the Proposed Merger does not complete, the Just Retirement Board will consider the best use for the net proceeds of the Just Retirement Placing and Open Offer, including accelerating the growth plans of the Just Retirement Group's business on a stand-alone basis and providing further comfort over the transition to Solvency II.
On 5 December 2015, the PRA approved the application of Just Retirement Limited, a wholly owned subsidiary of Just Retirement, to use its full internal model under Solvency II.
Further, on 10 March 2016, Just Retirement and Partnership Assurance announced that the PRA and the FCA had each approved the change in control applications made in connection with the Proposed Merger.
Established in 2004, Just Retirement is a specialist UK financial services group focusing on the retirement income market in the UK. For defined benefit pension scheme clients, Just Retirement provides de-risking solutions through bulk purchase guaranteed income for life solutions based on medical and/or lifestyle factors. Originally launched in 2012 with a ''deep underwritten approach'' focused on smaller pension schemes, these de-risking solutions now account for around half of Just Retirement's new business volumes.
In the UK retail retirement income market, Just Retirement is a leading player in the provision of guaranteed income for life solutions and lifetime mortgages (which allow individuals to convert the equity in their residential property assets into cash). Just Retirement focuses on providing better value for money and more tailored alternatives to customers who, due to one or more pre-existing medical conditions or lifestyle factors, are likely to have a reduced life expectancy.
Just Retirement secures new mandates in the defined benefit de-risking segment primarily through its strong relationships with employee benefit consultants. Just Retirement's guaranteed income products for the UK retirement income market are distributed through a number of different channels, including national and regional financial advisory businesses and a number of corporate partners.
Just Retirement is the holding company of the Just Retirement Group. On 15 November 2013, Just Retirement's ordinary share capital was admitted to listing on the premium listing segment of the Official List and to trading on the London Stock Exchange. As at 11 March 2016 (being the Last Practicable Date), Just Retirement had a market capitalisation of £773 million.
For the six months ended 31 December 2015, Just Retirement reported new business sales of £1,233.2 million and operating profit of £49.8 million. As of 31 December 2015, the business had embedded value of £1,143.8 million and total assets of £12,351.9 million.
Established in 2005 following the acquisition of the business of the Pension Annuity Friendly Society, Partnership Assurance is a UK life insurer focused on retirement income products, offering better rates to customers who suffer from shortened life expectancy by utilising an intellectual property-led, capitalefficient business model.
In the retail retirement income market in the UK, Partnership Assurance's annuity products are purchased by customers either to provide a guaranteed income or to meet the costs of long term care. Partnership Assurance also sells limited volumes of individually underwritten protection products to customers with shortened life expectancy. In addition, Partnership Assurance originates and purchases equity release mortgages with shorter expected duration for homeowners with medical conditions or for older homeowners, primarily to diversify its investment portfolio and enhance its risk-adjusted yields.
In defined benefit de-risking solutions, Partnership Assurance is able to use its expertise and proprietary intellectual property in individual underwriting to price the longevity risk of pensioners within defined benefit schemes more accurately, often resulting in more attractive prices for trustees.
Partnership Assurance's retirement income products are typically sold to customers by intermediaries. Partnership Assurance's defined benefit de-risking solutions are typically sold to scheme trustees via employee benefit consultants. Partnership Assurance has implemented a multi-channel distribution strategy and has strong relationships with its key partners which have supported its growth in recent years.
In June 2013 Partnership Assurance was admitted to listing on the premium listing segment of the Official List and to trading on the London Stock Exchange. As at 11 March 2016 (being the Last Practicable Date), Partnership Assurance had a market capitalisation of £524 million.
For the twelve months ended 31 December 2015, Partnership Assurance reported new business premiums of £631 million and operating profit of £40 million. As of 31 December 2015, embedded value was £633 million and total assets under management was £5.3 billion.
Investors should read the whole of this Circular and not rely solely on the summarised financial information in this section. Further financial information is contained in Part III (Partnership Assurance Financial Information) of this Circular.
Just Retirement published its unaudited financial statements for the six months ended 31 December 2015 on 11 March 2016.
Current trading remains in line with the statements and trends described in Just Retirement's Interim Results 2016 and continues to be in line with Just Retirement management's expectations.
Information on the Solvency II capital position of Just Retirement is set out in Section A of Part III (Information on the Solvency II Capital Position of Just Retirement and Partnership Assurance) of this Circular.
Partnership Assurance published its Audited Results 2015 on 11 March 2016, which includes the audited financial statements of Partnership Assurance for the years ended 31 December 2015.
Current trading remains in line with the statements and trends described in Partnership Assurance's Audited Results 2015 and continues to be in line with Partnership Assurance management's expectations.
Information on the Solvency II capital position of Partnership Assurance is set out in Section B of Part III (Information on the Solvency II Capital Position of Just Retirement and Partnership Assurance) of this Circular.
Just Retirement and Partnership Assurance attach great importance to the skills and experience of the existing management and employees of the respective groups.
Details of the proposed JRP Group Board are set out in paragraph 12 below. The remaining existing directors of Just Retirement and Partnership Assurance confirm they intend to resign as directors of Just Retirement or Partnership Assurance (as applicable) upon completion of the Proposed Merger.
The Just Retirement Board and the Partnership Assurance Board each recognise that in order to achieve the expected benefits of the Proposed Merger, operational and administrative restructuring will be required following completion of the Proposed Merger.
The Just Retirement Board and the Partnership Assurance Board recognise that an opportunity exists to rationalise premises and the final locations of specific teams, together with the location of head office of the Combined Group, which will be assessed following completion of the Proposed Merger by an integration team consisting of executives from the Just Retirement Group and the Partnership Assurance Group.
The initial synergy work carried out up to the publication of the Scheme Document on 5 November highlighted the potential to generate savings for the Combined Group in areas where there may be duplication and the Just Retirement Board and the Partnership Assurance Board each anticipated that this would involve headcount reduction.
Integration planning has continued following the publication of the Scheme Document. Since publication, the integration team has undertaken a further and more detailed analysis across all business units which will, following completion of the Proposed Merger, comprise the Combined Group. Although this further detailed analysis remains preliminary in nature and will, following completion of the Proposed Merger, require agreement from each of those business units and, ultimately, approval from the JRP Group Board following completion, this analysis has highlighted that headcount reductions over and above those assessed at the time of the publication of the Scheme Document may be possible. The headcount reduction is now expected to be at least 20 per cent. following the completion of the Proposed Merger (excluding any reduction in headcount attributable to an anticipated rate of employee attrition). This figure also excludes the positive impact of any growth in business in the Combined Group following completion of the Proposed Merger which would be expected to result in fewer reductions in headcount. It should be further noted that no decisions have been made to date and, therefore, the precise number of employees and specific teams, roles and locations affected will depend on the outcome of a post-completion consultation and integration planning process.
The headcount reductions in excess of those detailed in the Scheme Document are not capable of quantification at this time, as the relevant assessment is subject to further analysis, factual verification, consultation and, as stated above, agreement from each of the relevant business units and, ultimately, approval from the JRP Group Board. This will only be undertaken and finalised following completion of the Proposed Merger. Finalisation of the integration plan will be subject to engagement and consultation with appropriate stakeholders, including employee representative bodies in accordance with the legal obligations of the Combined Group.
Just Retirement confirms that, following implementation of the Proposed Merger, the existing contractual and statutory employment rights of all Just Retirement and Partnership Assurance employees will be fully observed. Further, Just Retirement confirms that there is no current intention to make any material change to the terms and conditions of employment of the employees of the Combined Group. Any changes that are proposed will be subject to appropriate consultation in accordance with the legal obligations of the Combined Group. The Just Retirement Board and the Partnership Assurance Board intend that, following
completion of the Proposed Merger, the Combined Group will continue to comply with all of its pension obligations (including any commitment to make employer contributions) and that the pension schemes of the Combined Group will continue to admit new members. In addition, Just Retirement has acknowledged that it and Partnership Assurance will, in the course of any redundancy consultation process that may take place after the Effective Date, consult with affected employees on the possibility of offering enhanced severance arrangements (in addition to a payment in lieu of contractual notice and non-contractual core benefits (excluding discretionary bonus save as set out below)) for Just Retirement and Partnership Assurance employees whose employment is terminated by reason of redundancy following the Effective Date in connection with the realisation of synergies as a result of the Proposed Merger.
A resolution to change the name of the Company to JRP Group plc, to take effect on completion of the Proposed Merger, will be put to Just Retirement Shareholders at the Just Retirement General Meeting.
The JRP Group Board will undertake a review of the branding strategy once the Proposed Merger has been completed. Prior to completion of such review, the existing brands of Just Retirement and Partnership Assurance will be retained across specific product lines.
It is anticipated that the JRP Group Board will be made up of 13 directors, comprising directors from both Just Retirement and Partnership Assurance's existing Boards, with suitable individuals selected to create a balanced Board with appropriate skills and relevant experience:
Rodney Cook, Group Chief Executive Officer David Richardson, Deputy Group Chief Executive Officer Simon Thomas, Group Finance Director
Chris Gibson-Smith, Chairman Tom Cross Brown, Deputy Chairman Keith Nicholson, Senior Independent Director Paul Bishop Peter Catterall (Cinven Funds nominated director) Ian Cormack Michael Deakin James Fraser (Avallux nominated director) Steve Melcher Clare Spottiswoode
It is envisaged that the JRP Group Board will establish five committees to assist the JRP Group Board with its governance mandate, comprising Nominations, Risk and Compliance, Audit, Remuneration and Market Disclosure Committees. Steve Groves, the current Chief Executive Officer of Partnership Assurance, will step down as Chief Executive Officer at the time of completion of the Proposed Merger. Further, at the time of completion of the Proposed Merger, Kate Avery and Shayne Deighton will step down as directors of Just Retirement and Douglas Ferrans, Ian Owen, Richard Ward and Simon Waugh will step down as directors of Partnership Assurance.
Pursuant to the Avallux Relationship Agreement, Avallux is entitled to appoint one non-executive director to the Just Retirement Board as long as Avallux (together with its associates) holds 15 per cent. or more of the voting rights of the Company. Following completion of the Proposed Merger, Avallux will hold approximately 29.2 per cent of Just Retirement Shares and will continue to be entitled to appoint one non-executive director (currently James Fraser) to the JRP Group Board.
On 14 November 2014, Partnership Assurance and the Cinven Entities entered into a relationship agreement whereby the Cinven Entities have the right, amongst other things, to appoint certain non-executive directors to the Partnership Assurance Board dependent upon the percentage of voting rights held by them. Peter Catterall is currently the Cinven Entities' appointee to the Partnership Assurance Board. This relationship agreement will terminate upon the completion of the Proposed Merger and consequently, Just Retirement has entered the Cinven Relationship Agreement pursuant to which
(among other things), conditional upon the Proposed Merger becoming Effective, the Cinven Entities will be entitled to appoint one non-executive director to the JRP Group Board as long as the Cinven Entities (together with their associates) hold 15 per cent. or more of the voting rights of Just Retirement. Following completion of the Proposed Merger, the Cinven Entities will hold approximately 19.5 per cent of the Just Retirement Shares and will therefore be entitled to appoint one non-executive director (currently Peter Catterall) to the JRP Group Board.
Just Retirement and Partnership Assurance have entered into a confidentiality agreement dated 27 April 2015 pursuant to which each of Just Retirement and Partnership Assurance has undertaken to keep certain information relating to the Proposed Merger and to the other party confidential and not to disclose such information to third parties, except to certain permitted disclosees for the purposes of evaluating the Proposed Merger or if required by applicable laws or regulations.
The confidentiality obligations of each party under this agreement will terminate on the earlier of (i) 26 April 2017 and (ii) the Effective Date.
Just Retirement, Partnership Assurance, Clifford Chance LLP and Freshfields Bruckhaus Deringer LLP have entered into a confidentiality and joint defence agreement dated 26 June 2015 which governs how confidential, sensitive and/or privileged information can be disclosed, used or shared for the purpose of preparing submissions to the CMA and the PRA.
Just Retirement and Partnership Assurance have entered into a co-operation agreement dated 11 August 2015 with respect to the implementation of the Proposed Merger.
Just Retirement and Partnership Assurance have agreed to co-operate and provide each other with reasonable information, assistance and access in relation to the filings, submissions and notifications to be made for the purpose of obtaining all regulatory clearances. Just Retirement and Partnership Assurance have also agreed to provide each other with reasonable information, assistance and access for the preparation of the key shareholder documentation. Just Retirement has also agreed to convene the Just Retirement General Meeting so that it is held on or around the same date as the Partnership Assurance Meetings.
Just Retirement is subject to certain customary restrictions on the conduct of its business during the period pending completion of the Proposed Merger, and which prohibit, among other things: (a) the payment by Just Retirement of dividends (other than in the ordinary course and consistent with past practice and its published dividend policy) and (b) the allotment of further shares (or rights or options in respect of shares) (other than pursuant to the Capital Raise, its existing share incentive schemes, or in order to settle options or awards vesting under its existing incentive schemes).
The Co-operation Agreement records Just Retirement and Partnership Assurance's intention to implement the Proposed Merger by way of the Scheme. However, Just Retirement may implement the Proposed Merger by way of a Takeover Offer: (i) if Partnership Assurance consents; (ii) if the Partnership Assurance Directors withdraw or modify their unanimous and unconditional recommendation of the Scheme to the shareholders of Partnership Assurance; or (iii) if a third party announces a possible or firm intention to make an offer for the entire issued share capital of Partnership Assurance which is recommended by the Partnership Assurance Directors. If Just Retirement elects to implement the Proposed Merger by way of a Takeover Offer, Just Retirement has agreed not to take any action which would cause the Takeover Offer not to proceed, to lapse or to be withdrawn in each case for nonfulfilment of the acceptance condition prior to the 60th day after publication of the offer document and Just Retirement has agreed to keep the Takeover Offer open for acceptances until such time.
The Co-operation Agreement will terminate if: (i) agreed in writing between Just Retirement and Partnership Assurance; (ii) any Condition (which has not been waived) is invoked (with permission of the Panel); (iii) if the Scheme is not approved by Partnership Assurance Shareholders or the Court refuses to sanction the Scheme or grant the Scheme Court Order (unless Just Retirement has within five Business Days of such event elected to implement the Proposed Merger by way of a Takeover Offer); (iv) (save as
the parties may otherwise agree in writing) the Proposed Merger is not implemented on or before the Long Stop Date; (v) an independent competing transaction becomes effective, becomes or is declared unconditional in all respects or is completed; or (vi) upon written notice from Just Retirement to Partnership Assurance in the event that the Partnership Assurance Board no longer unconditionally and unanimously recommends (or intends to recommend), or has adversely modified or qualified their recommendation (or intention to recommend) of, the Proposed Merger (or the Takeover Offer, as the case may be), or recommends (or intends to recommend) an independent competing transaction.
The Co-operation Agreement also contains provisions that will apply in respect of Partnership Assurance Employee Share Plans and certain other employee incentive arrangements.
On 11 August 2015, Just Retirement and the Cinven Entities entered into the Cinven Relationship Agreement which will, following completion of the Proposed Merger, regulate the ongoing relationship between Just Retirement and the Cinven Entities.
Under the Cinven Relationship Agreement, the Cinven Entities undertake (amongst other things):
Under the Cinven Relationship Agreement, the Cinven Entities are entitled to appoint one non-executive director to the JRP Group Board for so long as the Cinven Entities (together with their associates) are entitled to exercise or to control the exercise of 15 per cent. or more of the votes able to be cast on all or substantially all matters at general meetings of Just Retirement.
The Cinven Relationship Agreement will continue for so long as (a) Just Retirement Shares are listed on the premium listing segment of the Official List and traded on the London Stock Exchange's main market for listed securities; and (b) the Cinven Entities together with their associates are entitled to exercise or to control the exercise of 15 per cent. or more of the votes able to be cast on all or substantially all matters at general meetings of Just Retirement.
On 11 August 2015, Avallux, the Cinven Funds and Barclays entered into the Lock-up Agreement, pursuant to which Avallux and the Cinven Funds each agreed that they will not, without Barclays' consent, dispose of any Just Retirement Shares at any time during the lock-up period (subject to certain customary carve outs). The Lock-up Agreement is conditional upon and shall come into force upon the Effective Date, at which point the lock-up period commences and continues until 30 calendar days following the Effective Date.
On 11 August 2015, Avallux and the Cinven Funds entered into the Sell-down Agreement, pursuant to which Avallux and the Cinven Funds each agreed that that they will not dispose of any Just Retirement Shares without first offering each other the right to elect to participate in the proposed disposal at the same price and on the same terms and conditions, in the respective ratio 60:40. The Sell-down Agreement is conditional upon and shall come into force upon the Effective Date. The Sell-down Agreement terminates if either Avallux or the Cinven Funds cease to hold or control, in aggregate, five per cent. or more of the Just Retirement Shares or votes able to be cast at general meetings of Just Retirement.
Copies of these documents are available on the Company's website at www.justretirementgroup.com and on Partnership Assurance's website at www.partnership-group.com until the Scheme becomes Effective.
Both Just Retirement and Partnership Assurance recognise the importance of retaining the necessary skills and experience within Just Retirement and Partnership Assurance in the period to completion of the Proposed Merger and beyond. Just Retirement and Partnership Assurance have therefore agreed that appropriate retention arrangements may be put in place for certain employees of the Combined Group (conditional upon completion of the Proposed Merger).
Evercore has advised Partnership Assurance that the proposed terms relating to the treatment of awards under the Partnership Assurance LTIP are fair and reasonable insofar as they apply to members of management. Under these arrangements, which would apply to all plan participants, it is intended that the Partnership Assurance LTIP awards granted in 2014 will now be exchanged for an equivalent award over Just Retirement Shares. 40 per cent. of the award will vest on 31 December 2016 (including in respect of Good Leavers) and 60 per cent. of the award will vest on the third anniversary of grant in accordance with the rules of the Partnership Assurance LTIP, in each case subject to the applicable performance condition. In relation to the awards under the Partnership Assurance LTIP, which were granted on 11 August 2015, the award will be exchanged for an equivalent award over Just Retirement Shares. 20 per cent. of that award will vest on the earlier of 31 December 2016 and on the date on which the participant becomes a Good Leaver, and the remaining 80 per cent. of the award will vest on the third anniversary of grant of the 2015 award, subject to a performance condition appropriate for the Combined Group.
Participants in the Partnership Assurance Employee Share Plans were contacted separately regarding the effect of the Proposed Merger on their rights under the Partnership Assurance Employee Share Plans and with the details of Just Retirement's appropriate proposals. A summary of the effect of the Scheme on options and awards under the Partnership Assurance Employee Share Plans (''Awards'') and associated incentive arrangements is set out below.
The Proposed Merger will extend to any Partnership Assurance Shares which are unconditionally allotted, issued or transferred, on or prior to the Scheme Record Time to satisfy the exercise of existing options (or awards) under the Partnership Assurance Employee Share Plans prior to the Scheme Record Time. Any Partnership Assurance Shares allotted, issued or transferred after the Scheme Record Time under the Partnership Assurance Employee Share Plans will, subject to the Scheme becoming Effective, be immediately transferred to Just Retirement in exchange for the same consideration as Partnership Assurance Shareholders will be entitled to receive under the terms of the Proposed Merger. The terms of this exchange are to be set out in the proposed amendments to Partnership Assurance's articles of association which will be considered at the Partnership Assurance General Meeting. Further information in respect of the proposed amendments to Partnership Assurance's articles of association is contained in the Scheme Document dated 5 November 2015.
The Co-operation Agreement described the proposed terms in relation to the treatment of the Partnership Assurance LTIP awards granted in 2014 (the ''2014 Partnership Assurance LTIP Awards''). Under these arrangements, it was intended that to the extent that they vested in accordance with the plan rules (on application of the relevant performance condition which assesses Partnership Assurance's total shareholder return relative to a comparator group), 40 per cent. of each 2014 Partnership Assurance LTIP Award would become exercisable on the date of the Scheme Court Hearing with the remaining 60 per cent. being exchanged for an equivalent award over Just Retirement Shares, vesting on the earlier of 31 December 2016 and the date on which a participant became a Good Leaver. The Partnership Assurance remuneration committee (the ''Partnership Assurance Remuneration Committee'') has considered on a provisional basis the extent to which the performance condition for the 2014 LTIP Awards was likely to be met at the latest practicable time prior to the date of the Scheme Court Order. The Partnership Assurance Remuneration Committee concluded that it would be unlikely that any Partnership Assurance Shares would vest on the date of the Scheme Court Order in light of the provisional performance data reviewed.
Both Just Retirement and Partnership Assurance consider that non-vesting of the 2014 Partnership Assurance LTIP Awards would present challenges to the Combined Group in retaining the necessary skills and experience within the Combined Group. In order to incentivise and retain participants holding 2014 Partnership Assurance LTIP Awards, Just Retirement and Partnership Assurance have agreed that, in substitution for the terms agreed in relation to the 2014 Partnership Assurance LTIP Awards in the Co-operation Agreement, participants will, in accordance with the rules of the plan, be required to exchange each 2014 Partnership Assurance LTIP Award over Partnership Assurance Shares for an equivalent award over Just Retirement Shares following the date of the Scheme Court Order, such award to be subject to the terms and conditions of the Partnership Assurance LTIP (the ''2014 Rollover LTIP Award'') save that:
Participants who received LTIP Awards in 2015 (the ''2015 LTIP Awards'') will, in accordance with the terms of the Award, be required to exchange each 2015 LTIP Award for an equivalent award over Just Retirement Shares following the date of the Scheme Court Hearing, such award to be subject to the terms and conditions of the Partnership Assurance LTIP (the ''2015 Rollover LTIP Award'') save that:
Awards granted under the Partnership Assurance DSBP in 2014 and 2015 will vest in full and become exercisable from the date of the Scheme Court Hearing for one month or until the date as is one month following the date on which the Combined Group announces its financial results for the next period ending after completion of the Proposed Merger (or, if dealing restrictions apply following such announcement, one month following the date on which the dealing restrictions are lifted) whichever is later.
The Partnership Assurance employee benefit trust holds £466,000 in cash which it will use to subscribe for new Partnership Assurance Shares in order to satisfy outstanding awards or to acquire Partnership Assurance Shares in the market to satisfy Awards under the Partnership Assurance DSBP.
Outstanding options under the Partnership Assurance SAYE which would not otherwise have been exercisable prior to the Proposed Merger will (in consequence of the Proposed Merger and in accordance with participants' contractual rights under the Partnership Assurance SAYE) be exercisable to the extent permitted under the Partnership Assurance SAYE rules in the six months following the date of the Scheme Court Hearing and will be exercisable over fewer than the full number of Partnership Assurance Shares that could otherwise have been acquired on maturity of the related savings contracts. Consequently, Just Retirement has agreed that participants in the Partnership Assurance SAYE may elect to roll over their existing rights over Partnership Assurance Shares under the Partnership Assurance SAYE into equivalent options over Just Retirement Shares.
The participants in the Partnership Assurance SIP will be treated in the same way as other Partnership Assurance Shareholders. Partnership Assurance Shares held in the Partnership Assurance SIP trust on behalf of the Partnership Assurance SIP participants (''SIP Shares'') will participate in the Scheme (on the same terms as the other Partnership Assurance Shareholders) and the Partnership Assurance SIP Shares will remain in the SIP trust in accordance with the rules of the Partnership Assurance SIP.
Just Retirement has acknowledged and agreed that eligible Partnership Assurance employees will be due to receive annual cash bonuses in respect of 2015 in accordance with their employment contracts and/or Partnership Assurance policies and practices.
It is intended that dealings in Partnership Assurance Shares should be suspended at 5.00 p.m. London time on the date of the Scheme Court Hearing and no transfers of Partnership Assurance Shares will be registered after 5.00 p.m. on that day. It is further intended that an application will be made to the London Stock Exchange on the Effective Date for the cancellation of the trading of Partnership Assurance Shares on its market for listed securities and the UKLA will be requested to cancel the listing of Partnership Assurance Shares on the Official List to take effect by 8.00 a.m. on the Effective Date.
Share certificates in respect of the Partnership Assurance Shares will cease to be valid and should be destroyed following the Effective Date. In addition entitlements to Partnership Assurance Shares held within the CREST system will be cancelled after the Scheme Record Time but before the Scheme becomes Effective.
As soon as reasonably practicable after the Effective Date, it is intended that Partnership Assurance will be re-registered as a private limited company under the relevant provisions of the Companies Act.
The Boards of Just Retirement and Partnership Assurance agreed that Just Retirement Shareholders were entitled to receive the final dividend of 2.2 pence per Just Retirement Share for the year ended 30 June 2015, which was paid on 7 December 2015, and Partnership Assurance Shareholders were entitled to receive the interim dividend of 0.5 pence per Partnership Assurance Share for the six months ended 30 June 2015, which was paid on 30 October 2015. As the Proposed Merger is expected to complete on 4 April 2016, Partnership Assurance Shareholders in JRP Group plc at the record date of 6 May 2016 will be entitled to the Just Retirement interim dividend of 1.1 pence per JRP Group Share following completion of the Proposed Merger, subject to the agreed Exchange Ratio of 0.834 New Just Retirement Share being issued for every Partnership Assurance Share in connection with the Proposed Merger. The declaration of this interim dividend will not result in any adjustment to the Exchange Ratio. The Just Retirement Board expects that, in the first year following completion of the Proposed Merger, JRP Group plc will pay dividends in line with Just Retirement's existing dividend policy. Under the Just
Retirement Group's existing dividend policy, dividend payments will be made on an approximated one-third:two-thirds split for interim and final dividends, respectively.
The Proposed Merger will be effected by a court-sanctioned scheme of arrangement between Partnership Assurance and the Scheme Shareholders under Part 26 of the Companies Act. The purpose of the Scheme is to provide for Just Retirement to become owner of the whole issued and to be issued share capital of Partnership Assurance.
Under the Scheme, the Proposed Merger is to be principally achieved by:
The Proposed Merger will be subject to the Conditions and further terms and conditions summarised in paragraphs 19 and 20 below of this Part I (Letter from the Chairman of Just Retirement) and set out in full in the Scheme Document.
To become Effective, the Scheme requires, among other things, the approval of a majority in number of the relevant Scheme Shareholders present and voting in person or by proxy, representing not less than 75 per cent. in value of the Scheme Shares that are voted (or the relevant class or classes thereof, if applicable), at the Partnership Assurance Court Meeting, which is convened by order of the Court, and the passing of the resolutions necessary to implement the Proposed Merger at the Partnership Assurance General Meeting.
Following the Partnership Assurance Meetings, the Scheme must be sanctioned by the Court. The Scheme will become Effective in accordance with its terms on delivery of the Scheme Court Order to the Registrar of Companies.
Upon the Scheme becoming Effective, it will be binding on all Partnership Assurance Shareholders, irrespective of whether or not they attended or voted at the Partnership Assurance Meetings and the consideration due under the Proposed Merger will be despatched by Just Retirement to Scheme Shareholders no later than 14 days after the Effective Date.
The Scheme Document, which includes notices of the Partnership Assurance Meetings, was despatched by Partnership Assurance to Partnership Assurance Shareholders on 5 November 2015 and is available on Just Retirement's website (www.justretirementgroup.com).
The Scheme will be governed by English law. The Scheme will be subject to the applicable requirements of the Code, the Panel, the London Stock Exchange and the FCA.
The Scheme is expected to become Effective on or around 4 April 2016, subject to the satisfaction or waiver of the Conditions and certain further terms set out in the Scheme Document.
On 28 October 2015, the CMA announced that it has unconditionally cleared the Proposed Merger following its Phase 1 investigation. Therefore, the CMA Pre-Condition has been satisfied.
Further, on 10 March 2016, Just Retirement and Partnership Assurance announced that the PRA and the FCA had each approved the change in control applications made in connection with the Proposed Merger.
The Proposed Merger remains subject to the Conditions and to the full terms and conditions which are set out in the Scheme Document dated 5 November 2015, including, amongst other things:
(i) approval by a majority in number representing not less than 75 per cent. in value of Partnership Assurance Shareholders who are on the register of members of Partnership Assurance at the Voting Record Time, present and voting, whether in person or by proxy, at the Partnership Assurance Court Meeting and at any separate class meeting which may be required (or any adjournment thereof);
If the Conditions have not been satisfied or waived by the Long Stop Date, or such later date (if any) as Just Retirement and Partnership Assurance may agree and (if required) the Panel and the Court may allow, the Proposed Merger will not proceed.
In so far as a distribution is declared, made, paid or payable by Partnership Assurance or Just Retirement in respect of the Partnership Assurance Shares or Just Retirement Shares (as applicable) on or after the date of the Firm Offer Announcement save as set out in paragraph 17 of this Part I (Letter from the Chairman of Just Retirement), the Exchange Ratio will be adjusted accordingly by reference to the aggregate amount of the distribution that has been declared, made, paid or is payable. To the extent that a distribution that has been declared, made, paid or is payable is or will be transferred or cancelled pursuant to the Proposed Merger on a basis which entitles Just Retirement alone to receive the distribution and to retain it, the Exchange Ratio will not be subject to change in accordance with this paragraph.
The Partnership Assurance Shares will be acquired pursuant to the Proposed Merger fully paid and free from all liens, charges, equities, encumbrances, rights of pre-emption and any other interests of any nature whatsoever and together with all rights now or hereafter attaching thereto, including without limitation voting rights and the right to receive and retain in full all dividends and other distributions (if any) declared, made or paid on or after the Effective Date, save for any dividends payable on the terms set out in paragraph 17 of this Part I (Letter from the Chairman of Just Retirement).
The New Just Retirement Shares will be issued credited as fully paid and will rank pari passu in all respects with the existing Just Retirement Shares, including the right to receive and retain in full all dividends and other distributions (if any) made, paid or declared after the Effective Date.
Just Retirement published a Prospectus on 28 September 2015 in connection with the Just Retirement Placing and Open Offer and Proposed Merger. Just Retirement further published a Supplementary Prospectus on 14 March 2016. The Prospectus and the Supplementary Prospectus contain information relating to the Just Retirement Group, the Partnership Assurance Group, the Combined Group and the New Just Retirement Shares.
Application will be made to the FCA and the London Stock Exchange for the New Just Retirement Shares to be admitted to the premium listing segment of the Official List and to trading on the London Stock Exchange's main market for listed securities respectively. It is expected that Admission will become effective and that dealings for normal settlement in the New Just Retirement Shares will commence on the London Stock Exchange at 8.00 a.m. on the Effective Date.
Fractions of New Just Retirement Shares will not be allotted or issued to Partnership Assurance Shareholders and entitlements will be rounded down to the nearest whole number of Just Retirement Shares and all fractions of New Just Retirement Shares will be aggregated and sold in the market as soon as practicable after the Effective Date. The net proceeds of such sale (after deduction of all expenses and commissions incurred in connection with the sale) will be distributed by Just Retirement in due proportions to Partnership Assurance Shareholders who would otherwise have been entitled to such fractions, save that individual entitlements to amounts of less than £5 will be retained for the benefit of the Combined Group.
Subject to the terms of the Co-operation Agreement, Just Retirement reserves the right to implement the Proposed Merger by way of a Takeover Offer for the entire issued and to be issued share capital of Partnership Assurance not already held by Just Retirement as an alternative to the Scheme. In such an event, the Takeover Offer will be implemented on the same terms (subject to appropriate amendments), so far as applicable, as those which would apply to the Scheme.
If the Proposed Merger is effected by way of a Takeover Offer and such Takeover Offer becomes or is declared unconditional in all respects and sufficient acceptances are received, Just Retirement intends to:
If the Proposed Merger becomes Effective, it is expected that up to 369,893,501 New Just Retirement Shares will be issued. This will result in Just Retirement's issued ordinary share capital increasing by approximately 65.5 per cent. Just Retirement Shareholders will suffer an immediate dilution as a result of the Proposed Merger, following which they will hold approximately 60 per cent. of the issued ordinary share capital of JRP Group plc.
For a discussion of certain risk factors which should be taken into account when considering whether or not to vote in favour of the resolutions to be proposed at the Just Retirement General Meeting, see Part II (Risk Factors).
As described in paragraph 19 above, the implementation of the Proposed Merger is conditional upon, among other things, Just Retirement Shareholders' approval being obtained for the Just Retirement Resolutions at the Just Retirement General Meeting. Accordingly, you will find, set out at the end of this Circular, a notice convening a general meeting to be held at Reigate Town Hall, Castlefield Road, Reigate, Surrey RH2 0SH at 10.00 a.m. on 30 March 2016 at which the Just Retirement Resolutions will be proposed to approve the Proposed Merger, among other matters. The full text of the resolutions to be proposed at the Just Retirement General Meeting is set out in the notice.
Just Retirement resolution 1 will be proposed as an ordinary resolution requiring a simple majority of votes cast by way of a poll in favour of the resolution (see Note 10 to the Notice of General Meeting). Just Retirement resolution 1 proposes that the Proposed Merger be approved and the Just Retirement Directors be authorised to implement the Proposed Merger. The Proposed Merger will not proceed if Just Retirement resolution 1 is not passed.
Just Retirement resolution 2 will be proposed as an ordinary resolution requiring a simple majority of votes cast by way of a poll in favour of the resolution (see Note 10 to the Notice of General Meeting). Just Retirement resolution 2 proposes that the Just Retirement Directors be authorised to allot New Just Retirement Shares in connection with the Proposed Merger up to an aggregate nominal amount of £36,989,350.10 (representing, in aggregate, 369,893,501 New Just Retirement Shares). The Proposed Merger will not proceed if Just Retirement resolution 2 is not passed.
The authority represents approximately 65.5 per cent. of the total issued ordinary share capital of Just Retirement as at 11 March 2016 (being the Last Practicable Date). If the resolution is passed, this authority will expire on the Long Stop Date (unless previously revoked, renewed, varied or extended by Just Retirement in general meeting) and is in addition to any subsisting authorities to allot shares in Just Retirement. As at 11 March 2016 (being the Last Practicable Date), Just Retirement held no shares in treasury.
Just Retirement resolution 3 will be proposed as a special resolution requiring at least 75 per cent. of the votes cast by way of a poll in favour of the resolution (see Note 10 to the Notice of General Meeting). Just Retirement resolution 3 proposes that, subject to and conditional upon the Scheme becoming Effective or, as the case may be, the Takeover Offer becoming or being declared wholly unconditional, the Company's name be changed from Just Retirement Group plc to JRP Group plc.
You will find enclosed with this Circular a Form of Proxy for use at the Just Retirement General Meeting or any adjournment thereof. Whether or not you intend to be present at the Just Retirement General Meeting, you are requested to complete and sign the Form of Proxy in accordance with the instructions printed on it so as to be received by Just Retirement's registrars, Equiniti, at the address shown on the Form of Proxy, as soon as possible, and in any event no later than 10.00 a.m. on 24 March 2016 (or, in the case of an adjournment, not later than 48 hours (excluding non-working days) before the time fixed for the holding of the adjourned meeting).
If you hold Just Retirement Shares in CREST you may appoint a proxy by completing and transmitting a CREST Proxy Instruction in accordance with the procedures set out in the notice convening the Just Retirement General Meeting at the end of this Circular.
Alternatively, you may give proxy instructions by logging on to www.sharevote.co.uk and following the instructions. Proxies sent electronically (either via the CREST system or online) must also be sent as soon as possible and, in any event, so as to be received no later than 10.00 a.m. on 24 March 2016 (or, in the case of an adjournment, not later than 48 hours (excluding non-working days) before the time fixed for the holding of the adjourned meeting).
The completion and return of a Form of Proxy (or the electronic appointment of a proxy) will not preclude you from attending and voting in person at the Just Retirement General Meeting or any adjournment thereof, if you so wish.
Your attention is drawn to the further information contained in Part II (Risk Factors) and the information set out in Part IX (Additional Information) of this Circular.
The Just Retirement Board considers the Proposed Merger to be in the best interest of Just Retirement and the Just Retirement Shareholders as a whole and unanimously recommends that Just Retirement Shareholders vote in favour of each of the resolutions to be proposed at the Just Retirement General Meeting, as all Just Retirement Directors who hold Just Retirement Shares have irrevocably undertaken to do so in respect of their own aggregate beneficial holdings of 5,863,267 Just Retirement Shares, representing approximately 1.0 per cent. of the issued ordinary share capital of Just Retirement on the Last Practicable Date.
The Just Retirement Board has received financial advice from Barclays and Fenchurch in relation to the Proposed Merger. In providing their advice to the Just Retirement Board, Barclays and Fenchurch have relied upon the commercial assessments of the Just Retirement Directors of the Proposed Merger.
Yours faithfully,
Tom Cross Brown Chairman
Just Retirement Shareholders should consider the following risks and uncertainties together with all the other information set out in, or incorporated by reference into, this Circular prior to making any decision as to whether or not to vote in favour of the Proposed Merger.
The risks described below are all of the material risk factors related to the Proposed Merger, material new risk factors to the Just Retirement Group or the Partnership Assurance Group as a result of the Proposed Merger, or existing material risk factors to the Just Retirement Group or the Partnership Assurance Group which will be impacted by the Proposed Merger.
The risks described below are based on information known at the date of this Circular, but may not be the only risks to which the Just Retirement Group, the Partnership Assurance Group or, following completion, the Combined Group is or might be exposed. Additional risks and uncertainties, which are currently unknown to Just Retirement or that Just Retirement does not currently consider to be material, may materially affect the business of the Just Retirement Group, the Partnership Assurance Group and/or the Combined Group and could have material adverse effects on the business, financial condition, results of operations and prospects of the Just Retirement Group, the Partnership Assurance Group and/or the Combined Group. If any of the following risks were to occur, the business, financial condition, results of operations and prospects of the Just Retirement Group, the Partnership Assurance Group and/or the Combined Group could be materially adversely affected and the value of the Just Retirement Shares and/or the JRP Group Shares could decline and shareholders could lose all or part of the value of their investment in Just Retirement Shares and/or JRP Group Shares.
Completion of the Proposed Merger is conditional upon, inter alia, the Scheme becoming Effective no later than the Long Stop Date; the approval of the Scheme by a majority in number of the Scheme Shareholders (other than non-voting persons) (or the relevant class or classes thereof, if applicable) present and voting, either in person or by proxy, at the Partnership Assurance Court Meeting representing not less than 75 per cent. in value of the Scheme Shares voted by such Scheme Shareholders; all resolutions necessary to approve and implement the Scheme and to approve certain related matters being duly passed by the requisite majority or majorities at any Partnership Assurance General Meeting or at any adjournment of that meeting; the sanction of the Scheme with or without modification (but subject to any such modification being acceptable to Just Retirement and Partnership Assurance) by the Court; and the passing of the Just Retirement Resolutions at the Just Retirement General Meeting.
Although the Just Retirement Directors and Proposed Directors believe that the Conditions will be satisfied, it is possible that the parties may not obtain the requisite approvals from shareholders and, accordingly, the Proposed Merger may not be completed. If this were to happen it is possible that the business, results of operations, financial condition and/or prospects of the Just Retirement Group, the Partnership Assurance Group and/or, following completion of the Proposed Merger, the Combined Group may be materially adversely affected.
The current operations of the Just Retirement Group and the Partnership Assurance Group will be integrated to form the combined operations of the Combined Group over a period of two years. To the extent that the Combined Group is unable to efficiently integrate the operations, realise cost reductions, retain qualified personnel or customers and avoid unforeseen costs or delay, there may be an adverse effect on the business, results of operations, the financial condition and/or prospects of the Combined Group. While the Just Retirement Directors and the Proposed Directors believe that the costs and synergies expected to arise from the Proposed Merger have been reasonably estimated, unanticipated events or liabilities may arise (whether as a result of a decision or action taken by a regulator with jurisdiction over the Combined Group's business or otherwise) which result in a delay or reduction in the benefits derived from the Proposed Merger, or in costs significantly in excess of those estimated. The integration of the Just Retirement Group and the Partnership Assurance Group will be supported by a management team and the JRP Group Board with experience of large integration processes and cost reduction exercises. However, no assurance can be given that the integration process will deliver all or substantially all of the expected benefits or realise such benefits in a timely manner.
The Combined Group will encounter numerous integration challenges as a consequence of the Proposed Merger. In particular, following completion, the Combined Group's management and resources may be diverted from its core business activity due to personnel being required to assist in the integration process. The integration process may lead to an increase in the level of administrative errors. A decline in the service standards of the Combined Group may result in an increase in customer complaints and customer and/or regulatory actions, which may lead to reputational damage and the loss of customers and/or distributors by the Combined Group and have an adverse impact on financial performance and condition.
Following completion of the Proposed Merger, there is also a risk that some current and prospective employees may experience uncertainty about their future roles within the Combined Group, which may adversely affect the Combined Group's ability to retain or recruit key managers and other employees.
There will inevitably be a cost involved in revising the current systems and structures of the Combined Group following completion of the Proposed Merger. There is a risk that these costs could exceed current estimates, which may adversely affect anticipated integration benefits.
During the integration period following Admission, the Combined Group may not be in a position to acquire other companies or businesses that it might otherwise have sought to acquire. In view of the demands the integration process may have on management time, it may also cause a delay in other projects currently contemplated by the Just Retirement Group and the Partnership Assurance Group.
Under any of these circumstances, the business growth opportunities, overhead cost reductions, purchasing and distribution benefits and other synergies anticipated by Just Retirement and Partnership Assurance to result from the Proposed Merger may not be achieved as expected, or at all, or may be materially delayed. To the extent that the Combined Group incurs higher integration costs or achieves lower synergy benefits than expected, its business, results of operations, financial condition and/or prospects, and the price of JRP Group Shares, may be adversely affected.
Both Just Retirement and Partnership Assurance are listed companies whose ordinary shares are freely traded on the London Stock Exchange. It is possible that an existing or new shareholder with a significant shareholding in either Just Retirement or Partnership Assurance could use, or could threaten to use, its shareholding to vote against the Proposed Merger when shareholder consent is sought. Such an action could materially delay or prevent the implementation of the Scheme and therefore deprive the parties of some or all of the anticipated benefits of the Proposed Merger.
The Company cannot predict what effect, if any, future sales or issues of JRP Group Shares, or the possibility or perception of such future sales or issues, will have on the market price of the JRP Group Shares. Avallux and the Cinven Funds entered into the Lock-up Agreement with Barclays, pursuant to which Avallux and the Cinven Funds have agreed that they will not, without Barclays' consent, dispose of any Just Retirement Shares or, following the completion of the Proposed Merger, JRP Group Shares until 30 calendar days following the Effective Date. Sales of substantial amounts of JRP Group Shares in the public market by Avallux and the Cinven Funds following expiry of the lock-up period or by other shareholders at any time following completion of the Proposed Merger, or the issuance of a substantial number of JRP Group Shares, or the perception or any announcement that such sales or issuance could occur, could affect the market price of the JRP Group Shares and may make it more difficult for investors to sell their JRP Group Shares at a time and price which they deem appropriate, or at all.
Following completion of the Proposed Merger, the JRP Group Shares may be subject to market price volatility and the value of the JRP Group Shares may fluctuate significantly as a result of a large number of factors, including, but not limited to, those referred to in this Part II (Risk Factors), as well as period-to-period variations in operating results or change in revenue or profit estimates by the Company, industry participants or financial analysts. The value of the JRP Group Shares could also be affected by
developments unrelated to the Company's operating performance, such as the operating and share price performance of other companies that investors may consider comparable to the Company, speculation about the Company in the press or the investment community, strategic actions by competitors, including acquisitions and/or restructurings, changes in market conditions and regulatory changes in any number of countries, whether or not the Company derives significant revenue therefrom and shifts in macroeconomic or geopolitical conditions generally. Investors may not be able to sell their JRP Group Shares at or above the market price used to determine the Exchange Ratio.
The market price of the JRP Group Shares could be negatively affected by sales of substantial amounts of JRP Group Shares in the public markets or the perception that these sales could occur, which could impair the Combined Group's ability to raise capital through the sale of additional equity securities.
The Company's results of operations and financial condition are dependent on the trading performance of the members of the Combined Group. There can be no assurance that the Company will pay dividends in the future. Any decision to declare and pay dividends in the future will be made at the discretion of the JRP Group Board and will depend on, inter alia, applicable law, regulation, restrictions, the Company's and the Combined Group's financial performance and position (including the availability of distributable profits and reserves and cash available for this purpose), regulatory capital requirements, working capital requirements, finance costs, general economic conditions and other factors the JRP Group Board deems significant from time to time. The Company's ability to pay dividends will also depend on the level of dividends and other distributions, if any, received from its operating subsidiaries and companies in which it has an investment. The payment of dividends by subsidiaries is, in turn, subject to restrictions, including the existence of sufficient distributable reserves and cash in those subsidiaries as well as certain restrictions in the Company's debt financing arrangements. These restrictions could limit or prohibit the payment of dividends to the Company by its subsidiaries, which could restrict the Company's ability to pay dividends to JRP Group Shareholders.
After completion of the Proposed Merger, the Just Retirement Shareholders and Partnership Assurance Shareholders will own a smaller percentage of the Combined Group than they currently own of the Just Retirement Group and the Partnership Assurance Group, respectively. Based on the number of Partnership Assurance Shares in issue as at the close of business on 11 March 2016 (being the Last Practicable Date) and assuming that there are no other issues of Just Retirement Shares or Partnership Assurance Shares (including under the Just Retirement Employee Share Plans or Partnership Assurance Employee Share Plans) between 11 March 2016 (being the Last Practicable Date) and the date of Admission and that 369,893,501 New Just Retirement Shares are issued in connection with the Proposed Merger, the Just Retirement Shareholders and former Partnership Assurance Shareholders will own approximately 60 per cent. and approximately 40 per cent., respectively, of the JRP Group Shares. As a consequence, the number of voting rights which can be exercised and the influence which may be exerted by JRP Group Shareholders will be reduced.
The Combined Group may seek to raise financing to fund future acquisitions and other growth opportunities and may, for these and other purposes, such as in connection with share incentive and share option plans, issue additional equity or convertible equity securities. As a result, JRP Group Shareholders may suffer dilution in their percentage ownership or the price of the JRP Group Shares may be adversely affected.
A new solvency regime applicable to the EU insurance sector, known as Solvency II, has been developed over recent years. The main aim of this new prudential framework is to ensure the financial stability of the insurance industry across the EU and protect policyholders through establishing solvency requirements better matched to the true risks of the business. Full implementation of Solvency II took place on 1 January 2016.
One key feature of the new regime for insurers and reinsurers under Solvency II is that these entities will be allowed to make use of internal capital models to calculate capital requirements if the model has been approved by the appropriate regulator. Just Retirement has received approval from the PRA to use an internal model to calculate regulatory capital. It has also received approval for its matching adjustment application. Matching adjustment permits insurers to apply an addition to the risk free rate used to discount liabilities when calculating their technical provisions. This matching adjustment recognises a proportion of the yield on the assets (including lifetime mortgages) that rewards the provision of long-term liquidity, and has the effect of reducing the amount of technical provisions below the level that would otherwise be required, for both existing and new business.
The PRA has also given approval for Just Retirement to gain the benefit of certain transitional arrangements to spread technical provisions increases arising from Solvency II over a future period. Under technical provision transitional arrangements, insurers are, subject to approval, permitted to apply a deduction to the calculation of their technical provisions which reflects the difference between the technical provisions as calculated under the current regime (as at 31 December 2015) versus the technical provisions as calculated under Solvency II. The value of that deduction reduces over time with no deduction being permitted after 16 years.
It is important to note, however, that the transitional deduction approved by the PRA was calculated on the basis of Just Retirement's technical provisions at the point in time in which it applied for transitional measures. Technical provisions comprise the mean best estimate of liabilities of the insurance company and a risk margin. The risk margin is calculated by reference to the risk free rate and as such is sensitive to changes in this rate. Following Just Retirement's application to the PRA, the risk free rate (as published by EIOPA) has fallen and this has resulted in insurers such as Just Retirement having to calculate a materially higher risk margin. Just Retirement has applied to the PRA to recalculate its transitional deduction to reflect the larger technical provisions it currently holds; if successful, the application will increase the amount of the transitional deduction. Insurers are permitted to recalculate the transitional deduction where a firm's risk profile has materially changed but must apply to the PRA for approval to do so. To the extent to which the PRA does not approve the recalculation, there is a risk that Just Retirement's own funds may be lower than if there were a re-calculation, lowering its coverage ratio of the solvency capital requirement. Further falls in risk free rates could then lead to even lower coverage ratios. To the extent that the Just Retirement Board was concerned at the extent of this deterioration in ratio, it might require management, if they have not already done so, to take mitigating actions. These could include reducing expenses, increasing the prices of products to customers, or taking out hedges to protect against further falls in risk free rates.
Partnership Assurance Group's life company subsidiary, PLACL, has received approval for a matching adjustment application and will benefit from certain transitional arrangements. In due course, the Combined Group expects to apply to use an internal model to calculate capital for the Partnership Assurance business also.
Both businesses are taking steps to mitigate potential risks associated with the new regulation (e.g. the impact of matching adjustment on lifetime mortgages) including, in the case of Just Retirement, seeking to recalculate the transitional deduction of which it has the benefit. Although the Just Retirement Board and the Partnership Assurance Board are confident of their ability to manage the Combined Group in accordance with Solvency II and believe there is potential to optimise the Combined Group's capital structure following completion of the Proposed Merger, as at the date of this Circular it remains possible that implementation of the rules, or the outcome of the application of the approvals, may give rise to greater capital requirements, or may require changes to the structures and/or businesses, or result in price
increases for products of the Just Retirement Group, the Partnership Assurance Group or, following completion of the Proposed Merger, the Combined Group (including holding additional capital or placing restrictions on the ability of the Just Retirement Group, the Partnership Assurance Group or the Combined Group to pay dividends, or requiring the Just Retirement Group, the Partnership Assurance Group or the Combined Group to raise additional capital).
In addition, following the implementation of Solvency II, regulators may continue to issue guidance and other interpretations or calibrations of applicable requirements, which could require further adjustments by the Just Retirement Group, the Partnership Assurance Group or, following completion of the Proposed Merger, the Combined Group in the future. A failure by the Just Retirement Group or the Partnership Assurance Group to comply with the measures required by Solvency II in a timely manner could also lead to regulatory action and have a material adverse effect on the business, results of operations and financial condition of the Just Retirement Group, the Partnership Assurance Group and, following completion of the Proposed Merger, the Combined Group.
On 6 November 2015, the PRA published a letter from Andrew Bulley and Chris Moulder stating that it intends, during 2016, to undertake an industry-wide review of the valuations and capital treatment of equity release mortgages (which would include lifetime mortgages). The letter states that the outcome of that review may lead to a re-assessment of the extent to which firms are complying with the Solvency II requirements in areas such as asset valuation and the prudent person principle. This could cover internal models, the requirements for assumptions underlying the solvency capital requirement or the criteria for matching adjustment eligibility. There is also a risk that a change in the regulatory treatment of equity release mortgages/lifetime mortgages will result in a negative impact on the value of those products or the capital which needs to be held in respect of them which could have a material adverse effect on the business, results of operations, financial condition and prospects of the Just Retirement Group, the Partnership Assurance Group and, following completion of the Proposed Merger, the Combined Group.
The Just Retirement Group and the Partnership Assurance Group are exposed to changes in the behaviour of their customers and the markets in which they sell their insurance products. For example, changes in lifestyle or medicine could significantly alter customers' actual or perceived need for annuity products. In addition, further changes to regulation or taxation may make alternative at-retirement propositions more attractive to customers than annuities. Changes in technology could also give rise to new types of entrants into the insurance and/or insurance sales sectors, or the development of new distribution channels requiring further adaptation of the Just Retirement Group's and the Partnership Assurance Group's business and operations. Additionally, declines in the financial markets, for instance equity markets, can reduce the value of a customer's pension funds available to purchase an annuity, which could influence the decision to purchase an annuity. Moreover, declines in annuity yields could make the purchase of annuities unattractive and inhibit market growth. Such changes could result in reduced demand for the Just Retirement Group's and the Partnership Assurance Group's products and/or require the Just Retirement Group and the Partnership Assurance Group to expend significant energy, resources and capital to change their product offering, build new risk and pricing models, modify and renew their operating and IT systems and/or retrain or hire new people. Such changes could have a material adverse effect on the business, results of operations, financial condition and prospects of the Just Retirement Group, the Partnership Assurance Group and, following completion of the Proposed Merger, the Combined Group.
Just Retirement Ltd has been assigned an insurer financial strength rating of ''B'' by the actuarial consulting firm AKG, as last confirmed in January 2016. Just Retirement Ltd's insurer financial strength rating is subject to periodic review by, and may be revised downward or revoked at the sole discretion of, AKG.
PLACL has been assigned an insurer financial strength rating of ''B-strong'' by the actuarial consulting firm AKG, as last confirmed in November 2015. PLACL's insurer financial strength rating is subject to periodic review by, and may be revised downward or revoked at the sole discretion of, AKG.
Downgrade or revocation of Just Retirement Ltd's or PLACL's insurer financial strength rating could have a negative impact on the Just Retirement Group's and Partnership Assurance Group's public reputation, ability to secure reinsurance, and competitive position in the market, especially in relation to their distribution arrangements and commercial business, where partners or customers may not be willing or permitted to place their insurance business with a lower rated insurer, which could result in reduced business volumes and income. The occurrence of any of the above could have a material adverse effect on the business, results of operations, financial condition and prospects of the Just Retirement Group, the Partnership Assurance Group and, following completion of the Proposed Merger, the Combined Group.
In March 2010, the United States passed legislation that would require non-United States financial institutions to enter into agreements to provide information on United States accountholders beginning in 2015. If this information is not provided in a form and with contents satisfactory to the United States tax authorities, a non-United States financial institution will have a 30 per cent. withholding tax applied to certain amounts derived from United States sources. Under final United States Treasury regulations, no such withholding tax will be imposed on any payments made prior to 1 July 2014. On 1 September 2013, regulations were introduced in the UK (the ''Regulations'') to give effect to the UK-US IGA. Under the UK-US IGA, UK-based financial institutions should not be subject to a 30 per cent. withholding on US source income, unless they fail to meet the requirements set out in the UK-US IGA and the Regulations.
Any expansion into new geographies will expose the Just Retirement Group, the Partnership Assurance Group and, following completion of the Proposed Merger, the Combined Group to different local political, regulatory, business and financial risks and challenges which may affect their ability to implement the intended strategy and business plans for those geographic markets. These risks could include political, social or economic instability, credit and counterparty risks in new geographies, lack of local business experience and risks of cultural incompatibility with foreign parties. The occurrence of any of these events could have a material adverse effect on the business, results of operations, financial condition and prospects of the Just Retirement Group, the Partnership Assurance Group and, following completion of the Proposed Merger, the Combined Group.
Following completion of the Proposed Merger, Avallux and the Cinven Funds will own beneficially 29.2 per cent. and 19.5 per cent., respectively, of the issued ordinary share capital of the Company. As a result, each of Avallux and the Cinven Funds may, following completion of the Proposed Merger, possess voting power sufficient to have influence over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions.
The Company has entered into relationship agreements with Avallux and the Cinven Funds to regulate their relationship following completion of the Proposed Merger. Pursuant to these relationship agreements, Avallux will, following completion of the Proposed Merger, continue to be entitled to appoint one non-executive director to the JRP Group Board and the Cinven Funds will also be entitled to appoint one non-executive director to the JRP Group Board. Notwithstanding that Avallux and the Cinven Funds have entered into relationship agreements, the interests of Avallux and the Cinven Funds may not always be aligned with those of other holders of the JRP Group Shares and each will have a significant influence over matters requiring shareholder approval, including the election of directors and the approval of significant corporate transactions. In addition, Avallux and the Cinven Funds may hold interests in, or may make acquisitions of or investments in, other businesses that may be, or may become, competitors of the Combined Group.
In this Part III (Partnership Assurance Financial Information), unless otherwise stated, references to the ''Parent Company'' or the ''Company'' are references to Partnership Assurance, references to ''Group'' are references to the Partnership Assurance Group, references to the ''directors'' or the ''Board of Directors'' are references to the Partnership Assurance Directors and the Partnership Assurance Board, respectively, and references to pages are to the relevant pages of Partnership Assurance's Audited Results 2015, Partnership Assurance's Annual Report & Accounts 2014 or Partnership Assurance's Annual Report & Accounts 2013 (as applicable).
The following pages set out consolidated financial information relating to Partnership Assurance prepared under IFRS as adopted by the EU for each of the financial years ended 31 December 2015, 31 December 2014 and 31 December 2013. The financial information has been extracted without material adjustment from Partnership Assurance's Audited Results 2015, Partnership Assurance's Annual Report & Accounts 2014 or Partnership Assurance's Annual Report & Accounts 2013 (as applicable). Deloitte LLP of 2 New Street Square, London EC4A, chartered accountants regulated by the ICAEW, has issued unqualified audit opinions on the consolidated financial statements of the Partnership Assurance Group for each of the financial years ended 31 December 2015, 31 December 2014 and 31 December 2013.
The consolidated financial information contained in this Part III (Partnership Assurance Financial Information) does not constitute statutory information within the meaning of section 434 of the Companies Act.
In our opinion:
The financial statements comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statements of Financial Position, the Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company Statements of Changes in Equity, the related notes 1 to 45, and the Critical Accounting Estimates and Judgements on page 51. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
As required by the Listing Rules we have reviewed the directors' statement regarding the appropriateness of the going concern basis of accounting contained within note 2 to the financial statements and the directors' statement on the longer-term viability of the Group contained within the directors report, on page 51.
We have nothing material to add or draw attention to in relation to:
We agreed with the directors' adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's ability to continue as a going concern.
We are required to comply with the Financial Reporting Council's Ethical Standards for Auditors and we confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities in accordance with those standards. We also confirm we have not provided any of the prohibited non-audit services referred to in those standards.
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team.
The Group predominantly writes enhanced We used our actuarial specialist auditors to test the annuities which it prices using its bespoke mortality controls over the end-to-end reserving process, data and internally generated intellectual property. focusing on the controls over changes to the The Group reserves for the future expected cost of reserving model and changes to the underlying these policies using complex actuarial models to demographic and economic assumptions.
On 11 August 2015, Partnership announced it is to We held regular meetings with management to merge with Just Retirement plc to form understand the impact of the transaction on the JRP Group plc. The formation of JRP Group plc financial reporting process and assesed any resulted in a pervasive risk for our audit due to the potential and actual impact when performing our numerous challenges it creates for PAG plc's controls testing.
Periods of change and integration such as this also rise to any incentives for management to increase the risk of breakdowns in the control manipulate the 2015 financial results. environment due to resource being diverted from business as usual tasks.
The transaction also has a potential impact on senior managements' share options and hence the incentive for bias to be introduced into the financial statements may be heightened.
project the insurance liabilities. These models are We performed detailed substantive testing on the dependent on key assumptions made by data inputs to the model including checks on policy management in respect of the following: data via agreeing a sample back to original on the portfolio based on assumptions as to the assumptions for retirement annuities had been mortality of the policyholders based on their input to the model accurately. In addition, we test medical condition or lifestyle characteristics; the Group's controls over the completeness of the
of the portfolio of assets that back the the largest policy group. We tested these liabilities that is used to discount the expected assumptions, in addition to testing manual cash flows, which also needs to reflect a provisions, the closure reserve, reinsurance deduction for the credit risk of the underlying reserves, allowance for counterparty default risk, assets. allowance for cash flow and currency mis-matching risk and statutory capital requirements. We used Further detail on these principal assumptions can our actuarial specialist auditors to challenge be found in note 20 to the financial statements. management's assumptions by considering the Management's own assessment of critical Group's own experience, comparison to industry accounting estimates is disclosed on page 62 of the benchmarks and by testing compliance with financial statements. regulations.
The significance and inherent subjectivity of these An assessment on the overall results was made by assumptions means that we view this as an area of reviewing the analysis of change in reserves over the significant risk. period under audit.
management due to the complexities of the merger We read the Scheme Document, Long Term process and the additional financial reporting Incentive Plan (LTIP) announcements and other requirements such as reporting into the newly supporting information published in relation to the formed group. merger to determine whether the transaction gave
The Group's investments include loans secured by We tested the new bulk transactions through residential mortgages (''equity release assets''). In reviewing the due diligence work performed by the 2015 the Group completed bulk purchase with a Group and then tested the whole portfolio by face value of £39m, bringing the total value of the challenging the valuation basis put forward by
macroeconomic advice received. We assessed the The fair value of the investment is dependent on competence of the third party advisor and also the valuation of the underlying properties and the tested the underlying data used in the valuation of assumptions used in the fair value calculation, such the equity release assets via agreement of a sample as the property growth rate, property volatility, a of loans back to original policy documentation. revaluation index to revalue properties to the valuation date, swap rates, and mortality We assessed the underlying portfolio of assets for assumptions. Property assumptions are derived indicators of impairment via segmenting the from macroeconomic data received from a third portfolio geographically and using applicable party. Note 26b to the financial statements provides regional property valuation indices to check for further detail as to the methodology for calculating signs of significant diminution in the value of the fair value of these assets. underlying property.
The subjectivity of the key assumptions, coupled Our actuarial specialist auditors challenged with the significance of the bulk transactions, means management's methodology and assumptions used
equity release book to £1.4bn. management based on independent
that we view this as an area of significant risk. to value the equity release assets via comparison to industry benchmarks, consultation with Deloitte real estate specialists on property growth and overvaluation assumptions and consideration of whether the valuation was sensitive to the mortality assumption.
The Group holds a significant amount of goodwill Management's methodology for its impairment on its statement of financial position, in addition to assessment has been reviewed, comparing it to the intangible assets representing intellectual property. requirements of IAS 36 and checking for Further detail can be found in notes 10 and 11 to consistency with the prior year approach. Our the financial statements. procedures then included:
Goodwill and intangible assets have been identified • obtaining management's business plan and as a significant risk area due to the uncertainties considering the methodology behind its following the Pensions Freedoms introduced in production, as well as challenging the April 2015, which continue to make forecasting assumptions on which it is based. This included
and scrutinising the underlying analysis for There is also judgment over the allocation of assets evidence of bias. and liabilities to the in-force and new business cash generating units (see note 11 to the financial • challenging whether all relevant assets and statements for further detail). This in turn affects liabilities had been allocated to the new the carrying value within the impairment business cash generating unit; and
Management's own assessment of critical recalculate the discount rate used and verify accounting estimates is disclosed on page 62 of the the inputs to the impairment calculation, which financial statements. is based on the capital asset pricing model, in
Individually underwritten bulk annuities are a key We have substantively tested all of the contracts source of revenue for the Group, representing 43% written by tracing the premiums to signed of the Group's gross written premium for 2015, quotations and observing the cash receipts into the including a single premium of £59m. Group's bank account.
The significance of the individual transactions means that we see this as an area of significant risk.
The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee discussed on pages 46 to 48. The risks above identified are consistent the previous year, with the addition of the risk surrounding the planned merger with Just Retirement plc.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
We determined materiality for the Group to be £4.3m (2014: £4.5m), which is below 1% of net written premiums. We consider a turnover based measure to be the most suitable benchmark at this stage in Partnership Assurance Group plc's development as it drives one of the Group's key performance indicators and is a figure on which the users of the financial statements focus.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £86,000 (2014: £90,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the group level. Our Group audit has covered entities representing 100% of the Group's net assets, 100% of the Group's revenue and 100% of the Group's profit before tax (2014: 100% of net assets, revenue and profit before tax). The result of the Group is predominantly driven by a single trading company, Partnership Life Assurance Company Limited. All of the Group entities audited are based in the same location and were audited by the Group audit team and the Group engagement partner.
Our audit work was executed at levels of materiality applicable to each individual entity which were lower than Group materiality. Component materialities ranged from £0.02m to £4.09m (2014: £0.03m to £4.28m).
At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances.
In our opinion:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have nothing to report in respect of these matters.
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors' remuneration have not been made or the part of the Directors' Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters.
Under the Listing Rules we are also required to review part of the Corporate Governance Statement relating to the company's compliance with certain provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors' statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.
As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Paul Stephenson BA FCA (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 10 March 2016
| Note | 2015 £000's |
2014 £000's |
|
|---|---|---|---|
| Gross premiums written Outward reinsurance premiums |
1 | 651,447 (217,586) |
760,638 (307,959) |
| Net premiums earned | 433,861 | 452,679 | |
| Net investment income Share of results of joint ventures and associates accounted for using the |
3 | 51,271 | 299,232 |
| equity method Profit on loss of control of subsidiary |
14 14 |
21 — |
(179) 158 |
| Other income | 194 | 207 | |
| Total income | 485,347 | 752,097 | |
| Gross claims paid Reinsurers' share of claims paid |
(413,144) 263,480 |
(390,570) 255,957 |
|
| Change in insurance liabilities: | (149,664) | (134,613) | |
| Gross amount | (193,731) | (883,524) | |
| Reinsurers' share |
(41,953) | 405,259 | |
| (235,684) | (478,265) | ||
| Acquisition costs | 4 | (3,089) | (4,997) |
| Investment expenses and charges | (14,764) | (14,352) | |
| Interest on External borrowings Other operating expenses |
5 | (7,347) (91,247) |
— (95,803) |
| (116,447) | (115,152) | ||
| Total claims and expenses | (501,795) | (728,030) | |
| (Loss)/profit from continuing operations before tax | (16,448) | 24,067 | |
| Income tax credit/(expense) from continuing operations |
7 | 2,348 | (5,213) |
| (Loss)/profit for the period | (14,100) | 18,854 | |
| (Loss)/profit attributable to: | |||
| —Owners of the Parent —Non-controlling interest |
(14,100) — |
18,852 2 |
|
| (Loss)/profit for the period | (14,100) | 18,854 | |
| Basic earnings per ordinary share Diluted earnings per ordinary share |
8 8 |
£ 0.03 £ 0.03 |
£ 0.05 £ 0.05 |
| Attributable to Owners of the Parent | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Note | Share Capital £000's |
Share Premium £000's |
Merger Relief Reserve £000's |
Merger Reserve £000's |
Shares held by Employee Benefit Trust £000's |
Retained profit £000's |
Total £000's |
Non controlling interest £000's |
Total £000's |
|
| At 1 January 2014 | 40,000 | 435,249 | — | (24,521) | (58) | 147,945 | 598,615 | (66) | 598,549 | |
| Share based payments | 19 | — | — | — | — | (78) | 1,301 | 1,223 | — | 1,223 |
| Disposal of subsidiary . |
— | — | — | — | — | — | — | 64 | 64 | |
| Dividends paid | — | — | — | — | — | (14,000) (14,000) | — | (14,000) | ||
| Profit for the year | — | — | — | — | — | 18,852 | 18,852 | 2 | 18,854 | |
| At 31 December 2014 . |
40,000 | 435,249 | — | (24,521) | (136) | 154,098 | 604,690 | — | 604,690 | |
| At 1 January 2015 | 40,000 | 435,249 | — | (24,521) | (136) | 154,098 | 604,690 | — | 604,690 | |
| Share issued/ bought for cash |
32 | 4,013 | — | 49,085 | — | — | — | 53,098 | — | 53,098 |
| Share based payments | 19 | — | — | — | — | (56) | 3,186 | 3,130 | — | 3,130 |
| Dividends paid | — | — | — | — | — | (6,000) | (6,000) | — | (6,000) | |
| Loss for the year | — | — | — | — | — | (14,100) (14,100) | — | (14,100) | ||
| At 31 December 2015 | 44,013 | 435,249 | 49,085 | (24,521) | (192) | 137,184 | 640,818 | — | 640,818 |
| Note | 2015 | 2014 | |
|---|---|---|---|
| £000's | £000's | ||
| Assets | |||
| Property, plant and equipment |
9 | 9,297 | 12,557 |
| Goodwill | 10 | 126,207 | 126,207 |
| Other intangible assets | 11 | 12,220 | 15,219 |
| Financial assets . |
12 | 4,886,583 | 4,910,904 |
| Investment in joint ventures and associates | 14 | 254 | 233 |
| Reinsurance assets | 20 | 3,204,055 | 3,246,008 |
| Insurance and other receivables | 15 | 90,382 | 39,167 |
| Prepayments and accrued income . |
16 | 3,480 | 3,615 |
| Deferred tax asset . |
17 | 938 | 519 |
| Cash and cash equivalents | 18 | 453,033 | 87,251 |
| Total assets |
8,786,449 | 8,441,680 | |
| Equity | |||
| Share capital . |
32 | 44,013 | 40,000 |
| Share premium | 32 | 435,249 | 435,249 |
| Merger relief reserve . |
32 | 49,085 | — |
| Merger reserve | 32 | (24,521) | (24,521) |
| Shares held by Employee Benefit Trust . |
32 | (192) | (136) |
| Retained profit | 137,184 | 154,098 | |
| Total equity | 640,818 | 604,690 | |
| Liabilities | |||
| Insurance liabilities | 20 | 5,424,843 | 5,231,112 |
| Insurance and other payables . |
21 | 47,372 | 29,527 |
| Financial liabilities | 22 | 2,561,290 | 2,571,288 |
| Current tax liabilities . |
23 | 3,957 | 3,735 |
| External borrowings | 24 | 107,257 | — |
| Deferred tax liability | 17 | 912 | 1,328 |
| Total liabilities | 8,145,631 | 7,836,990 | |
| Total equity and liabilities | 8,786,449 | 8,441,680 |
| Note | 2015 | 2014 | |
|---|---|---|---|
| Cash generated from operations | 27 | £000's 224,569 |
£000's 11,664 |
| Corporation tax paid | (5,315) | (19,705) | |
| Net cash from/ (used in) operating activities | 219,254 | (8,041) | |
| Cash flows from investing activities: Purchase of property, plant and equipment Purchase of other intangible assets Investment in associate |
9 11 |
(285) (195) — |
(1,308) (2,093) (48) |
| Net cash used in investing activities | (480) | (3,449) | |
| Cash flows from financing activities: Proceeds from issuance of share capital . Dividends paid to shareholders Proceeds from external borrowings |
32 24 |
53,098 (6,000) 99,910 |
— (14,000) — |
| Net cash from/ (used in) financing activities | 147,008 | (14,000) | |
| Net increase/ (decrease) in cash and cash equivalents | 365,782 | (25,490) | |
| Cash and cash equivalents brought forward | 87,251 | 112,741 | |
| Cash and cash equivalents carried forward | 18 | 453,033 | 87,251 |
Cash flows related to the sale and purchase of financial investments are included in operating cash flows as they are associated with the origination of insurance contracts and payment of insurance claims.
The operating segments reflect the level within the Group at which key strategic and resource allocation decisions are made and the way in which operating performance is reported internally to the chief operating decision makers in the Group, being the Group Board.
Information is provided to the Board which identifies operating profit segmented between: that achieved on new business written in the period; that which derives from in-force policies; and that relating to the long-term expected return on surplus assets. This split forms the reportable operating segments in accordance with IFRS 8 ''Operating Segments''.
New business revenue is reported as Single Premium Equivalent (''SPE''), being the actual single premium plus ten times the annual regular premium for new contracts written during the year. These revenue measures are monitored by the Board separately for each core target market.
The table below shows operating profit for each year, together with a reconciliation to profit before tax:
| For the year ended 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| New business operating profit | 10,755 | 38,962 |
| In-force operating profit | 14,601 | 8,477 |
| Long-term expected return on surplus assets | 14,451 | 16,328 |
| Operating profit |
39,807 | 63,767 |
| Investment variances |
(25,642) | (23,491) |
| Non-recurring items | (23,420) | (16,348) |
| Other gains | 154 | 139 |
| Interest on borrowings | (7,347) | — |
| (Loss)/profit from continuing operations before tax | (16,448) | 24,067 |
Investment variances reflect:
Non-recurring expenditure primarily relates to:
In addition, non-recurring amortisation and impairment totalled £3.8m in 2015 (2014: £8.5m).
Other gains relate to the Group's interest in distribution subsidiaries and holding company expenses.
The profit measure used by the Board to monitor performance is operating profit before tax, analysed between new business operating profit, in-force operating profit and the long-term expected return on surplus assets.
| 2015 | 2014 | |
|---|---|---|
| Cash | 0.5% | 0.5% |
| Gilts | 3.0% | 3.0% |
| Corporate bonds | 4.0% | 4.5% |
| Commodity Trade Finance loans |
N/A | 10.0% |
| Loans secured by residential mortgages |
6.0% | 6.0% |
No significant amount of commodity trade finance loans were held at any point during 2015 and so no yield on these investments was used in the derivation of long-term expected return.
| For the Year ended 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Individual retirement annuities | 280,235 | 465,840 |
| Defined benefit buy-in/buy-out annuities | 277,185 | 246,573 |
| Individual care annuities | 68,408 | 75,741 |
| Individual protection policies | 4,952 | 3,083 |
| Total SPE | 630,780 | 791,237 |
Premiums are recognised in the accounting period in which an insurance contract commences, gross of any commission paid. Premiums which have been received and for which no contract is yet in-force are classified as payables arising from insurance contracts and are included within insurance and other payables in the Consolidated Statement of Financial Position. Where a contract has been issued but premiums have not yet been received, a debtor arising out of direct insurance operations is recognised for the expected premiums due. Reinsurance premiums and recoveries are accounted for in the accounting period in accordance with the contractual terms of the reinsurance treaties. Premiums exclude any taxes or duties based on premiums.
New business revenue by target market reconciles to gross premiums written as follows:
| For the year ended 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Total SPE | 630,780 | 791,237 |
| Adjustment in respect of regular premium business | (4,393) | 135 |
| Change in premiums receivable—not included in SPE | 25,060 | (30,734) |
| Gross premiums written | 651,447 | 760,638 |
Premiums are written at the point an insurance contract comes into force. For management purposes SPE is recorded when all funds have been received from the policyholder. Amounts due from policyholders for premiums not yet received is shown in note 15.
The following table illustrates revenue by product as required by IFRS 8 'Operating Segments'. All revenues from external customers are predominantly derived from business originated in the UK, and as such no geographical information is disclosed.
The Board considers the Group's external customers to be the individual policyholders. As such, the Group is not reliant on any individual customer.
An analysis of gross premiums written by product is set out below:
| For the year ended 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Individual retirement annuities | 305,525 | 435,106 |
| Defined benefit buy-in/buy-out annuities | 274,155 | 246,573 |
| Individual care annuities | 68,522 | 75,864 |
| Individual protection policies | 3,245 | 3,095 |
| Total gross premiums written |
651,447 | 760,638 |
Partnership Assurance Group (PAG) plc (the ''Company'') was incorporated in the United Kingdom and registered in England and Wales on 26 February 2013 as a public company limited by shares. The Company's registered office address is 5th Floor, 110 Bishopsgate, London, EC2N 4AY.
The principal activity of the Company is that of a holding company. The Company and the entities controlled by the Company (its ''subsidiaries'') are collectively ''the Group''.
The Strategic Report on pages 1 to 33 outlines the activities, performance and future outlook of the Group. Note 30 to the Financial Statements sets out the Group's policies and procedures for managing insurance and financial risk, and note 31 sets out how the Group manages its capital resources.
These financial statements comprise the consolidated annual financial statements of the Group and the individual annual financial statements of the Company made up to 31 December 2015.
The results of subsidiaries acquired or disposed of during the period are included from or up to the effective date of acquisition or disposal. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. The Group has control over an entity if all of the following conditions are met: (a) the Group has power over an entity; (b) the Group is exposed to, or has rights, to variable returns from its involvement with the entity; (c) the Group has the ability to use its power over the entity to affect its own returns.
The presentation currency of the Group is sterling. Unless otherwise stated, the amounts shown in the consolidated financial statements are in thousands of pounds sterling (£'000).
The consolidated financial statements and those of the Company have been prepared and approved by the Directors in accordance with IFRS as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Group has applied all IFRS standards and interpretations adopted by the EU effective for the year ended 31 December 2015.
The Directors have undertaken a going concern assessment in accordance with 'Going Concern and Liquidity Risk: Guidance for UK directors of UK Companies 2009', published by the Financial Reporting Council in October 2009 as described on page 51 of the Directors' Report.
Significant accounting policies applied to the preparation of these financial statements are presented in the designated boxes within the notes to the financial statements, aligning disclosure of accounting policies to the item which is most directly relevant to the policy.
The Group has adopted the following new or revised standards that became effective (as adopted by the EU) as of 1 January 2015:
The following new or revised or amended standards, in issue, were not yet effective, or in some cases not yet endorsed by the EU. The Group has not early adopted any of these standards.
| Standard/ Interpretation |
Content/amendment | Applicable for annual financial periods beginning on or after |
|---|---|---|
| IFRS 9 | Financial Instruments | 1 January 2018 |
| IFRS 9 will replace IAS 39: Financial Instruments— Recognition and Measurement. The impact of the adoption of IFRS 9 on the Group will depend on the finalisation of the standard and the interaction of the requirements of IFRS 9 with the IASB's on-going insurance contracts accounting project. The standard has not yet been endorsed by the EU. |
||
| IFRS 10, IFRS 11 and IAS 28 |
Consolidated Financial Statements, Joint Arrangements, Investments in Associates and Joint Ventures |
1 January 2016 |
| Amendments regarding the sale of contribution of assets between an investor and its associate or joint venture. The amendments have not yet been endorsed by the EU. |
| Standard/ Interpretation |
Content/amendment | Applicable for annual financial periods beginning on or after |
|---|---|---|
| IFRS 14 | Regulatory Deferral Accounts | 1 January 2016 |
| The standard permits an entity which is a first-time adopter of IFRS to continue to account for 'regulatory deferral account balances' in accordance with its previous GAAP. As the Group is not a first-time adopter of IFRS, the standard will have no impact on the Group. The standard will not be endorsed by the EU. |
||
| IFRS 15 | Revenue from Contracts with Customers | 1 January 2018 |
| IFRS 15 specifies how and when to recognise revenue, and requires additional disclosures. The standard provides a single, principles based five-step model to be applied to contracts with customers. Insurance contracts and financial instruments are excluded from the scope of the standard. Therefore the standard is not expected to have a material impact on the Group's profit before tax for the year or equity. The standard has not yet been endorsed by the EU. |
||
| IFRS 16 | Leases | 1 January 2019 |
| IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The standard will require the recognition of assets and liabilities arising from contracts currently classified as operating lease but is not expected to have a material impact on Group profit before tax. The standard has not yet been endorsed by the EU. |
||
| IAS 16 | Property, Plant and Equipment | 1 January 2016 |
| Amendments regarding the clarification of acceptable methods of depreciation and amortisation and brining bearer plants into the scope of IAS 16. The standard has not yet been endorsed by the EU. |
||
| IAS 27 | Separate Financial Statements | 1 January 2016 |
| Amendments reinstating the equity method as an accounting option for investments in subsidiaries, joint ventures and associates in an entity's separate financial statements. The standard has not yet been endorsed by the EU. |
||
| IAS 38 | Intangible Assets | 1 January 2016 |
| Amendments regarding the clarification of acceptable methods of depreciation and amortisation. The standard has not yet been endorsed by the EU. |
||
| IAS 41 | Agriculture | 1 January 2016 |
| Amendments bringing bearer plants into the scope of IAS 16. The standard has not yet been endorsed by the EU. |
| Standard/ Interpretation |
Content/amendment | Applicable for annual financial periods beginning on or after |
|---|---|---|
| Annual Improvements— 2012 - 2014 cycle |
Amendments to a number of IFRS standards, clarifying guidance, wording or minor corrections. None of the proposed amendments are expected to have a material impact on the Group's profit before tax for the year or equity. |
1 January 2016 |
| The standard has not yet been endorsed by the EU. | ||
| IFRS 11 | Accounting for Acquisitions of interests in Joint Operations | 1 January 2016 |
| Amendments clarify that all the measurement and disclosure requirements of IFRS 3 apply to the acquisition of interests in Joint Operations. None of the proposed amendments are expected to have a material impact on the Group's profit before tax for the year or equity. The amendments will be applied prospectively. |
||
| IAS 1 | Disclosure Initiative | 1 January 2016 |
| Amendments that provide clarification on permissible aggregation and disaggregation of financial statement items, and additional examples of possible ways of ordering notes to the financial statements. None of the proposed amendments are expected to have a material impact on the Group's profit before tax for the year or equity. |
||
| IAS 12 | Recognition of Deferred Tax Assets for Unrealised Losses | 1 January 2017 |
| Amendments that clarify the recognition of deferred tax assets for unrealised losses on debt instruments, guidance on estimates for future taxable profits and the assessment of multiple deferred tax assets in combination. None of the proposed amendments are expected to have a material impact on the Group's profit before tax for the year or equity. The amendments have not yet been endorsed by the EU. |
Investment income comprises interest received on financial investments, realised investment gains and losses and movements in unrealised gains and losses.
Expenses and charges are included on an accruals basis.
Realised gains and losses on investments are calculated as the difference between net sales proceeds less costs of sale and original cost. Unrealised gains and losses on investments represent the difference between the valuation at the balance sheet date and their purchase price or, if they have been previously valued, their valuation at the last balance sheet date. The movement in unrealised gains and losses recognised in the year also includes the reversal of unrealised gains and losses recognised in earlier accounting periods in respect of investment disposals in the current period.
| For the year ended 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Net Interest income on financial assets and financial liabilities |
63,837 | 71,454 |
| (Losses)/gains on financial assets and financial liabilities | (7,782) | 231,327 |
| Losses on derivative instruments (designated as held for trading) | (4,784) | (3,549) |
| Total net investment income | 51,271 | 299,232 |
All financial assets and liabilities at 31 December 2015 are classified at fair value through profit and loss.
Acquisition costs comprise direct costs such as commissions and indirect costs of obtaining and processing new business. They are allocated to particular categories of business based on available information. Acquisition costs are not deferred as they are largely recovered at policy inception through profit margins.
| For the year ended 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Commission |
2,469 | 4,049 |
| Other acquisition expenses | 620 | 948 |
| Total acquisition costs | 3,089 | 4,997 |
Profit from continuing operations before tax is stated after charging the following items:
| For the year ended 31 December | Note | 2015 | 2014 |
|---|---|---|---|
| £000's | £000's | ||
| Staff costs, including directors' remuneration |
6 | 38,505 | 40,760 |
| Depreciation of property, plant and equipment | 9 | 3,274 | 3,238 |
| Amortisation of intangible assets | 11 | 3,194 | 3,275 |
| Rental of leased premises | 2,835 | 3,220 | |
| Other operating leases |
757 | 308 | |
| Auditor remuneration | 1,217 | 704 | |
| Share based payment charges . |
19 | 3,144 | 1,223 |
| Consultancy | 9,104 | 8,681 | |
| Legal and professional fees | 8,523 | 5,288 | |
| Marketing |
5,985 | 12,591 | |
| Other (primarily office maintenance and supplies) |
14,709 | 16,515 | |
| Total other operating expenses | 91,247 | 95,803 |
Included in the expenses above are £69.1m (2014: £78.1m) of Operating expenses that are included in the derivation of the Operating profit. A further £19.9m (2014: £16.3m) are included in non-recurring expenditure (note 1a) and the balance of £2.2m (2014: £1.4m) is included within other non-operating items.
The analysis of the auditor's remuneration for the year is as follows:
| Fees payable for the year ended 31 December were in respect of: | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| The audit of the PAG plc Annual Report and Accounts | 66 | 94 |
| The audit of other group entities |
183 | 192 |
| Audit related assurance services |
202 | 172 |
| Taxation compliance services | 8 | 118 |
| Taxation advisory services | 23 | — |
| All other assurance services |
735 | — |
| Corporate finance transactions relating to the IPO in June 2013 | — | 128 |
| Auditor remuneration | 1,217 | 704 |
All other assurance services include assurance requested by the PRA in reviewing Solvency II methodologies and the balance sheet, as well as assurance connected to the proposed merger with Just Retirement.
The aggregate staff costs, including Directors' remuneration in the year were:
| £000's | £000's | |
|---|---|---|
| Wages and salaries | 32,147 | 34,202 |
| Social security costs |
4,373 | 4,494 |
| Other pension costs | 1,985 | 2,064 |
| Total staff costs | 38,505 | 40,760 |
| The average number of persons employed during the year were: | ||
| Administration and finance | 368 | 444 |
| Sales and marketing | 73 | 73 |
| Average number of employees | 441 | 517 |
An analysis of Directors' remuneration is included in the Remuneration Report on pages 54 to 60.
Income tax comprises current and deferred tax. Income tax is charged or credited to other comprehensive income if it relates to items that are charged or credited to other comprehensive income. Similarly, income tax is charged or credited to equity if it relates to items that are credited or charged directly to equity.
Provision is made for taxation on taxable profits for the year, using tax rates enacted or substantially enacted at the balance sheet date together with adjustments to tax payable in respect of previous years.
Deferred tax is provided in full on temporary differences arising, which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on tax rates and laws enacted or substantively enacted at the balance sheet date. Temporary differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements except for differences arising from the initial recognition of goodwill and the initial recognition of assets and liabilities in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting nor taxable profit.
A deferred tax asset is recognised to the extent that it is regarded as more likely than not that it will be recovered. Deferred tax assets and liabilities are not discounted.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date. Deferred income tax assets and liabilities are offset only if: a legally enforceable right exists to set off current tax assets against current tax liabilities; the deferred income taxes relate to the same taxation authority; and that authority permits the Group to make a single net payment.
| For the year ended 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Current taxation: | ||
| Tax (credit)/ charge for the year | (1,204) | 6,015 |
| Adjustment in respect of prior periods |
(309) | (2,035) |
| (1,513) | 3,980 | |
| Deferred taxation: | ||
| Tax (credit)/ charge for the year | (835) | 1,233 |
| Net taxation (credit)/ charge |
(2,348) | 5,213 |
The actual tax charge of the Group differs from the expected tax charge, computed by applying the average rate of UK corporation tax for the year of 20.25% (2014: 21.5%), as follows:
| For the year ended 31 December | 2015 £000's |
2014 £000's |
|---|---|---|
| (Loss)/ profit from continuing operations before tax | (16,448) | 24,067 |
| Total tax at the statutory 2015 rate of 20.25% (2014: 21.5%) | (3,330) | 5,173 |
| Impact of translation to reporting currency | 36 | — |
| Disallowable expenses | 1,226 | 51 |
| Adjustments in respect of prior periods |
(309) | (2,035) |
| Adjustments to deferred tax in respect of prior periods | (35) | 1,903 |
| Rate change impact | (83) | 55 |
| Non-qualifying depreciation | 97 | 106 |
| Share based payment credit/ (charge) on which deferred tax not recognised | 50 | (40) |
| Net taxation (credit)/ charge | (2,348) | 5,213 |
Taxation was all from continuing operations in 2015 and 2014.
Basic earnings per share is calculated using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the period.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares, including share options and awards.
Diluted earnings per share amounts are calculated by dividing the profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive ordinary shares into ordinary shares.
The calculation of the basic and diluted earnings per share from continuing operations is based on the following data:
| For the year ended 31 December | 2015 £000's |
2014 £000's |
|
|---|---|---|---|
| (Loss)/ profit for the year Less non controlling interests |
(14,100) — |
18,854 (2) |
|
| (Loss)/ profit attributable to equity holders of the parent Effect of dilutive potential ordinary shares: Share options |
(14,100) — |
18,852 — |
|
| Diluted profit attributable to equity holders of the parent | (14,100) | 18,852 | |
| For the year ended 31 December | 2015 | 2014 | |
| Number of Shares |
Number of Shares |
||
| Basic weighted average number of shares | 410,194,086 | 399,870,568 | |
| Effect of dilutive potential ordinary shares: | |||
| Share options |
16,777,936 | 2,780,521 |
The Group has a number of other employee share based plans (note 19). Each of these plans has a dilutive effect.
Diluted weighted average number of shares ....................... 426,972,022 402,651,089
For the year ended 31 December 2015
It is our current intention that the Long Term Incentive Plan (LTIP) and the share element of the Deferred Share Bonus Plan (DBSP) be settled by fresh issues of shares as the awards vest. The weighted average number of shares calculation above has been derived on the assumption that the vesting of shares in respect of the LTIP and DSBP awards will be settled by a fresh issue of shares when the awards vest and hence will be dilutive.
On 29 September 2015, an additional 39,995,997 shares were issued raising capital of £53,284,942 and a further 136,154 shares were issued during December 2016 to settle LTIP and DBSP awards (see note 32).
Assets are stated at cost less accumulated depreciation and impairment losses. Depreciation is calculated to write off the :cost of tangible assets over their estimated useful life on a straight-line basis. The principal rates used for this purpose are as follows:
| 2015 | 2014 | |||
|---|---|---|---|---|
| Computer equipment Fixutres and fittings |
10% to 20% | 33% | 33% 10% to 20% |
|
| Office re-fit | 10% to 50% | 10% to 50% | ||
| Property, plant and equipment | Computer equipment |
Fixtures and fittings |
Office refit costs |
Total |
| £000's | £000's | £000's | £000's | |
| Cost at 1 January 2015 | 8,680 | 496 | 11,225 | 20,401 |
| Additions | 275 | — | 10 | 285 |
| Disposals | — | — | (577) | (577) |
| At 31 December 2015 | 8,955 | 496 | 10,658 | 20,109 |
| Accumulated depreciation at 1 January 2015 | 5,592 | 454 | 1,798 | 7,844 |
| Charge for the year |
1,945 | 19 | 1,310 | 3,274 |
| Disposals | — | — | (306) | (306) |
| At 31 December 2015 | 7,537 | 473 | 2,802 | 10,812 |
| Net book value at 31 December 2014 |
3,088 | 42 | 9,427 | 12,557 |
| Net book value at 31 December 2015 | 1,418 | 23 | 7,856 | 9,297 |
Goodwill represents the excess of cost of acquisition over the fair value of the separable net assets of businesses acquired. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is allocated to each of the cash-generating units (''CGU'') that are expected to benefit from the combination. Goodwill is tested for impairment at least annually, or when circumstances or events indicate there may be uncertainty over this value. Impairment is determined by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Any impairment is recognised immediately in the Consolidated Statement of Comprehensive Income and is not subsequently reversed.
| 2015 | 2014 | |
|---|---|---|
| £000's | £000's | |
| At 1 January | 126,207 | 126,207 |
| At 31 December |
126,207 | 126,207 |
The goodwill arose on acquisition of the PLACL operations and the value represented the potential of this business to generate value from future sales. Therefore the goodwill is allocated to the new business cash generating unit, the scope of which is identical to the ''new business'' operating segment described in note 1.
The carrying value of goodwill has been tested for impairment at the balance sheet date. Value in use has been determined as the present value of expected future cash flows associated with new business. The cash flows used in this calculation are consistent with those monitored by management.
Expected future new business cash flows are based on financial plans approved by management, covering a period of 5 years from the balance sheet date. A rate of 15.1% (2014: 13.1%) has been applied to discount cash flows to a present value.
No impairment has been recognised in 2015 or 2014.
Other intangible assets comprise intellectual property and software development costs.
The intellectual property asset comprises of specific mortality tables derived from data collected over an extended period and are deemed to have an indefinite life. Consequently no amortisation is charged against its carrying value.
Development costs that are directly attributable to the design and testing of identifiable software products, controlled by the Group, are recognised as intangible assets when it can be demonstrated that it is technically feasible to complete the product so that it is available for use and will generate probable future economic benefits. Software development costs have a finite useful life and are amortised using the straight-line method over three to five years.
Impairment review of other intangible assets
The carrying amounts of intangible assets with finite expected useful economic lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. A review for indicators of impairment is conducted annually. The carrying amounts of intangible assets with indefinite expected useful economic lives are tested for impairment at least annually, or when circumstances or events indicate there may be uncertainty over this value. An impairment loss is recognised in the Consolidated Statement of Comprehensive Income for the amount by which the asset's carrying amount exceeds its recoverable amount.
The recoverable amount of an asset is the greater of its net selling price (fair value less selling costs) and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the
recoverable amount is determined for the cash-generating unit, or company of units, to which the asset belongs.
| 2015 | 2014 | |
|---|---|---|
| £000's | £000's | |
| Intellectual property cost and carrying amount: | ||
| At 1 January |
3,100 | 3,100 |
| At 31 December | 3,100 | 3,100 |
| Software development cost: | ||
| At 1 January |
19,898 | 17,805 |
| Additions at cost |
195 | 2,093 |
| At 31 December | 20,093 | 19,898 |
| Software development accumulated amortisation: | ||
| At 1 January |
7,779 | 4,504 |
| Charge for the year |
3,194 | 3,275 |
| At 31 December | 10,973 | 7,779 |
| Total intangible assets at 1 January | 15,219 | 16,401 |
| Total intangible assets at 31 December |
12,220 | 15,219 |
The value of intellectual property has been determined based upon an estimate of the costs to employ adequately skilled individuals over an appropriate period of time to develop intellectual property of a similar nature sufficient to enable the Group to replicate the estimated future cash flows and profits deriving from that intellectual property.
The intellectual property is continually updated through the collection of further data, updated analyses, and conversion into new and more detailed underwriting manuals and mortality tables. For this reason, the intangible asset is deemed to have an indefinite life, and consequently, no amortisation is provided against the value of the intangible asset. The carrying value of the intangible asset is tested for impairment at each reporting date, and is allocated to the ''new business'' cash-generating unit, the scope of which is identical to the ''new business'' operating segment described in note 1. The method and assumptions used in this test are identical to those applied in the goodwill impairment test, as set out in note 10.
No impairment of intellectual property has been recognised in 2015 or 2014.
The Group classifies its financial assets as financial investments, loans secured by residential mortgages, loans secured by commercial mortgages and derivative financial assets at fair value through profit and loss. The category of fair value through profit and loss has two sub-categories: those that meet the definition as being held for trading; and those that the Group chooses to designate as fair value. The fair value through profit and loss is selected as the Group's strategy is to manage its financial assets, as a portfolio, on a fair value basis.
Purchases and sales of debt securities and other fixed income securities are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Transaction costs are expensed as incurred. These investments are derecognised when the contractual rights to receive cash flows from the investments expire, or where the investments have been transferred, together with substantially all the risks and rewards of ownership.
For the year ended 31 December 2015
Debt securities and other fixed income securities are subsequently carried at fair value with changes in fair value included in the Consolidated Statement of Comprehensive Income in the period in which they arise.
The fair values of debt securities are based on quoted bid prices, or based on modelled prices (using observable market inputs) where quoted bid-prices are not available.
Commodity Trade Finance Investments, whether by way of a direct loan or an investment in a fund of such loans (CTF Investments), are carried at fair value on initial recognition and are recognised when the cash is advanced for the trade. CTF Investments are subsequently carried at fair value with changes in fair value included in the Consolidated Statement of Comprehensive Income in the period in which they arise. The fair value of these investments is not based on observable market data.
Loans secured by residential mortgages are recognised when the cash is advanced to borrowers at their fair values. These loans are derecognised when the contractual rights to receive cash flows from the investments expire, or where the investments have been transferred, together with substantially all the risks and rewards of ownership.
Loans secured by residential mortgages are subsequently carried at fair value with changes in fair value included in the Consolidated Statement of Comprehensive Income in the period in which they arise.
The fair value of loans secured by residential mortgages is initially deemed to be the transaction price and subsequently marked to model. The underlying model follows the methodology used to establish transaction prices. It uses longevity assumptions to derive expected cash flows and the Black Scholes option pricing methodology to establish the value of the no negative equity guarantee that is embedded in the product. The discount rates that are applied to cash flows to produce the fair values are based on long-dated swaps adjusted so that they would produce transaction date prices on the date of transaction.
Loans secured by commercial mortgages are recognised when the cash is advanced to borrowers at their fair values. These loans are derecognised when the contractual rights to receive cash flows from the investments expire, or where the investments have been transferred, together with substantially all the risks and rewards of ownership.
Loans secured by commercial mortgages are subsequently carried at fair value with changes in fair value included in the Consolidated Statement of Comprehensive Income in the period in which they arise.
The fair value of loans secured by commercial mortgages is initially deemed to be the transaction price and subsequently marked to model. The valuation model produces a series of projected future cash flows for each mortgage, based on a range of simulations of changes in property prices drawn from a distribution based on historic observed changes. Potential changes in property tenancy are also modelled in a range of simulations. The discount rates that are applied to cash flows to produce the fair values are based on long-dated swaps adjusted so that they would produce transaction date prices on the date of the transaction.
The Group enters into a variety of derivative financial instruments to manage its exposure to interest rates, inflation, credit default and foreign exchange rate risk, including foreign exchange forward currency contracts, interest rate swaps, credit default swaps, inflation swaps, fixed coupon cross currency swaps, interest rate futures and swaptions.
Derivative contracts are traded either through an exchange or over-the-counter (''OTC''). OTC derivative contracts are individually negotiated between contracting parties and can include options, swaps, caps and floors.
Derivatives are initially recognised at fair value at the date that a derivative contract is entered into and are subsequently remeasured to fair value at each balance sheet date. The resulting gain or loss is recognised in the Consolidated Statement of Comprehensive Income. The fair values are obtained from quoted market prices or, if these are not available, by using standard valuation techniques based on discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair value is positive and liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset in the Consolidated Statement of Financial Position at the date of purchase representing their fair value at that date.
| Fair value at 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Financial investments | 3,371,950 | 3,584,820 |
| Loans secured by residential mortgages | 1,434,788 | 1,212,324 |
| Derivative assets |
14,228 | 75,892 |
| Loans secured by commercial mortgages | 65,617 | 37,868 |
| Total financial assets | 4,886,583 | 4,910,904 |
The methodology used to derive the fair values is set out in note 26.
| Cost at 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Financial investments | 3,314,066 | 3,298,543 |
| Loans secured by residential mortgages | 1,139,627 | 950,909 |
| Derivative assets |
4,246 | — |
| Loans secured by commercial mortgages | 65,399 | 37,481 |
| Total financial assets | 4,523,338 | 4,286,933 |
Items included in the financial statement of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the ''functional currency''). The functional currency of each of the Group's material entities is sterling. The consolidated financial statements are presented in sterling, which is the Group's presentation currency.
Assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the end of the financial period. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in net investment income in the Consolidated Statement of Comprehensive Income.
Set out below are the principal subsidiary and associate undertakings of Partnership Assurance Group plc. All of the companies are incorporated in the United Kingdom and registered in England and Wales unless otherwise indicated. The shares held are voting ordinary equity shares. A full list of subsidiary and joint
For the year ended 31 December 2015
venture undertakings will be annexed to the Partnership Assurance Group plc annual return filed at Companies House.
| Name: | Principal activity: | Holding: |
|---|---|---|
| PAG Holdings Limited(i) |
Holding company | 100% |
| PAG Finance Limited(i) | Holding company | 100% |
| Partnership Holdings Limited |
Holding company | 100% |
| Partnership Group Holdings Limited | Holding company | 100% |
| Partnership Life Assurance Company Limited | Life assurance and pension annuities | 100% |
| Partnership Home Loans Limited |
Provision of lifetime mortgage products | 100% |
| Partnership Services Limited | Service company | 100% |
| Payingforcare Limited | Website | 100% |
| PASPV Limited | Investment activity | 100% |
| Partnership Life US Company(ii) | Management services | 100% |
| PAERSPV Limited(iii) |
Investment activity | 100% |
| Eldercare Group Limited(iv) | Independent financial advisors | 33% |
(i) Incorporated in Jersey (now dormant)
Partnership Assurance Group plc directly or indirectly holds 100% of the ordinary shares and voting rights in the entities listed above (with the exception of Eldercare Group Limited), therefore Partnership Assurance Group plc controls these entities as subsidiaries.
The Group's regulated insurance entity, Partnership Life Assurance Company Limited, is subject to UK solvency requirements which may, in the event of a breach of those requirements, affect that entity's ability to transfer funds in the form of cash dividends to other entities in the Group. The net assets of Partnership Life Assurance Company Limited at the balance sheet date are £450.3m (2014: £459.0m). There are no protective rights of non-controlling interests which significantly restrict the Group's ability to access or use the assets and settle the liabilities of the Group.
The Group uses the equity method to consolidate its investments in joint ventures and associates. Under the equity method of accounting the investment is initially recognised at fair value and adjusted thereafter for the post-acquisition change in the Group's share of net assets of the joint venture.
| Associates | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| At 1 January |
233 | — |
| Fair value on initial recognition | — | 206 |
| Share of profit from continuing operations | 21 | 27 |
| At 31 December | 254 | 233 |
For the year ended 31 December 2015
| Joint ventures | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| At 1 January |
— | 206 |
| Impairment of joint venture |
— | (206) |
| At 31 December | — | — |
During 2014 the Group entered into a transaction that changed its holding in Eldercare from a subsidiary to an associate and also impaired and then disposed of its joint venture investment in Gateway.
There were no profits or losses arising from discontinued operations in joint ventures or associates in 2015 or 2014. There were no items of other comprehensive income in joint ventures or associates in 2015 or 2014.
Insurance and reinsurance debtors represent amounts receivable after commencement of the contract which has not been settled at the balance sheet date.
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Debtors arising out of insurance contracts(i) | 68,187 | 11,135 |
| Debtors arising out of reinsurance contracts | 9,880 | 22,522 |
| Other debtors |
3,235 | 3,266 |
| Corporation tax receivable |
8,920 | 2,091 |
| Amounts due from associate | 160 | 153 |
| Total insurance and other receivables | 90,382 | 39,167 |
(i) Includes £34.6m in respect of premiums written for which funds had not yet been received from the policyholder (2014: £9.7m), and £33.6m in respect of Defined Benefit de-risking premiums written for which funds had not yet been received from two schemes (2014: £2.3m, one scheme)
The Directors consider that the carrying value of insurance and other receivables in the balance sheet is a reasonable approximation of the fair value.
Interest accrued represents the balance receivable for interest income, calculated daily based on the contractual interest rates of the relevant instruments, recognised since the last interest payment date.
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Accrued interest |
188 | 32 |
| Prepayments | 3,292 | 3,583 |
| Total prepayments and accrued income | 3,480 | 3,615 |
| 2015 | 2014 | |
|---|---|---|
| £000's | £000's | |
| Deferred tax asset at 1 January |
519 | 424 |
| Deferred tax liability at 1 January |
(1,328) | — |
| Credit/ (debit) to Consolidated Statement of Comprehensive Income | 835 | (1,233) |
| Deferred tax asset at 31 December | 938 | 519 |
| Deferred tax liability at 31 December | (912) | (1,328) |
The deferred tax asset is recognised as a result of the difference between: the accumulated depreciation and the capital allowances claimed on property, plant and equipment and the accumulated share based payment charges and a more current estimation of the likely cost of schemes that have not yet vested based on a revaluation at the balance sheet date.
The deferred tax liability is recognised as a result of the difference between the accumulated amortisation and research and development claims relating to software development costs. The UK corporation tax rate that is expected to be appropriate when each of these timing differences arise is 18.75% (2014: 20%).
Cash and cash equivalents comprise cash in hand, deposits held on call with banks and other short term highly liquid investments with original maturities of 90 days or less. Bank overdrafts are included in cash and cash equivalents for the purposes of the Consolidated Cash Flow Statement.
Equity-settled share based payments to employees are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. The fair value determined at the grant date of the equity-settled share based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest.
At each period end, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in the Consolidated Statement of Comprehensive Income such that the cumulative expense reflects the revised estimate with a corresponding adjustment to equity.
Where the terms and conditions of options are modified before they vest, the increase in the fair value of those instruments, measured immediately before and after the modification, is also charged to the Consolidated Statement of Comprehensive Income over the remaining vesting period.
The share based payment expense recognised for employee services receivable during the year is as follows:
| For the year ended 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Long Term Incentive Plan |
1,877 | 863 |
| Deferred Share Bonus Plan | 989 | 273 |
| Share Incentive Plan |
102 | 92 |
| Save As You Earn Plan | 176 | (5) |
| Total expense |
3,144 | 1,223 |
| 2015 | 2014 | |
|---|---|---|
| No of Awards |
No of Awards |
|
| Outstanding at the beginning of the year | 5,731,511 | 1,280,414 |
| Granted during the year | 3,249,243 | 4,745,589 |
| Forfeited during the year | (304,854) | (294,492) |
| Settled during the year | (202,922) | — |
| Outstanding at the end of the year | 8,472,978 | 5,731,511 |
The Group made awards under the LTIP to Executive Directors and other senior executives in August 2015 (2015 LTIP), May 2014 (2014 LTIP) and June 2013 (2013 LTIP). The LTIP awards will be subject to the satisfaction of the following performance conditions which will determine the proportion (if any) of the LTIP award to vest at the end of the performance period:
50 per cent of the 2013 LTIP awards are subject to a performance condition relating to the growth in the Group's operating profit over a performance period of three financial years. If operating profit for the financial year ending 31 December 2015 exceeds operating profit for the financial year ending 31 December 2012 by 33.1 per cent, 10 per cent of the 2013 LTIP award will vest. The maximum 50 per cent will vest if operating profit for the financial year ending 31 December 2015 exceeds operating profit for the financial year ending 31 December 2012 by at least 64.3 per cent. Payment will be on a sliding scale in between these points.
The remaining 50 per cent of the 2013 LTIP awards and all of the 2014 LTIP and 2015 LTIP will be subject to a condition measuring the Company's total shareholder return (TSR) performance relative to the constituent companies of the FTSE 250 index (excluding investment trusts, mining companies and oil and gas producers), over the period from admission to the London stock exchange in June 2013 to 31 December 2015, in respect of the 2013 LTIP, the period from 22 May 2014 to 22 May 2017 in respect of the 2014 LTIP, and 11 August 2015 to 11 August 2018 in respect of the 2015 LTIP. Vesting of 10 per cent of the 2013 LTIP award and 20 per cent of the 2014 and 2015 LTIP awards will occur for median performance and the maximum vesting (50 per cent for the 2013 LTIP and 100 per cent for the 2014 and 2015 LTIPs) at upper quartile performance or above, with the proportion vesting between these points calculated on a straight line basis.
The awards are accounted for as equity-settled schemes. The fair value of these schemes is calculated at each award date based upon the number of shares expected to vest and the expense charge is recognised over the course of the vesting period.
A charge of £1,876,730 (2014: £862,718) has been recognised in the Consolidated Statement of Comprehensive Income with a corresponding increase in equity in the Consolidated Statement of Financial Position. The weighted average fair value of awards made in the year was £0.88.
The fair value of the award was measured with reference to the quoted share price of PAG plc at the measurement date. The performance condition relating to total shareholder return was incorporated into the measure of fair value through stochastic models incorporating the historical TSR volatility of the Group and other comparable listed entities. The performance condition relating to operating profit performance and other non-market vesting conditions are incorporated into the estimate of the total number of awards expected to vest. This expectation is reviewed and if necessary, revised at each reporting date.
The weighted average exercise price of all awards under the LTIP is £nil.
| 2015 | 2014 | |
|---|---|---|
| No of Awards | No of Awards | |
| Outstanding at the beginning of the year |
899,528 | — |
| Granted during the year |
887,699 | 946,134 |
| Forfeited during the year | (3,322) | (46,606) |
| Settled during the year |
(134,989) | — |
| Outstanding at the end of the year |
1,648,916 | 899,528 |
Effective from June 2013, one-third of the bonuses earned by Executive Directors and certain other senior executives in respect of the Company's annual bonus arrangements are deferred into shares in PAG plc. The remaining two thirds of the awards will continue to be paid in cash. The share element of the bonus awards will vest on the third anniversary of the date of the determination of the bonus in respect of which they were granted. Options are then exercisable until the tenth anniversary of the grant date, unless the exercise period is shortened in accordance with DSBP rules.
The share element of these bonus awards are accounted for as equity-settled schemes. The fair value of these awards are calculated at each award date based on one-third of the estimated annual bonus payout and the expense charge is recognised over the course of the service period to which the bonus relates and the vesting period.
A charge of £988,642 (2014: £272,545) has been recognised in the Consolidated Statement of Comprehensive Income in respect of these schemes for the year to 31 December 2014 with a corresponding increase in equity in the Consolidated Statement of Financial Position.
The weighted average fair value of awards made during the year was £1.56. The fair value of the award was measured with reference to the quoted share price of PAG plc at the measurement date. Non-market vesting conditions are incorporated into the estimate of the total number of awards expected to vest. This expectation is reviewed and, if necessary, revised at each reporting date.
| 2015 | 2014 | |
|---|---|---|
| No of Awards | No of Awards | |
| Outstanding at the beginning of the year |
87,843 | 119,340 |
| Granted during the year |
864 | 2,911 |
| Forfeited during the year | (16,347) | (34,408) |
| Outstanding at the end of the year |
72,360 | 87,843 |
In 2013 the Company made a one-off award of £1,000 of free shares immediately after admission to all eligible employees under a new all-employee share plan, known as the Share Incentive Plan (SIP). These
shares will be forfeited if the employees cease employment (except in ''good leaver'' circumstances) within the first three years from the date of the award. Awards made under this plan entitle these employees to:
These awards are accounted for as equity-settled schemes. The fair value of these schemes is calculated at each award date based upon the number of shares awarded multiplied by the share price at grant date and expensed over the vesting period. The weighted average exercise price of the awards is £nil.
A charge of £102,497 (2014: £92,430) has been recognised in the Consolidated Statement of Comprehensive Income in respect of this scheme for the year to 31 December 2015 with a corresponding increase in equity in the Consolidated Statement of Financial Position.
Further awards have been made in the year to 31 December 2015, reflecting additional shares to scheme participants on payment on dividends by the Group, subject to the same conditions as the original award. The weighted average fair value of awards made in the year was £1.35. The fair value of the award was measured with reference to the quoted share price of PAG plc at the measurement date. Non-market vesting conditions are incorporated into the estimate of the total number of awards expected to vest. The expectation is reviewed and, if necessary, revised at each reporting date.
| Weighted average exercise price | ||||
|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |
| No of Awards | £ | £ | ||
| Outstanding at the beginning of the year | 1,560,562 | 465,761 | 1.08 | 3.57 |
| Granted during the year | 396,843 | 1,536,051 | 1.23 | 0.94 |
| Forfeited during the year |
(231,436) | (441,250) | 1.45 | 3.21 |
| Outstanding at the end of the year | 1,725,969 | 1,560,562 | 1.07 | 1.08 |
In July 2013, the Group introduced a SAYE scheme. Under this plan, employees may elect to save up to £500 per month over a three or five year period. The amount of ordinary shares of PAG plc over which the option is granted will be determined at the grant date to reflect the amount that each employee has agreed to save under the Share Save contract. Awards were granted under the scheme to member employees in July 2013 and November 2014 and 2015.
A charge of £175,829 (2014 credit of £4,954) has been recognised in the Consolidated Statement of Comprehensive Income in respect of this scheme for the year to 31 December 2015 with a corresponding increase in equity in the Consolidated Statement of Financial Position.
The fair value of the awards made in the year has been determined using a Black-Scholes valuation model. Key assumptions within this valuation model were: expected share price volatility (41.8%), expected dividend yield (1%), risk free interest rate (1.7%), expected option life (three years and five years), exercise price (£1.23) and share price at the measurement date 16 September 2015 (£1.50).
Insurance contracts are defined as those containing significant insurance risk if, and only if, and insured event would cause and insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire.
For the year ended 31 December 2015
The Group's long-term insurance contracts include annuities to fund retirement income, annuities to fund care fees (immediate needs and deferred), long-term care insurance and whole of life and term protection insurance. These contracts are expected to remain in force for an extended period of time, and insure events associated with human life.
One of the purposes of insurance is to enable policyholders to protect themselves against future uncertain events such as death or specific types of illness. Insurance companies accept the transfer of uncertainty from policyholders and seek to add value through the aggregation and management of these risks. As a consequence of this uncertainty, estimation techniques are employed by suitably qualified personnel in computing the levels of provisions held against such uncertainty.
The insurance liabilities, which are also referred to as the long-term business provision and policyholder reserves elsewhere in this report, are determined by the Partnership Board on the advice of the Group's Chief Actuary on the modified statutory basis using recognised actuarial methods with due regard to the actuarial principles set out in the PRA's Insurance Prudential Sourcebook. In particular, a prospective gross premium valuation method has been adopted for major classes of business.
Although the process for the establishment of insurance liabilities follows specified rules and guidelines, the provisions that result from the process remain uncertain. As a consequence of this uncertainty, the eventual value of claims could vary from the amounts provided to cover future claims. The Group seeks to provide for appropriate levels of contract liabilities taking known facts and experiences into account but nevertheless such provisions remain uncertain.
The estimation process used in determining insurance liabilities involves projecting future annuity payments and the costs of maintaining the contracts. For non-annuity contracts, the long-term business provision is determined as the sum of the discounted value of future benefit payments and future administration expenses less the expected value of premiums payable under the contract. The key sensitivities are the assumed level of interest rates and the mortality experience.
At the balance sheet date, provision is made for all notified claims plus an estimate for those claims that have been incurred but not reported. The principal assumptions underlying the calculation of insurance liabilities are set out in note 20.
Long-term business is ceded to reinsurers under contracts to transfer part or all of one or more of the following risks: mortality, morbidity, investment, persistency and expenses. The benefits to which the Group are entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within ''Insurance and other receivables'') as well as longer term receivables that are dependent on the expected benefits arising under the related reinsured contracts.
Amounts recoverable from reinsurers are estimated in a consistent manner with insurance liabilities, and are classified as ''Reinsurance assets''.
Some contracts, which provide for the transfer of significant risk, are also structured to provide financing. When, under such contracts, financing components are to be repaid in future accounting periods, the amount outstanding under the contract at the balance sheet date are classified as ''Payables arising from reinsurance contracts'' and included within insurance and other payables in the Consolidated Statement of Financial Position.
If the reinsurance asset were impaired, the Group would adjust the carrying amount accordingly and recognise that impairment loss in the Consolidated Statement of Comprehensive Income. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
At the end of each reporting period, liability adequacy tests are performed to ensure the adequacy of the insurance liabilities. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is immediately charged to the Consolidated Statement of Comprehensive Income.
Maturity claims and annuities are charged against revenue when due for payment. Death claims and all other claims are accounted for when notified. Claims reinsurance recoveries are accounted for in the same period as the related claim. Where reinsurance treaties are recaptured, amounts received to compensate for the transfer of risk from the reinsurer are accounted for when received or, if earlier, on the date the treaty ceases to be included within the calculation of the reinsurers' share of long-term business provision.
| £000's | £000's | |
|---|---|---|
| Long term business provision | 5,424,843 | 5,231,112 |
| Reinsurers' share of long term business provision |
(3,204,055) | (3,246,008) |
| Net provision |
2,220,788 | 1,985,104 |
The principal assumptions underlying the calculation of the long-term business provision are as follows:
| Mortality tables | Valuation discount rates |
||
|---|---|---|---|
| Medically underwritten annuity products |
2015 | Modified E&W Population Mortality with improvements based on CMI_2014_M (1.75%) and CMI_2014_F (1.50%) |
3.88% |
| 2014 | Modified E&W Population Mortality with improvements based on CMI_2013_M (1.75%) and CMI_2013_F (1.50%) |
3.53% | |
| Other annuity products | 2015 | Modified PCMA/PCFAOO bespoke improvements |
1.68% |
| 2014 | Modified PCMA/PCFA00 bespoke improvements |
1.35% | |
| Term and whole of life products | 2015 | 86.25% TM/TF00Select | 1.15% |
| 2014 | 86.25% TM/TF00Select | 1.00% |
Valuation discount rate assumptions are set with regards to yields on supporting assets. An allowance for risk is included by making an explicit deduction from the yields on debt and other fixed income securities based on historical default experience and expected experience of each asset class. The allowance for credit risk has been set at 43% (31 December 2014: 42%) of the spread on the yield of the corporate bonds over the yield on gilts
The changes in the valuation discount rates at each period end reflect changes in yields on the supporting assets and changes made to the allowance for risk.
The mortality tables used have been adjusted to reflect additional mortality based on the proprietary data held by the Group developed from actual experience incurred. The valuation basis used to calculate the long-term business provisions includes an allowance for future expenses.
Movements in the carrying amount of insurance liabilities and reinsurance assets are explained as follows:
| For the year ended 31 December 2015 | Gross | Reinsurance | Net |
|---|---|---|---|
| £000's | £000's | £000's | |
| At 1 January 2015 | 5,231,112 | (3,246,008) | 1,985,104 |
| Increase in liability from new business |
613,687 | (149,631) | 464,056 |
| Release of in-force liability | (166,449) | 107,560 | (58,889) |
| Release of liability due to recorded deaths | (80,311) | 39,467 | (40,844) |
| Economic changes | (195,491) | 113,394 | (82,097) |
| Non-economic changes |
521 | — | 521 |
| Other | 21,774 | (68,837) | (47,063) |
| At 31 December 2015 | 5,424,843 | (3,204,055) | 2,220,788 |
| For the year ended 31 December 2014 | Gross | Reinsurance | Net |
| £000's | £000's | £000's | |
| At 1 January 2014 | 4,347,588 | (2,840,749) | 1,506,839 |
| Increase in liability from new business |
692,005 | (266,845) | 425,160 |
| Release of in-force liability | (130,286) | 87,709 | (42,577) |
| Release of liability due to recorded deaths | (67,743) | 31,799 | (35,944) |
| Economic changes | 332,956 | (211,434) | 121,522 |
| Non-economic changes . |
912 | — | 912 |
| Other | 55,680 | (46,488) | 9,192 |
| At 31 December 2014 | 5,231,112 | (3,246,008) | 1,985,104 |
The following table analyses insurance liabilities and reinsurance assets by duration.
| less than one year |
one to five years |
five to ten years |
more than ten years |
Carrying value (discounted) |
|---|---|---|---|---|
| £000's | £000's | £000's | £000's | £000's |
| 432,711 | 1,592,748 | 1,715,036 | 4,603,886 | 5,424,843 |
| (266,774) | (993,084) | (1,071,279) | (2,612,022) | (3,204,055) |
| 165,937 | 599,664 | 643,757 | 1,991,864 | 2,220,788 |
| less than one year |
one to five years |
five to ten years |
more than ten years |
Carrying value (discounted) |
| £000's | £000's | £000's | £000's | £000's |
| 411,885 | 1,510,716 | 1,624,201 | 4,367,492 | 5,231,112 |
| (258,539) | (966,479) | (1,053,161) | (2,699,933) | (3,246,008) |
| 153,346 | 544,237 | 571,040 | 1,667,559 | 1,985,104 |
| Expected cash flows (undiscounted) Expected cash flows (undiscounted) |
Life insurance results are inherently uncertain due to actual experience being different to modelled assumptions. Sensitivity analysis is provided below to illustrate the impact of changes in key assumptions.
| Sensitivity factor | Description of sensitivity factor applied |
|---|---|
| Interest rate & investment return |
The impact of a change in the market interest rates by +/ 1% (e.g. if a current interest rate is 5%, the impact of an immediate change to 4% and 6% respectively). The test allows consistently for similar changes to investment returns and movements in the market backing fixed interest securities. |
| Credit spreads |
The impact of credit spreads widening by 50bps with a corresponding pro-rated change to defaults. |
| Expenses | The impact of an increase in maintenance expenses by 10%. |
| Mortality rates | The impact of a decrease in mortality rates by 5%. |
| Property values | The impact of an immediate decrease in the value of properties by 10%. The test allows for the impact on the annuity liabilities arising from any change in yield on the loans secured by residential mortgages and loans secured by commercial mortgages used to back the liabilities. |
| Voluntary redemptions |
The impact of an increase in voluntary redemption rates on loans secured by residential mortgages by 10%. The test allows for the impact on the annuity liabilities arising from any change in yield on the loans secured by residential mortgages that are used to back the liabilities. |
The table below demonstrates the effect of a change in a key assumption whilst other assumptions remain unchanged. In reality, such an occurrence is unlikely due to correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The sensitivity analyses do not take into consideration that the Group's assets and liabilities are actively managed and may vary at the time that any actual market movement occurs.
| Increase / (decrease) in profit before tax |
||
|---|---|---|
| Change in assumption: | 2015 | 2014 |
| £000's | £000's | |
| Interest rates +1% |
(6,805) | 2,866 |
| Interest rates 1% |
35,537 | (5,993) |
| Credit spreads +0.5% |
(22,267) | (11,621) |
| Expenses +10% | (10,126) | (10,906) |
| Mortality 5% |
(34,314) | (32,027) |
| Property Prices 10% |
(42,252) | (38,583) |
| Voluntary redemptions +10% | (5,861) | (6,412) |
For the year ended 31 December 2015
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Payables arising from insurance contracts | 3,872 | 4,774 |
| Payables arising from reinsurance contracts | 610 | 3,159 |
| Other creditors and accruals | 42,890 | 21,594 |
| Total insurance and other payables | 47,372 | 29,527 |
The Directors consider that the carrying value of insurance and other payables in the balance sheet is a reasonable approximation of the fair value.
As well as derivative financial liabilities, the Group carries financial liabilities where assets under specific reinsurance treaties are legally and physically deposited back to the Group by reinsurers. Financial liabilities are initially recognised at fair value on the same date that the value of underlying deposited assets is recognised and are subsequently remeasured at fair value at each balance sheet date. The resulting gain or loss is recognised in the Consolidated Statement of Comprehensive Income. The net gain or loss recognised incorporates any interest paid on the financial liability. Fair value is determined as the amount payable discounted from the first date that the amount is required to be paid.
A financial liability (including subordinated debt and external borrowings) is generally derecognised when the contract that gives rise to it, is settled, sold, cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange of modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in the Consolidated Statement of Comprehensive Income.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Deposits from reinsurers |
2,506,378 | 2,491,795 |
| Derivative liabilities | 54,912 | 79,493 |
| Total financial liabilities | 2,561,290 | 2,571,288 |
Payables arising from reinsurance contracts at fair value through profit and loss are designated as such on initial recognition. Derivative liabilities are carried at fair value through profit and loss.
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Other taxes and social security costs | 3,957 | 3,735 |
| Total current tax liabilities | 3,957 | 3,735 |
During the period the Group issued a £100m bond and applied the following policy to the resulting liability: External borrowings are recorded at the proceeds received, net of direct issue costs. Issue costs are capitalised and charged to the consolidated statement of comprehensive income over the life of the loan using the effective interest method. Interest payable is accounted for on an accruals basis in the consolidated statement of comprehensive income. Gains and losses on the repurchase, settlement or otherwise cancellation of external borrowings are recognised respectively in the income and interest expenses and charges.
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| External Borrowings | 107,257 | — |
| Total External borrowings | 107,257 | — |
The Group issued a £100m Solvency II Tier 2 qualifying debt instrument at par in March 2015 with a maturity date of March 2025 and a coupon of 9.5%. Net of issuance fees the amount received was £99,910,000.
The Group uses various derivative financial instruments to manage its exposure to interest rates, counterparty credit risk, inflation and foreign exchange risk, including foreign exchange forward contracts, interest rate swaps, credit default swaps and inflation swaps, cross currency interest rate swap, and swaptions.
| At 31 December 2015 | Asset fair value |
Liability fair value |
Notional amount |
|---|---|---|---|
| £000's | £000's | £000's | |
| Forward currency positions |
359 | 6,278 | 192,794 |
| Interest rate swaps |
9,827 | 14,734 | 1,373,765 |
| Inflation swaps | 790 | 19,626 | 515,490 |
| Credit default swaps | 3,166 | — | 37,146 |
| Cross currency interest rate swaps | — | 11,138 | 371,577 |
| Interest rate futures |
— | 3,136 | 6 |
| Swaptions | 86 | — | 592,325 |
| Total derivative financial instruments |
14,228 | 54,912 | 3,083,103 |
| At 31 December 2014 | Asset fair value |
Liability fair value |
Notional amount |
| £000's | £000's | £000's | |
| Forward currency positions |
7,335 | 1,615 | 553,106 |
| Interest rate swaps |
66,651 | 62,030 | 1,119,400 |
| Inflation swaps | 309 | 15,848 | 414,646 |
| Credit default swaps | 1,597 | — | 38,104 |
| Total derivative financial instruments | 75,892 | 79,493 | 2,125,256 |
All over-the-counter derivative transactions are conducted under standardised ISDA (International Swaps and Derivatives Association Inc) master agreements and the Group has collateral agreements between the individual group entities and relevant counterparties in place under each of these master agreements.
At 31 December 2015, the Group had pledged £34.6m (2014: £29.8m) and held collateral of £6.7m (2014: £19.0m) in respect of outstanding over-the-counter derivative positions.
For the year ended 31 December 2015
All financial instruments, with the exception of external borrowings, are classified at fair value through profit and loss. In accordance with IFRS 13 Fair Value Measurement, financial instruments at fair value have been classified into three categories:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); or
Level 3: Inputs for the assets or liabilities that are not based on observable market data (that is, unobservable inputs)
An analysis of financial assets and liabilities held at fair value in accordance with the fair value hierarchy is set out below. All these financial assets and liabilities relate to recurring fair value measurements. There are no non-recurring fair value measurements as at 31 December 2015 and 31 December 2014.
| At 31 December 2015 | Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Financial investments (a) | £000's 3,371,858 |
£000's — |
£000's 92 |
£000's 3,371,950 |
| Loans secured by residential mortgages (b) | — | — | 1,434,788 | 1,434,788 |
| Derivative assets (c) | — | 14,228 | — | 14,228 |
| Loans secured by commercial mortgages (d) | — | — | 65,617 | 65,617 |
| Total financial assets held at fair value | 3,371,858 | 14,228 | 1,500,497 | 4,886,583 |
| Deposits from reinsurers (e) | — | — | 2,506,378 | 2,506,378 |
| Derivative liabilities (c) | — | 54,912 | — | 54,912 |
| Total financial liabilities held at fair value | — | 54,912 | 2,506,378 | 2,561,290 |
| At 31 December 2014 | Level 1 | Level 2 | Level 3 | Total |
| £000's | £000's | £000's | £000's | |
| Financial investments (a) | 3,583,183 | — | 1,637 | 3,584,820 |
| Loans secured by residential mortgages (b) | — | — | 1,212,324 | 1,212,324 |
| Derivative assets (c) | — | 75,892 | — | 75,892 |
| Loans secured by commercial mortgages (d) | — | — | 37,868 | 37,868 |
| Total financial assets held at fair value |
3,583,183 | 75,892 | 1,251,829 | 4,910,904 |
| Deposits from reinsurers (e) | — | — | 2,491,795 | 2,491,795 |
| Derivative liabilities (c) | — | 79,493 | — | 79,493 |
| Total financial liabilities held at fair value | — | 79,493 | 2,491,795 | 2,571,288 |
The Group's policy is to recognise transfers into and transfers out of levels 1, 2 and 3 as of the date at which the Consolidated Statement of Financial Position is prepared.
There have been no transfers between levels 1, 2 and 3 in 2015.
For the year ended 31 December 2015
The table below reconciles the opening and closing recorded amount of level 3 financial liabilities and financial assets which are stated at fair value.
| For the year ended 31 December 2015 | Deposits from reinsurers |
Loans secured by commercial mortgages |
CTF Investments |
Loans secured by residential mortgages |
|---|---|---|---|---|
| £000's | £000's | £000's | £000's | |
| At 1 January 2015 | (2,491,795) | 37,868 | 1,637 | 1,212,324 |
| Loans (received)/ advanced |
(217,586) | 31,415 | — | 219,160 |
| Total (losses)/ gains in Consolidated Statement of | ||||
| Comprehensive Income |
(70,189) | (1,356) | 79 | (215) |
| Redemptions made/ (received) | 366,377 | (3,905) | (1,624) | (57,567) |
| (Interest payable accrued)/ interest receivable accrued . | (93,185) | 1,595 | — | 61,086 |
| At 31 December 2015 | (2,506,378) | 65,617 | 92 | 1,434,788 |
| For the year ended 31 December 2014 | Deposits from reinsurers |
Loans secured by commercial mortgages |
CTF Investments |
Loans secured by residential mortgages |
| £000's | £000's | £000's | £000's | |
| At 1 January 2014 | (2,182,350) | — | 11,568 | 840,066 |
| Loans (received)/ advanced |
(307,959) | 37,480 | 6,321 | 232,519 |
| Total (losses)/ gains in Consolidated Statement of | ||||
| Comprehensive Income |
(139,376) | 263 | (884) | 185,634 |
| Redemptions made/ (received) | 229,082 | — | (16,386) | (51,273) |
| (Interest payable accrued)/ interest receivable accrued . | (91,192) | 125 | 1,018 | 5,378 |
| At 31 December 2014 | (2,491,795) | 37,868 | 1,637 | 1,212,324 |
The gains and losses are included within net investment income in the Consolidated Statement of Comprehensive Income.
The unrealised gains/(losses) in respect of deposits from reinsurers, loans secured by commercial mortgages, commodity trade finance investments and loans secured by residential mortgages for the period to 31 December 2015 are £(70.2)m (2014: £(139.4)m), £(1.4)m (2014: £0.3m) and £0.1m (2014: £(0.9)m) and £(0.2)m (2014: £185.6m) respectively. These unrealised gains and losses are included within net investment income in the Consolidated Statement of Comprehensive Income.
| Impact of alternative assumption | ||||||
|---|---|---|---|---|---|---|
| At 31 December 2015 | Significant assumption |
Current fair value |
Increase in fair value |
Decrease in fair value |
||
| £000's | £000's | £000's | ||||
| Assets | ||||||
| Loans secured by commercial mortgages | Discount rate | 65,617 | 3,881 | (3,582) | ||
| Loans secured by residential mortgages | Discount rate | 1,434,788 | 182,255 | (153,479) | ||
| Liabilities | ||||||
| Deposits from reinsurers |
Discount rate | (2,506,378) | (223,056) | 190,339 |
| At 31 December 2014 | Current fair value |
Increase in fair value |
Decrease in fair value |
|
|---|---|---|---|---|
| £000's | £000's | £000's | ||
| Assets | ||||
| CTF Investments | Expected defaults | 1,637 | 289 | (353) |
| Loans secured by commercial mortgages | Discount rate | 37,868 | 2,744 | (2,501) |
| Loans secured by residential mortgages | Discount rate | 1,212,324 | 156,367 | (132,186) |
| Liabilities | ||||
| Deposits from reinsurers |
Discount rate | (2,491,795) | (220,538) | 192,268 |
The impact of reasonably possible alternative assumptions are estimated by modelling alternative scenarios for the key assumptions for each valuation model.
All financial investments are designated at fair value through profit and loss. All financial investments excluding commodity trade finance (CTF) are listed.
In assessing the fair value of the debt securities and other fixed income securities, the Directors have relied upon values provided by an independent third party which specialises in providing such values to companies. The third party provides prices based upon quoted market prices, or where not available, modelled prices using observable market inputs. At 31 December 2015 and 31 December 2014, 100% of the values provided were based on quoted market prices that are observable for the asset or liability.
Due to the short-term nature of the CTF loans, the fair value of these instruments is estimated as the principal amount borrowed plus accrued interest from the date of acquisition, adjusted for incurred and expected defaults. These CTF loans are considered to be Level 3 within the valuation category prescribed by IFRS 13 as the inputs to the fair value calculation are not based on observable market data, and includes the Group's own assumptions.
The change in the fair value of level 3 financial instruments from period to period is analysed into loans advanced, loans repaid/ redemptions, and interest accrued, with the remaining balance representing fair value measurement gains and losses recognised in the Statement of Comprehensive Income.
Interest rate: The interest rate used in estimating the fair value of the CTF Funds as at 31 December 2015 was nil% p.a. (31 December 2014: nil%).
The fair value recognised in the financial statements for loans secured by residential mortgages is determined using a marked to model valuation technique where a significant proportion of inputs are not based on observable market data and so these assets are considered to be Level 3 within the valuation category prescribed by IFRS 13.
The valuation model discounts the expected future cash flows using an interest rate swap curve with an additional spread or yield factor minus the cost of the no-negative equity guarantee. The no-negative equity guarantee represents an embedded guarantee that the repayment of the loan cannot exceed the value of the property at the time of repayment.
Although such valuations are sensitive to various estimates, it is considered that only the discount rate and no-negative equity guarantee assumptions would have significant impact on the fair value.
Discount rate: Loans secured by residential mortgages are valued using the swap rate appropriate to the term of each contract with adjustment to reflect the credit and liquidity risk associated with such long-dated contracts. The risk adjusted swap rate for the portfolio weighted by average value at 31 December 2015 was 5.10% (31 December 2014: 5.05%).
For the year ended 31 December 2015
No-negative equity guarantee: The fair value of loans secured by residential mortgages takes into account an explicit provision in respect of the no-negative equity guarantee which is calculated using a variant of the Black Scholes option pricing model. The key assumptions used to derive the value of the no-negative equity guarantee include property growth, volatility and over-valuation. The property growth and volatility assumed at 31 December 2015 were 5.5% (31 December 2014: 5.5%) and 13% (31 December 2014: 13%) respectively. The over-valuation assumption used as at 31 December 2015 was 28% (31 December 2014: 27.4%). The value of the no-negative equity guarantee as at 31 December 2015 was £128.7m (31 December 2014: £112.5m).
The valuation technique that the Group uses to assess the fair value of loans secured by mortgages is consistent with that used to derive the prices applied at the initial transaction. As such, there is no difference between the fair value of loans secured by equity release mortgages at initial recognition and the amount that would have been determined at that date using the valuation technique.
The estimated fair value of derivative instruments reflects the estimated amount the Group would receive or pay in an arm's length transaction. All the derivatives held at 31 December 2015 and 31 December 2014 were purchased over-the-counter.
The Group's derivative assets and liabilities include forward currency positions, interest rate swaps, inflation swaps, credit default swaps, cross currency, interest rate futures and swaptions.
Forward currency positions: Forward currency exchange contracts are priced from independent third parties.
Interest rate swaps: The fair value of the interest rate swaps is derived from an interest rate swap pricing model. Inputs to the model are the characteristics of the swap and market rates such as SONIA, LIBOR, FRA rates and interest rate swap rates. The choice of which rates to use and how to combine them is dependent on the characteristics of the swap, and on the Credit Support Annex under which the swap is transacted. This data is used to calculate zero coupon interest rate swap curves. From this, forward curves are created to generate the future floating leg cash flows of the swap. The curves are also used to discount all fixed and derived future cash flows to create the fair value of the fixed and floating legs of the swaps.
Inflation swaps: The fair value of the inflation swaps is derived from an inflation swap pricing model. This uses a time series of historic inflation index levels, to create and inflation seasonality model, market zero coupon inflation swap rates, to create an inflation expectation curve, and a zero coupon interest rate swap curve, (see for Interest rate swap). The inflation swap pricing model generates the future cash flows for the inflation legs of the swap and then discounts both fixed and floating legs to create the fair value of the fixed and floating legs of the swap.
Credit default swaps (CDS): The fair value of credit default swaps is derived using a CDS pricing model. Inputs to the model are the characteristics of the CDS and market rates such as EONIA, LIBOR, FRA rates, interest rate swap rates and CDS spreads. The choice of which rates to use and how to combine them is dependent of the characteristics of the CDS, and on the Credit Support Annex under which the CDS is transacted. This data is used to calculate the probability of default and zero coupon interest rate swap curves. From these expected future cash flows are calculated and then discounted to create the fair value of the CDS.
Fixed coupon cross currency swaps: The fair value of fixed coupon cross currency swaps is derived using a cross currency swap pricing model. Inputs to the model are the characteristics of the swap and market rates such as SONIA, Fed Funds, LIBOR, FRA's, interest rate swap rates, basis swap rates and FX rates. The choice of which rates to use and how to combine them is dependent on the characteristics of the swap, and on the Credit Support Annex under which the swap is transacted. The model calculates zero coupon interest rate and cross currency swap curves for each currency. These curves and FX rates are then used to discount all cash flows to create the fair value of the swap.
For the year ended 31 December 2015
Interest rate futures: The fair value of the futures is taken from the closing price from the relevant exchange.
Swaptions: The fair value of the swaptions is derived from a swaption pricing model. Inputs to the model are the characteristics of the swaption and market rates such as SONIA, LIBOR, FRA rates, interest rate swap rates and volatility and volatility skews. The choice of which rates to use and how to combine them is dependent on the type of swaption, and on the Credit Support Annex under which the swaption is transacted. The model calculated the fair value of the swaption using a sophisticated option pricing algorithm.
The fair value recognised in the financial statements for loans secured by commercial mortgages is determined using a marked to model valuation technique where a significant proportion of inputs are not based on observable market data and so these assets are considered to be Level 3 within the valuation category prescribed by IFRS 13.
The valuation model produces a series of projected future cash flows for each mortgage, based on a range of simulations of changes in property prices drawn from a distribution based on historic observed changes. Potential changes in property tenancy (e.g. tenant default, exercise of break clause or non-renewal of lease) are also modelled in a range of simulations. Risk adjusted cash flows are calculated as the average across the range of simulations.
The risk adjusted cash flows are discounted using a swap curve with an additional spread. The additional spread is the increase in swap discount rates required so that the initial discounted risk adjusted cash flows equal the initial purchase price. This uplift is reviewed if there is evidence that market has moved materially.
The discount rate and changes in property prices and tenancy are the most significant assumptions applied in calculating the fair value of the loans.
The fair value recognised in the financial statements is determined using a marked to model valuation technique where not all inputs are based on observable market data and so these liabilities are considered to be Level 3 within the valuation category prescribed by IFRS 13.
The valuation model discounts the expected future cash flows using a discount rate derived from the assets hypothecated to back these liabilities at a product level.
As payables arising from reinsurance contracts do not have a single fixed maturity date it is not possible to determine an amount that would be contractually required to pay at maturity.
Discount rate: The key inputs to the derivation of the discount rate include market observable gross redemption yields, contractual investment expenses and an allowance for credit risk on a best estimate basis. The discount rates used as at 31 December 2015 for Individual retirement and Individual care annuities were 4.43% and 1.67% respectively (31 December 2014: 4.16% and 1.67% respectively).
For the year ended 31 December 2015
| For the year ended 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| (Loss)/ profit from continuing operations before tax |
(16,448) | 24,067 |
| Depreciation of property, plant and equipment | 3,274 | 3,238 |
| Amortisation of intangible assets |
3,194 | 3,275 |
| Assets written off | 270 | 971 |
| Investment in associate—Eldercare | (21) | (27) |
| Reclassification of subsidiary to associate |
— | (94) |
| Share of loss of joint venture | — | 206 |
| Profit of subsidiary before disposal | — | 2 |
| Share based payment charge | 3,144 | 1,223 |
| Interest on External borrowings | 7,347 | — |
| Decrease/ (increase) in financial assets | 24,321 | (900,635) |
| (Decrease)/ increase in financial liabilities | (9,998) | 356,547 |
| Decrease/ (increase) in reinsurance assets | 41,953 | (405,259) |
| (Increase) /decrease in insurance and other receivables excluding Corporation Ta | (44,386) | 42,557 |
| Increase in prepayments and accrued income |
135 | 7,376 |
| Increase in insurance liabilities | 193,731 | 883,524 |
| Increase/ (decrease) in insurance and other payables | 17,845 | (4,477) |
| Increase/ (decrease) in other taxes and social security payables | 222 | (830) |
| Cash generated from operations | 224,569 | 11,664 |
Details of the amounts payable for the year are included in 'Other pension costs', in note 6. No amounts are outstanding in respect of these contributions at the end of the year.
The Group is a Participating Employer for a money purchase group personal pension plan. The assets of the plan are held separately from those of the Group. The Group does not provide a final salary plan.
Financial assets arising from the payment of reinsurance premiums, less the repayment of claims, to certain reinsurers in relation to specific treaties are legally and physically deposited back with the Group. Although the funds are managed by the Group (as the Group controls the investment of the asset), no future benefits accrue to the Group as any returns on the deposits are paid to reinsurers. Consequently the deposits are not recognised as assets of the Group and the investment income they produce does not accrue to the Group.
In addition, the Group has trust agreements with two reinsurers (2014: two) whereby the assets are held in trust in order to fully fund the reinsurers' obligations under the reinsurance treaty. As the Group has no control over these funds and does not accrue any future benefit these funds are not recognised as assets of the Group.
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Deposits managed by the Group |
232,720 | 269,630 |
| Deposits held in trust |
279,640 | 279,619 |
| Total deposits received from reinsurers |
512,360 | 549,249 |
The Group issues contracts that accept insurance risk in return for a premium. In addition the Group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and policyholder liabilities. In particular, the key financial risk is that the proceeds from financial assets are not sufficient to fund the obligations arising from contracts with policyholders. The most important components of this financial risk are interest rate risk, credit risk, property risk and liquidity risk. The Group is not exposed to any equity price risk and to currency risk only to an immaterial extent.
Underwriting and pricing risk is the risk that insurance contracts will be written that are not within the Board's risk appetite, or that the premium charged for that business is not adequate to cover the risks borne by the Group.
The accurate pricing of non-standard annuities is dependent on the Group's assessment of the impact on prospective customers' longevity of various medical and lifestyle factors and an estimate of future investment yields and credit default.
The actual timing of deaths and investment income experience may be inconsistent with the assumptions and pricing models used in underwriting and setting prices for its products.
Reserving risk is the risk that the reserves have been calculated incorrectly, or the assumptions used in the calculations are inappropriate.
As the Group's insurance business is targeted at people with conditions affecting their life expectancy, or people seeking to fund domiciliary or residential care, the underwriting risk is managed through the use of highly trained, and qualified underwriting staff, together with detailed underwriting manuals designed to cover a large range of medical conditions.
Partnership has developed its own proprietary underwriting manuals for retirement annuity business and those seeking care funding, based on industry standard mortality tables modified to take account of experience data recorded by Partnership.
The assumptions used in the reserving for future policyholder payments are set based on available market and experience data, on the advice of Partnership's Chief Actuary. The assumptions are approved by the Board. The reserves are calculated using recognised actuarial methods with due regard to the actuarial principles set out in the PRA's sourcebooks, including appropriate levels of prudential margin against future adverse experience.
Insurance risk on the Group's annuity contracts arises through longevity risk and through the risk that operating factors, such as administration expenses, are worse than expected.
Insurance risk on the Group's protection policies arises through higher than expected mortality levels.
The Group's longevity and mortality experience is monitored on a regular basis and compared to the underlying assumptions used to reserve for future insurance payments. The exposure to longevity and mortality risk is reduced through the use of reinsurance.
Expense risk is managed through regular assessment and quarterly reforecasting of expenses incurred against budgets.
Interest rate risk arises from open positions in fixed and variable rate stock issued by government and corporate bodies that are exposed to general and specific market movements. The Group is exposed to the
market movements in interest rates to the extent that the asset value movement is different to the accompanying movement in the value of its insurance liabilities.
The difference between asset and liability movements can arise from both a change in the absolute level of interest rates, and from a change in the ''spread'' (that is the level of interest rates applying to an asset in excess of the risk-free interest rate).
The Group manages its interest rate risk within an asset liability management (ALM) framework that has been developed to achieve investment returns in excess of its obligations under insurance contracts. The principal technique of the ALM framework is to match assets to the liabilities arising from insurance contracts by reference to the type of benefits payable to policyholders.
The Group monitors interest rate risk by calculating the mean duration and cash flow profile of the investment portfolio and the liabilities. The mean duration is an indicator of the sensitivity of the assets and insurance liabilities to changes in current interest rates but is not sufficient in isolation. The mean duration of the liabilities is determined by means of projecting expected cash flows from the contracts using best estimates of mortality and voluntary terminations. No future discretionary supplemental benefits are assumed to accrue. The mean duration of the assets is calculated in a consistent manner. Any gap between the mean duration of the assets and the mean duration of the liabilities is minimised by means of buying and selling fixed interest securities of different durations or purchasing interest rate swap derivatives to alter the effective mean duration of the assets. Periodically the cash flow matching is reviewed and rebalanced.
At 31 December 2015, the mean duration of the assets including surplus assets was 8.7 years (2014: 8.3 years) measured with reference to a gross redemption yield and the mean duration of the liabilities (including both retirement and care liabilities) was at 9.8 years (2014: 9.6 years) measured with reference to the valuation interest rate.
The Group has reinsurance arrangements in place which provide for fixed payments to the reinsurer over future periods. In assessing the fair value of this liability, the Directors have used a discount rate derived from current market yields earned on assets held to fund the future cash outflows, adjusted for the risk of default on those assets. No further adjustment to the discount rate to reflect any risk of the Group defaulting on those payments to the reinsurer was deemed appropriate.
Market credit risk is the risk that the Group invests in assets that may default.
If an asset fails to repay either interest or capital, or that payment is significantly delayed, the Group may make losses and be unable to meet liabilities as they fall due.
The Group's Investment Management Guidelines set out maximum exposure to bonds issued by a single, or related group of, counterparty(/ies) and to credit ratings. The allowance made for issuer default in the Group's valuation is regularly monitored and kept up to date.
At 31 December 2015, £6.7m of collateral (2014: £19.0m) had been pledged to the Group to mitigate the credit risk exposure associated with the derivative assets held at that time.
Counterparty credit risk arises if another party fails to honour its obligations to the Group including failure to honour these obligations in a timely manner.
The Group's primary counterparty credit risk exposure arises from the inability of the reinsurers to meet their claim payment obligations.
The Group has arrangements with its reinsurers whereby most reinsurance premiums are either deposited back to the Group or held by a third party in a trust arrangement.
In addition, the Group's reinsurance policy is to seek to choose companies with a minimum ''A'' credit rating.
The following table analyses the credit exposure of the Group by type of asset and includes the credit risk arising out of reinsurance exposures, based on the credit ratings of the reinsurer, as published by Standard & Poors, or an equivalent rating from another recognised rating agency. These principles continue to be the basis for IFRS reporting, though the new Solvency II regime works on a different basis for setting margins.
| Credit rating | ||||||
|---|---|---|---|---|---|---|
| At 31 December 2015 | AAA | AA | A | BBB | Unrated | Total |
| £000's | £000's | £000's | £000's | £000's | £000's | |
| Financial Investments |
684,384 | 344,871 | 955,680 | 1,353,382 | 33,633 | 3,371,950 |
| Derivative assets | — | — | — | — | 14,228 | 14,228 |
| Loans secured by residential | ||||||
| mortgages | — | — | — | — | 1,434,788 | 1,434,788 |
| Loans secured by commercial | ||||||
| mortgages | — | — | — | — | 65,617 | 65,617 |
| Reinsurance assets |
— | 1,242,972 | 1,961,083 | — | — | 3,204,055 |
| Insurance and other receivables | — | 6,072 | 3,808 | — | 80,502 | 90,382 |
| Total |
684,384 | 1,593,915 | 2,920,571 | 1,353,382 | 1,628,768 | 8,181,020 |
| AAA | AA | A | BBB | Unrated | Total |
|---|---|---|---|---|---|
| £000's | £000's | £000's | £000's | £000's | £000's |
| 3,584,820 | |||||
| 75,892 | |||||
| — | — | — | — | 1,212,324 | 1,212,324 |
| — | — | — | — | 37,868 | 37,868 |
| — | 1,290,232 | 1,955,776 | — | — | 3,246,008 |
| — | 17,761 | 4,761 | — | 16,645 | 39,167 |
| 815,605 | 1,542,764 | 3,211,641 | 1,280,870 | 1,345,199 | 8,196,079 |
| 815,605 — |
234,771 — |
1,251,104 — |
Credit rating 1,280,870 — |
2,470 75,892 |
No financial assets were past due at 31 December 2015 and 31 December 2014.
Liquidity risk arises where cash flows from investments and from new premiums prove insufficient to meet our obligations to policyholders and other third parties as they fall due.
The Group's Asset Liability Matching ('ALM') framework ensures that cash flows are sufficient to meet both long- and short-term liabilities.
The Group maintains a minimum level of cash and highly liquid assets such that, in the extreme scenario of new business cash flows being insufficient to meet current obligations, those obligations can continue to be met.
In accordance with PRA regulations, the Group's assets are reviewed to ensure they are of sufficient amount and of an appropriate currency and term to ensure that the cash inflows from those assets will meet the expected cash outflows from the Group's insurance and other financial liabilities.
In the following table expected cash outflows for:
• net insurance liabilities have been modelled with reference to underlying mortality and longevity assumptions;
The following table includes insurance and financial liabilities that are exposed to liquidity risk.
| Expected cashflows (undiscounted) | Carrying | ||||
|---|---|---|---|---|---|
| At 31 December 2015 | less than one year |
one to five years |
five to ten years |
more than ten years |
value (discounted) |
| £000's | £000's | £000's | £000's | £000's | |
| Net insurance liabilities | 165,937 | 599,664 | 643,757 | 1,991,864 | 2,220,788 |
| Deposits from reinsurers | 223,309 | 825,619 | 863,813 | 1,983,497 | 2,506,378 |
| Derivative liabilities | 4,220 | 30,957 | 26,813 | 64,432 | 54,912 |
| External borrowings | 9,500 | 38,000 | 147,500 | — | 107,257 |
| Total |
402,966 | 1,494,240 | 1,681,883 | 4,039,793 | 4,889,335 |
| Expected cashflows (undiscounted) | Carrying | ||||
|---|---|---|---|---|---|
| At 31 December 2014 | less than one year |
one to five years |
five to ten years |
more than ten years |
value (discounted) |
| £000's | £000's | £000's | £000's | £000's | |
| Net insurance liabilities | 153,346 | 544,237 | 571,040 | 1,667,559 | 1,985,104 |
| Deposits from reinsurers | 213,142 | 793,042 | 843,324 | 2,005,880 | 2,491,795 |
| Derivative liabilities | 13,523 | 37,602 | 10,603 | 34,097 | 79,493 |
| Total |
380,011 | 1,374,881 | 1,424,967 | 3,707,536 | 4,556,392 |
The maximum exposure to credit risk is equal to the balance sheet value of debt instruments / derivatives.
Property risk arises from the provision of a protected equity guarantee on the mortgages underlying the equity release assets purchased. The Group is exposed to the risk that property values do not rise sufficiently, or that the property is not maintained properly, to recover the full value of the loan made plus accrued interest.
The Group manages its purchase of loan assets to a level appropriate to its liability profile and ensures that the purchase prices of loan assets reflect a prudent assessment of future property price growth. Appropriate limits are applied to the ''loan to value ratio'' in order to limit the risk exposure to the Group. The Group seeks to avoid excess concentration of property holdings in any geographical area.
Property risk on commercial mortgages is the risk that property values decline or property tenancy changes such that the full value of the commercial mortgage loan is not recovered. The initial loan value is restricted to a maximum ''loan to value'' that limits its exposure for the Group.
Economic capital is the principal risk-based capital measure used by the Board. Economic capital is based on the Board's view of the available capital and required capital calibrated to a 1 in 200 stress.
The Group's capital consists of the equity attributable to the equity holders of the parent company. For the purposes of regulatory capital requirements, certain assets are restricted, or are inadmissible.
The Group manages its capital to ensure that all of the entities within the Group will be able to continue to operate as going concerns, remaining compliant with all regulatory capital requirements to which each is subject.
Up until 31 December 2015 'PLACL', the principal operating and only insurance company in the Group, is required to comply with minimum capital requirements calculated at the level of its EEA parent and ultimate parent company level as required by the PRA as set out in the Insurance Groups Directive, as well as its own single entity level as required by the PRA. PAG plc is both the EEA parent and ultimate parent company of PLACL. From 1 January 2016 the minimum capital requirement that apply at the 'PLACL' and 'PAG plc level have become those set out in the Solvency II regulation.
The table below provides a reconciliation between the available capital resources of the PAG plc Group, measured under IFRS, and the surplus over the regulatory capital requirement as is required to be measured under the Insurance Groups Directive. Any changes or release of capital from long-term funds is subject to there being an established surplus shown by an actuarial investigation.
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Total Equity of PAG plc Group | 640,818 | 604,690 |
| Adjustments in respect of regulatory capital basis: |
— | — |
| Tier 2 debt | 107,257 | — |
| Inadmissible intangible assets |
(12,220) | (15,219) |
| Inadmissible goodwill | (126,207) | (126,207) |
| Inadmissible deferred tax asset |
(938) | (519) |
| Equity and reserves related to non-regulated entities (excluded from regulatory | ||
| capital calculation), adjusted for inadmissible assets already adjusted above . |
(4,985) | 3,042 |
| Total available capital resources (IGD basis) | 603,725 | 465,787 |
| Group minimum capital requirement (IGD basis) | (232,578) | (224,127) |
| Surplus over regulatory capital requirement |
371,147 | 241,660 |
Movements in Equity are shown in the Consolidated Statement of Changes in Equity.
Throughout the year, each regulated subsidiary has maintained capital resources in excess of the minimum required by the PRA regulations and the EU directives.
The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly attributable to the issue of the ordinary shares are recognised in equity, net of tax.
| At 31 December 2015 | Number of shares |
Share Capital £000's |
Share Premium £000's |
|---|---|---|---|
| The allotted and issued Share Capital of PAG plc: | |||
| Shares subdivided into 500,000 ordinary shares of £0.10 each Shares issued for cash |
399,999,971 40,132,151 |
40,000 4,013 |
435,249 — |
| As at 31 December 2015, ordinary shares of £0.10 each | 440,132,122 | 44,013 | 435,249 |
| At 31 December 2014 | |||
| The allotted and issued Share Capital of PAG plc: | |||
| Shares subdivided into 500,000 ordinary shares of £0.10 each | 399,999,971 | 40,000 | 435,249 |
| As at 31 December 2014, ordinary shares of £0.10 each | 399,999,971 | 40,000 | 435,249 |
The ordinary share entitles the holder to dividends declared by the Board which are not cumulative. The ordinary share entitles the holder to one vote for every share held.
On 29 September 2015, an additional 39,995,997 shares were issued raising capital of £53,284,942 and a further 136,154 shares were issued during December 2015 to settle LTIP and DBSP awards.
For the year ended 31 December 2015
The Merger Reserve arose on 12 June 2013 as a result of the transfer of ordinary shares in PAG Holdings Limited to the Company in exchange for the allotment and issue of ordinary shares in the Company. This resulted in the creation of the Merger Reserve as a result of the Group electing to account for the acquisition of its 100% shareholding in PAGH as a Group reconstruction.
The Merger Relief Reserve arose on 29 September 2015, as a result of the shares issued on that date. The shares were used to acquire all the outstanding ordinary shares of a limited company thereby qualifying for Merger Relief under section 612 of the Companies Act 2006. That limited company was wound up immediately after the transaction.
Where an employee trust acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including attributable transaction costs, net of tax) is shown as a deduction from the owners' equity. Gains and losses on sales of shares held by the employee trust are charged or credited to the own shares account in equity.
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Employee benefit trust | (192) | (136) |
The Group has annual commitments in respect of non-cancellable operating leases as follows:
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Leases expiring not later than one year | 3,257 | 2,816 |
| Leases expiring between one and five years | 9,489 | 9,036 |
| Leases expiring in more than five years | 5,552 | 7,835 |
| Total lease commitments | 18,298 | 19,687 |
Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
During the period, the Group entered into transactions, in the ordinary course of business, with other related parties. Transactions entered into and balances outstanding at the end of each reporting date are detailed below.
Key management personnel consist of the directors of the Company. The remuneration of the Directors, who are the key management personnel of the Group, is set out below:
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
|---|---|---|
| Short-term employee benefits | 3,193 | 2,850 |
| Post-employment benefits | — | 16 |
| Total | 3,193 | 2,866 |
A number of directors who are defined as key management personnel of the Company held loans during the period. The loans owed to/by the Directors are detailed as follows:
| At 31 December | 2015 £000's |
2014 £000's |
|---|---|---|
| Amounts owed to directors: | ||
| Loan advances | 313 | 302 |
| Loans owed by Directors | 313 | 302 |
The loan advances to directors accrue interest fixed at 4% per annum and are repayable in whole or in part at any time.
The amounts accruing from the Directors in respect of loans are detailed below:
| At 31 December | 2015 | 2014 |
|---|---|---|
| £000's | £000's | |
| Interest accrued on Directors' loan advances | 12 | 12 |
| Interest accrued due from Directors |
12 | 12 |
During the year the Group entered into transactions with other entities controlled by Cinven Limited, associates and joint ventures as set out below. All transactions were on a commercial basis.
| 2015 £000's |
2014 £000's |
|
|---|---|---|
| Costs paid to entities related to the ultimate parent controlling party |
65 | 122 |
| Group's share of losses of joint venture investment |
— | 6 |
| Loans advanced to associate and fees on loans | 3 | 187 |
| Value of other related party transactions | 68 | 315 |
At 31 December 2015 there was no amount due or receivable from any entities related to the ultimate parent controlling party (2014: £nil).
Loans are regularly advanced to the Group's associate, Eldercare to provide short term prefunding for policy holder annuity purchases. At 31 December 2015, Eldercare owed the Group £184,000 (2014: £185,000).
Prior to 29 September 2015 the majority of the Company's ordinary shares were held by the partnerships comprising the Fourth Cinven Funds (the ''Cinven Funds''), being funds managed and advised by Cinven Limited, a company incorporated in the United Kingdom. After this point the Company did not have an Ultimate controlling party.
In our opinion:
The financial statements comprise the consolidated statement of comprehensive income, the consolidated and Parent Company statements of financial position, the consolidated and Parent Company cash flow statements, the consolidated statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
As required by the Listing Rules we have reviewed the Directors' statement that the Group is a going concern. We confirm that:
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's ability to continue as a going concern.
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team:
The Group predominantly writes enhanced We used our actuarial specialist auditors to test the annuities which it prices using its bespoke mortality controls over the end-to-end reserving process, data and internally generated intellectual property. focussing on the controls over changes to the The Group reserves for the future expected cost of reserving model and changes to the underlying these policies using complex actuarial models to demographic and economic assumptions.
The significance and inherent subjectivity of these benchmarks and by testing compliance with assumptions means that we view this as an area of regulations.
project the insurance liabilities. These models are We performed detailed substantive testing on the dependent on key assumptions made by data inputs to the model including checks on policy management in respect of the following: data via agreeing a sample back to original on the portfolio based on assumptions as to the assumptions had been input to the model mortality of the policyholders based on their accurately. In addition, we test the Group's controls
and Management have updated their mortality basis for of the portfolio of assets that back the assumptions, in addition to testing manual liabilities that is used to discount the expected provisions, the closure reserve, reinsurance cash flows, which also needs to reflect a reserves, allowance for counterparty default risk, deduction for the credit risk of the underlying allowance for cash flow and currency mis-matching assets. risk and statutory capital requirements. We used our actuarial specialist auditors to challenge Further detail on these principal assumptions can management's assumptions by considering the be found in note 20 to the financial statements. Group's own experience, comparison to industry
significant risk. An assessment on the overall results was made by reviewing the analysis of change in reserves over the period under audit.
The Group's investments include loans secured by We tested the new bulk transaction through residential mortgages (equity release assets). In Q4 reviewing the due diligence work performed by the 2014 the Group completed one bulk purchase deal Group, and then tested the whole portfolio by with a face value of £61m, bringing the total value challenging the valuation basis put forward
macroeconomic advice received. We also tested the The fair value of the investment is dependent on underlying data used in the valuation of the equity the valuation of the underlying properties and the release assets via agreement of a sample of loans assumptions used in the fair value calculation, such back to original policy documentation. as the property growth rate, property volatility, a revaluation index to revalue properties to the We assessed the underlying portfolio of assets for valuation date, swap rates, and mortality indicators of impairment by segmenting the assumptions. Note 25b to the financial statements portfolio geographically and using applicable provides further detail as to the methodology used regional property valuation indices to check for to calculate the fair value of these assets. signs of significant diminution in the value of
underlying property. The subjectivity of the key assumptions, coupled with the significance of the bulk transaction, means Our actuarial specialist auditors assessed
of the equity release book to £1.2bn. by management based on independent
that we view this as an area of significant risk. management's methodology and assumptions used to value the equity release assets via comparison to industry benchmarks, consultation with real estate specialists and consideration of whether the valuation was sensitive to the mortality assumption.
The Group holds a significant amount of goodwill Management's methodology for its impairment on its statement of financial position, in addition to assessment has been reviewed, comparing it to the intangible assets representing intellectual property. requirements of IAS 36 and checking for Further detail can be found in notes 10 and 11 to consistency with the prior year approach. Our the financial statements. procedures then included:
Goodwill and intangible assets have been identified • obtaining management's business plan and as a significant risk area due to the uncertainties considering the methodology behind its following the Chancellor's Budget announcement in production, as well as challenging the March 2014 surrounding rules on the use of assumptions on which it is based. This included pensions. A key parameter within the goodwill and challenging management's market projections intangible assets valuation is current and projected and scrutinising the underlying analysis for new business sales, which have become more evidence of bias;
There is also judgement over the allocation of liabilities had been allocated to the new assets and liabilities to the in-force and new business cash-generating unit; and
Individually underwritten bulk annuities are We have substantively tested 100% of the contracts becoming an increasingly important source of written by tracing the premiums to signed revenue for the Group, representing 32% of the quotations and agreeing the consideration received Group's gross written premium for 2014, including to bank accounts or custodian confirmations as a single premium of £206m. appropriate.
The significance of the individual transactions means that we see this as an area of significant risk.
Last year the risk relating to Defined Benefit transactions concerned the model used to calculate the reserves for Defined Benefit business, which does not form part of the risk this year because the model has become embedded into the established reporting process.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
We determined materiality for the Group to be £4.5m (2013: £4.2m), which is below 1% of net written premiums. We consider a turnover based measure to be the most suitable benchmark at this stage in Partnership Assurance Group plc's development as it drives one of the Group's key performance indicators and is a figure on which the users of the financial statements focus.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £86,000 (2013: £84,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Our Group audit has covered entities representing 100% of the Group's net assets, 100% of the Group's revenue and 100% of the Group's profit before tax (2013: 100% of net assets, revenue and profit before tax). The result of the Group is predominantly driven by a single trading company, Partnership Assurance Life Assurance Company Limited. All of the Group entities audited are based in the same location and were audited by the Group audit team and the Group engagement partner.
Our audit work was executed at levels of materiality applicable to each individual entity which were lower than Group materiality. Component materialities ranged from £0.03m to £4.28m (2013: £0.06m to £3.99m).
At the Parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances.
In our opinion:
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have nothing to report in respect of these matters.
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors' remuneration have not been made or the part of the Directors' Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters.
Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the Company's compliance with 10 provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Report is:
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the Directors' statement that they consider the Annual Report is fair, balanced and understandable and whether the Annual Report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.
As explained more fully in the Directors' Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and the Parent Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Paul Stephenson BA ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 2 March 2015
| Gross premiums written |
Note 1 |
2014 £000's 760,638 |
2013 £000's 1,159,562 |
|
|---|---|---|---|---|
| Outward reinsurance premiums | (307,959) | (733,849) | ||
| Net premiums earned | 452,679 | 425,713 | ||
| Net investment income Share of results of joint ventures and associates accounted for using the |
3 | 299,232 | 137,762 | |
| equity method | 14 | (179) | (162) | |
| Profit on loss of control of subsidiary Other income |
13 | 158 207 |
— 219 |
|
| Total income Gross claims paid |
752,097 (390,570) |
563,532 (341,124) |
||
| Reinsurers' share of claims paid Change in insurance liabilities: |
255,957 | 225,277 | ||
| Gross amount |
(883,524) | (624,290) | ||
| Reinsurers' share | 405,259 | 428,197 | ||
| Acquisition costs |
4 | (4,997) | (13,036) | |
| Investment expenses and charges | (14,352) | (13,270) | ||
| Interest on external borrowings | — | (25,403) | ||
| Other operating expenses | 5 | (95,803) | (117,223) | |
| Total claims and expenses | (728,030) | (480,871) | ||
| Profit from continuing operations before tax | 5 | 24,067 | 82,661 | |
| Income tax charge from continuing operations | 7 | (5,213) | (23,240) | |
| Profit for the year from continuing operations Profit/(loss) attributable to: |
18,854 | 59,421 | ||
| Owners of the Parent | 18,852 | 59,465 | ||
| Non-controlling interest |
2 | (44) | ||
| Profit for the period | 18,854 | 59,421 | ||
| Basic earnings per ordinary share | 8 | £ | 0.05 | £ 0.17 |
| Diluted earnings per ordinary share |
8 | £ | 0.05 | £ 0.17 |
| Note | Share Capital |
Share Premium |
Capital Redemption Reserve |
Proposed Merger Reserve |
Shares held by Employee Benefit Trust |
Retained profit |
Total | Non controlling interest |
Total |
|---|---|---|---|---|---|---|---|---|---|
| £000's | £000's | £000's | £000's | £000's | £000's | £000's | £000's | £000's | |
| 36 | 182 | 3,297 | — | (33) | 78,901 | 82,383 | (22) | 82,361 | |
| — | |||||||||
| 325,750 | |||||||||
| 125,725 | |||||||||
| (4,032) | |||||||||
| 9,324 | |||||||||
| — | — | — | — | — | 59,465 | 59,465 | (44) | 59,421 | |
| 40,000 | 435,249 | — | (24,521) | (58) | 147,945 | 598,615 | (66) | 598,549 | |
| 19 | 40,000 — |
435,249 — |
— — |
(24,521) — |
(58) (78) |
147,945 1,301 |
598,615 1,223 |
(66) — |
598,549 1,223 |
| — | — | — | — | — | — | — | 64 | 64 | |
| (14,000) | |||||||||
| — | — | — | — | — | 18,852 | 18,852 | 2 | 18,854 | |
| 40,000 | 435,249 | — | (24,521) | (136) | 154,098 | 604,690 | — | 604,690 | |
| 19 | 28,250 8,462 3,252 — — — |
317,288 121,993 — — |
(182) (3,297) — — (4,032) — — — |
(24,521) — — — — — |
(250) — (46) — 271 — |
Attributable to Owners of the Parent — — 526 — 9,053 |
— 325,750 125,725 (4,032) 9,324 (14,000) (14,000) |
— — — — — — |
| Note | 2014 £000's |
Restated 2013 £000's |
|
|---|---|---|---|
| Assets | |||
| Property, plant and equipment |
9 | 12,557 | 15,459 |
| Goodwill | 10 | 126,207 | 126,207 |
| Other intangible assets | 11 | 15,219 | 16,401 |
| Financial assets . |
12 | 4,910,904 | 4,010,269 |
| Investment in joint ventures and associates | 14 | 233 | 206 |
| Reinsurance assets | 20 | 3,246,008 | 2,840,749 |
| Insurance and other receivables | 15 | 39,167 | 79,633 |
| Prepayments and accrued income . |
16 | 3,615 | 10,991 |
| Deferred tax asset . |
17 | 519 | 424 |
| Cash and cash equivalents | 18 | 87,251 | 112,741 |
| Total assets | 8,441,680 | 7,213,080 | |
| Equity | |||
| Share capital . |
31 | 40,000 | 40,000 |
| Share premium | 31 | 435,249 | 435,249 |
| Merger reserve | (24,521) | (24,521) | |
| Shares held by Employee Benefit Trust . |
31 | (136) | (58) |
| Retained profit | 154,098 | 147,945 | |
| Total equity attributable to owners of the Parent |
604,690 | 598,615 | |
| Non-controlling interest |
— | (66) | |
| Total equity | 604,690 | 598,549 | |
| Liabilities | |||
| Insurance liabilities | 20 | 5,231,112 | 4,347,588 |
| Insurance and other payables . |
21 | 29,527 | 34,004 |
| Financial liabilities | 22 | 2,571,288 | 2,214,741 |
| Current tax liabilities . |
23 | 3,735 | 18,198 |
| Deferred tax liability | 17 | 1,328 | — |
| Total liabilities | 7,836,990 | 6,614,531 | |
| Total equity and liabilities | 8,441,680 | 7,213,080 |
| Note | 2014 £000's |
2013 £000's |
|
|---|---|---|---|
| Cash generated from/(used in) operations Corporation tax paid |
26 | 11,664 (19,705) |
(56,851) (17,000) |
| Net cash used in operating activities Cash flows from investing activities: |
(8,041) | (73,851) | |
| Purchase of property, plant and equipment | 9 | (1,308) | (13,657) |
| Purchase of other intangible assets | 11 | (2,093) | (7,696) |
| Investment in associate . |
(48) | — | |
| Disposal of subsidiary |
— | — | |
| Net cash used in investing activities | (3,449) | (21,353) | |
| Cash flows from financing activities: | |||
| Proceeds from issuance of share capital . |
31 | — | 121,693 |
| Repayment of loan notes | — | (7,656) | |
| Repayment of bank loan |
— | (70,000) | |
| Dividends paid to shareholders | (14,000) | — | |
| Interest payable on external borrowings |
— | (2,365) | |
| Net cash (used in)/from financing activities |
(14,000) | 41,672 | |
| Net (decrease)/increase in cash and cash equivalents | (25,490) | (53,532) | |
| Cash and cash equivalents brought forward | 112,741 | 166,273 | |
| Cash and cash equivalents carried forward | 18 | 87,251 | 112,741 |
Cash flows related to the sale and purchase of financial investments are included in operating cash flows as they are associated with the origination of insurance contracts and payment of insurance claims.
The operating segments reflect the level within the Group at which key strategic and resource allocation decisions are made and the way in which operating performance is reported internally to the chief operating decision makers in the Group, being the Group Board.
Information is provided to the Board which identifies operating profit segmented between: that achieved on new business written in the period; that which derives from in-force policies; and that relating to the long-term expected return on surplus assets. This split forms the reportable operating segments in accordance with IFRS 8 ''Operating Segments''.
New business revenue is reported as Single Premium Equivalent (SPE), being the actual single premium plus 10 times the annual regular premium for new contracts written during the year. These revenue measures are monitored by the Board separately for each core target market.
The table below shows operating profit for each year, together with a reconciliation to profit before tax:
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| New business operating profit |
38,962 | 85,678 |
| In-force operating profit |
8,477 | 34,278 |
| Long-term expected return on surplus assets | 16,328 | 11,435 |
| Operating profit | 63,767 | 131,391 |
| Investment variances | (23,491) | 8,643 |
| Non-recurring expenditure | (16,348) | (30,769) |
| Other | 139 | (1,201) |
| Interest on borrowings | — | (25,403) |
| Profit from continuing operations before tax | 24,067 | 82,661 |
Investment variances reflect:
Non-recurring expenditure primarily relates to:
In addition, non-recurring non cash items were recognised, comprising £6.0m impairment of sales infrastructure in and a further £2.5m of IT development costs, which are being amortised over a 5 year period (2013: £nil).
2013 non-recurring expenditure also included £15.8m expenses in respect of the Group's restructure and IPO and £9.8m in respect of the Group's staff share option which vested as a result of the IPO.
Other gains/(losses) relate to the Group's interest in distribution subsidiaries and holding company expenses.
The profit measure used by the Board to monitor performance is operating profit before tax, analysed between new business operating profit, in-force operating profit and the long-term expected return on surplus assets.
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| % p.a. | % p.a. | |
| Cash | 0.5 | 0.5 |
| Gilts | 3.0 | 3.0 |
| Corporate bonds |
4.5 | 4.5 |
| Commodity trade finance | 10.0 | 10.0 |
| Loans secured by residential mortgages | 6.0 | n/a |
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Individual retirement annuities |
465,840 | 1,076,693 |
| Defined benefit buy-in/buy-out annuities |
246,573 | 82,923 |
| Individual care annuities | 75,741 | 65,854 |
| Individual protection policies | 3,083 | 3,389 |
| Total SPE |
791,237 | 1,228,859 |
Premiums are recognised in the accounting period in which an insurance contract commences, gross of any commission paid. Premiums which have been received and for which no contract is yet in-force are classified as payables arising from insurance contracts and are included within insurance and other payables in the consolidated statement of financial position. Where a contract has been issued but premiums have not yet been received, a debtor arising out of direct insurance operations is recognised for the expected premiums due. Reinsurance premiums and recoveries are accounted for in the accounting
period in accordance with the contractual terms of the reinsurance treaties. Premiums exclude any taxes or duties based on premiums.
New business revenue by target market reconciles to gross premiums written as follows:
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Total single premium equivalent |
791,237 | 1,228,859 |
| Adjustment in respect of regular premium business |
135 | (5) |
| Change in premiums receivable—not included in SPE |
(30,734) | (69,335) |
| Reinsurance premiums received | — | 43 |
| Gross premiums written | 760,638 | 1,159,562 |
Premiums are written at the point an insurance contract comes into force. For management purposes SPE is recorded when all funds have been received from the policyholder. Amounts due from policyholders for premiums not yet received is shown in note 15.
The following table illustrates revenue by product as required by IFRS 8 ''Operating Segments''. All revenues from external customers are predominantly derived from business originated in the UK, and as such no geographical information is disclosed.
The Board considers the Group's external customers to be the individual policyholders. As such, the Group is not reliant on any individual customer.
An analysis of gross premiums written by product is set out below:
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Individual retirement annuities |
435,106 | 1,007,359 |
| Defined benefit buy-in/buy-out annuities |
246,573 | 82,923 |
| Individual care annuities | 75,864 | 65,979 |
| Individual protection policies | 3,095 | 3,258 |
| Other |
— | 43 |
| Total gross premiums written | 760,638 | 1,159,562 |
Partnership Assurance Group plc (the Company) was incorporated in the United Kingdom and registered in England and Wales on 26 February 2013 as a public company limited by shares. The Company's registered office address is 5th Floor, 110 Bishopsgate, London, EC2N 4AY.
The principal activity of the Company is that of a holding company. The Company and the entities controlled by the Company (its subsidiaries) are collectively ''the Group''.
Note 29 to the financial statements sets out the Group's policies and procedures for managing insurance and financial risk, and note 30 sets out how the Group manages its capital resources.
These financial statements comprise the consolidated annual financial statements of the Group and the individual annual financial statements of the Company made up to 31 December 2014.
The results of subsidiaries acquired or disposed of during the period are included from or up to the effective date of acquisition or disposal. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. The Group has control over an
entity if all of the following conditions are met: (a) the Group has power over an entity; (b) the Group is exposed to, or has rights, to variable returns from its involvement with the entity; (c) the Group has the ability to use its power over the entity to affect its own returns.
The presentation currency of the Group is sterling. Unless otherwise stated, the amounts shown in the consolidated financial statements are in thousands of pounds sterling (£'000).
The consolidated financial statements and those of the Company have been prepared and approved by the Directors in accordance with IFRS as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Group has applied all IFRS standards and interpretations adopted by the EU effective for the year ended 31 December 2014.
The Directors have undertaken a going concern assessment in accordance with ''Going Concern and Liquidity Risk: Guidance for UK directors of UK Companies 2009'', published by the Financial Reporting Council in October 2009 as described in the Directors' Report.
Significant accounting policies applied to the preparation of these financial statements are presented in the designated boxes within the notes to the financial statements, aligning disclosure of accounting policies to the item which is most directly relevant to the policy.
The Group has adopted the following new standards and changes to existing standards which are relevant to the Group's operations, and became effective for financial years beginning on or after 1 January 2014:
• IAS 39 Financial Instruments: Recognition and measurement—An amendment to IAS 39 which clarifies the circumstances in which hedge accounting can be continued when derivatives are novated to a central counterparty. The application of the amendment has no impact on the financial statements in the current or comparative periods.
The following new or revised or amended standards, in issue, were not yet effective, or in some cases not yet endorsed by the EU. The Group has not early adopted any of these standards.
| Content/amendment | Applicable for annual financial periods beginning on or after |
|---|---|
| Financial Instruments | 1 January 2018 |
| IFRS 9 will replace IAS 39: ''Financial Instruments— Recognition and Measurement''. The impact of the adoption of IFRS 9 on the Group will depend on the finalisation of the standard and the interaction of the requirements of IFRS 9 with the IASB's on-going insurance contracts accounting project. The standard has not yet been endorsed by the EU. |
|
| Consolidated Financial Statements, Joint Arrangements, Investments in Associates and Joint Ventures |
1 January 2016 |
| Amendments regarding the sale of contribution of assets between an investor and its associate or joint venture and application of the consolidation exception. The amendments have not yet been endorsed by the EU. |
|
| Standard/ Interpretation |
Content/amendment | Applicable for annual financial periods beginning on or after |
|---|---|---|
| IFRS 14 | Regulatory Deferral Accounts | 1 January 2016 |
| The standard permits an entity which is a first-time adopter of IFRS to continue to account for ''regulatory deferral account balances'' in accordance with its previous GAAP. As the Group is not a first-time adopter of IFRS, the standard will have no impact on the Group. The standard has not yet been endorsed by the EU. |
||
| IFRS 15 | Revenue from Contracts with Customers | 1 January 2017 |
| IFRS 15 specifies how and when to recognise revenue, and requires additional disclosures. The standard provides a single, principles-based five-step model to be applied to contracts with customers. Insurance contracts and financial instruments are excluded from the scope of the standard. Therefore the amendments are not expected to have a material impact on the Group's profit before tax for the year or equity. The standard has not yet been endorsed by the EU. |
||
| IAS 16 | Property, Plant and Equipment | 1 January 2016 |
| Amendments regarding the clarification of acceptable methods of depreciation and amortisation and bringing bearer plants into the scope of IAS 16. The standard has not yet been endorsed by the EU. |
||
| IAS 19 | Employee Benefits | 1 July 2014 |
| Amendments clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. The amendments have been endorsed by the EU. |
||
| IAS 27 | Separate Financial Statements | 1 January 2016 |
| Amendments reinstating the equity method as an accounting option for investments in subsidiaries, joint ventures and associates in an entity's separate financial statements. The amendments have not yet been endorsed by the EU. |
||
| IAS 38 | Intangible Assets | 1 January 2016 |
| Amendments regarding the clarification of acceptable methods of depreciation and amortisation. The amendments have not yet been endorsed by the EU. |
||
| IAS 41 | Agriculture | 1 January 2016 |
| Amendments bringing bearer plants into the scope of IAS 16. The amendments have not yet been endorsed by the EU. |
| Standard/ Interpretation |
Content/amendment | Applicable for annual financial periods beginning on or after |
|---|---|---|
| IAS1 | Presentation of Financial Statements | 1 January 2016 |
| Amendments that provide additional clarity and explanations on the application of materiality and the presentation of accounting policies and disclosures in financial statements. The amendments have not yet been endorsed by the EU. |
||
| Annual Improvements 2010–2012 Cycle |
Amendments to a number of IFRS standards, clarifying guidance, wording or minor corrections. None of the proposed amendments are expected to have a material impact on the Group's profit before tax for the year or equity. |
1 July 2014 |
| The amendments have been endorsed by the EU. | ||
| Annual Improvements 2011–2013 Cycle |
Amendments to a number of IFRS standards, clarifying guidance, wording or minor corrections. None of the proposed amendments are expected to have a material impact on the Group's profit before tax for the year or equity. |
1 July 2014 |
| The amendments have been endorsed by the EU. | ||
| Annual Improvements 2012–2014 Cycle |
Amendments to a number of IFRS standards, clarifying guidance, wording or minor corrections. None of the proposed amendments are expected to have a material impact on the Group's profit before tax for the year or equity. |
1 January 2016 |
| The amendments have not yet been endorsed by the EU. |
Investment income comprises interest received on financial investments, realised investment gains and losses and movements in unrealised gains and losses. Expenses and charges are included on an accruals basis.
Realised gains and losses on investments are calculated as the difference between net sales proceeds less costs of sale and original cost. Unrealised gains and losses on investments represent the difference between the valuation at the balance sheet date and their purchase price or, if they have been previously valued, their valuation at the last balance sheet date. The movement in unrealised gains and losses recognised in the year also includes the reversal of unrealised gains and losses recognised in earlier accounting periods in respect of investment disposals in the current period.
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Interest receivable from financial assets | 152,519 | 138,533 |
| Interest payable on financial liabilities | (81,065) | (71,596) |
| Movement in fair value of financial assets | 365,915 | 26,616 |
| Movement in fair value of financial liabilities |
(176,573) | 17,382 |
| Realised gains on financial assets | 95,158 | 72,604 |
| Realised losses on financial liabilities |
(56,723) | (45,777) |
| Total net investment income | 299,232 | 137,762 |
All financial assets and liabilities at 31 December 2014 are classified at fair value through profit and loss.
Acquisition costs comprise direct costs such as commissions and indirect costs of obtaining and processing new business. They are allocated to particular categories of business based on available information. Acquisition costs are not deferred as they are largely recovered at policy inception through profit margins.
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Commission | 4,049 | 11,435 |
| Other acquisition expenses | 948 | 1,601 |
| Total acquisition costs | 4,997 | 13,036 |
Profit from continuing operations before tax is stated after charging the following items:
| For the year ended 31 December | Note | 2014 | 2013 |
|---|---|---|---|
| £000's | £000's | ||
| Staff costs, including Directors' remuneration | 6 | 40,760 | 41,052 |
| Depreciation of property, plant and equipment | 9 | 3,239 | 1,843 |
| Amortisation of intangible assets . |
11 | 3,275 | 1,997 |
| Rental of leased premises |
3,220 | 2,860 | |
| Other operating leases | 308 | 419 | |
| Auditor remuneration | 704 | 3,307 | |
| Share-based payment charges | 19 | 1,223 | 9,324 |
| Consultancy |
8,681 | 11,507 | |
| Legal and professional fees | 5,288 | 20,143 | |
| Marketing | 12,591 | 11,591 | |
| Other (primarily office maintenance and supplies) | 16,515 | 13,180 | |
| Total other operating expenses | 95,803 | 117,223 |
Included in the expenses above are £78.1m (2013: £83.9m) of Operating expenses that are included in the derivation of the Operating profit. A further £16.3m (2013: £30.8m) are reported as non-Recurring expenditure and the balance of £1.4m (2013: £2.5m) are included within other non-operating items.
The analysis of the auditor's remuneration for the year is as follows:
| Fees payable for the year ended 31 December were in respect of: | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| The audit of the Partnership Assurance Group plc Annual Report and Accounts | 94 | 85 |
| The audit of other Group entities | 192 | 336 |
| Audit related assurance services |
172 | 166 |
| Taxation compliance services | 118 | 44 |
| All other assurance services |
128 | — |
| Corporate finance transactions relating to the IPO in June 2013 | — | 2,676 |
| Auditor remuneration | 704 | 3,307 |
The aggregate staff costs, including Directors' remuneration in the year were:
| 2014 | 2013 |
|---|---|
| £000's | £000's |
| 34,202 | 33,839 |
| 4,494 | 5,528 |
| 2,064 | 1,685 |
| 40,760 | 41,052 |
| 444 | 430 |
| 73 | 109 |
| 517 | 539 |
An analysis of Directors' remuneration is included in the Remuneration Report.
Income tax comprises current and deferred tax. Income tax is charged or credited to other comprehensive income if it relates to items that are charged or credited to other comprehensive income. Similarly, income tax is charged or credited to equity if it relates to items that are credited or charged directly to equity. Otherwise income tax is recognised in the consolidated statement of comprehensive income.
Provision is made for taxation on taxable profits for the year, using tax rates enacted or substantially enacted at the balance sheet date together with adjustments to tax payable in respect of previous years.
Deferred tax is provided in full on temporary differences arising, which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on tax rates and laws enacted or substantively enacted at the balance sheet date. Temporary differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements except for differences arising from the initial recognition of goodwill and the initial recognition of assets and liabilities in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting nor taxable profit.
A deferred tax asset is recognised to the extent that it is regarded as more likely than not that it will be recovered. Deferred tax assets and liabilities are not discounted.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date. Deferred income tax assets and liabilities are offset only if: a legally enforceable right exists to set off current tax assets against current tax liabilities; the deferred income taxes relate to the same taxation authority; and that authority permits the Group to make a single net payment.***
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| Current taxation: | £000's | £000's |
| Tax charge for the year | 6,015 | 23,112 |
| Adjustment in respect of prior periods | (2,035) | 394 |
| 3,980 | 23,506 | |
| Deferred taxation: | ||
| Tax credit for the year | 1,233 | (266) |
| Net taxation charge |
5,213 | 23,240 |
The actual tax charge of the Group differs from the expected tax charge, computed by applying the average rate of UK corporation tax for the year of 21.5% (2013: 23.25%), as follows:
| For the year ended 31 December | 2014 £000's |
2013 £000's |
|---|---|---|
| Profit before tax | 24,067 | 82,661 |
| Current taxation at 21.5% (2013: 23.25%) | 5,173 | 19,216 |
| Disallowable expenses | 51 | 4,140 |
| Adjustments in respect of prior periods | (2,035) | 394 |
| Adjustments to deferred tax in respect of prior periods | 1,903 | (315) |
| Rate change impact | 55 | 15 |
| Non-qualifying depreciation |
106 | 66 |
| Share-based payment charge on which deferred tax not recognised | (40) | (276) |
| Net taxation charge |
5,213 | 23,240 |
Taxation was all from continuing operations in 2014 and 2013.
Basic earnings per share is calculated using the earnings attributable to ordinary equity holders of the Parent, divided by the weighted average number of ordinary shares in issue during the period.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares, including share options and awards.
Diluted earnings per share amounts are calculated by dividing the profit attributable to ordinary equity holders of the Parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive ordinary shares into ordinary shares.
The calculation of the basic and diluted earnings per share from continuing operations is based on the following data:
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Profit for the year |
18,854 | 59,421 |
| Less non-controlling interests |
(2) | 44 |
| Profit attributable to equity holders of the Parent Effect of dilutive potential ordinary shares: |
18,852 | 59,465 |
| Share options | — | — |
| Diluted profit attributable to equity holders of the Parent |
18,852 | 59,465 |
Prior to 12 June 2013 the top holding company in the Group was PAG Holdings Limited. All of PAG Holdings Limited's A, B and C shares (see note 31) were exchanged for Partnership Assurance Group plc shares on 12 June 2013. For the purpose of the earnings per share calculation, the weighted average
number of share shown below has been calculated as if the exchange of these PAG Holdings Limited shares had occurred at the beginning of the comparative period.
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| Number of shares |
Number of shares |
|
| Basic weighted average number of shares Effect of dilutive potential ordinary shares: |
399,870,568 | 346,138,910 |
| Share options | 2,780,521 | 1,276,243 |
| Diluted weighted average number of shares |
402,651,089 | 347,415,153 |
The options granted by the PAG Holdings Limited trust in respect of the ESOP scheme have a dilutive effect, up to the date of the IPO when these options vested.
As detailed in note 19, the Group implemented a number of new employee share-based plans following admission on the London Stock Exchange. The Share Incentive Plan (SIP) has a dilutive effect.
It is our current intention that the Long Term Incentive Plan (LTIP) and the share element of the Deferred Share Bonus Plan (DSBP) be settled by fresh issues of shares as the awards vest. The weighted average number of shares calculation above has been derived on the assumption that the vesting of shares in respect of the LTIP and DSBP awards will be settled by a fresh issue of shares when the awards vest and hence will be dilutive.
Assets are stated at cost less accumulated depreciation and impairment losses. Depreciation is calculated to write off the cost of tangible assets over their estimated useful life on a straight-line basis. The principal rates used for this purpose are as follows:
| Computer equipment | 33% |
|---|---|
| Fixtures and fittings . |
10% to 20% |
| Office re-fit | 10% to 50% |
| Computer equipment £000's |
Fixtures and fittings £000's |
Office refit costs £000's |
Total £000's |
|
|---|---|---|---|---|
| Cost at 1 January 2014 | 7,830 | 1,373 | 11,164 | 20,367 |
| Additions | 873 | 16 | 419 | 1,308 |
| Disposals | (22) | (893) | (358) | (1,273) |
| At 31 December 2014 | 8,681 | 496 | 11,225 | 20,402 |
| Accumulated depreciation at 1 January 2014 | 3,577 | 423 | 908 | 4,908 |
| Charge for the year |
2,037 | 31 | 1,171 | 3,239 |
| Disposals | (22) | — | (280) | (302) |
| At 31 December 2014 | 5,592 | 454 | 1,798 | 7,845 |
| Net book value: | ||||
| At 31 December 2013 | 4,253 | 950 | 10,256 | 15,459 |
| At 31 December 2014 | 3,089 | 42 | 9,427 | 12,557 |
Goodwill represents the excess of cost of acquisition over the fair value of the separable net assets of businesses acquired. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is allocated to each of the cash generating
units (CGU) that are expected to benefit from the combination. Goodwill is tested for impairment at least annually, or when circumstances or events indicate there may be uncertainty over this value. Impairment is determined by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Any impairment is recognised immediately in the consolidated statement of comprehensive income and is not subsequently reversed.
| 2014 | 2013 | |
|---|---|---|
| £000's | £000's | |
| At 1 January | 126,207 | 126,207 |
| At 31 December |
126,207 | 126,207 |
The goodwill arose on acquisition of the PLACL operations and the value represented the potential of this business to generate value from future sales. Therefore the goodwill is allocated to the new business cash-generating unit, the scope of which is identical to the ''new business'' operating segment described in note 1.
The carrying value of goodwill has been tested for impairment at the balance sheet date.
The impairment test compares the carrying value of the new business cash generating unit (including goodwill and intangible assets) to its recoverable amount. The recoverable amount of the CGU is the higher of fair value less costs to sell and value in use. The Group uses an estimate of value in use is the primary measure of the recoverable amount. The future cash flows from the CGU are estimated as the expected future profits for the CGU set out in the Group's business plan as determined by management for a period of five years from the balance sheet date. These plans reflect management's best estimate of future profits based on both historical experience and expected growth rates for the CGU. The underlying assumptions of these projections include market size and growth, market share, profit margins, customer numbers and mortality.
Expected future profits for the CGU are discounted using a risk adjusted discount rate. The risk adjusted discount rate is a combination of a risk-free rate and an allowance for risk estimated with reference to observable rates and factors applied to business of similar size and nature. A rate of 13.1% (2013: 10.0%) has been applied to discount cash flows to a present value.
No impairment has been recognised in 2014 or 2013.
Other intangible assets comprise intellectual property and software development costs.
The intellectual property asset comprising specific mortality tables derived from data collected over an extended period and are deemed to have an indefinite life. Consequently no amortisation is charged against its carrying value.
Development costs that are directly attributable to the design and testing of identifiable software products, controlled by the Group, are recognised as intangible assets when it can be demonstrated that it is technically feasible to complete the product so that it is available for use and will generate probable future economic benefits. Software development costs have a finite useful life and are amortised using the straight-line method over three to five years.
The carrying amounts of intangible assets with finite expected useful economic lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. A review for indicators of impairment is conducted annually. The carrying amounts of intangible assets with indefinite expected useful economic lives are tested for impairment at least annually, or when circumstances or events indicate there may be uncertainty over this value. An impairment loss is
For the year ended 31 December 2014
recognised in the Consolidated Statement of Comprehensive Income for the amount by which the asset's carrying amount exceeds its recoverable amount.
The recoverable amount of an asset is the greater of its net selling price (fair value less selling costs) and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit, or company of units, to which the asset belongs.
| 2014 £000's |
2013 £000's |
|
|---|---|---|
| Intellectual property cost and carrying amount: | ||
| At 1 January |
3,100 | 3,100 |
| At 31 December | 3,100 | 3,100 |
| Software development cost: | ||
| At 1 January |
17,805 | 11,750 |
| Additions at cost |
2,093 | 7,696 |
| Assets written off | — | (1,641) |
| At 31 December | 19,898 | 17,805 |
| Software development accumulated amortisation: | ||
| At 1 January |
4,504 | 2,507 |
| Charge for the year |
3,275 | 1,997 |
| At 31 December | 7,779 | 4,504 |
| Total intangible assets at 1 January | 16,401 | 12,343 |
| Total intangible assets at 31 December |
15,219 | 16,401 |
The value of intellectual property has been determined based upon an estimate of the costs to employ adequately skilled individuals over an appropriate period of time to develop intellectual property of a similar nature sufficient to enable the Group to replicate the estimated future cash flows and profits deriving from that intellectual property.
The intellectual property is continually updated through the collection of further data, updated analyses, and conversion into new and more detailed underwriting manuals and mortality tables. For this reason, the intangible asset is deemed to have an indefinite life, and consequently, no amortisation is provided against the value of the intangible asset. The carrying value of the intangible asset is tested for impairment at each reporting date, and is allocated to the ''new business'' cash-generating unit, the scope of which is identical to the ''new business'' operating segment described in note 1. The method and assumptions used in this test are identical to those applied in the goodwill impairment test, as set out in note 10.
No impairment of intellectual property has been recognised in 2013 or 2014.
The Group classifies its financial assets as financial investments, loans secured by residential mortgages, loans secured by commercial mortgages and derivative financial assets at fair value through profit and loss. The category of fair value through profit and loss has two sub-categories: those that meet the definition as being held for trading; and those that the Group chooses to designate as fair value. The fair value through profit and loss is selected as the Group's strategy is to manage its financial assets, as a portfolio, on a fair value basis.
For the year ended 31 December 2014
Purchases and sales of debt securities and other fixed income securities are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Transaction costs are expensed as incurred. These investments are derecognised when the contractual rights to receive cash flows from the investments expire, or where the investments have been transferred, together with substantially all the risks and rewards of ownership.
Debt securities and other fixed income securities are subsequently carried at fair value with changes in fair value included in the Consolidated Statement of Comprehensive Income in the period in which they arise.
The fair values of debt securities are based on quoted bid prices, or based on modelled prices (using observable market inputs) where quoted bid-prices are not available.
Commodity Trade Finance Investments, whether by way of a direct loan or an investment in a fund of such loans (CTF Investments), are carried at fair value on initial recognition and are recognised when the cash is advanced for the trade. CTF Investments are subsequently carried at fair value with changes in fair value included in the consolidated statement of comprehensive income in the period in which they arise. The fair value of these investments is not based on observable market data.
Loans secured by residential mortgages are recognised when the cash is advanced to borrowers at their fair values. These loans are derecognised when the contractual rights to receive cash flows from the investments expire, or where the investments have been transferred, together with substantially all the risks and rewards of ownership.
Loans secured by residential mortgages are subsequently carried at fair value with changes in fair value included in the consolidated statement of comprehensive income in the period in which they arise.
The fair value of loans secured by residential mortgages is initially deemed to be the transaction price and subsequently marked to model. The underlying model follows the methodology used to establish transaction prices. It uses longevity assumptions to derive expected cash flows and the Black-Scholes option pricing methodology to establish the value of the ''no negative equity guarantee'' (NNEG) that is embedded in the product. The discount rates that are applied to cash flows to produce fair value are based on long dated swaps adjusted so that they would produce transaction date prices on the date of transaction.
Loans secured by commercial mortgages are recognised when the cash is advanced to borrowers at their fair values. These loans are derecognised when the contractual rights to receive cash flows from the investments expire, or where the investments have been transferred, together with substantially all the risks and rewards of ownership.
Loans secured by commercial mortgages are subsequently carried at fair value with changes in fair value included in the consolidated statement of comprehensive income in the period in which they arise.
The fair value of loans secured by commercial mortgages is initially deemed to be the transaction price and subsequently marked to model. The valuation model produces a series of projected future cash flows for each mortgage, based on a range of simulations of changes in property prices drawn from a distribution based on historic observed changes. Potential changes in property tenancy are also modelled in a range of simulations. The discount rates that are applied to cash flows to produce the fair value are based on long dated swaps adjusted so that they would produce transaction date prices on the date of the transaction.
For the year ended 31 December 2014
The Group enters into a variety of derivative financial instruments to manage its exposure to interest rates, inflation, credit default and foreign exchange rate risk, including foreign exchange forward contracts, interest rate swaps, credit default swaps and inflations swaps.
Derivative contracts are traded either through an exchange or over-the-counter (OTC). OTC derivative contracts are individually negotiated between contracting parties and can include options, swaps, caps and floors.
Derivatives are initially recognised at fair value at the date that a derivative contract is entered into and are subsequently remeasured to fair value at each balance sheet date. The resulting gain or loss is recognised in the consolidated statement of comprehensive income. The fair values are obtained from quoted market prices or, if these are not available, by using standard valuation techniques based on discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair value is positive and liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset in the consolidated statement of financial position at the date of purchase representing their fair value at that date.
| Financial assets: Fair value at 31 December | 2014 | Restated(i) 2013 |
|---|---|---|
| £000's | £000's | |
| Financial investments | 3,584,820 | 3,133,790 |
| Loans secured by residential mortgages | 1,212,324 | 840,066 |
| Derivative assets |
75,892 | 36,413 |
| Loans secured by commercial mortgages | 37,868 | — |
| Total financial assets | 4,910,904 | 4,010,269 |
(i) See note 2.
The methodology used to derive the fair values is set out in note 25.
| £000's | £000's | |
|---|---|---|
| Financial investments | 3,298,543 | 2,991,196 |
| Loans secured by residential mortgages at cost |
950,909 | 796,788 |
| Derivative assets |
— | — |
| Loans secured by commercial mortgages at cost | 37,481 | — |
| Total financial assets | 4,286,933 | 3,787,984 |
Items included in the financial statement of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currency of each of the Group's material entities is sterling. The consolidated financial statements are presented in sterling, which is the Group's presentation currency.
Assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the end of the financial period. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in net investment income in the consolidated statement of comprehensive income.
Set out below are the principal subsidiary and associate undertakings of Partnership Assurance Group plc. All of the companies are incorporated in the United Kingdom and registered in England and Wales unless otherwise indicated. The shares held are voting ordinary equity shares. A full list of subsidiary and joint venture undertakings will be annexed to the Partnership Assurance Group plc annual return filed at Companies House.
| Name: | Principal activity: | Holding |
|---|---|---|
| PAG Holdings Limited(i) |
Holding company | 100% |
| PAG Finance Limited(i) | Holding company | 100% |
| Partnership Holdings Limited | Holding company | 100% |
| Partnership Group Holdings Limited | Holding company | 100% |
| Partnership Life Assurance Company Limited |
Life assurance and pension annuities | 100% |
| Partnership Home Loans Limited | Provision of lifetime mortgage products | 100% |
| Partnership Services Limited |
Service company | 100% |
| Payingforcare Limited | Website | 100% |
| PASPV Limited | Investment activity | 100% |
| Partnership Life US Company(ii) | Management services | 100% |
| Eldercare Group Limited(iii) | Independent financial advisers | 33% |
(i) Incorporated in Jersey (now dormant).
(ii) Incorporated in the USA.
(iii) Associate.
Partnership Assurance Group plc directly or indirectly holds 100% of the ordinary shares and voting rights in the entities listed above (with the exception of Eldercare Group Limited), therefore Partnership Assurance Group plc controls these entities as subsidiaries.
On 6 February 2014 the Group's subsidiary, Eldercare Group Limited (Eldercare), entered into a transaction to acquire Care Fee Investment Limited, an independent financial adviser in exchange for the issue of ordinary shares. As part of the transaction the Group made a capital contribution to Eldercare of £48,345. As a result of this transaction the Group's holding in Eldercare represented a smaller proportion of the enlarged Eldercare group, decreasing to 33% of its ordinary shares. Eldercare therefore ceased to be a subsidiary and became an associate of the Group. The Group's interest in the associate was initially measured at £206,000, representing its fair value on the date of the transaction. As a result of the transaction a gain of £157,509 arose, representing the difference between the fair value of the Group's interest in the associate and the prior carrying value of the Group's share of the subsidiary, less the capital contribution and attributable costs.
During 2014 the Group completed a review of the operations of Gateway Specialist Advice Services Limited (Gateway), and wrote down to £nil the value of its joint venture investment in Gateway and wrote down to £nil the value of its loans to Gateway (see note 8). A £334,000 charge for the write down of the value of loans is included in Operating expenses and a £206,000 charge for the write down of the investment is included in Share of result of joint venture and associates accounted for using the equity method in the Statement of Comprehensive Income. On 29 August 2014 the Group disposed of its investment in Gateway to Sesame Limited for consideration of £1, resulting in a profit on disposal of £1 recognised in the Share of results in joint ventures and associates using the equity method in the Statement of Total Comprehensive Income.
For the year ended 31 December 2014
The Group's regulated insurance entity, Partnership Assurance Life Assurance Company Limited, is subject to UK solvency requirements which may, in the event of a breach of those requirements, affect that entity's ability to transfer funds in the form of cash dividends to other entities in the Group. The net assets of Partnership Assurance Life Assurance Company Limited at the balance sheet date are £459.0m (2013: £415.5m). There are no protective rights of non-controlling interests which significantly restrict the Group's ability to access or use the assets and settle the liabilities of the Group.
The Group uses the equity method to consolidate its investments in joint ventures and associates. Under the equity method of accounting the investment is initially recognised at fair value and adjusted thereafter for the post-acquisition change in the Group's share of net assets of the joint venture.
| £000's | £000's | |
|---|---|---|
| At 1 January |
— | — |
| Fair value on initial recognition | 206 | — |
| Share of profit from continuing operations | 27 | — |
| At 31 December | 233 | — |
| Joint ventures | 2014 | 2013 |
| £000's | £000's | |
| At 1 January |
206 | 368 |
| Impairment of joint venture |
(206) | (162) |
| At 31 December | — | 206 |
In the year the Group entered into a transaction that changed its holding in Eldercare from a subsidiary to an associate and also disposed of its joint venture investment in Gateway. Details of both of these transactions are included in note 13.
There were no profits or losses arising from discontinued operations in joint ventures or associates in 2014 or 2013. There were no items of other comprehensive income in joint ventures or associates in 2014 or 2013.
Insurance and reinsurance debtors represent amounts receivable after commencement of the contract which has not been settled at the balance sheet date.
| As at 31 December | 2014 | Restated(i) 2013 |
|---|---|---|
| £000's | £000's | |
| Debtors arising out of insurance contracts(ii) |
11,135 | 51,140 |
| Debtors arising out of reinsurance contracts |
22,522 | 24,196 |
| Other debtors | 3,266 | 4,008 |
| Corporation tax receivable | 2,091 | — |
| Amounts due from associate |
153 | — |
| Amounts due from joint venture | — | 289 |
| Total insurance and other receivables | 39,167 | 79,633 |
(i) See note 2.
(ii) Includes £9.7m in respect of premiums written for which funds have not yet been received from the policyholder (2013: £51.1m).
For the year ended 31 December 2014
The Directors consider that the carrying value of insurance and other receivables in the balance sheet is a reasonable approximation of the fair value.
Interest accrued represents the balance receivable for interest income, calculated daily based on the contractual interest rates of the relevant instruments, recognised since the last interest payment date.
| As at 31 December | Restated(i) 2013 |
|
|---|---|---|
| £000's | £000's | |
| Accrued interest | 32 | 11 |
| Prepayments | 3,583 | 10,980 |
| Total prepayments and accrued income |
3,615 | 10,991 |
(i) See note 2.
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| At 1 January |
424 | 158 |
| (Debit)/credit to consolidated statement of comprehensive income | (1,233) | 266 |
| Deferred tax asset at 31 December |
519 | 424 |
| Deferred tax liability at 31 December | (1,328) | — |
The deferred tax asset is recognised as a result of the difference between: the accumulated depreciation and the capital allowances claimed on property, plant and equipment and the accumulated share based payment charges and a more current estimation of the likely cost of schemes that have not yet vested based on a revaluation at the balance sheet date. The recoverability of deferred tax assets have been considered with regard to the future taxable profits expected in management plans. The deferred tax liability is recognised as a result of the difference between the accumulated amortisation and research and development claims relating to software development costs. The UK corporation tax rate that is expected to be appropriate when each of these timing differences arise is 20% (2013: 20%).
Cash and cash equivalents comprise cash in hand, deposits held on call with banks and other short-term highly liquid investments with original maturities of 90 days or less. Bank overdrafts are included in cash and cash equivalents for the purposes of the consolidated cash flow statement.
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Short-term bank deposits |
56,159 | 94,723 |
| Cash at bank and in hand | 31,092 | 18,018 |
| Total cash and cash equivalents |
87,251 | 112,741 |
Equity-settled share-based payments to employees and others providing services are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. The fair value determined at the grant date of the equity-settled share-based payments
is expensed on a straight-line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest.
At each period end, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in the consolidated statement of comprehensive income such that the cumulative expense reflects the revised estimate with a corresponding adjustment to equity.
Where the terms and conditions of options are modified before they vest, the increase in the fair value of those instruments, measured immediately before and after the modification, is also charged to the consolidated statement of comprehensive income over the remaining vesting period.
The share-based payment expense recognised for employee services receivable during the year is as follows:
| For the year ended 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Employee Share Option Plan | — | 8,378 |
| Long Term Incentive Plan |
863 | 432 |
| Deferred Share Bonus Plan | 273 | 374 |
| Share Incentive Plan |
92 | 65 |
| Save As You Earn Plan | (5) | 75 |
| Total expense |
1,223 | 9,324 |
In 2009, the Group implemented an Employee Share Option Plan (ESOP) to retain and motivate its employees. Following admission on the London Stock Exchange on 12 June 2013, all the awards under the ESOP vested in full and were exercised immediately. There were no outstanding options under the ESOP as at 31 December 2014 or 31 December 2013.
| 2014 | 2013 | |
|---|---|---|
| Number of Awards |
Number of Awards |
|
| Outstanding at the beginning of the year | 1,280,414 | — |
| Granted during the year | 4,745,589 | 1,294,740 |
| Forfeited during the year | (294,492) | (14,326) |
| Outstanding at the end of the year | 5,731,511 | 1,280,414 |
The Group made awards under the LTIP to Executive Directors and other senior executives in May 2014 (2014 LTIP) and June 2013 (2013 LTIP). The LTIP awards will be subject to the satisfaction of the following performance conditions which will determine the proportion (if any) of the LTIP award to vest at the end of the performance period.
50% of the 2013 LTIP awards are subject to a performance condition relating to the growth in the Group's operating profit over a performance period of three financial years. If operating profit for the financial year ending 31 December 2015 exceeds operating profit for the financial year ending 31 December 2012 by 33.1%, 10% of the 2013 LTIP award will vest. The maximum 50% will vest if operating profit for the financial year ending 31 December 2015 exceeds operating profit for the financial year ending 31 December 2012 by at least 64.3%. Payment will be on a sliding scale in between these points.
The remaining 50% of the 2013 LTIP awards and all of the 2014 LTIP will be subject to a condition measuring the Company's total shareholder return (TSR) performance relative to the constituent
companies of the FTSE 250 index (excluding investment trusts, mining companies and oil and gas producers), over the period from admission to 31 December 2015, in respect of the 2013 LTIP, and over the period from 22 May 2014 to 22 May 2017 in respect of the 2014 LTIP. Vesting of 10% of the 2013 LTIP award and 20% of the 2014 LTIP award will occur for median performance and the maximum vesting (50% for the 2013 LTIP and 100% for the 2014 LTIP) at upper quartile performance or above, with the proportion vesting between these points calculated on a straight-line basis.
The awards are accounted for as equity-settled schemes. The fair value of these schemes is calculated at each award date based upon the number of shares expected to vest and the expense charge is recognised over the course of the vesting period.
A charge of £862,718 (2013: £431,848) has been recognised in the consolidated statement of comprehensive income with a corresponding increase in equity in the consolidated statement of financial position. The weighted average fair value of awards made in the year was £0.74.
The fair value of the award was measured with reference to the quoted share price of Partnership Assurance Group plc at the measurement date. The performance condition relating to total shareholder return was incorporated into the measure of fair value through stochastic models incorporating the historical TSR volatility of the Group and other comparable listed entities. The performance condition relating to operating profit performance and other non-market vesting conditions are incorporated into the estimate of the total number of awards expected to vest. This expectation is reviewed and if necessary, revised at each reporting date.
During the period the Group reviewed the stochastic model used to incorporate the performance condition into the fair value of the LTIP awards. Resulting corrections to the working of the model resulted in an increase in the value of the 2013 LTIP award recognised. This correction has resulted in an increase in the charge recognised during the period of £194,000.
The weighted average exercise price of all awards under the LTIP is £nil.
Effective from June 2013, one-third of the bonuses earned by Executive Directors and certain other senior executives in respect of the Company's annual bonus arrangements are deferred into shares in Partnership Assurance Group plc. The remaining two-thirds of the awards will continue to be paid in cash. The share element of the bonus awards will vest on the third anniversary of the date of the determination of the bonus in respect of which they were granted.
The share element of these bonus awards are accounted for as equity-settled schemes. The fair value of these awards are calculated at each award date based on one-third of the estimated annual bonus payout and the expense charge is recognised over the course of the service period to which the bonus relates and the vesting period.
A charge of £272,545 (2013: £374,072) has been recognised in the consolidated statement of comprehensive income in respect of these schemes for the year to 31 December 2014 with a corresponding increase in equity in the consolidated statement of financial position. 946,134 awards were made in the period. 46,606 awards were forfeit during the period and 899,528 awards were outstanding at the end of the period. The weighted average exercise price of the awards is £nil.
The weighted average fair value of awards made during the year was £1.25. The fair value of the award was measured with reference to the quoted share price of Partnership Assurance Group plc at the measurement date. Non-market vesting conditions are incorporated into the estimate of the total number of awards expected to vest. This expectation is reviewed and, if necessary, revised at each reporting date.
For the year ended 31 December 2014
| 2014 | 2013 | |
|---|---|---|
| Number of Awards |
Number of Awards |
|
| Outstanding at the beginning of the year | 119,340 | — |
| Granted during the year | 2,911 | 131,300 |
| Forfeited during the year | (34,408) | (11,960) |
| Outstanding at the end of the year | 87,843 | 119,340 |
In 2013 the Company made a one-off award of £1,000 of free shares immediately after admission to all eligible employees under a new all-employee share plan, known as the Share Incentive Plan (SIP). These shares will be forfeited if the employees cease employment (except in ''good leaver'' circumstances) within the first three years from the date of the award. Awards made under this plan entitle these employees to:
These awards are accounted for as equity-settled schemes. The fair value of these schemes is calculated at each award date based upon the number of shares awarded multiplied by the share price at grant date and expensed over the vesting period. The weighted average exercise price of the awards is £nil.
A charge of £92,430 (2013: £65,277) has been recognised in the consolidated statement of comprehensive income in respect of this scheme for the year to 31 December 2014 with a corresponding increase in equity in the consolidated statement of financial position.
Further awards have been made in the year to 31 December 2014, reflecting additional shares to scheme participants on payment on dividends by the Group, subject to the same conditions as the original award. The weighted average fair value of awards made in the year was £1.31. The fair value of the award was measured with reference to the quoted share price of Partnership Assurance Group plc at the measurement date. Non-market vesting conditions are incorporated into the estimate of the total number of awards expected to vest. The expectation is reviewed and, if necessary, revised at each reporting date.
| 2014 | 2013 | 2014 | 2013 | |
|---|---|---|---|---|
| Number of Awards |
Number of Awards |
Weighted average of exercise price £ |
Weighted average of exercise price £ |
|
| Outstanding at the beginning of the year |
465,761 | — | 3.57 | 0.00 |
| Granted during the year |
1,536,051 | 508,261 | 0.94 | 3.57 |
| Forfeited during the year | (441,250) | (42,500) | 3.21 | 3.57 |
| Outstanding at the end of the year |
1,560,562 | 465,761 | 1.08 | 3.57 |
In July 2013, the Group introduced a SAYE scheme. Under this plan, employees may elect to save up to £500 per month over a three- or five-year period. The amount of ordinary shares of Partnership Assurance Group plc over which the option is granted will be determined at the grant date to reflect the amount that each employee has agreed to save under the Share Save contract. Awards were granted under the scheme to member employees in July 2013 and November 2014.
A credit of £4,954 (2013 charge of £74,734) has been recognised in the Consolidated Statement of Comprehensive Income in respect of this scheme for the year to 31 December 2014 with a corresponding
For the year ended 31 December 2014
decrease in equity in the consolidated statement of financial position, reflecting an increase in the lapse assumption applied to the 2013 award as a result of lapse experience during the period exceeding previous expectations.
The fair value of the awards made in the year has been determined using a Black-Scholes valuation model. Key assumptions within this valuation model were: expected share price volatility (41.8%), expected dividend yield (1%), risk-free interest rate (1.7%), expected option life (three years and five years), exercise price (£0.94) and share price at the measurement date (£1.17).
Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event would cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire.
The Group's long-term insurance contracts include annuities to fund retirement income, annuities to fund care fees (immediate needs and deferred), long-term care insurance and whole of life and term protection insurance. These contracts are expected to remain in force for an extended period of time, and insure events associated with human life.
One of the purposes of insurance is to enable policyholders to protect themselves against future uncertain events such as death or specific types of illness. Insurance companies accept the transfer of uncertainty from policyholders and seek to add value through the aggregation and management of these risks. As a consequence of this uncertainty, estimation techniques are employed by suitably qualified personnel in computing the levels of provisions held against such uncertainty.
The insurance liabilities, which are also referred to as the long-term business provision and policyholder reserves elsewhere in this report, are determined by the Partnership Assurance Board on the advice of the Group's Actuarial Function Holder on the modified statutory basis using recognised actuarial methods with due regard to the actuarial principles set out in the PRA's (formerly the FSA's) Insurance Prudential Sourcebook. In particular, a prospective gross premium valuation method has been adopted for major classes of business.
Although the process for the establishment of insurance liabilities follows specified rules and guidelines, the provisions that result from the process remain uncertain. As a consequence of this uncertainty, the eventual value of claims could vary from the amounts provided to cover future claims. The Group seeks to provide for appropriate levels of contract liabilities taking known facts and experiences into account but nevertheless such provisions remain uncertain.
The estimation process used in determining insurance liabilities involves projecting future annuity payments and the costs of maintaining the contracts. For non-annuity contracts, the long-term business provision is determined as the sum of the discounted value of future benefit payments and future administration expenses less the expected value of premiums payable under the contract. The key sensitivities are the assumed level of interest rates and the mortality experience.
At the balance sheet date, provision is made for all notified claims plus an estimate for those claims that have been incurred but not reported. The principal assumptions underlying the calculation of insurance liabilities are set out in note 20.
Long-term business is ceded to reinsurers under contracts to transfer part or all of one or more of the following risks: mortality, morbidity, investment, persistency and expenses. The benefits to which the Group are entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within ''Insurance and other receivables'') as
For the year ended 31 December 2014
well as longer-term receivables that are dependent on the expected benefits arising under the related reinsured contracts.
Amounts recoverable from reinsurers are estimated in a consistent manner with insurance liabilities, and are classified as ''Reinsurance assets''.
Some contracts, which provide for the transfer of significant risk, are also structured to provide financing. When, under such contracts, financing components are to be repaid in future accounting periods, the amount outstanding under the contract at the balance sheet date are classified as ''Payables arising from reinsurance contracts'' and included within insurance and other payables in the consolidated statement of financial position.
If the reinsurance asset were impaired, the Group would adjust the carrying amount accordingly and recognise that impairment loss in the consolidated statement of comprehensive income. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
At the end of each reporting period, liability adequacy tests are performed to ensure the adequacy of the insurance liabilities. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is immediately charged to the consolidated statement of comprehensive income.
Maturity claims and annuities are charged against revenue when due for payment. Death claims and all other claims are accounted for when notified. Claims reinsurance recoveries are accounted for in the same period as the related claim. Where reinsurance treaties are recaptured, amounts received to compensate for the transfer of risk from the reinsurer are accounted for when received or, if earlier, on the date the treaty ceases to be included within the calculation of the reinsurers' share of long-term business provision.
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Long-term business provision | 5,231,112 | 4,347,588 |
| Reinsurers' share of long-term business provision |
(3,246,008) | (2,840,749) |
| Net provision |
1,985,104 | 1,506,839 |
The principal assumptions underlying the calculation of the long-term business provision are as follows:
| Mortality tables | Valuation discount rates |
|
|---|---|---|
| 2014 | 3.53% | |
| 2013 | 4.31% | |
| 2014 | 1.35% | |
| 2013 | 1.70% | |
| 2014 | 1.00% | |
| 2013 | 86.25% TM/TF00Select | 1.44% |
| Modified E&W Population Mortality with CMI 2013m (1.25%) and CMI 2013f (1.00%) Modified E&W Population Mortality with CMI 2012m (1.75%) and CMI 2012f (1.50%) Modified PCMA/PCFA00u bespoke Modified PCMA/PCFA00u bespoke 86.25% TM/TF00Select |
Valuation discount rate assumptions are set with regards to yields on supporting assets. An allowance for risk is included by making an explicit deduction from the yields on debt and other fixed income securities based on historical default experience and expected experience of each asset class. The allowance for credit risk has been set at 42% (31 December 2013: 47%) of the spread on the yield of the corporate bonds over the yield on gilts.
The changes in the valuation discount rates at each period end reflect changes in yields on the supporting assets and changes made to the allowance for risk.
The mortality tables used have been adjusted to reflect additional mortality based on the proprietary data held by the Group developed from actual experience incurred. The valuation basis used to calculate the long-term business provisions includes an allowance for future expenses.
Movements in the carrying amount of insurance liabilities and reinsurance assets are explained as follows:
| For the year ended 31 December 2014 | Gross £000's |
Reinsurance £000's |
Net £000's |
|---|---|---|---|
| At 1 January 2014 | 4,347,588 | (2,840,749) | 1,506,839 |
| Increase in liability from new business |
692,005 | (266,845) | 425,160 |
| Release of in-force liability | (130,286) | 87,709 | (42,577) |
| Release of liability due to recorded deaths | (67,743) | 31,799 | (35,944) |
| Economic changes | 332,956 | (211,434) | 121,522 |
| Non-economic changes |
912 | — | 912 |
| Other | 55,680 | (46,488) | 9,192 |
| At 31 December 2014 | 5,231,112 | (3,246,008) | 1,985,104 |
| For the year ended 31 December 2013 | Gross | Reinsurance | Net |
| £000's | £000's | £000's | |
| At 1 January 2013 | 3,723,298 | (2,412,551) | 1,310,747 |
| Increase in liability from new business |
1,038,011 | (678,827) | 359,184 |
| Release of in-force liability | (111,110) | 75,012 | (36,098) |
| Release of liability due to recorded deaths | (69,967) | 31,040 | (38,927) |
| Economic changes | (209,299) | 144,164 | (65,135) |
| Non-economic changes Other |
(25,847) 2,502 |
1,609 (1,196) |
(24,238) 1,306 |
The following table analyses insurance liabilities and reinsurance assets by duration.
| Expected cash flows (undiscounted) | ||||||
|---|---|---|---|---|---|---|
| At 31 December 2014 | less than one year |
one to five years |
five to ten years |
more than ten years |
Carrying value (discounted) |
|
| £000's | £000's | £000's | £000's | £000's | ||
| Long-term business provision | 411,885 | 1,510,716 | 1,624,201 | 4,367,492 | 5,231,112 | |
| Reinsurers' share of long-term business | ||||||
| provision | (258,539) | (966,479) | (1,053,161) | (2,699,933) | (3,246,008) | |
| Net | 153,346 | 544,237 | 571,040 | 1,667,559 | 1,985,104 |
| Expected cash flows (undiscounted) | ||||||
|---|---|---|---|---|---|---|
| At 31 December 2013 | less than one year |
one to five years |
five to more than ten years ten years |
Carrying value (discounted) |
||
| £000's | £000's | £000's | £000's | £000's | ||
| Long-term business provision |
373,419 | 1,360,968 | 1,450,164 | 3,829,024 | 4,347,588 | |
| Reinsurers' share of long-term business | ||||||
| provision | (241,692) | (903,711) | (985,311) | (2,544,018) | (2,840,749) | |
| Net | 131,727 | 457,257 | 464,853 | 1,285,006 | 1,506,839 |
Life insurance results are inherently uncertain due to actual experience being different to modelled assumptions. Sensitivity analysis is provided below to illustrate the impact of changes in key assumptions.
| Sensitivity factor | Description of sensitivity factor applied |
|---|---|
| Interest rate and investment return | The impact of a change in the market interest rates by +/ 1% (e.g. if a current interest rate is 5%, the impact of an immediate change to 4% and 6% respectively). The test allows consistently for similar changes to investment returns and movements in the market backing fixed interest securities. |
| Credit spreads |
The impact of credit spreads widening by 50bps with a corresponding pro-rated change to defaults. |
| Expenses | The impact of an increase in maintenance expenses by 10%. |
| Mortality rates | The impact of a decrease in mortality rates by 5%. |
| Property values | The impact of an immediate decrease in the value of properties by 10%. The test allows for the impact on the annuity liabilities arising from any change in yield on the loans secured by residential mortgages and loans secured by commercial mortgages used to back the liabilities. |
| Voluntary redemptions |
The impact of an increase in voluntary redemption rates on loans secured by residential mortgages by 10%. The test allows for the impact on the annuity liabilities arising from any change in yield on the loans secured by residential mortgages that are used to back the liabilities. |
The table below demonstrates the effect of a change in a key assumption whilst other assumptions remain unchanged. In reality, such an occurrence is unlikely due to correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The sensitivity analyses do not take into
consideration that the Group's assets and liabilities are actively managed and may vary at the time that any actual market movement occurs.
| Increase/(decrease) in profit before tax |
||
|---|---|---|
| Change in assumption: | 2014 | 2013 |
| £000's | £000's | |
| Interest rates +1% |
2,866 | 2,954 |
| Interest rates 1% |
(5,993) | (3,308) |
| Credit spreads +0.5% |
(11,621) | (10,917) |
| Expenses +10% | (10,906) | (9,962) |
| Mortality 5% |
(32,027) | (22,140) |
| Property prices 10% |
(38,583) | (25,313) |
| Voluntary redemptions +10% | (6,412) | (2,402) |
| As at 31 December | 2014 | Restated(i) 2013 |
|---|---|---|
| £000's | £000's | |
| Payables arising from insurance contracts |
4,774 | 9,639 |
| Payables arising from reinsurance contracts | 3,159 | 1,916 |
| Other creditors and accruals | 21,594 | 22,449 |
| Total insurance and other payables | 29,527 | 34,004 |
(i) See note 2.
The Directors consider that the carrying value of insurance and other payables in the balance sheet is a reasonable approximation of the fair value.
As well as derivative financial liabilities, the Group carries financial liabilities where assets under specific reinsurance treaties are legally and physically deposited back to the Group by reinsurers. Financial liabilities are initially recognised at fair value on the same date that the value of underlying deposited assets is recognised and are subsequently remeasured at fair value at each balance sheet date. The resulting gain or loss is recognised in the consolidated statement of comprehensive income. The net gain or loss recognised incorporates any interest paid on the financial liability. Fair value is determined as the amount payable discounted from the first date that the amount is required to be paid.
A financial liability (including subordinated debt and external borrowings) is generally derecognised when the contract that gives rise to it, is settled, sold, cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange of modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in the consolidated statement of comprehensive income.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.
| As at 31 December | 2014 | Restated(i) 2013 |
|---|---|---|
| £000's | £000's | |
| Deposits from reinsurers |
2,491,795 | 2,182,350 |
| Derivative liabilities | 79,493 | 32,391 |
| Total financial liabilities | 2,571,288 | 2,214,741 |
Payables arising from reinsurance contracts at fair value through profit and loss are designated as such on initial recognition. Derivative liabilities are carried at fair value through profit and loss.
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Corporation tax payable | — | 13,633 |
| Other taxes and social security costs | 3,735 | 4,565 |
| Total current tax liabilities | 3,735 | 18,198 |
The Group uses various derivative financial instruments to manage its exposure to interest rates, counterparty credit risk, inflation and foreign exchange risk, including foreign exchange forward contracts, interest rate swaps, credit default swaps and inflation swaps.
| As at 31 December 2014 | Asset fair value |
Liability fair value |
Notional amount |
|---|---|---|---|
| £000's | £000's | £000's | |
| Forward currency positions |
7,335 | 1,615 | 553,106 |
| Interest rate swaps |
66,651 | 62,030 | 1,119,400 |
| Inflation swaps | 309 | 15,848 | 414,646 |
| Credit default swaps | 1,597 | — | 38,104 |
| Total derivative financial instruments |
75,892 | 79,493 | 2,125,256 |
| As at 31 December 2013 | Asset fair value |
Liability fair value |
Notional amount |
| £000's | £000's | £000's | |
| Forward currency positions |
8,488 | 278 | 548,392 |
| Interest rate swaps |
24,847 | 31,271 | 1,242,924 |
| Inflation swaps | 3,078 | 842 | 162,135 |
| Total derivative financial instruments | 36,413 | 32,391 | 1,953,451 |
All over-the-counter derivative transactions are conducted under standardised ISDA (International Swaps and Derivatives Association Inc) master agreements and the Group has collateral agreements between the individual Group entities and relevant counterparties in place under each of these master agreements.
At 31 December 2014, the Group had pledged £29.8m (2013: £10.1m) and held collateral of £19.0m (2013: £0.9m) in respect of outstanding over-the-counter derivative positions.
For the year ended 31 December 2014
All financial instruments, with the exception of external borrowings, are classified at fair value through profit and loss. In accordance with IFRS 13 Fair Value Measurement, financial instruments at fair value have been classified into three categories:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); or
Level 3: Inputs for the assets or liabilities that are not based on observable market data (that is, unobservable inputs).
An analysis of financial assets and liabilities held at fair value in accordance with the fair value hierarchy is set out below. All these financial assets and liabilities relate to recurring fair value measurements. There are no non-recurring fair value measurements as at 31 December 2014 and 31 December 2013.
| At 31 December 2014 | Level 1 £000's |
Level 2 £000's |
Level 3 £000's |
Total £000's |
|---|---|---|---|---|
| Financial investments (a) | 3,583,183 | — | 1,637 | 3,584,820 |
| Loans secured by residential mortgages (b) | — | — | 1,212,324 | 1,212,324 |
| Derivative assets (c) | — | 75,892 | — | 75,892 |
| Loans secured by commercial mortgages (d) | — | — | 37,868 | 37,868 |
| Total financial assets held at fair value | 3,583,183 | 75,892 | 1,251,829 | 4,910,904 |
| Deposits from reinsurers (e) | — | — | 2,491,795 | 2,491,795 |
| Derivative liabilities (c) | — | 79,493 | — | 79,493 |
| Total financial liabilities held at fair value | — | 79,493 | 2,491,795 | 2,571,288 |
| Restated(i) At 31 December 2013 |
Level 1 | Level 2 | Level 3 | Total |
| £000's | £000's | £000's | £000's | |
| Financial investments (a) | 3,122,222 | — | 11,568 | 3,133,790 |
| Loans secured by residential mortgages (b) | — | — | 840,066 | 840,066 |
| Derivative assets (c) | — | 36,413 | — | 36,413 |
| Total financial assets held at fair value |
3,122,222 | 36,413 | 851,634 | 4,010,269 |
| Deposits from reinsurers (e) | — | — | 2,182,350 | 2,182,350 |
| Derivative liabilities (c) | — | 32,391 | — | 32,391 |
| Total financial liabilities held at fair value | — | 32,391 | 2,182,350 | 2,214,741 |
(i) See note 2.
The Group's policy is to recognise transfers into and transfers out of Levels 1, 2 and 3 as of the date at which the consolidated statement of financial position is prepared.
There have been no transfers between Levels 1, 2 and 3 in 2014.
The table below reconciles the opening and closing recorded amount of level 3 financial liabilities and financial assets which are stated at fair value.
| For the year ended 31 December 2014 | Deposits from reinsurers |
Loans secured by commercial mortgages |
CTF Investments |
Loans secured by residential mortgages |
|---|---|---|---|---|
| £000's | £000's | £000's | £000's | |
| At 1 January 2014 |
(2,182,350) | — | 11,568 | 840,066 |
| Loans (received)/advanced |
(307,959) | 37,481 | 6,321 | 232,519 |
| Total (losses)/gains in consolidated statement of | ||||
| comprehensive income | (139,376) | 263 | (884) | 185,634 |
| Redemptions made/(received) | 229,082 | — | (16,386) | (51,273) |
| (Interest payable accrued)/interest receivable | ||||
| accrued | (91,192) | 125 | 1,018 | 5,378 |
| At 31 December 2014 |
(2,491,795) | 37,869 | 1,637 | 1,212,324 |
| Restated(i) For the year ended 31 December 2013 |
Deposits from reinsurers |
Loans secured by commercial mortgages |
CTF Investments |
Loans secured by residential mortgages |
|---|---|---|---|---|
| £000's | £000's | £000's | £000's | |
| At 1 January 2013 |
(1,728,998) | — | — | 478,097 |
| Loans (received)/advanced |
(733,849) | — | 23,990 | 416,473 |
| Total (losses)/gains in consolidated statement of | ||||
| comprehensive income | (155,522) | — | (3,135) | (25,695) |
| Redemptions made/(received) | 514,878 | — | (11,306) | (34,187) |
| (Interest payable accrued)/interest receivable | ||||
| accrued | (78,859) | — | 2,019 | 5,378 |
| At 31 December 2013 | (2,182,350) | — | 11,568 | 840,066 |
(i) See note 2.
The gains and losses are included within net investment income in the consolidated statement of comprehensive income.
The unrealised gains/(losses) in respect of payables arising out of reinsurance contracts, commodity trade finance investments, loans secured by residential mortgages and loans secured by commercial mortgages for the period to 31 December 2014 are £139.4m (2013: £155.5m), £0.9m (2013: £(1.1)m), £191.0m (2013: £(20.3)m) and £0.2m (2013: £nil) respectively. These unrealised gains and losses are included within net investment income in the Consolidated Statement of Comprehensive Income.
| Impact of alternative assumption | |||||
|---|---|---|---|---|---|
| As at 31 December 2014 | Significant assumption | Current fair value |
Increase in fair value |
Decrease in fair value |
|
| £000's | £000's | £000's | |||
| Assets | |||||
| CTF Investments |
Expected defaults | 1,637 | 289 | (353) | |
| Loans secured by commercial mortgages |
Discount rate | 37,868 | 2,744 | (2,501) | |
| Loans secured by residential mortgages | Discount rate | 1,212,324 | 156,367 | (132,186) | |
| Liabilities | |||||
| Deposits from reinsurers | Discount rate | (2,491,795) | (220,538) | 192,268 |
| Restated(i) At 31 December 2013 |
Significant assumption | Current fair value |
Increase in fair value |
Decrease in fair value |
|---|---|---|---|---|
| £000's | £000's | £000's | ||
| Assets | ||||
| CTF Investments |
Expected defaults | 11,568 | 406 | (584) |
| Loans secured by residential mortgages | Value of NNEG | 840,066 | 100,863 | (86,046) |
| Liabilities | ||||
| Deposits from reinsurers | Discount rate | (2,182,350) | (182,645) | 161,733 |
The impact of reasonably possible alternative assumptions are estimated by modelling alternative scenarios for the key assumptions for each valuation model.
All financial investments are designated at fair value through profit and loss. All financial investments excluding commodity trade finance are listed.
In assessing the fair value of the debt securities and other fixed income securities, the Directors have relied upon values provided by an independent third party which specialises in providing such values to companies. The third party provides prices based upon quoted market prices, or where not available, modelled prices using observable market inputs. At 31 December 2014 and 31 December 2013, 100% of the values provided were based on quoted market prices that are observable for the asset or liability.
Due to the short-term nature of the commodity trade finance (CTF) loans, the fair value of these instruments is estimated as the principal amount borrowed plus accrued interest from the date of acquisition, adjusted for incurred and expected defaults. These CTF loans are considered to be Level 3 within the valuation category prescribed by IFRS 13 as the inputs to the fair value calculation are not based on observable market data, and includes the Group's own assumptions.
The change in the fair value of Level 3 financial instruments from period to period is analysed into loans advanced, loans repaid/redemptions, and interest accrued, with the remaining balance representing fair value measurement gains and losses recognised in the statement of comprehensive income.
Interest rate: The interest rate used in estimating the fair value of the CTF Funds as at 31 December 2014 was nil% p.a. (31 December 2013: 12%).
The fair value recognised in the financial statements for loans secured by residential mortgages is determined using a marked to model valuation technique where a significant proportion of inputs are not based on observable market data and so these assets are considered to be Level 3 within the valuation category prescribed by IFRS 13.
The valuation model discounts the expected future cash flows using an interest rate swap curve with an additional spread or yield factor minus the cost of the no-negative equity guarantee. The no-negative equity guarantee represents an embedded guarantee that the repayment of the loan cannot exceed the value of the property at the time of repayment.
Although such valuations are sensitive to various estimates, it is considered that only the discount rate and no-negative equity guarantee assumptions would have significant impact on the fair value.
Discount rate: Loans secured by mortgages are valued using the swap rate appropriate to the term of each contract with adjustment to reflect the credit and liquidity risk associated with such long dated contracts. The risk adjusted swap rate for the portfolio weighted by average value at 31 December 2014 was 5.05% (31 December 2013: 6.42%).
No-negative equity guarantee: The fair value of loans secured by residential mortgages takes into account an explicit provision in respect of the no-negative equity guarantee which is calculated using a variant of the Black-Scholes option pricing model. The key assumptions used to derive the value of the no-negative equity guarantee include property growth, volatility and over-valuation. The property growth and volatility assumed at 31 December 2014 were 5.5% (31 December 2013: 5.5%) and 13% (31 December 2013: 13%) respectively. The over-valuation assumption used as at 31 December 2014 was 27.4% (31 December 2013: 22%). The value of the no-negative equity guarantee as at 31 December 2014 was £112.5m (31 December 2013: £67.3m).
The valuation technique that the Group uses to assess the fair value of loans secured by mortgages is consistent with that used to derive the prices applied at the initial transaction. As such, there is no difference between the fair value of loans secured by equity release mortgages at initial recognition and the amount that would have been determined at that date using the valuation technique.
The estimated fair value of derivative instruments reflects the estimated amount the Group would receive or pay in an arm's length transaction. All the derivatives held at 31 December 2014 and 31 December 2013 were purchased over-the-counter.
The Group's derivative assets and liabilities largely relate to forward currency positions, interest rate swaps and inflation swaps.
Forward currency positions: Forward currency exchange contracts are priced by independent third parties.
Interest rate swaps: The fair value of the interest rate swaps is derived using an interest rate swap pricing model, using a time series of historical LIBOR rates, an applicable zero coupon interest rate swap curve to derive future cash flows (forward curve) and an applicable zero coupon interest rate swap curve to discount future cash flows (discount curve) as inputs. The forward curve is used by the pricing model to determine the future LIBOR rates to be applied in the calculation of the floating leg cash flow(s). The discount curve is used to calculate the present value of the future cash flow(s) of both the fixed and floating legs of the swap and its composition is driven by the terms of the Credit Support Annex under which the swap is traded.
Inflation swaps: The fair value of the inflation swaps is derived using the inflation swap pricing model, using a time series of historical inflation index levels, a zero coupon swap inflation expectation curve, an inflation seasonality model and a zero coupon interest rate swap curve as inputs. The inflation swap pricing model generates a future cash flow for both the fixed and inflation legs of a swap for which a present value is determined using zero coupon interest rate swap curve.
The derivative assets and liabilities are presented on a gross basis in the consolidated statement of financial position. All over-the-counter derivative transactions are conducted under standardised ISDA (International Swaps and Derivatives Association Inc) master agreements and the Group has collateral agreements between the individual Group entities and relevant counterparties in place under each of these master agreements.
The fair value recognised in the financial statements for loans secured by commercial mortgages is determined using a marked to model valuation technique where a significant proportion of inputs are not based on observable market data and so these assets are considered to be Level 3 within the valuation category prescribed by IFRS 13.
The valuation model produces a series of projected future cash flows for each mortgage, based on a range of simulations of changes in property prices drawn from a distribution based on historic observed changes. Potential changes in property tenancy (e.g. tenant default, exercise of break clause or non-renewal of
lease) are also modelled in a range of simulations. Risk adjusted cash flows are calculated as the average across the range of simulations.
The risk adjusted cash flows are discounted using a swap curve with an additional spread. The additional spread is the increase in swap discount rates required so that the initial discounted risk adjusted cash flows equal the initial purchase price. This uplift is reviewed if there is evidence that market has moved materially.
The discount rate and changes in property prices and tenancy are the most significant assumptions applied in calculating the fair value of the loans.
Discount rate: Loans secured by commercial mortgages are valued using the swap rate appropriate to the term of each contract with adjustment to reflect the credit and liquidity risk associated with such long dated contracts. The risk adjusted swap rate for the portfolio weighted by average value at 31 December 2014 was 3.02%.
The fair value recognised in the financial statements is determined using a marked to model valuation technique where not all inputs are based on observable market data and so these liabilities are considered to be Level 3 within the valuation category prescribed by IFRS 13.
The valuation model discounts the expected future cash flows using a discount rate derived from the assets hypothecated to back these liabilities at a product level.
As payables arising from reinsurance contracts do not have a single fixed maturity date it is not possible to determine an amount that would be contractually required to pay at maturity.
Discount rate: The key inputs to the derivation of the discount rate include market observable gross redemption yields, contractual investment expenses and an allowance for credit risk on a best estimate basis. The discount rates used as at 31 December 2014 for Individual retirement and Individual care annuities were 4.16% and 1.67% respectively (31 December 2013: 4.95% and 1.97% respectively).
| For the year ended 31 December | 2014 | Restated(i) 2013 |
|---|---|---|
| £000's | £000's | |
| Profit before income tax including discontinued operations | 24,067 | 82,661 |
| Fair value gains and interest accrued on financial assets | (365,937) | (32,028) |
| Fair value losses and interest accrued on financial liabilities |
257,638 | 54,214 |
| Depreciation of property, plant and equipment |
3,238 | 1,843 |
| Amortisation of intangible assets | 3,275 | 1,997 |
| Assets written off | 971 | 1,684 |
| Investment in associate—Eldercare | (27) | — |
| Profit on reclassification of subsidiary to associate |
(94) | — |
| Share of loss of joint venture |
206 | 162 |
| Profit of subsidiary before disposal |
2 | — |
| Share-based payment charge | 1,223 | 9,324 |
| Amortisation of capitalised loan note debt issuance costs |
— | 2,519 |
| Amortisation of capitalised bank loan debt issuance costs | — | 1,765 |
| Interest accrued on loan notes |
— | 19,125 |
| Interest on bank loan | — | 1,995 |
| Net investment in financial assets |
(534,698) | (764,815) |
| Net receipt of financial liabilities | 98,909 | 340,612 |
| Increase in reinsurance assets | (405,259) | (428,198) |
| Decrease in insurance and other receivables excluding Corporation Tax | 42,557 | 61,916 |
| Decrease/(increase) in prepayments and accrued income | 7,376 | (2,293) |
| Increase in insurance liabilities |
883,524 | 624,290 |
| Decrease in insurance and other payables |
(4,477) | (34,462) |
| (Decrease)/increase in other taxes and social security payables |
(830) | 838 |
| Cash generated from/(used in) operations | 11,664 | (56,851) |
(i) See note 2.
Details of the amounts payable for the year are included in ''Other pension costs'', in note 6. No amounts are outstanding in respect of these contributions at the end of the year.
The Group is a Participating Employer for a money purchase group personal pension plan. The assets of the plan are held separately from those of the Group. The Group does not provide a final salary plan.
Financial assets arising from the payment of reinsurance premiums, less the repayment of claims, to certain reinsurers in relation to specific treaties are legally and physically deposited back with the Group. Although the funds are managed by the Group (as the Group controls the investment of the asset), no future benefits accrue to the Group as any returns on the deposits are paid to reinsurers. Consequently the deposits are not recognised as assets of the Group and the investment income they produce does not accrue to the Group.
In addition, the Group has trust agreements with two reinsurers (2013: two) whereby the assets are held in trust in order to fully fund the reinsurers' obligations under the reinsurance treaty. As the Group has no control over these funds and does not accrue any future benefit these funds are not recognised as assets of the Group.
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Deposits managed by the Group |
269,630 | 272,493 |
| Deposits held in trust |
279,619 | 241,699 |
| Total deposits received from reinsurers |
549,249 | 514,192 |
The Group issues contracts that accept insurance risk in return for a premium. In addition the Group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and policyholder liabilities. In particular, the key financial risk is that the proceeds from financial assets are not sufficient to fund the obligations arising from contracts with policyholders. The most important components of this financial risk are interest rate risk, credit risk, property risk and liquidity risk. The Group is not exposed to any equity price risk and to currency risk only to an immaterial extent.
Underwriting and pricing risk is the risk that insurance contracts will be written that are not within the Board's risk appetite, or that the premium charged for that business is not adequate to cover the risks borne by the Group.
The accurate pricing of non-standard annuities is dependent on the Group's assessment of the impact on prospective customers' longevity of various medical and lifestyle factors and an estimate of future investment yields and credit default.
The actual timing of deaths and investment income experience may be inconsistent with the assumptions and pricing models used in underwriting and setting prices for its products.
Reserving risk is the risk that the reserves have been calculated incorrectly, or the assumptions used in the calculations are inappropriate.
As the Group's insurance business is targeted at people with conditions affecting their life expectancy, or people seeking to fund domiciliary or residential care, the underwriting risk is managed through the use of highly trained, and qualified underwriting staff, together with detailed underwriting manuals designed to cover a large range of medical conditions.
Partnership Assurance has developed its own proprietary underwriting manuals for retirement annuity business and those seeking care funding, based on industry standard mortality tables modified to take account of experience data recorded by Partnership Assurance.
The assumptions used in the reserving for future policyholder payments are set based on available market and experience data, on the advice of Partnership Assurance's Actuarial Function Holder. The assumptions are approved by the Board. The reserves are calculated using recognised actuarial methods with due regard to the actuarial principles set out in the PRA's sourcebooks, including appropriate levels of prudential margin against future adverse experience.
Insurance risk on the Group's annuity contracts arises through longevity risk and through the risk that operating factors, such as administration expenses, are worse than expected. Insurance risk on the Group's protection policies arises through higher than expected mortality levels. The Group's longevity and mortality experience is monitored on a regular basis and compared to the underlying assumptions used to reserve for future insurance payments. The exposure to longevity and mortality risk is reduced through the use of reinsurance.
Expense risk is managed through regular assessment and quarterly reforecasting of expenses incurred against budgets.
Interest rate risk arises from open positions in fixed and variable rate stock issued by government and corporate bodies that are exposed to general and specific market movements. The Group is exposed to the market movements in interest rates to the extent that the asset value movement is different to the accompanying movement in the value of its insurance liabilities.
The difference between asset and liability movements can arise from both a change in the absolute level of interest rates, and from a change in the ''spread'' (that is the level of interest rates applying to an asset in excess of the risk-free interest rate).
The Group manages its interest rate risk within an asset liability management (ALM) framework that has been developed to achieve investment returns in excess of its obligations under insurance contracts. The principal technique of the ALM framework is to match assets to the liabilities arising from insurance contracts by reference to the type of benefits payable to policyholders.
The Group monitors interest rate risk by calculating the mean duration and cash flow profile of the investment portfolio and the liabilities. The mean duration is an indicator of the sensitivity of the assets and insurance liabilities to changes in current interest rates but is not sufficient in isolation. The mean duration of the liabilities is determined by means of projecting expected cash flows from the contracts using best estimates of mortality and voluntary terminations. No future discretionary supplemental benefits are assumed to accrue. The mean duration of the assets is calculated in a consistent manner. Any gap between the mean duration of the assets and the mean duration of the liabilities is minimised by means of buying and selling fixed interest securities of different durations or purchasing interest rate swap derivatives to alter the effective mean duration of the assets. Periodically the cash flow matching is reviewed and rebalanced.
At 31 December 2014, the mean duration of the assets including surplus assets was 8.3 years (2013: 7.5 years) measured with reference to a gross redemption yield and the mean duration of the liabilities (including both retirement and care liabilities) was at 9.6 years (2013: 8.9 years) measured with reference to the valuation interest rate.
The Group has reinsurance arrangements in place which provide for fixed payments to the reinsurer over future periods. In assessing the fair value of this liability, the Directors have used a discount rate derived from current market yields earned on assets held to fund the future cash outflows, adjusted for the risk of default on those assets. No further adjustment to the discount rate to reflect any risk of the Group defaulting on those payments to the reinsurer was deemed appropriate.
Market credit risk is the risk that the Group invests in assets that may default.
If an asset fails to repay either interest or capital, or that payment is significantly delayed, the Group may make losses and be unable to meet liabilities as they fall due.
The Group's Investment Management Guidelines set out maximum exposure to bonds issued by a single, or related group of, counterparty(/ies) and to credit ratings. The allowance made for issuer default in the Group's valuation is regularly monitored and kept up to date.
At 31 December 2014, £19.0m of collateral (2013: £0.9m) had been pledged to the Group to mitigate the credit risk exposure associated with the derivative assets held at that time.
Counterparty credit risk arises if another party fails to honour its obligations to the Group including failure to honour these obligations in a timely manner.
The Group's primary counterparty credit risk exposure arises from the inability of the reinsurers to meet their claim payment obligations.
The Group has arrangements with its reinsurers whereby most reinsurance premiums are either deposited back to the Group or held by a third party in a trust arrangement.
In addition, the Group's reinsurance policy is to seek to choose companies with a minimum ''A'' credit rating.
The following table analyses the credit exposure of the Group by type of asset and includes the credit risk arising out of reinsurance exposures, based on the credit ratings of the reinsurer, as published by Standard & Poor's, or an equivalent rating from another recognised rating agency.
| Credit rating | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| At 31 December 2014 | AAA | AA | A | BBB | Unrated | Total | ||||
| £000's | £000's | £000's | £000's | £000's | £000's | |||||
| Financial investments |
815,605 | 234,771 | 1,251,104 | 1,280,870 | 2,470 | 3,584,820 | ||||
| Derivative assets | — | — | — | — | 75,892 | 75,892 | ||||
| Loans secured by residential | ||||||||||
| mortgages | — | — | — | — | 1,212,324 | 1,212,324 | ||||
| Loans secured by commercial | ||||||||||
| mortgages | — | — | — | — | 37,868 | 37,868 | ||||
| Reinsurance assets |
— | 1,290,232 | 1,955,776 | — | — | 3,246,008 | ||||
| Insurance and other receivables | — | 17,761 | 4,761 | — | 16,645 | 39,167 | ||||
| Total |
815,605 | 1,542,764 | 3,211,641 | 1,280,870 | 1,345,199 | 8,196,079 |
| Restated(i) | Credit rating | ||||||
|---|---|---|---|---|---|---|---|
| At 31 December 2013 | AAA | AA | A | BBB | Unrated | Total | |
| £000's | £000's | £000's | £000's | £000's | £000's | ||
| Financial investments | 611,062 | 260,620 | 1,193,352 | 1,057,189 | 11,568 | 3,133,790 | |
| Derivative assets | — | — | — | — | 36,413 | 36,413 | |
| Loans secured by residential | |||||||
| mortgages |
— | — | — | — | 840,066 | 840,066 | |
| Reinsurance assets | — | 1,240,280 | 1,600,469 | — | — | 2,840,749 | |
| Insurance and other receivables | — | 13,132 | 11,064 | — | 55,437 | 79,633 | |
| Total | 611,062 | 1,514,032 | 2,804,885 | 1,057,189 | 943,484 | 6,930,651 |
(i) See note 2.
The following table presents an aging analysis of financial assets by payment due status:
No financial assets were past due at 31 December 2014.
| Past due but not impaired | |||||||
|---|---|---|---|---|---|---|---|
| Restated(i) As at 31 December 2013 |
Not past due |
Less than 1 month |
1–3 months | 3–6 months | More than 6 months |
Impaired | Total |
| £000's | £000's | £000's | £000's | £000's | £000's | £000's | |
| CTF investments |
7,094 | — | 742 | 3,732 | — | — | 11,568 |
| Loans secured by mortgages | 840,066 | — | — | — | — | — | 840,066 |
| Other financial assets | 6,079,017 | — | — | — | — | — | 6,079,017 |
(i) See note 2.
Liquidity risk arises where cash flows from investments and from new premiums prove insufficient to meet our obligations to policyholders and other third parties as they fall due.
The Group's ALM framework ensures that cash flows are sufficient to meet both long- and short-term liabilities.
The Group maintains a minimum level of cash and highly liquid assets such that, in the extreme scenario of new business cash flows being insufficient to meet current obligations, those obligations can continue to be met.
In accordance with PRA regulations, the Group's assets are reviewed to ensure they are of sufficient amount and of an appropriate currency and term to ensure that the cash inflows from those assets will meet the expected cash outflows from the Group's insurance and other financial liabilities.
In the following table expected cash outflows for:
The following table includes insurance and financial liabilities that are exposed to liquidity risk.
| Expected cash flows (undiscounted) | ||||||
|---|---|---|---|---|---|---|
| At 31 December 2014 | less than one year |
one to five years |
five to ten years |
more than ten years |
Carrying value (discounted) |
|
| £000's | £000's | £000's | £000's | £000's | ||
| Net insurance liabilities | 153,346 | 544,237 | 571,040 | 1,667,559 | 1,985,104 | |
| Deposits received from reinsurers | 213,142 | 793,042 | 843,324 | 2,005,880 | 2,491,795 | |
| Derivative liabilities |
13,523 | 37,602 | 10,603 | 34,097 | 79,493 | |
| Total | 380,011 | 1,374,881 | 1,424,967 | 3,707,536 | 4,556,392 |
| Expected cash flows (undiscounted) | ||||||
|---|---|---|---|---|---|---|
| Restated At 31 December 2013 |
less than one year |
one to five years |
five to ten years |
more than ten years |
Carrying value (discounted) |
|
| £000's | £000's | £000's | £000's | £000's | ||
| Net insurance liabilities |
131,727 | 457,257 | 464,853 | 1,285,066 | 1,506,839 | |
| Deposits received from reinsurers | 1,831,083 | 735,336 | 792,792 | 1,934,163 | 2,182,350 | |
| Derivative liabilities | 584 | 10,252 | 14,381 | 15,596 | 32,391 | |
| Total | 1,963,394 | 1,202,845 | 1,272,026 | 3,234,825 | 3,721,580 |
The maximum exposure to credit risk is equal to the balance sheet value of debt instruments/derivatives.
Property risk arises from the provision of a protected equity guarantee on the mortgages underlying the equity release assets purchased. The Group is exposed to the risk that property values do not rise sufficiently, or that the property is not maintained properly, to recover the full value of the loan made plus accrued interest.
The Group manages its purchase of loan assets to a level appropriate to its liability profile and ensures that the purchase prices of loan assets reflect a prudent assessment of future property price growth. Appropriate limits are applied to the ''loan-to-value'' ratio in order to limit the risk exposure to the Group. The Group seeks to avoid excess concentration of property holdings in any geographical area.
Property risk on commercial mortgages is the risk that property values decline or property tenancy changes such that the full value of the commercial mortgage loan is not recovered. The initial loan value is restricted to a maximum ''loan-to-value'' ratio that limits its exposure for the Group.
Economic capital is the principal risk-based capital measure used by the Board. Economic capital is based on the Board's view of the available capital and required capital calibrated to a 1 in 200 stress.
The Group's capital consists of equity attributable to equity holders of the Parent Company. For the purposes of regulatory capital requirements, certain assets are restricted, or are inadmissible.
The Group manages its capital to ensure that all of entities within the Group will be able to continue to operate as going concerns, remaining compliant with all regulatory capital requirements to which each is subject.
Partnership Assurance Life Assurance Company Limited (PLACL), the principal operating and only insurance company in the Group, is required to comply with minimum capital requirements calculated at the level of its EEA parent and ultimate Parent Company level as required by the PRA as set out in the Insurance Groups Directive, as well as its own single entity level as required by the PRA. Partnership Assurance Group plc is both the EEA parent and ultimate Parent Company of PLACL.
The table below provides a reconciliation between the available capital resources of the Partnership Assurance Group, measured under IFRS, and the surplus over regulatory capital requirement as is required to be measured under the Insurance Groups Directive. Any changes or release of capital from long-term funds is subject to there being an established surplus shown by an actuarial investigation.
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Total equity of Partnership Assurance Group | 604,690 | 598,549 |
| Minority interest in equity for regulated business | — | (66) |
| Adjustments in respect of regulatory capital basis: | ||
| Inadmissible intangible assets |
(15,219) | (16,401) |
| Inadmissible goodwill | (126,207) | (126,207) |
| Inadmissible deferred tax asset |
(519) | (424) |
| Equity and reserves related to non-regulated entities (excluded from regulatory | ||
| capital calculation), adjusted for inadmissible assets already adjusted above . |
3,042 | 13,031 |
| Total available capital resources (IGD basis) | 465,787 | 468,482 |
| Group minimum capital requirement (IGD basis) | (224,127) | (191,630) |
| Surplus over regulatory capital requirement |
241,660 | 276,852 |
Movements in equity are shown in the Consolidated Statement of Changes in Equity.
Throughout the year, each regulated subsidiary has maintained capital resources in excess of the minimum required by the PRA regulations and the EU directives.
The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly attributable to the issue of the ordinary shares are recognised in equity, net of tax.
| As at 31 December 2014 | Number of shares |
Share capital £000's |
Share premium £000's |
|---|---|---|---|
| The allotted and issued share capital of Partnership Assurance Group plc: |
|||
| Shares subdivided into 500,000 ordinary shares of £0.10 each | 399,999,971 | 40,000 | 435,249 |
| As at 31 December 2014, ordinary shares of £0.10 each | 399,999,971 | 40,000 | 435,249 |
| As at 31 December 2013 | Number of shares |
Share capital | Share premium |
|---|---|---|---|
| £000's | £000's | ||
| The allotted and issued share capital of Partnership Assurance Group plc: |
|||
| On incorporation, ordinary shares of £1.00 each |
50,000 | 50 | — |
| On 12 June 2013: | |||
| Shares subdivided into 500,000 ordinary shares of £0.10 each | 450,000 | — | — |
| Exchange of the A and B loan notes | 69,212,294 | 6,921 | 259,547 |
| Exchange of C loan notes |
15,397,726 | 1,540 | 57,742 |
| Share for share exchange of A, B and C ordinary shares in PAG | |||
| Holdings Limited for ordinary shares in Partnership Assurance | |||
| Group plc |
282,358,446 | 28,236 | — |
| New issue of shares as part of Global Offer |
32,467,532 | 3,247 | 121,752 |
| New ordinary shares issued to senior management | 51,948 | 5 | 195 |
| New ordinary shares issued to EBT |
12,025 | 1 | 45 |
| Share issue costs | — | — | (4,032) |
| As at 31 December 2013, ordinary shares of £0.10 each | 399,999,971 | 40,000 | 435,249 |
The ordinary share entitles the holder to dividends declared by the Board which are not cumulative. The ordinary share entitles the holder to one vote for every share held.
Where an employee trust acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including attributable transaction costs, net of tax) is shown as a deduction from the owners' equity. Gains and losses on sales of shares held by the employee trust are charged or credited to the own shares account in equity.
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Employee benefit trust | (136) | (58) |
The Group has annual commitments in respect of non-cancellable operating leases as follows:
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Leases expiring not later than one year | 2,816 | 3,645 |
| Leases expiring between one and five years | 9,036 | 11,671 |
| Leases expiring in more than five years | 7,835 | 9,453 |
| Total lease commitments | 19,687 | 24,769 |
Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
During the period, the Group entered into transactions, in the ordinary course of business, with other related parties. Transactions entered into and balances outstanding at the end of each reporting date are detailed below.
Key management personnel consist of the Directors of the Company. The key management personnel changed during the year 2014 reflecting the Group reorganisation. The remuneration of the Directors, who are the key management personnel of the Group, is set out below:
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Short-term employee benefits | 2,850 | 2,060 |
| Post-employment benefits | 16 | 55 |
| Total | 2,866 | 2,115 |
A number of Directors who are defined as key management personnel of the Company held loans during the period. The loans owed to/by the Directors are detailed as follows:
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Amounts owed by Directors: | ||
| Loan advances | 302 | 289 |
| Loans owed by Directors | 302 | 289 |
The terms of the B and Vendor loan notes are detailed in note 31 and, as set out in that note, were exchanged for ordinary shares in the Company as part of the IPO.
The loan advances to Directors accrue interest fixed at 4% per annum and are repayable in whole or in part at any time.
The amounts accruing (to)/from the Directors in respect of these loan notes are detailed below:
| £000's | £000's | |
|---|---|---|
| Interest accrued on B and Vendor loan notes | — | (663) |
| Interest accrued on Directors' loan advances | 12 | 6 |
| Total | 12 | (657) |
During the year the Group entered into transactions with other entities controlled by Cinven Limited, associates and joint ventures as set out below. All transactions were on a commercial basis.
| 2014 | 2013 | |
|---|---|---|
| £000's | £000's | |
| Costs paid to entities related to the ultimate parent controlling party |
122 | 558 |
| Group's share of losses of joint venture investment |
6 | — |
| Loans advanced to associate and fees on loans | 187 | — |
| Value of other related party transactions | 315 | 558 |
Costs paid to entities related to the ultimate parent controlling party include management fees paid to Cinven Partnerships LLP for director services. The comparative cost in 2013 included expenses associated with the 2013 IPO. At 31 December 2014 there was no amount due or receivable from any entities related to the ultimate parent controlling party (2013: £nil).
The Group's share of losses of joint venture investment arose in Gateway prior to sale on 29 August 2014. Note 13 includes detail of loans from Gateway that were written off in 2014. At 31 December 2014 there was no amount due or receivable from Gateway (2013: £289,000).
Loans were advanced to the Group's associate, Eldercare, during the 2014. At 31 December 2014, Eldercare owed the Group £153,000. At 31 December 2013 Eldercare was not an associate of the Group.
As at 31 December 2014 a majority of the Company's ordinary shares are held by the partnerships comprising the Fourth Cinven Funds (the Cinven Funds), being funds managed and advised by Cinven Limited, a company incorporated in the United Kingdom. Accordingly, the Directors consider the Company's ultimate controlling party to be Cinven Limited, the manager and adviser to the Cinven Funds.
Subsequent to 31 December 2014, the Directors proposed a final dividend for 2014 of 1.0 pence per ordinary share (2013: 3.0 pence), amounting to £4.0m (2013: £12m) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 29 May 2015 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2015.
On 2 March 2015 the Group entered into an agreement to issue a £100m bond to funds managed by Cinven Capital Management ('Cinven'), its majority shareholder. The bond is repayable after a 10 year term with possible redemption, at option of the Group, at the fifth anniversary or on any interest payment date thereafter, in each case subject to PRA consent. The bond has an annual interest rate of 9.5% payable annually in arrears from the issue date. The bond is a Tier 2 qualifying regulatory capital instrument under existing solvency regulations and Solvency II compliant following implementation of the Solvency II regime on 1 January 2016. The bond is issued by Partnership Assurance Group plc with a guarantee provided by Partnership Assurance Life Assurance Company Limited.
The separate financial statements of Partnership Assurance Group plc (the Company) have been prepared on a going concern basis in accordance with the Companies Act 2006 applicable to companies reporting under IFRS, and accounting policies have been applied consistently. As permitted by that act, the separate financial statements have been prepared in accordance with IFRS which comprise standards and interpretations approved by either the International Accounting Standards Board or the IFRS Interpretations Committee or their predecessors, as adopted by the European Union (EU) as at 31 December 2013. The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its own Income Statement and Statement of Comprehensive Income.
The financial statements have been prepared on the historical cost basis, except for the measurement of long-term employee benefits at present value of the obligation less fair value of any assets held to settle the obligation. The principal accounting policies adopted are the same as those set out in the Group's financial statement note disclosures. In addition, note 36 sets out the accounting policy in respect of investments in subsidiary undertakings.
Investments in subsidiaries are stated at cost less impairment in the Statement of Financial Position of the Company, as determined by the Company's Directors.
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Investment in PAG Holdings Limited |
28,286 | 28,286 |
| Investment in Partnership Holdings Limited (PHL) | 1,171,534 | 1,148,534 |
| Investment in Partnership Services Limited (PSL) |
2,169 | 946 |
| Investment in subsidiaries | 1,201,989 | 1,177,766 |
During the year the Company made a capital contribution of £23m in the form of a gift to the Company's subsidiary, PHL. The capital contribution is recognised as an increase in cost of investment in the subsidiary.
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Other debtors . |
29 | — |
| Amounts due from other Group undertakings | 9,932 | 25,514 |
| Total insurance and other receivables | 9,961 | 25,514 |
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Accrued income | 4 | 10 |
| Total prepayments and accrued income | 4 | 10 |
| 2014 | 2013 |
|---|---|
| £000's | £000's | |
|---|---|---|
| Short-term bank deposits |
10,846 | 30,012 |
| Cash at bank and in hand | 66 | 2,548 |
| Total cash and cash equivalents |
10,912 | 32,560 |
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Amounts due to other Group undertakings |
58,219 | 58,219 |
| Total insurance and other payables | 58,219 | 58,219 |
| As at 31 December | 2014 | 2013 |
|---|---|---|
| £000's | £000's | |
| Income taxes | 46 | 421 |
| Total current tax liabilities | 46 | 421 |
For the year ended 31 December 2014
Details of the Company's share capital and share premium are set out in note 31.
During the year the Company made a capital contribution of £23m to PHL in the form of a gift (note 36).
On 14 July 2014, the Company advanced a loan to its subsidiary, PSL. At 31 December 2014 the balance on that loan was £9.4m and is included in Amounts due from other Group undertakings (note 37). Interest is charged on that loan at 150 basis points over 6 months LIBOR. £155,800 of interest accrued to the Company on the loan in 2014.
The Company received no other interest or income, neither did it suffer costs incurred from any other Group entity during 2014. The Amounts due from other Group undertakings receivable, included in insurance and other payables, are not interest bearing.
The Amounts due to another Group undertaking (note 40) is a balance due to the Company's wholly owned dormant subsidiary, PAG Finance Limited, and is equal to the equity of that subsidiary.
Details of the remuneration of key management personnel is set out in note 33.
The Company's ultimate Parent undertakings are the partnerships comprising the Fourth Cinven Funds (the Cinven Funds), being funds managed and advised by Cinven Limited, a company incorporated in the United Kingdom. Accordingly, the Directors consider the Company's ultimate controlling party to be Cinven Limited, the manager and adviser to the Cinven Funds.
The events after the balance sheet date applicable to the Company are set out in note 34.
In our opinion:
The financial statements comprise the consolidated statement of comprehensive income, the consolidated and Parent Company statements of financial position, the consolidated and Parent Company cash flow statements, the consolidated and Parent Company statements of changes in equity and the related notes 1 to 36. The financial reporting framework that has been applied in their preparation is applicable law and IFRS as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
As required by the Listing Rules we have reviewed the directors' statement that the Group is a going concern. We confirm that:
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's ability to continue as a going concern.
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team
The Group predominantly writes non-standard We used our internal actuarial specialists to test the annuities which it prices using its bespoke mortality controls over the end-to-end reserving process, data and internally generated intellectual property. focusing on the controls over changes to the The Company reserves for the future expected cost reserving model and changes to the underlying of these policies using complex actuarial models to demographic and economic assumptions.
actuarial specialists to challenge management's Further detail on these principal assumptions can assumptions by considering the Group's own be found in note 20 to the financial statements. The experience, comparison to industry benchmarks and significance and inherent subjectivity of these by testing compliance with regulations. assumptions means that we view this as an area of
project the insurance liabilities. These models are We performed detailed substantive testing on the dependent on key assumptions made by data inputs to the model including checks on policy management in respect of the following: data via agreeing a sample back to original on the portfolio based on assumptions as to the assumptions had been input to the model
medical condition or lifestyle characteristic; Management has updated their mortality basis for and the largest policy group and a new valuation rate of of the portfolio of assets that back the year. We tested these assumptions, in addition to liabilities that is used to discount the expected testing manual provisions, reinsurance reserves, cash flows, which also needs to reflect a allowance for counterparty default risk, allowance deduction for the credit risk of the underlying for cash flow and currency mis-matching risk and assets. statutory capital requirements. We used our internal
heightened risk. An assessment on the overall results was made by reviewing the analysis of change in reserves over the period under audit.
The Group's investments include loans backed by a We tested the new transactions through reviewing portfolio of equity release assets. In Q3 2013 the the due diligence work performed by the Group, Group completed a large bulk purchase deal for a challenging the valuation basis put forward by value of £218m, with a further deal completed in management based on independent macroeconomic Q4 2013 for a value of £69m. advice received, and testing the underlying data used
in the valuation of the equity release assets via The fair value of the investment is dependent on agreement of a sample of loans back to original the valuation of the underlying properties and the policy documentation. assumptions used in the fair value calculation, such as the property growth rate, property volatility, a We also assessed the underlying portfolio of assets revaluation index to revalue properties to the for indicators of impairment via segmenting the valuation date, swap rates, and mortality portfolio geographically and using applicable assumptions. Note 26b to the financial statements regional property valuation indices to check for provides further detail as to the methodology for signs of significant diminution in the value of the
secured, as well as analysing the age of the loan The subjectivity of the key assumptions, coupled book. with the significance of the transactions, means that we view this as an area of risk. Our internal actuarial specialists challenged
calculating the fair value of these assets. underlying properties on which the loans are
management's methodology and assumptions used to value the equity release assets via comparison to industry benchmarks, including whether the valuation was sensitive to the mortality assumption.
The Group is further diversifying its business Our internal actuarial specialists have reviewed the through insuring the risk on defined benefit controls over, and management's testing of, the schemes, focusing specifically on high value, model and gained assurance that it is operating
The assumptions underlying the model were A new model was introduced during the period to challenged via comparison to industry benchmarks calculate the reserves for this liability. The lack of and by testing compliance with regulations. maturity around this model means that we view this as an area of risk.
impaired policies. effectively with a framework of supporting controls.
The Audit Committee's consideration of these risks is set out herein.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
We determined materiality for the Group to be £4.2m, which is below 1% of net written premiums. We consider a turnover based measure to be the most suitable benchmark at this stage in Partnership Assurance Group plc's development as it drives one of the Group's key performance indicators and is a figure on which the users of the financial statements focus.
We agreed with the Audit Committee that we would report to the Audit Committee all audit differences in excess of £84,000, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level.
Our Group audit has covered entities representing 100% of the Group's net assets, 100% of the Group's revenue and 100% of the Group's profit before tax. The result of the Group is predominantly driven by a single trading company, Partnership Assurance Life Assurance Company Limited. All of the Group entities audited are based in the same location and were audited by the Group audit team and the Group engagement partner.
Our audit work was executed at levels of materiality applicable to each individual entity which were lower than Group materiality.
Further information on the Group and the recent restructure can be found in notes 13 and 32 to the Annual Report and Accounts.
At the Parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances.
In our opinion:
• the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have nothing to report in respect of these matters.
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors' remuneration have not been made or the part of the Directors' Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters.
Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the Company's compliance with nine provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Report is
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors' statement that they consider the Annual Report is fair, balanced and understandable and whether the Annual Report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.
As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team, strategically focused second partner reviews and independent partner reviews.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and the Parent Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
(Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 18 March 2014
| Note | 2013 | 2012 | |
|---|---|---|---|
| Gross premiums written Outward reinsurance premiums |
1 | £000's 1,159,562 (733,849) |
£000's 1,468,008 (554,620) |
| Net premiums earned before restructure of reinsurance treaty Reinsurance premium related to restructure of treaty |
425,713 — |
913,388 (495,803) |
|
| Net premiums earned Net investment income Share of results of joint venture Other income |
3 14 |
425,713 137,762 (162) 219 |
417,585 290,738 (40) 180 |
| Total income Gross claims paid Reinsurers' share of claims paid Recovery related to recapture of reinsurance treaty |
563,532 (341,124) 225,277 — |
708,463 (273,655) 188,462 99,748 |
|
| Net claims (paid)/recovered Change in insurance liabilities: |
(115,847) | 14,555 | |
| Gross amount Reinsurers' share not related to restructure and recapture Reinsurers' share related to restructure and recapture . |
20 | (624,290) 428,197 — |
(1,564,761) 663,452 396,213 |
| Net change in insurance liabilities Acquisition costs Investment expenses and charges Interest on subordinated debt Interest on external borrowings |
4 | (196,093) (13,036) (13,270) — (25,403) |
(505,096) (34,566) (8,178) (496) (33,976) |
| Administrative and other expenses |
5 | (117,223) | (73,227) |
| Total expenses Total claims, change in insurance liabilities and expenses |
(168,931) (480,872) |
(150,443) (640,984) |
|
| Profit from continuing operations before tax Income tax charge from continuing operations |
5 7 |
82,661 (23,240) |
67,479 (17,245) |
| Profit for the year from continuing operations Loss for the year from discontinued operations |
7 | 59,421 — |
50,234 (28) |
| Profit for the period | 59,421 | 50,206 | |
| Profit/(loss) attributable to: • Owners of the Parent • Non-controlling interest |
59,465 (44) |
50,193 13 |
|
| Profit for the period | 59,421 | 50,206 | |
| Basic earnings per ordinary share Diluted earnings per ordinary share |
8 8 |
£ 0.17 £ 0.17 |
£ 0.18 £ 0.18 |
| Attributable to Owners of the Parent | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Note | Share Capital |
Share Premium |
Capital Redemption Reserve |
Merger Reserve |
Shares held by Employee Benefit Trust |
Retained profit |
Total | Non controlling interest |
Total | |
| £000's | £000's | £000's | £000's | £000's | £000's | £000's | £000's | £000's | ||
| At 1 January 2013 | 36 | 182 | 3,297 | — | (33) | 78,901 | 82,383 | (22) | 82,361 | |
| PAG Holdings Limited shares exchanged for |
||||||||||
| ordinary shares . |
33 | 28,250 | (182) | (3,297) | (24,521) | (250) | — | — | — | — |
| Loan notes exchanged | ||||||||||
| for ordinary shares | 33 | 8,462 317,288 | — | — | — | — 325,750 | — | 325,750 | ||
| Shares issued for cash | 33 | 3,252 121,993 | — | — | (46) | 526 125,725 | — | 125,725 | ||
| Share issue costs | — | (4,032) | — | — | — | — | (4,032) | — | (4,032) | |
| Share-based payments | 19 | — | — | — | — | 271 | 9,053 | 9,324 | — | 9,324 |
| Profit for the year | — | — | — | — | — | 59,465 | 59,465 | (44) | 59,421 | |
| At 31 December 2013 | 40,000 435,249 | — | (24,521) | (58) | 147,945 598,615 | (66) | 598,549 |
| Note | Share Capital £000's |
Share Premium £000's |
Capital Redemption Merger Reserve £000's |
Reserve £000's |
Shares held by Employee Benefit Trust £000's |
Retained profit £000's |
Total £000's |
Non controlling interest £000's |
Total £000's |
|
|---|---|---|---|---|---|---|---|---|---|---|
| At 1 January 2012 Shares issued/(bought |
3,330 | 182 | — | — | (33) | 27,208 | 30,687 | (35) | 30,652 | |
| back) for cash | 33 | (3,294) | — | 3,297 | — | — | — | 3 | — | 3 |
| Share-based payments | 19 | — | — | — | — | — | 1,500 | 1,500 | — | 1,500 |
| Profit for the year | — | — | — | — | — | 50,193 | 50,193 | 13 | 50,206 | |
| At 31 December 2012 . |
36 | 182 | 3,297 | — | (33) | 78,901 | 82,383 | (22) | 82,361 |
Attributable to Owners of the Parent
| Note | 2013 | 2012 | |
|---|---|---|---|
| £000's | £000's | ||
| Assets | |||
| Property, plant and equipment |
9 | 15,459 | 3,688 |
| Goodwill | 10 | 126,207 | 126,207 |
| Other intangible assets | 11 | 16,401 | 12,343 |
| Financial assets . |
12 | 3,950,443 | 3,159,001 |
| Investment in joint ventures . |
14 | 206 | 368 |
| Reinsurance assets | 20 | 2,840,749 | 2,412,551 |
| Insurance and other receivables | 15 | 64,476 | 94,881 |
| Prepayments and accrued income . |
16 | 70,817 | 63,123 |
| Deferred tax assets | 17 | 424 | 158 |
| Cash and cash equivalents | 18 | 112,741 | 166,273 |
| Total assets |
7,197,923 | 6,038,593 | |
| Equity | |||
| Share capital . |
33 | 40,000 | 36 |
| Share premium | 33 | 435,249 | 182 |
| Capital redemption reserve | 33 | — | 3,297 |
| Merger reserve | 33 | (24,521) | — |
| Shares held by Employee Benefit Trust . |
33 | (58) | (33) |
| Retained profit | 147,945 | 78,901 | |
| Total equity attributable to owners of the Parent |
598,615 | 82,383 | |
| Non-controlling interest |
(66) | (22) | |
| Total equity | 598,549 | 82,361 | |
| Liabilities | |||
| Insurance liabilities | 20 | 4,347,588 | 3,723,298 |
| Insurance and other payables . |
21 | 32,088 | 62,948 |
| Financial liabilities | 22 | 2,201,500 | 1,778,765 |
| External borrowings | 23 | — | 380,367 |
| Current tax liabilities . |
24 | 18,198 | 10,854 |
| Total liabilities | 6,599,374 | 5,956,232 | |
| Total equity and liabilities | 7,197,923 | 6,038,593 |
| Note | 2013 | 2012 | |
|---|---|---|---|
| Cash (used in)/from operations . Corporation tax paid |
27 | £000's (56,851) (17,000) |
£000's 46,171 (17,074) |
| Net cash (used in)/from operating activities |
(73,851) | 29,097 | |
| Cash flows from investing activities: Purchase of property, plant and equipment Purchase of other intangible assets |
9 11 |
(13,657) (7,696) |
(3,058) (7,385) |
| Net cash used in investing activities | (21,353) | (10,443) | |
| Cash flows from financing activities: Proceeds from issuance of share capital . Repayment of subordinated debt . |
33 23 |
121,693 — |
3 (16,000) |
| Repayment of loan notes (Repayment)/receipt of bank loan Proceeds from issuance of bank loan . Interest on subordinated debt Interest payable on external borrowings |
23 23 23 |
(7,656) (70,000) — — (2,365) |
— 50,000 68,075 (496) (829) |
| Net cash from financing activities | 41,672 | 100,753 | |
| Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents brought forward |
(53,532) 166,273 |
119,407 46,866 |
|
| Cash and cash equivalents carried forward | 18 | 112,741 | 166,273 |
Cash flows related to the sale and purchase of financial investments are included in operating cash flows as they are associated with the origination of insurance contracts and payment of insurance claims.
The operating segments reflect the level within the Group at which key strategic and resource allocation decisions are made and the way in which operating performance is reported internally to the chief operating decision makers in the Group, being the Board.
Information is provided to the Board, which identifies operating profit split between that achieved on new business written in the period, that which derives from in-force policies and that relating to the long-term expected return on surplus assets, and therefore this split forms the reportable operating segments in accordance with IFRS 8 ''Operating Segments''.
New business revenue is reported as Single Premium Equivalent (SPE), being the actual single premium plus ten times the annual regular premium for new contracts written during the year. These revenue measures are monitored by the Board separately for each core target market.
The table below shows operating profit for each year, together with a reconciliation to profit before tax
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| New business operating profit |
85,678 | 93,871 |
| In-force operating profit |
34,278 | 14,263 |
| Long-term expected return on surplus assets | 11,435 | 3,997 |
| Operating profit | 131,391 | 112,131 |
| Investment variances | 8,643 | (3,289) |
| Non-recurring expenditure | (30,769) | (5,735) |
| Other | (1,201) | (1,156) |
| Interest on borrowings |
(25,403) | (34,472) |
| Profit from continuing operations before tax |
82,661 | 67,479 |
Investment variances reflect:
Non-recurring expenditure comprises:
Other losses relate to the Group's interest in distribution subsidiaries and holding company expenses.
The profit measure used by the Board to monitor performance is operating profit before tax, analysed between new business operating profit, n-force operating profit and the long-term expected return on surplus assets. Each component of operating profit is explained as
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| % p.a. | % p.a. | |
| Cash | 0.5 | 0.5 |
| Gilts | 3.0 | 3.0 |
| Corporate bonds |
4.5 | 4.5 |
| Commodity trade finance | 10.0 | n/a |
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Retirement |
1,159,616 | 1,167,537 |
| Care | 65,854 | 94,362 |
| Protection | 3,389 | 2,738 |
| Total single premium equivalent | 1,228,859 | 1,264,637 |
Premiums are recognised in the accounting period in which an insurance contract commences, gross of any commission paid. Single premium retirement policies commence at the point that the policyholder accepts a quote. Other policies commence on the date set out in the individual policy contracts. Premiums which have been received and for which no contract is yet in-force are classified as payables arising from insurance contracts and are included within insurance and other payables in the consolidated statement of financial position. Where a contract has been issued but premiums have not yet been received, a debtor arising out of direct insurance operations is recognised for the expected premiums due. Reinsurance premiums and recoveries are accounted for in the accounting period in accordance with the contractual terms of the reinsurance treaties. Premiums exclude any taxes or duties based on premiums.
New business revenue by target market reconciles to gross premiums as follows:
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Total single premium equivalent | 1,228,859 | 1,264,637 |
| Adjustment in respect of regular premium business | (5) | — |
| Premiums received in respect of equity release longevity insurance | — | 2,522 |
| Premiums arising from change to contract terms in 2012 |
(69,335) | 109,580 |
| Reinsurance premiums received |
43 | 91,269 |
| Gross premiums written | 1,159,562 | 1,468,008 |
Premiums are written at the point an insurance contract comes into force. In November 2012, the Group changed the terms of its offer to potential retirement policyholders such that an insurance contract would come into force at the point of their acceptance of the offered terms. Previously a contract only came into force when all funds had been received from the policyholder. For management purposes SPE continues to be recorded when all funds have been received from the policyholder. £109.6m of premium recognised in 2012 would otherwise have been recognised in 2013 and £40.3m of the premium recognised in 2013 would otherwise have been recognised in 2014 so that total premium recognised in 2013 was £69.3m lower than would otherwise have been recognised. This also gives rise to amounts due from policyholders for premiums not yet received, as shown in note 15.
The following table illustrates revenue by product as required by IFRS 8 ''Operating Segments''. All revenues from external customers are derived from business originated in the UK, and as such no geographical information is disclosed.
The Board consider the Group's external customers to be the individual policyholders. As such, the Group is not reliant on any individual customer.
An analysis of gross premiums written by product is set out below:
| For the year ended 31 December 2013 | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Retirement annuity |
1,090,282 | 1,277,177 |
| Care annuity | 65,979 | 94,508 |
| Protection life assurance | 3,258 | 3,433 |
| Other | 43 | 92,950 |
| Total gross premiums written | 1,159,562 | 1,468,008 |
Partnership Assurance Group plc (the ''Company'') was incorporated and registered in England and Wales on 26 February 2013 as a public company limited by shares. The Company's registered office address is 5th Floor, 110 Bishopsgate, London EC2N 4AY
The principal activity of the Company is that of a holding company. The Company and the entities controlled by the Company (its ''subsidiaries'') are collectively ''the Group''
On incorporation, the share capital of the Company was £50,000 divided into 50,000 ordinary shares of 100 pence each. The 50,000 subscriber shares of 100 pence each were issued in consideration for an undertaking by funds managed or advised by Cinven Partners LLP (Cinven) to pay cash at par. On 12 June 2013, at admission on the London Stock Exchange, the 50,000 ordinary shares of 100 pence each were subdivided into 500,000 ordinary of 10 pence shares each.
For the year ended 31 December 2013
During the year, prior to admission, the Company acquired a 100% shareholding in PAG Holdings Limited and completed a number of steps as part of a reorganisation of the Group. In addition, the Company also successfully completed the issue of new ordinary shares to raise approximately £125m through its admission via a Premium Listing on the London Stock Exchange, (collectively, the ''Global Offer''). Details of these transactions are detailed in note 32.
The Strategic Report outlines the activities, performance and future outlook of the Group. Note 30 to the financial statements sets out the Group's policies and procedures for managing insurance and financial risk, and note 31 sets out how the Group manages its capital resources.
These financial statements comprise the consolidated annual financial statements of the Group and the individual annual financial statements of the Company made up to 31 December 2013.
The results of subsidiaries acquired or disposed of during the period are included from or up to the effective date of acquisition or disposal. Non-controlling interest in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Control is achieved where the Group has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
The presentation currency of the Group is sterling. Unless otherwise stated, the amounts shown in the consolidated financial statements are in thousands of pounds sterling (£'000).
The consolidated financial statements and those of the Company have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Group has applied all IFRS standards and interpretations adopted by the EU effective for the year ended 31 December 2013. These are the first annual consolidated financial statements of the Group and are prepared in accordance with IFRS adopted for use in the EU.
IFRS 1 ''First Time Adoption of International Financial Reporting Standards'' requires an explanation to be presented of how the transition to IFRS has affected the reported financial position and the financial performance of the Group. As these are the Group's first full year financial statements no transitional disclosures are necessary.
The Group in its current structure was formed on 12 June 2013 when the Company acquired PAG Holdings Limited from the Cinven funds, certain Directors, certain members of Senior Management and other individuals (see note 32). Whilst legally the Company is the acquirer and PAG Holdings Limited the acquiree, IFRS 3, ''Business Combinations'' requires consideration as to which entity's shareholder has majority control after the combination. The majority of shares in both entities are held by the Cinven Funds, but after the restructure the majority of the share holdings in the Company are owned by virtue of holdings that had existed in PAG Holdings Limited before they were swapped for share holdings in the Company. Given this, for the purposes of IFRS 3, PAG Holdings Limited is treated as the accounting acquirer and the Company as the accounting acquiree. At the point of the acquisition, the Company did not meet the test of being a business. As the accounting acquiree is not a business, the acquisition falls outside of the scope of IFRS 3. Accordingly, as permitted by IAS 8, ''Accounting Polices, Changes in Accounting Estimates and Errors'', in the absence of specific guidance in IFRS for entities involved in common control transactions, the group has elected to account for the acquisition as a group reconstruction as described under the UK GAAP accounting standard, Financial Reporting Standard 6, ''Acquisitions and Mergers''. The consolidated financial statements have been prepared as if the transaction that gave rise to the formation of the Group had taken place at the beginning of the comparative period. Under these principles, the consolidated financial statements have been prepared as if the Company were the holding company of PAG Holdings Limited from 1 January 2012, the date of the beginning of the comparative period.
The information for the year ended 31 December 2012 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. As the predecessor holding company of the Group, PAG Holdings
Limited is a Jersey company. A copy of the statutory accounts for that year has not been delivered to the Registrar of Companies. Deloitte LLP (the ''auditor'') reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and by virtue of the PAG Holdings Limited being a Jersey company, did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
The Directors have undertaken a going concern assessment in accordance with ''Going Concern and Liquidity Risk Guidance for UK directors of UK Companies 2009'' published by the Financial Reporting Council in October 2009 as described in the Directors' Report.
Significant accounting policies applied to the preparation of these financial statements are presented in the notes below, aligning disclosure of accounting policies to the item which is most directly relevant to the policy.
The Group has adopted the following new standards and changes to existing standards which are relevant to the Group's operations, and became effective for financial years beginning on or after 1 January 2013
The following new or revised or amended standards, in issue, were not yet effective, or in some cases not yet endorsed by the EU. The Group has not early adopted any of these standards.
| Standard/ Interpretation |
Content/amendment | Applicable for financial periods beginning on or after |
|---|---|---|
| IFRS 10 | Consolidated financial statements | 1 January 2014* |
| IFRS 10 establishes a new definition of ''control'' to be applied when determining which entities must be consolidated. This definition is based on the concept of power, exposure or rights to variable returns and their linkage. This differs from the current definition in IAS 27 which is based on the power to determine financial and operating policies. The standard is not expected to have a material impact on the Group's profit before tax for the year or equity. The standard has been endorsed by the EU. |
||
| IFRS 11 | Joint arrangements | 1 January 2014* |
| IFRS 11 defines two types of joint arrangements—joint ventures and joint operations—based on how rights and obligations are shared by parties to the arrangements. The standard sets out the required accounting treatment for each type of joint arrangement. The standard is not expected to have a material impact on the Group's profit before tax for the year or equity. The standard has been endorsed by the EU. |
||
| IFRS 12 | Disclosures of interests in other entities | 1 January 2014* |
| IFRS 12 requires additional disclosure for investments, in subsidiaries, joint arrangements, associates and structured entities. The standard is expected to have a significant impact on the level of disclosure in respect of subsidiaries and joint arrangements. The standard has been endorsed by the EU. |
||
| IAS 27 | Separate financial statements | 1 January 2014* |
| Removes requirements superseded by IFRS 10. The standard has been endorsed by the EU. |
||
| IAS 28 | Associates and joint ventures | 1 January 2014* |
| Amendment to bring joint ventures into the scope of IAS 28 and to require equity accounting for these entities. The amendment is not expected to have a significant impact on the Group financial statements. The amendment has been endorsed by the EU. |
||
| IFRS 10, IFRS 12 and IAS 27 |
Investment Entities | 1 January 2014* |
| Amendments to provide ''investment entities'' an exemption from the consolidation of particular subsidiaries. The Group is not an investment entity, as defined in the amendments, and therefore the amendment is not expected to have a significant impact on the Group financial statements. The amendment has been endorsed by the EU. |
| Standard/ Interpretation |
Content/amendment | Applicable for financial periods beginning on or after |
|---|---|---|
| IAS 32 | Financial Instruments—Presentation | 1 January 2014* |
| This amendment clarifies the requirements for offsetting financial assets and financial liabilities on the statement of financial position. The amendment is not expected to have significant implications for the Group financial statements. The amendment has been endorsed by the EU. |
||
| IAS 36 | Recoverable Amount Disclosures for Non-Financial Assets | 1 January 2014* |
| Amendments which reduce the circumstances in which the recoverable amount of assets is required to be disclosed and clarification and amendments to the disclosures required. The amendment is not expected to have significant implications for the Group financial statements. The amendment has been endorsed by the EU. |
||
| IAS 39 | Novation of Derivatives and Continuation of Hedge Accounting | 1 January 2014* |
| Amendment to clarify the circumstances in which hedge accounting can be continued if derivatives are novated, to facilitate the novation of derivatives to a central counterparty. The amendment is not expected to have significant implications for the Group financial statements. The amendment has been endorsed by the EU. |
||
| IFRS 9 | Financial Instruments | 1 January 2018 |
| IFRS 9 will replace IAS 39: ''Financial instruments—Recognition and Measurement''. The impact of the adoption of IFRS 9 on the Group will depend on the finalisation of the standard and the interaction of the requirements of IFRS 9 with the IASB's on-going insurance contracts accounting project. The standard has not yet been endorsed by the EU. |
* as adopted by the EU.
Investment income comprises interest received on financial investments, realised investment gains and losses and movements in unrealised gains and losses.
Expenses and charges are included on an accruals basis.
Realised gains and losses on investments are calculated as the difference between net sales proceeds less costs of sale and original cost. Unrealised gains and losses on investments represent the difference between the valuation at the balance sheet date and their purchase price or, if they have been previously valued, their valuation at the last balance sheet date. The movement in unrealised gains and losses recognised in
the year also includes the reversal of unrealised gains and losses recognised in earlier accounting periods in respect of investment disposals in the current period.
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Interest receivable from financial assets | 138,533 | 113,479 |
| Interest payable from financial liabilities | (71,596) | (58,970) |
| Movement in fair value of financial assets |
26,616 | 247,126 |
| Movement in fair value of financial liabilities | 17,382 | (38,787) |
| Realised gains on financial assets | 72,604 | 65,531 |
| Realised losses on financial liabilities | (45,777) | (37,641) |
| Total net investment income |
137,762 | 290,738 |
All financial assets and liabilities at 31 December 2013 are classified at fair value through profit and loss.
Acquisition expenses comprise direct costs such as commissions and indirect costs of obtaining and processing new business. They are allocated to particular categories of business based on available information. Acquisition expenses are not deferred as they are largely recovered at inception through profit margins.
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Commission(i) | 11,435 | 32,899 |
| Other acquisition expenses | 1,601 | 1,667 |
| Total acquisition expenses | 13,036 | 34,566 |
(i) The regulatory changes introduced by the Retail Distribution Review in December 2012 have prompted an increase in adviser fees paid directly by polio/holders to their financial advisers and a reduction in commission paid by the Group and reported in acquisition expenses.
Profit from continuing operations before tax is stated after charging the following items:
| £000's | £000's | |
|---|---|---|
| Staff costs, including directors' remuneration | 41,052 | 34,241 |
| Share-based payments | 9,324 | 1,500 |
| Depreciation of property, plant and equipment | 1,843 | 1,037 |
| Amortisation of intangible assets | 1,997 | 1,263 |
| Rental of leased premises | 2,860 | 950 |
| Other operating leases |
419 | 9 |
| Auditor remuneration | 3,307 | 1,424 |
| Consultancy | 11,507 | 12,613 |
| Legal and professional fees | 20,143 | 3,551 |
| Marketing |
11,591 | 9,883 |
| Other (primarily office maintenance and supplies) |
13,180 | 6,756 |
| Total administrative and other expenses |
117,223 | 73,227 |
For the year ended 31 December 2013
The analysis of auditor's remuneration for the year is as follows:
| Fees payable for the year ended 31 December were in respect of: | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Audit of the Partnership Assurance Group plc Annual Report and Accounts | 85 | 8 |
| Audit of other Group entities | 336 | 160 |
| Audit related assurance services | 166 | 72 |
| Taxation compliance services |
44 | 127 |
| Corporate finance transactions relating to the IPO in June 2013 | 2,676 | 1,057 |
| Auditor remuneration |
3,307 | 1,424 |
The aggregate staff costs, including Directors' remuneration in the year were:
| For the year ended 31 December | 2013 £000's |
2012 £000's |
|---|---|---|
| Wages and salaries | 33,839 | 29,369 |
| Social security costs |
5,528 | 3,784 |
| Other pension costs | 1,685 | 1,088 |
| Total staff costs | 41,052 | 34,241 |
| The average number of persons employed during the year were: | ||
| Administration and finance | 430 | 323 |
| Sales and marketing | 109 | 95 |
| Average number of employees | 539 | 418 |
An analysis of Directors' remuneration is included in the Remuneration Report.
Income tax comprises current and deferred tax. Income tax is charged or credited to other comprehensive income if it relates to items that are charged or credited to other comprehensive income. Similarly, income tax is charged or credited to equity if it relates to items that are credited or charged directly to equity. Otherwise income tax is recognised in the consolidated statement of comprehensive income.
Provision is made for taxation on taxable profits for the year, using tax rates enacted or substantially enacted at the balance sheet date together with adjustments to tax payable in respect of previous years.
Deferred tax is provided in full on temporary differences arising, which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on tax rates and laws enacted or substantively enacted at the balance sheet date. Temporary differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements except for differences arising from the initial recognition of goodwill and the initial recognition of assets and liabilities in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting nor taxable profit.
A deferred tax asset is recognised to the extent that it is regarded as more likely than not that it will be recovered. Deferred tax assets and liabilities are not discounted.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date. Deferred income tax assets and liabilities are offset, only if a legally enforceable right exists to set-off current tax
assets against current tax liabilities, the deferred income taxes relate to the same taxation authority and that authority permits the Group to make a single net payment.
| For the year ended 31 December | Continuing operations 2013 |
Discontinued operations 2012 |
Continuing operations 2012 |
|---|---|---|---|
| £000's | £000's | £000's | |
| Current taxation: | |||
| Tax charge for the year |
23,112 | — | 17,555 |
| Adjustment in respect of prior periods | 394 | — | (299) |
| 23,506 | — | 17,256 | |
| Deferred taxation: | |||
| Tax credit for the year | (266) | — | (11) |
| Net taxation charge | 23,240 | — | 17,245 |
The actual tax charge of the Group differs from the expected tax charge, computed by applying the average rate of UK corporation tax for the year of 23.25% (2012: 24.5%), as follows:
| For the year ended 31 December | Continuing operations 2013 |
Discontinued operations 2012 |
Continuing operations 2012 |
|
|---|---|---|---|---|
| £000's | £000's | £000's | ||
| Profit/(loss) before tax | 82,661 | (28) | 67,479 | |
| Current taxation at 23.25% (2012: 24.5%) | 19,216 | (7) | 16,532 | |
| Prior period losses utilised in period | (5) | — | — | |
| Disallowable expenses | 3,892 | 7 | 970 | |
| Difference between depreciation and capital allowances for tax | ||||
| purposes | (110) | — | 42 | |
| Expenses not deductible in determining taxable profit | 247 | — | ||
| Share-based payments crystallised in the period | (2,296) | — | ||
| Add back IFRS 2 share-based payment charge |
2,168 | — | — | |
| Deferred taxation |
(266) | — | ||
| Adjustment in respect of prior periods | 394 | — | (299) | |
| Net taxation charge | 23,240 | — | 17,245 | |
| For the year ended 31 December | 2013 | 2012 | ||
| £000's | £000's | |||
| Unutilised tax losses | 44 | 21,420 | ||
| Unrecognised deferred tax assets | — | 4,500 |
From 1 January 2013 insurers carrying on long-term insurance business in the UK are required to calculate taxable trading profits or losses by reference to the statutory accounts rather than their annual return to the Prudential Regulatory Authority. This change has little impact on the tax arrangements of the Group as it has treated all insurance profits as pension business (rather than Basic Life Assurance and General Annuity Business, 'BLAGAB', or any other tax category) in its corporation tax calculations since 2007.
Under this new regime, £14.1m of carried forward unutilised tax losses which arose in PLACL, the main life subsidiary of the Group, on BLAGAB business as a result of excess management expenses, cannot be utilised after 31 December 2013 since taxable BLAGAB profits will not arise. The remaining £7.3m of carried forward unutilised tax losses related to a Group entity which became dormant in 2013 so that future taxable profits will not arise. No deferred tax asset is recognised for any of these losses because the Group does not expect to be able to utilise them.
For the year ended 31 December 2013
Basic earnings per share is calculated using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the period.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares, including share options.
Diluted earnings per share amounts are calculated by dividing the profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.
The calculation of the basic and diluted earnings per share from continuing operations is based on the following data:
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Profit for the year |
59,421 | 50,206 |
| Less non-controlling interests |
44 | (13) |
| Profit attributable to equity holders of the Parent | 59,465 | 50,193 |
| Effect of dilutive potential ordinary shares: | ||
| Share options | — | — |
| Diluted profit attributable to equity holders of the Parent |
59,465 | 50,193 |
All of PAG Holdings Limited's A, B and C shares (see note 32) were exchanged for Partnership Assurance Group plc shares on 12 June 2013. For the purpose of the earnings per share calculation, the weighted average number of share shown below has been calculated as if the exchange of these PAG Holdings Limited shares had occurred at the beginning of the comparative period.
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| Number of shares |
Number of shares |
|
| Basic weighted average number of shares | 346,138,910 | 279,527,196 |
| Effect of dilutive potential ordinary shares: | — | — |
| Share options | 1,276,243 | 2,133,025 |
| Diluted weighted average number of shares |
347,415,153 | 281,660,221 |
The options granted by the PAG Holdings Limited trust in respect of the ESOP scheme have a dilutive effect, up to the date of the IPO when these options vested.
As detailed in note 19, the Group implemented a number of new employee share-based plans following admission on the London Stock Exchange. The Share Incentive Plan (SIP) has a potential dilutive effect.
No decisions have been made as to the method of settlement of the Long Term Incentive Plan (LTIP) or the share element of the Deferred Share Bonus Plan (DSBP). The weighted average number of shares calculation above has been derived on the assumption that the vesting of shares in respect of the LTIP and DSBP awards will be settled with shares bought externally from the market and hence will not be dilutive.
For the year ended 31 December 2013
Assets are stated at cost less accumulated depreciation and impairment losses. Depreciation is calculated to write off the cost of tangible assets over their estimated useful life on a straight-line basis. The principal rates used for this purpose are as follows:
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| Computer equipment | 33% | 33% |
| Fixtures and fittings | 10% to 20% | 20% |
| Office refit | 10% to 50% | 20% to 50% |
The range of principal rates used changed during 2013 as new assets came into use.
| Computer equipment |
Fixtures and fittings |
Office refit costs |
Total | |
|---|---|---|---|---|
| £000's | £000's | £000's | £000's | |
| Cost at 1 January 2013 | 4,586 | 473 | 2,906 | 7,965 |
| Acquired at fair value: | ||||
| Additions at cost |
3,244 | 900 | 9,513 | 13,657 |
| Depreciated assets written off | — | — | (1,255) | (1,255) |
| At 31 December 2013 | 7,830 | 1,373 | 11,164 | 20,367 |
| Accumulated depreciation at 1 January 2013 | 2,397 | 375 | 1,505 | 4,277 |
| Charge for the year |
1,180 | 48 | 615 | 1,843 |
| Depreciated assets written off | — | — | (1,212) | (1,212) |
| At 31 December 2013 | 3,577 | 423 | 908 | 4,908 |
| Net book value: | ||||
| At 31 December 2012 | 2,189 | 98 | 1,401 | 3,688 |
| At 31 December 2013 | 4,253 | 950 | 10,256 | 15,459 |
Goodwill represents the excess of cost of acquisition over the fair value of the separable net assets of businesses acquired. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is allocated to each of the cash-generating units (CGU) that are expected to benefit from the combination. Goodwill is tested for impairment at least annually, or when circumstances or events indicate there may be uncertainty over this value. Impairment is determined by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Any impairment is recognised immediately in the consolidated statement of comprehensive income and is not subsequently reversed.
| 2013 | 2012 | |
|---|---|---|
| £000's | £000's | |
| At 1 January | 126,207 | 126,207 |
| At 31 December |
126,207 | 126,207 |
The goodwill arose on acquisition of the PLACL operations and the value represented the potential of this business to generate value from future sales. Therefore the goodwill is allocated to the new business cash generating unit, the scope of which is identical to the ''new business'' operating segment described in note 1.
The carrying value of goodwill has been tested for impairment at the balance sheet date. Value in use has been determined as the present value of expected future cash flows associated with new business. The cash flows used in this calculation are consistent with those monitored by management.
For the year ended 31 December 2013
Expected future new business cash flows are based on financial plans approved by management, covering a period of three years from the balance sheet date. A rate of 10% has been applied to discount cash flows to a present value.
No impairment has been recognised in 2013 or 2012.
Other intangible assets comprise intellectual property and software development costs.
The intellectual property asset comprises of specific mortality tables derived from data collected over an extended period and are deemed to have an indefinite life. Consequently no amortisation is charged against its carrying value.
Development costs that are directly attributable to the design and testing of identifiable software products, controlled by the Group, are recognised as intangible assets when it can be demonstrated that it is technically feasible to complete the product so that it is available for use and will generate probable future economic benefits. Software development costs have a finite useful life and are amortised using the straight-line method over three to five years.
The carrying amounts of intangible assets with finite expected useful economic lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. A review for indicators of impairment is conducted annually. The carrying amounts of intangible assets with indefinite expected useful economic lives are tested for impairment at least annually, or when circumstances or events indicate there may be uncertainty over this value. An impairment loss is recognised in the consolidated statement of comprehensive income for the amount by which the asset's carrying amount exceeds its recoverable amount.
The recoverable amount of an asset is the greater of its net selling price (fair value less selling costs) and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit, or company of units, to which the asset belongs.
| 2013 | 2012 | |
|---|---|---|
| £000's | £000's | |
| Intellectual property cost and carrying amount: | ||
| At 1 January |
3,100 | 3,100 |
| At 31 December | 3,100 | 3,100 |
| Software development cost: | ||
| At 1 January |
11,750 | 4,365 |
| Additions at cost |
7,696 | 7,385 |
| Assets written off | (1,641) | — |
| At 31 December | 17,805 | 11,750 |
| Software development accumulated amortisation: | ||
| At 1 January |
2,507 | 1,244 |
| Charge for the year |
1,997 | 1,263 |
| At 31 December | 4,504 | 2,507 |
| Total intangible assets at 1 January | 12,343 | 6,221 |
| Total intangible assets at 31 December |
16,401 | 12,343 |
The value of intellectual property has been determined based upon an estimate of the costs to employ adequately skilled individuals over an appropriate period of time to develop intellectual property of a similar nature sufficient to enable the Group to replicate the estimated future cash flows and profits deriving from that intellectual property.
The intellectual property is continually updated through the collection of further data, updated analyses, and conversion into new and more detailed underwriting manuals and mortality tables. For this reason, the intangible asset is deemed to have an indefinite life, and consequently, no amortisation is provided against the value of the intangible asset. The carrying value of the intangible asset is tested for impairment at each reporting date, and is allocated to the ''new business'' cash-generating unit, the scope of which is identical to the ''new business'' operating segment described in note 1. The method and assumptions used in this test are identical to those applied in the goodwill impairment test, as set out in note 10.
No impairment of intellectual property has been recognised in 2012 or 2013.
The amortisation period for software development costs is three to five years. During the year the intangible assets relating to software development were reviewed for impairment. As a result of this certain software assets were identified as no longer being expected to generate economic benefits for the Group. No other indicators of impairment existed in respect of software development costs as at the balance sheet date.
The Group classifies its financial assets as financial investments, loans secured by mortgages and derivative financial assets at fair value through profit and loss. The category of fair value through profit and loss has two sub-categories: those that meet the definition as being held for trading; and those that the Group chooses to designate as fair value. The fair value through profit and loss is selected as the Group's strategy is to manage its financial assets, as a portfolio, on a fair value basis.
Purchases and sales of debt securities and other fixed income securities are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Transaction costs are expensed as incurred. These investments are derecognised when the contractual rights to receive cash flows from the investments expire, or where the investments have been transferred, together with substantially all the risks and rewards of ownership.
Debt securities and other fixed income securities are subsequently carried at fair value with changes in fair value included in the consolidated statement of comprehensive income in the period in which they arise.
The fair values of debt securities are based on quoted bid prices, or based on modelled prices (using observable market inputs) where quoted bid-prices are not available.
Investments in Commodity Trade Finance loans are carried at fair value on initial recognition and are recognised when the cash is advanced for the trade. Commodity Trade Finance loans are subsequently carried at fair value with changes in fair value included in the consolidated statement of comprehensive income in the period in which they arise. The fair value of these investments is not based on observable market data.
Loans secured by mortgages are recognised when the cash is advanced to borrowers at their fair values. These loans are derecognised when the contractual rights to receive cash flows from the investments expire, or where the investments have been transferred, together with substantially all the risks and rewards of ownership.
For the year ended 31 December 2013
Loans secured by mortgages are subsequently carried at fair value with changes in fair value included in the consolidated statement of comprehensive income in the period in which they arise.
The fair value of loans secured by mortgages is initially deemed to be the transaction price and subsequently marked to model. The underlying model follows the methodology used to establish transaction prices. It uses longevity assumptions to derive expected cash flows and the Black-Scholes option pricing methodology to establish the value of the no-negative equity guarantee that is embedded in the product. The discount rates that are applied to cash flows to produce fair value are based on long dated swaps adjusted so that they would produce transaction date prices on the date of transaction.
The Group enters into a variety of derivative financial instruments to manage its exposure to interest rates, inflation, credit default and foreign exchange rate risk, including foreign exchange forward contracts, interest rate swaps, credit default swaps and inflation swaps.
Derivative contracts are traded either through an exchange or over-the-counter (OTC). OTC derivative contracts are individually negotiated between contracting parties and can include options, swaps, caps and floors.
Derivatives are initially recognised at fair value at the date that a derivative contract is entered into and are subsequently remeasured to fair value at each balance sheet date. The resulting gain or loss is recognised in the consolidated statement of comprehensive income. The fair values are obtained from quoted market prices or, if these are not available, by using standard valuation techniques based on discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair value is positive and liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset in the consolidated statement of financial position at the date of purchase representing their fair value at that date.
| Fair value at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Financial investments | 3,073,964 | 2,645,997 |
| Loans secured by mortgages | 840,066 | 478,097 |
| Derivative assets |
36,413 | 34,907 |
| Total financial assets | 3,950,443 | 3,159,001 |
| Cost at 31 December | 2013 | 2012 |
| £000's | £000's | |
| Financial investments | 2,991,196 | 2,464,790 |
| Loans secured by mortgages at cost |
796,788 | 414,500 |
| Derivative assets |
— | — |
| Total financial assets | 3,787,984 | 2,879,290 |
The methodology used to derive the fair values is set out in note 26.
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the ''functional currency''). The functional currency of each of the Group's material entities is sterling. The consolidated financial statements are presented in sterling, which is the Group's presentation currency.
Assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the end of the financial period. Foreign exchange gains and losses resulting from the settlement of
For the year ended 31 December 2013
such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in net investment income in the consolidated statement of comprehensive income.
Set out below are the principal subsidiary and joint venture undertakings of Partnership Assurance Group plc. All of the companies are incorporated in England and Wales unless otherwise indicated. The shares held are voting ordinary equity shares. A full list of subsidiary and joint venture undertakings will be annexed to the Partnership Assurance Group plc annual return filed at Companies House.
| Name: | Principal activity: | Holding |
|---|---|---|
| PAG Holdings Limited(i) | Holding company | 100% |
| PAG Finance Limited(i) | Holding company | 100% |
| Partnership Holdings Limited | Holding company | 100% |
| Partnership Group Holdings Limited | Holding company | 100% |
| Partnership Life Assurance Company Limited | Life assurance and pension annuities | 100% |
| Partnership Home Loans Limited | Provision of Lifetime Mortgage products | 100% |
| Partnership Services Limited | Service company | 100% |
| Payingforcare Limited |
Website company | 100% |
| PASPV Limited | Investment activity | 100% |
| Eldercare Group Limited | Independent financial advisers | 51% |
| Gateway Specialist Advice Services Limited(ii) |
Independent financial advisers | 50% |
(i) incorporated in Jersey
(ii) joint Venture
The Group has chosen to take advantage of the option under IAS 31 to use the equity method to consolidate its investment in its joint venture. Under the equity method of accounting the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the Group's share of net assets of the joint venture.
| 2013 | 2012 | |
|---|---|---|
| £000's | £000's | |
| At 1 January |
368 | 408 |
| Share of losses in the year |
(162) | (40) |
| At 31 December | 206 | 368 |
The investment in joint venture at 31 December 2013 relates entirely to the Group's investment in Gateway Specialist Advice Services Limited, an IFA business that provides specialist later-life financial advice.
On 3 June 2011 the Group entered into a joint venture agreement with Digitalis Retail 1 Limited. As a result of this agreement, the Group acquired 49 shares in Pension Annuity Limited (the joint venture entity) representing 49% of its issued share capital, for a total consideration of £150,000.
On 9 March 2012, the Group acquired the remaining 51 shares in Pension Annuity Limited from Digitalis Retail 1 Limited for a total consideration of £30,000, at which time Pension Annuity Limited became a wholly owned subsidiary.
The operations of Pension Annuity Limited were discontinued during 2012 and on 29 January 2013, the Company was dissolved and removed from the register of companies.
For the year ended 31 December 2013
Insurance and reinsurance debtors represent amounts receivable after commencement of the contract which have not been settled at the balance sheet date.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Debtors arising out of insurance contracts(i) | 51,140 | 85,153 |
| Debtors arising out of reinsurance contracts | 9,039 | 5,627 |
| Other debtors(i) |
4,008 | 3,879 |
| Amounts due from joint venture | 289 | 222 |
| Total insurance and other receivables | 64,476 | 94,881 |
(i) The 2013 balances are impacted relative to 2012 as they reflect the revised policy contract terms explained in note 1
The Directors consider that the carrying value in the balance sheet is a reasonable approximation of the fair value.
Interest accrued represents the balance receivable for interest income, calculated daily based on the contractual interest rates of the relevant instruments, recognised since the last interest payment date.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Accrued interest | 59,837 | 54,425 |
| Prepayments |
10,980 | 8,698 |
| Total prepayments and accrued income | 70,817 | 63,123 |
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| At 1 January |
158 | 147 |
| Credit to consolidated statement of comprehensive income | 266 | 11 |
| At 31 December | 424 | 158 |
Deferred tax is recognised as a result of the difference between the accumulated depreciation and the capital allowances granted in the annual corporation tax submission on property, plant and equipment using a UK corporation tax rate of 20%, which is appropriate for when the timing differences are expected to unwind (2012: 23%).
Cash and cash equivalents comprise cash in hand, deposits held on call with banks and other short-term highly liquid investments with original maturities of 90 days or less. Bank overdrafts are included in cash and cash equivalents for the purposes of the consolidated cash flow statement.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Short-term bank deposits | 94,723 | 151,529 |
| Cash at bank and in hand | 18,018 | 14,744 |
| Total cash and cash equivalents | 112,741 | 166,273 |
For the year ended 31 December 2013
Equity-settled share-based payments to employees and others providing services are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest.
At each period end, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in the consolidated statement of comprehensive income such that the cumulative expense reflects the revised estimate with a corresponding adjustment to equity.
Where the terms and conditions of options are modified before they vest, the increase in the fair value of those instruments, measured immediately before and after the modification, is also charged to the consolidated statement of comprehensive income over the remaining vesting period.
The share-based payment expense recognised for employee services receivable during the year is as follows:
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Employee Share Option Plan | 8,378 | 1,500 |
| Long Term Incentive Plan |
432 | — |
| Deferred Share Bonus Plan | 374 | — |
| Share Incentive Plan |
65 | — |
| Save as you earn Plan |
75 | — |
| Total expense |
9,324 | 1,500 |
In 2009, the Group implemented an Employee Share Option Plan (ESOP) to retain and motivate its employees. Awards under this plan were in the form of options to acquire shares of PAG Holdings Limited, the top holding company of the Group at that point in time, for an exercise price equivalent to the market value of those shares at the grant date. The expense recognised in other operating expenses in the consolidated statement of comprehensive income for the period to 31 December 2013 is £8.4m (£6.9m net of tax) (31 December 2012: £1.5m). As shares awarded under the plan were unlisted at the grant date as their fair value could not be measured reliably, therefore the value, and expense, relating to this scheme was measured at its intrinsic value, remeasured at each reporting date.
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| Number of share options |
Number of share options |
|
| Outstanding at the beginning of the year |
23,953 | 26,285 |
| Granted during the year |
7,910 | — |
| Forfeited during the year | — | (2,332) |
| Exercised during the year |
(31,863) | — |
| Outstanding at the end of the year |
— | 23,953 |
During the year the terms of the ESOP were modified such that the options to acquire shares of PAG Holdings Limited were exchanged for options to acquire shares in Partnership Assurance Group plc of equal value at the date of the modification. No incremental fair value arose as a result of this modification.
Following admission on the London Stock Exchange, the awards under the ESOP vested in full and were exercised immediately. The settlement of these ESOPs was funded by the sale of 2,706,399 shares from the PAG Holdings Limited EBT.
For the year ended 31 December 2013
The weighted average exercise price for the awards exercised in the year was £0.20. The share price at the date of exercise was £3.85.
There are no outstanding options under the ESOP as at 31 December 2013.
Following admission, the Group has implemented the following employee share-based payment plans;
The Group made awards under the LTIP to Executive Directors and other senior executives in June 2013. The LTIP awards will be subject to the satisfaction of the following performance conditions which will determine the proportion (if any) of the LTIP award to vest at the end of the performance period.
50% of these LTIP awards are subject to a performance condition relating to the growth in the Group's operating profit over a performance period of three financial years. If operating profit for the financial year ending 31 December 2015 exceeds operating profit for the financial year ended 31 December 2012 by 33.1%, 10% of the LTIP award will vest. The maximum 50% will vest if operating profit for the financial year ending 31 December 2015 exceeds operating profit for the financial year ended 31 December 2012 by at least 64.3%. Payment will be on a sliding scale in between these points.
The remaining 50% of these LTIP awards will be subject to a condition measuring the Company's total shareholder return (TSR) performance relative to the constituent companies of the FTSE 250 index (excluding investment trusts, mining companies and oil and gas producers) over the period from admission to 31 December 2015. Vesting of 10% of the LTIP award will occur for median performance and the maximum 50% at upper quartile performance or above, with straight line vesting in between these points.
The awards are accounted for as equity-settled schemes. The total value of these schemes is measured at each award date based upon the number of shares expected to vest awarded and the expense charge is recognised over the course of the vesting period.
At 31 December 2013 there were 1,248,636 awards in issue and a charge of £431,848 has been recognised in the consolidated statement of comprehensive income with a corresponding increase in equity in the consolidated statement of financial position. The weighted average fair value of awards made during the year was £2.67.
The fair value of the award was measured with reference to the quoted share price of Partnership Assurance Group plc at the measurement date. The performance condition relating to total shareholder return was incorporated into the measure of fair value through a stochastic model incorporating the historical TSR volatility of comparable listed entities.
The performance condition relating to operating profit over performance and other non-market vesting conditions are incorporated into the estimate of the total number of awards expected to vest. This expectation is reviewed and, if necessary, revised at each reporting date.
Effective from June 2013, one-third of the bonuses earned by Executive Directors and certain other senior executives in respect of the Company's annual bonus arrangements are deferred into shares in Partnership Assurance Group plc. The remaining two-thirds of the awards will continue to be paid in cash. The share element of the bonus awards will vest on the third anniversary of the date of the determination of the bonus in respect of which they were granted.
The share element of the bonus awards are accounted for as equity-settled schemes. The fair value of the awards are calculated at each aware date based on one-third of the estimated annual bonus payout and the expense charge is recognised over the course of the vesting period.
A charge of £374,072 has been recognised in the consolidated statement of comprehensive income in respect of these schemes for the year to 31 December 2013 with a corresponding increase in equity in the consolidated statement of financial position.
The weighted average fair value of awards made during the year was £3.85. The fair value of the award was measured with reference to the quoted share price of Partnership Assurance Group plc at the measurement date. Non-market vesting conditions are incorporated into the estimate of the total number of awards expected to vest. This expectation is reviewed and, if necessary, revised at each reporting date.
The Company has made a one-off award of £1,000 of free shares immediately after admission to all eligible employees under a new all-employee share plan, known as the Share Incentive Plan (SIP). These shares will be forfeited if the employees cease employment (except in ''good leaver'' circumstances) within the first three years from the date of the award. Awards made under this plan entitle these employees to
These awards are accounted for as equity-settled schemes. The fair value of these schemes is calculated at each award date based upon the number of shares awarded multiplied by the share price at grant date and expensed over the vesting period.
A charge of £65,277 has been recognised in the consolidated statement of comprehensive income in respect of this scheme for the year to 31 December 2013 with a corresponding increase in equity in the consolidated statement of financial position.
The weighted average fair value of awards made during the year was £3.85. The fair value of the award was measured with reference to the quoted share price of Partnership Assurance Group plc at the measurement date. Non-market vesting conditions are incorporated into the estimate of the total number of awards expected to vest. This expectation is reviewed and, if necessary, revised at each reporting date.
In July 2013, the Group introduced a SAYE scheme. Under this plan, employees may elect to save up to £2 50 per month over a three or five year period. The amount of ordinary shares of Partnership Assurance Group plc over which the option is granted will be determined at the grant date to reflect the amount that each employee has agreed to save under the Share Save contract.
A charge of £74,734 has been recognised in the consolidated statement of comprehensive income in respect of this scheme for the year to 31 December 2013 with a corresponding increase in equity in the consolidated statement of financial position.
The weighted average fair value of the awards made during the year was £18,546. The fair value of the awards has been determined using a Black-Scholes valuation model.
Key assumptions within this valuation model were: expected share price volatility (43%), expected dividend yield (1%), risk-free interest rate (2%), expected option life (three years and five years), exercise price (£3.57), and share price at the measurement date (£4.45).
Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event would cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire.
For the year ended 31 December 2013
The Group's long-term insurance contracts include annuities to fund retirement income, annuities to fund care fees (immediate needs and deferred), long-term care insurance and whole of life and term protection insurance. These contracts are expected to remain in force for an extended period of time, and insure events associated with human life.
One of the purposes of insurance is to enable policyholders to protect themselves against future uncertain events such as death or specific types of illness. Insurance companies accept the transfer of uncertainty from policyholders and seek to add value through the aggregation and management of these risks. As a consequence of this uncertainty, estimation techniques are employed by suitably qualified personnel in computing the levels of provisions held against such uncertainty.
The insurance liabilities, which are also referred to as the long-term business provision and policyholder reserves elsewhere in this report, are determined by the Partnership Assurance Board on the advice of the Group's Actuarial Function Holder on the modified statutory basis using recognised actuarial methods with due regard to the actuarial principles set out in the PRA's (formerly the FSA's) Insurance Prudential Sourcebook. In particular, a prospective gross premium valuation method has been adopted for major classes of business.
Although the process for the establishment of insurance liabilities follows specified rules and guidelines, the provisions that result from the process remain uncertain. As a consequence of this uncertainty, the eventual value of claims could vary from the amounts provided to cover future claims. The Group seeks to provide for appropriate levels of contract liabilities taking known facts and experiences into account but nevertheless such provisions remain uncertain.
The estimation process used in determining insurance liabilities involves projecting future annuity payments and the costs of maintaining the contracts. For non-annuity contracts, the long-term business provision is determined as the sum of the discounted value of future benefit payments and future administration expenses less the expected value of premiums payable under the contract. The key sensitivities are the assumed level of interest rates and the mortality experience.
At the balance sheet date, provision is made for all notified claims plus an estimate for those claims that have been incurred but not reported. The principal assumptions underlying the calculation of insurance liabilities are set out below.
Long-term business is ceded to reinsurers under contracts to transfer part or all of one or more of the following risks: mortality, morbidity, investment, persistency and expenses. The benefits to which the Group are entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within ''Insurance and other receivables'') as well as longer-term receivables that are dependent on the expected benefits arising under the related re-insured contracts.
Amounts recoverable from reinsurers are estimated in a consistent manner with insurance liabilities, and are classified as ''reinsurance assets''.
Some contracts, which provide for the transfer of significant risk, are also structured to provide financing. When, under such contracts, financing components are to be repaid in future accounting periods, the amount outstanding under the contract at the balance sheet date are classified as ''payables arising from reinsurance contracts'' and included within insurance and other payables in the consolidated statement of financial position.
If the reinsurance asset were impaired, the Group would adjust the carrying amount accordingly and recognise that impairment loss in the consolidated statement of comprehensive income. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the
For the year ended 31 December 2013
contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
At the end of each reporting period, liability adequacy tests are performed to ensure the adequacy of the insurance liabilities. In performing these tests, current best-estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is immediately charged to the consolidated statement of comprehensive income.
Maturity claims and annuities are charged against revenue when due for payment. Death claims and all other claims are accounted for when notified. Claims reinsurance recoveries are accounted for in the same period as the related claim. Where reinsurance treaties are recaptured, amounts received to compensate for the transfer of risk from the reinsurer are accounted for when received or, if earlier, on the date the treaty ceases to be included within the calculation of the reinsurers' share of long-term business provision.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Long-term business provision | 4,347,588 | 3,723,298 |
| Reinsurers' share of long-term business provision |
(2,840,749) | (2,412,551) |
| Net provision |
1,506,839 | 1,310,747 |
The principal assumptions underlying the calculation of the long-term business provision are as follows:
| Mortality tables | Valuation discount rates |
||
|---|---|---|---|
| Medically underwritten annuity | |||
| products | 2013 | Modified E&W Population Mortality with CMI | 4.31% |
| 2012u (1.75%) and CMI 2012F (1.50%) | |||
| 2012 | Modified PML/PFL92 (U=2013) modified ave | 3.76% | |
| MC & LC floor 1.5% | |||
| Other annuity products | 2013 | Modified PCMA/PCFA00u2014 p-spline | 1.70% |
| 2012 | Modified PCMA/PCFA00u2013 p-spline | 2.26% | |
| Term and whole of life products | 2013 | 86.25% TM/TF00Select | 1.44% |
| 2012 | 86.25% TM/TF00Select | 1.07% |
Valuation discount rate assumptions are set with regards to yields on supporting assets. An allowance for risk is included by making an explicit deduction from the yields on debt and other fixed income securities based on historical default experience and expected experience of each asset class. The allowance for credit risk has been set at 47% (2012: 37%) of the spread on the yield of the corporate bonds over the yield on gilts.
The changes in the valuation discount rates at each period end reflect changes in yields on the supporting assets and changes made to the allowance for risk.
The mortality tables used have been adjusted to reflect additional mortality based on the proprietary data held by the Group developed from actual experience incurred. The valuation basis used to calculate the long-term business provisions includes an allowance for future expenses.
Movements in the carrying amount of insurance liabilities and reinsurance assets are explained as follows:
| For the year ended 31 December 2013 | Gross | Reinsurance | Net |
|---|---|---|---|
| £000's | £000's | £000's | |
| At 1 January 2013 | 3,723,298 | (2,412,551) | 1,310,747 |
| Increase in liability from new business |
1,038,011 | (678,827) | 359,184 |
| Release of in-force liability | (111,110) | 75,012 | (36,098) |
| Release of liability due to recorded deaths | (69,967) | 31,040 | (38,927) |
| Economic changes | (209,299) | 144,164 | (65,135) |
| Non-economic changes |
(25,847) | 1,609 | (24,238) |
| Other | 2,502 | (1,196) | 1,306 |
| At 31 December 2013 | 4,347,588 | (2,840,749) | 1,506,839 |
| For the year ended 31 December 2012 | Gross | Reinsurance | Net |
| £000's | £000's | £000's | |
| At 1 January 2012 | 2,158,537 | (1,352,886) | 805,651 |
| Increase in liability from new business |
1,324,979 | (532,265) | 792,714 |
| Release of in-force liability | (48,465) | 30,083 | (18,382) |
| Release of liability due to recorded deaths | (61,815) | 36,098 | (25,717) |
| Recapture and restructure of reinsurance treaties* |
— | (396,213) | (396,213) |
| Economic changes | 335,573 | (200,464) | 135,109 |
| Non-economic changes |
11,266 | — | 11,266 |
| Other | 3,223 | 3,096 | 6,319 |
| At 31 December 2012 | 3,723,298 | (2,412,551) | 1,310,747 |
* The impact of the recapture and restructure of reinsurance treaties has been calculated as if both transactions occurred on 31 December 2012 before the impact of year end basis changes.
The following table analyses insurance liabilities and reinsurance assets by duration.
| Expected cash flows (undiscounted) | |||||
|---|---|---|---|---|---|
| At 31 December 2013 | less than one year |
one to five years |
five to ten years |
more than ten years |
Carrying value (discounted) |
| £000's | £000's | £000's | £000's | £000's | |
| Gross | 373,419 | 1,360,968 | 1,450,164 | 3,829,024 | 4,347,588 |
| Reinsurance | (241,692) | (903,711) | (985,311) | (2,544,018) | (2,840,749) |
| Net |
131,727 | 457,257 | 464,853 | 1,285,066 | 1,506,839 |
| less than one year |
one to five years |
five to ten years |
more than ten years |
Carrying value (discounted) |
|---|---|---|---|---|
| £000's | £000's | £000's | £000's | £000's |
| 3,723,298 | ||||
| (191,170) | (711,459) | (767,756) | (2,028,997) | (2,412,551) |
| 109,715 | 368,737 | 354,806 | 969,614 | 1,310,747 |
| 300,885 | 1,080,196 | 1,122,562 | Expected cash flows (undiscounted) 2,998,611 |
Life insurance results are inherently uncertain due to actual experience being different to modelled assumptions. Sensitivity analysis is provided below to illustrate the impact of changes in key assumptions.
| Sensitivity factor | Description of sensitivity factor applied |
|---|---|
| Interest rate & investment | |
| return | The impact of a change in the market interest rates by +/ 1% (e.g. if a current interest rate is 5%, the impact of an immediate change to 4% and 6% respectively). The test allows consistently for similar changes to investment returns and movements in the market backing fixed interest securities. |
| Credit spreads |
The impact of credit spreads widening by 50bps with a corresponding pro-rated change to defaults. |
| Expenses | The impact of an increase in maintenance expenses by 10%. |
| Mortality rates | The impact of a decrease in mortality rates by 5%. |
| Property values | The impact of an immediate decrease in the value of properties by 10%. The test allows for the impact on the annuity liabilities arising from any change in yield on the equity release assets used to back the liabilities. |
| Voluntary redemptions |
The impact of an increase in voluntary redemption rates on equity release loans by 10%. The test allows for the impact on the annuity liabilities arising from any change in yield on the equity release assets used to back the liabilities. |
The table below demonstrates the effect of a change in a key assumption whilst other assumptions remain unchanged. In reality, such an occurrence is unlikely due to correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The sensitivity analyses do not take into consideration that the Group's assets and liabilities are actively managed and may vary at the time that any actual market movement occurs.
| Increase/(decrease) in profit before tax |
||
|---|---|---|
| Change in assumption: | 2013 | 2012 |
| £000's | £000's | |
| Interest rates +1% | 2,954 | 1,362 |
| Interest rates 1% . |
(3,308) | (8,610) |
| Credit spreads +0.5% | (10,917) | (7,305) |
| Expenses +10% | (9,962) | (8,894) |
| Mortality 5% . |
(22,140) | (19,791) |
| Property prices 10% . |
(25,313) | (11,093) |
| Voluntary redemptions +10% | (2,402) | 2,871 |
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Payables arising from insurance contracts | 9,639 | 40,208 |
| Other creditors and accruals | 22,449 | 22,740 |
| Total insurance and other payables | 32,088 | 62,948 |
For the year ended 31 December 2013
The Directors consider that the carrying value in the balance sheet is a reasonable approximation of the fair value.
As well as derivative financial liabilities, the Group carries financial liabilities where assets under specific reinsurance treaties are legally and physically deposited back to the Group by reinsurers. Financial liabilities are classified as at fair value through profit and loss. As such, financial liabilities are initially recognised at fair value on the same date that the value of underlying deposited assets is recognised and are subsequently remeasured at fair value at each balance sheet date. The resulting gain or loss is recognised in the consolidated statement of comprehensive income. The net gain or loss recognised incorporates any interest paid on the financial liability. Fair value is determined as the amount payable discounted from the first date that the amount is required to be paid.
A financial liability (including subordinated debt and external borrowings) is generally derecognised when the contract that gives rise to it, is settled, sold, cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in the consolidated statement of comprehensive income.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Payables arising from reinsurance contracts | 2,169,109 | 1,728,998 |
| Derivative liabilities | 32,391 | 49,767 |
| Total financial liabilities | 2,201,500 | 1,778,765 |
Payables arising from reinsurance contracts at fair value through profit and loss are designated as such on initial recognition. Derivative liabilities are carried at fair value through profit and loss.
External borrowings are recorded at the proceeds received, net of direct issue costs. Issue costs are capitalised and charged to the consolidated statement of comprehensive income over the life of the loan using the effective interest method. Interest payable is accounted for on an accruals basis in the consolidated statement of comprehensive income.
Gains and losses on the repurchase, settlement or otherwise cancellation of external borrowings are recognised respectively in the income and interest expenses and charges.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
|---|---|---|
| Due in more than five years: | ||
| Loan notes issued, repayable otherwise than by instalments (unsecured) | — | 299,823 |
| Less capitalised debt issuance costs on loan notes | — | (2,519) |
| Interest payable on loan notes | — | 14,458 |
| Due in one to five years: | ||
| Bank loan | — | 70,000 |
| Less capitalised debt issuance costs on bank loan | — | (1,765) |
| Interest payable on bank loan | — | 370 |
| Total external borrowings | — | 380,367 |
The Group hedged its exposure to LIBOR, using an interest rate swap, whereby LIBOR payments were swapped for a fixed interest payment of 0.7% p.a. for two years from the date the loan was taken. Interest was payable at three monthly instalments, in advance, starting 21 November 2012. Effective 21 June 2013, this interest rate swap arrangement was terminated.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Income taxes | 13,633 | 7,127 |
| Other taxes and social security costs |
4,565 | 3,727 |
| Total current tax liabilities | 18,198 | 10,854 |
The Group uses various derivative financial instruments to manage its exposure to interest rates, counterparty credit risk, inflation and foreign exchange risk, including foreign exchange forward contracts, interest rate swaps, credit default swaps and inflation swaps.
| As at 31 December 2013 | Asset fair value |
Liability fair value |
Notional amount |
|---|---|---|---|
| £000's | £000's | £000's | |
| Forward currency positions |
8,488 | 278 | 548,392 |
| Interest rate swaps |
24,847 | 31,271 | 1,242,924 |
| Inflation swaps | 3,078 | 842 | 162,135 |
| Total derivative financial instruments |
36,413 | 32,391 | 1,953,451 |
| As at 31 December 2012 | Asset fair value |
Liability fair value |
Notional amount |
|---|---|---|---|
| £000s | £000s | £000s | |
| Forward currency positions . |
860 | 2,957 | 372,062 |
| Interest rate swaps |
33,657 | 41,187 | 792,980 |
| Inflation swaps | 390 | 5,623 | 121,355 |
| Total derivative financial instruments | 34,907 | 49,767 | 1,286,397 |
All over-the-counter derivative transactions are conducted under standardised ISDA (International Swaps and Derivatives Association Inc.) master agreements and the Group has collateral agreements between the individual Group entities and relevant counterparties in place under each of these market master agreements.
At 31 December 2013, the Group had pledged £10.1m (2012: £13.8m) and held collateral of £0.9m (2012: £0.5m) in respect of over-the-counter derivative transactions.
All financial instruments, with the exception of external borrowings are classified at fair value through profit and loss. In accordance with IFRS 13 Fair Value measurement, financial instruments at fair value have been classified into three categories.
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities,
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); and
Level 3: Inputs for the assets or liabilities that are not based on observable market data (that is, unobservable inputs).
An analysis of financial assets and liabilities held at fair value in accordance with the fair value hierarchy is set out below. All these financial assets and liabilities relate to recurring fair value measurements. There are no non-recurring fair value measurements as at 31 December 2013 and 31 December 2012.
| At 31 December 2013 | Level 1 £000's |
Level 2 £000's |
Level 3 £000's |
Total £000's |
|---|---|---|---|---|
| Financial investments (a) | 3,063,140 | — | 10,824 | 3,073,964 |
| Loans secured by mortgages (b) | — | — | 840,066 | 840,066 |
| Derivative assets (c) | — | 36,413 | — | 36,413 |
| Total financial assets held at fair value | 3,063,140 | 36,413 | 850,890 | 3,950,443 |
| Payables arising from reinsurance contracts (d) | — | — | 2,169,109 | 2,169,109 |
| Derivative liabilities (c) | — | 32,391 | — | 32,391 |
| Total financial liabilities held at fair value | — | 32,391 | 2,169,109 | 2,201,500 |
| At 31 December 2012 | Level 1 | Level 2 | Level 3 | Total |
| £000's | £000's | £000's | £000's | |
| Financial investments (a) | 2,645,997 | — | — | 2,645,997 |
| Loans secured by mortgages (b) | — | — | 478,097 | 478,097 |
| Derivative assets (c) | — | 34,907 | — | 34,907 |
| Total financial assets held at fair value |
2,645,997 | 34,907 | 478,097 | 3,159,001 |
| Payables arising from reinsurance contracts (d) Derivative liabilities (c) |
— — |
— 49,767 |
1,728,998 — |
1,728,998 49,767 |
For the year ended 31 December 2013
The Group's policy is to recognise transfers into and transfers out of Levels 1, 2 and 3 as of the date at which the consolidated statement of financial position is prepared.
During 2012, all the financial investments, with the exception of Commodity Trade Finance (CTF) loans were reclassified from Level 2 to Level 1. Since the financial crisis in 2008, there has been a continual improvement in the level of liquidity in the fixed and variable rate securities markets, and having considered this during 2012, the Directors considered that the market is sufficiently active to allow classification of these financial investments as Level 1. There are no transfers between Levels 1, 2 and 3 during the period to 31 December 2013.
The table below reconciles the opening and closing recorded amount of Level 3 financial liabilities and financial assets which are stated at fair value.
| For the year ended 31 December 2013 | Payables arising out of reinsurance contracts |
Commodity Trade Finance Loans |
Loans secured by mortgages |
|
|---|---|---|---|---|
| £000's | £000's | £000's | ||
| At 1 January 2013 | (1,728,998) | — | 478,097 | |
| Loans (received)/advanced | (733,849) | 23,990 | 416,473 | |
| Total (losses)/gains in consolidated statement of comprehensive | ||||
| income excluding reinsurance restructure | (155,522) | (3,135) | (25,695) | |
| Redemptions made/(received) | 528,119 | (11,306) | (34,187) | |
| (Interest payable accrued)/interest receivable accrued | (78,859) | 1,275 | 5,378 | |
| At 31 December 2013 | (2,169,109) | 10,824 | 840,066 |
| For the year ended 31 December 2012 | Payables arising out of reinsurance contracts |
Commodity Trade Finance Loans |
Loans secured by mortgages |
|---|---|---|---|
| £000's | £000's | £000's | |
| At 1 January 2012 | (809,641) | — | 316,729 |
| Loans (received)/advanced | (1,050,424) | — | 148,030 |
| Total (losses)/gains in consolidated statement of comprehensive | |||
| income excluding reinsurance restructure | (75,427) | — | 7,246 |
| Total gains in consolidated statement of comprehensive income | |||
| from reinsurance restructure | 35,186 | — | — |
| Redemptions made/(received) | 224,083 | — | (13,847) |
| (Interest payable accrued)/interest receivable accrued | (52,775) | — | 19,939 |
| At 31 December 2012 |
(1,728,998) | — | 478,097 |
The gains and losses are included within net investment income in the consolidated statement of comprehensive income.
The unrealised gains/(losses) in respect of payables arising out of reinsurance contracts, commodity trade finance loans and loans secured by mortgages for the period to 31 December 2013 are £105.6m, £118.3m and £(14.1)m respectively (31 December 2012: £(40.2)m, £nil and £27.2m respectively). These unrealised gains and losses are included within net investment income in the consolidated statement of comprehensive income.
| As at 31 December 2013 | Reasonably possible alternative assumptions |
Current fair value £000's |
Increase in fair value £000's |
Decrease in fair value £000's |
|---|---|---|---|---|
| Assets | ||||
| Commodity trade finance loans . |
Expected defaults | 10,824 | 350 | (528) |
| Loans secured by mortgages | Discount rate, value of no-negative equity guarantee |
840,066 | 100,863 | (86,046) |
| Liabilities | ||||
| Payables arising out of reinsurance contracts |
Discount rate | (2,169,109) | (182,645) | 161,733 |
The impacts of reasonably possible alternative assumptions are estimated by modelling alternative scenarios for the key assumptions for each valuation model.
All financial investments are designated at fair value through profit and loss. All financial investments excluding commodity trade finance are listed.
In assessing the fair value of the debt securities and other fixed income securities, the Directors have relied upon values provided by an independent third party which specialises in providing such values to companies. The third party provides prices based upon quoted market prices, or where not available, modelled prices using observable market inputs. At 31 December 2013 and 31 December 2012, 100% of the values provided were based on quoted market prices that are observable for the asset or liability.
Due to the short-term nature of the commodity trade finance (CTF) loans, the fair value of these instruments is estimated as the principal amount borrowed plus accrued interest from the date of acquisition, adjusted for incurred and expected defaults. These CTF loans are considered to be Level 3 within the valuation category prescribed by IFRS 13 as the inputs to the fair value calculation are not based on observable market data, and includes the Company's own assumptions.
The change in the fair value of Level 3 financial instruments from period to period is analysed into loans advanced, loans repaid/redemptions, and interest accrued, with the remaining balance representing fair value measurement gains and losses recognised in the statement of comprehensive income.
Interest rate: The interest rate used in estimating the fair value of the CTF loans as at 31 December 2013 was 12.0% p.a. (31 December 2012 not applicable).
The fair value recognised in the financial statements for loans secured by mortgages is determined using a marked to model valuation technique where a significant proportion of inputs are not based on observable market data and so these assets are considered to be Level 3 within the valuation category prescribed by IFRS 13.
The valuation model discounts the expected future cash flows using an interest rate swap curve with an additional spread or yield factor minus the cost of the no-negative equity guarantee. The no-negative equity guarantee represents an embedded guarantee that the repayment of the loan cannot exceed the value of the property at the time of repayment.
Although such valuations are sensitive to various estimates, it is considered that only the discount rate and no-negative equity guarantee assumptions would have significant impact the fair value.
Discount rate: Loans secured by mortgages are valued using the swap rate appropriate to the term of each contract with adjustment to reflect the credit and liquidity risk associated with such long dated contracts. The risk adjusted swap rate for the portfolio weighted by average value at 31 December 2013 was 6.24% (31 December 2012: 5.89%).
For the year ended 31 December 2013
No-negative equity guarantee: The fair value of loans secured by mortgages takes into account an explicit provision in respect of the no-negative equity guarantee which is calculated using a variant of the Black-Scholes option pricing model. The key assumptions used to derive the value of the no-negative equity guarantee include property growth, volatility and over-valuation. The property growth and volatility assumed at 31 December 2013 were 5.5% (31 December 2012: 5.5%) and 13% (31 December 2012: 13%) respectively. The over-valuation assumption used as at 31 December 2013 was 22% (31 December 2012: 17%). The value of the no-negative equity guarantee as at 31 December 2013 was £67.3m (31 December 2012: £27.6m).
The valuation technique that the Group uses to assess the fair value of loans secured by mortgages is consistent with that used to derive the prices applied at the initial transaction. As such, there is no difference between the fair value of loans secured by equity release mortgages at initial recognition and the amount that would have been determined at that date using the valuation technique.
The estimated fair value of derivative instruments reflects the estimated amount the Group would receive or pay in an arm's length transaction. All the derivatives held at 31 December 2013 and 31 December 2012 were purchased over-the-counter.
The Group's derivative assets and liabilities largely relate to forward currency positions, interest rate swaps and inflation swaps.
Forward currency positions: Forward currency exchange contracts are priced from independent third parties.
Interest rate swaps: The fair value of the interest rate swaps is derived using an interest rate swap pricing model, using a time series of historical LIBOR rates, an applicable zero coupon interest rate swap curve to derive future cash flows (''forward curve'') and an applicable zero coupon interest rate swap curve to discount future cash flows (''discount curve'') as inputs. The forward curve is used by the pricing model to determine the future LIBOR rates to be applied in the calculation of the floating leg cash flow(s). The discount curve is used to calculate the present value of the future cash flow(s) of both the fixed and floating legs of the swap and its composition is driven by the terms of the Credit Support Annex under which the swap is traded.
Inflation swaps: The fair value of the inflation swaps is derived using the inflation swap pricing model, using a time series of historical inflation index levels, a zero coupon swap inflation expectation curve, an inflation seasonality model and a zero coupon interest rate swap curve as inputs. The inflation swap pricing model generates a future cash flow for both the fixed and inflation legs of a swap for which a present value is determined using zero coupon interest rate swap curve.
The derivative assets and liabilities are presented on a gross basis in the consolidated statement of financial position. All over-the-counter derivative transactions are conducted under standardised ISDA (International Swaps and Derivatives Association Inc) master agreements and the Group has collateral agreements between the individual Group entities and relevant counterparties in place under each of these market master agreements. As at 31 December 2013, the Group had pledged £10.1m (31 December 2012: £13.8m) and held collateral of £0.9m (31 December 2012: £0.5m) in respect of over-the-counter derivative transactions.
The fair value recognised in the financial statements is determined using a marked to model valuation technique where not all inputs are based on observable market data and so these liabilities are considered to be Level 3 within the valuation category prescribed by IFRS 13.
The valuation model discounts the expected future cash flows using a discount rate, derived from the assets hypothecated to back these liabilities at a product level.
For the year ended 31 December 2013
As payables arising from reinsurance contracts do not have a single fixed maturity date it is not possible to determine an amount that would be contractually required to pay at maturity.
Discount rate: The key inputs to the derivation of the discount rate include market observable gross redemption yields, contractual investment expenses and an allowance for credit risk on a best-estimate basis. The discount rate used as at 31 December 2013 for Retirement and Care was 4.95% and 1.97% respectively (31 December 2012: 4.53% and 2.45% respectively).
| For the year ended 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Profit before income tax including discontinued operations | 82,661 | 67,451 |
| Non-cash movements in profit before income tax: | ||
| Fair value gains and interest accrued on financial assets | (32,028) | (360,606) |
| Fair value losses and interest accrued on financial liabilities | 54,214 | 97,758 |
| Depreciation of property, plant and equipment |
1,843 | 1,037 |
| Amortisation of intangible assets | 1,997 | 1,263 |
| Assets written off | 1,684 | — |
| Interest accrued on subordinated debt | — | 496 |
| Share of loss of joint venture | 162 | 40 |
| Share-based payment charge | 9,324 | 1,500 |
| Amortisation of subordinated debt issuance costs | — | 75 |
| Amortisation of capitalised loan note debt issuance costs | 2,519 | 97 |
| Amortisation of capitalised bank loan debt issuance costs | 1,765 | 160 |
| Interest accrued on loan notes |
19,125 | 32,519 |
| Interest on bank loan | 1,995 | 1,199 |
| Net investment in financial assets | (759,414) | (1,048,017) |
| Net receipt of financial liabilities | 368,521 | 837,424 |
| Increase in reinsurance assets | (428,198) | (1,059,665) |
| Decrease/(Increase) in insurance and other receivables excluding corporation | ||
| tax | 30,405 | (83,727) |
| Increase in prepayments and accrued income | (7,694) | (26,897) |
| Increase in insurance liabilities | 624,290 | 1,564,761 |
| (Decrease)/Increase in insurance and other payables |
(30,860) | 18,138 |
| Increase in other taxes and social security payables |
838 | 1,165 |
| Cash (used in)/generated from operations | (56,851) | 46,171 |
Details of the amounts payable for the year are included in ''Other pension costs'', in note 6. No amounts are outstanding in respect of these contributions at the end of the year.
The Group is a Participating Employer for a money purchase group personal pension plan. The assets of the plan are held separately from those of the Group. The Group does not provide a final salary plan.
Financial assets arising from the payment of reinsurance premiums, less the repayment of claims, to certain reinsurers in relation to specific treaties are legally and physically deposited back with the Group. Although the funds are managed by the Group (as the Group controls the investment of the asset), no future benefits accrue to the Group as any returns on the deposits are paid to reinsurers. Consequently the deposits are not recognised as assets of the Group and the investment income they produce does not accrue to the Group.
In addition, the Group has trust agreements with two reinsurers (2012: two) whereby the assets are held in trust in order to fully fund the reinsurers' obligations under the reinsurance treaty. As the Group has no control over these funds and does not accrue any future benefit these funds are not recognised as assets of the Group.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Deposits managed by the Group |
272,493 | 330,012 |
| Deposits held in trust |
241,699 | 192,781 |
| Total deposits received from reinsurers |
514,192 | 522,793 |
The Group issues contracts that accept insurance risk in return for a premium. In addition the Group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance liabilities. In particular, the key financial risk is that the proceeds from financial assets are not sufficient to fund the obligations arising from contracts with policyholders. The most important components of this financial risk are interest rate risk and credit risk. The Group is not exposed to any equity price risk and to currency risk only to an immaterial extent.
Underwriting and pricing risk is the risk that inappropriate business will be written, or an inappropriate premium will be charged for that business. Reserving risk is the risk that the insurance liabilities have been calculated incorrectly, or the assumptions used in the calculations are incorrect.
As the Group's insurance business is specifically targeted at people with medical conditions affecting their life expectancy, or people seeking to fund domiciliary or residential care, the underwriting risk is managed through the use of highly trained, and qualified underwriting staff, together with tailored underwriting manuals designed to specifically cover a large array of medical conditions.
The Group has developed its own proprietary underwriting manuals for retirement annuity business and those seeking care funding, based on industry standard mortality tables modified to take account of experience data recorded by the Group and its predecessor organisations.
The assumptions used in the reserving for future policyholder payments are set based on available market and experience data, on the advice of the Actuarial Function Holder. The assumptions are approved by the Partnership Assurance Board. The insurance liabilities are calculated using recognised actuarial methods with due regard to the actuarial principles set out in the Prudential Regulation Authority's Prudential sourcebooks.
Insurance risk on the annuity contracts arises through longevity risk and through the risk that operating factors, such as administration expenses, are worse than expected. Insurance risk on the protection policies arises through higher than expected mortality levels. Longevity and mortality experience is monitored on a regular basis and compared to the underlying assumptions used to reserve for future insurance payments. The exposure to longevity and mortality risk is also reduced significantly through the use of reinsurance. Expense risk is managed through regular assessment of expenses incurred against budgets and overall impact on profitability of the insurance contracts.
The Group writes annuity contracts for the provision of retirement income or care fees and protection insurance contracts, primarily for individuals in the UK with one or more medical conditions or lifestyle factors that are likely to reduce their overall life expectancy. The Group's insurance risk is therefore concentrated on longevity and mortality risk. These risks are significantly reduced through the Group's use of external reinsurance arrangements.
Interest rate risk arises from open positions in fixed and variable rate stock issued by government and corporate bodies that are exposed to general and specific market movements. The Group is exposed to the market movements in interest rates to the extent that the asset value movement is different to the accompanying movement in the value of insurance liabilities.
The Group manages its interest rate risk within an asset liability management (ALM) framework that has been developed to achieve long-term investment returns in excess of its obligations under insurance and investment contracts. The principal technique of the Group's ALM framework is to match assets to the liabilities arising from insurance contracts by reference to the type of benefits payable to policyholders.
The Group monitors interest rate risk by calculating the mean duration and cash flow profile of the investment portfolio and the liabilities. The mean duration is an indicator of the sensitivity of the assets and insurance liabilities to changes in current interest rates but is not sufficient in isolation. The mean duration of the liabilities is determined by means of projecting expected cash flows from the contracts using best-estimates of mortality and voluntary terminations. No future discretionary supplemental benefits are assumed to accrue. The mean duration of the assets is calculated in a consistent manner. Any gap between the mean duration of the assets and the mean duration of the liabilities is minimised by means of buying and selling fixed interest securities of different durations or purchasing interest rate swap derivatives to alter the effective mean duration of the assets. Periodically the cash flow matching is reviewed and rebalanced.
At 31 December 2013, the mean duration of the assets was 7.5 years (2012: 7.7 years) measured with reference to a gross redemption yield and the mean duration of the liabilities was at 9.0 years (2012: 8.9 years) measured with reference to the valuation interest rate.
The Group has reinsurance arrangements in place which provide for fixed payments to the reinsurer over future periods. In assessing the fair value of this liability, the Directors have used a discount rate derived from current market yields earned on assets held to fund the future cash outflows, adjusted for the risk of default on those assets. No further adjustment to the discount rate to reflect any risk of the Group defaulting on those payments to the reinsurer was deemed appropriate.
Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the Group is exposed to credit risk are exposure to:
The Group places limits on its exposures to a single counterparty, or groups of connected counterparties. With respect to its investment in corporate bonds, the credit rating is derived from the Standard & Poor's, Moody and Fitch ratings for each individual stock, if two or more ratings are available the second highest rating is used otherwise the single available rating is used. The Group places limits on the exposure to bond issuers with different credit ratings. Credit default swaps are also used to manage exposure to single
issuers. Current restrictions do not allow investment in any corporate bond with a rating below ''BBB'' (or equivalent). Where investments already held are subsequently downgraded, the Directors will review each holding to determine whether to retain that exposure.
At 31 December 2013, £0.5m of collateral (2012: £8.6m) had been pledged to the Group to mitigate the credit risk exposure associated with the derivative assets held at that time.
Reinsurance is used to manage insurance risk. This does not, however, discharge the Group's liability as primary insurer, and consequently, if a reinsurer fails to pay a claim, the Group remains liable for the payment to the policyholder. As a result, the Group is exposed to credit risk in relation to the reinsurers' ability to fulfil its obligations to the Group. The creditworthiness of reinsurers is considered by reviewing their financial strength prior to finalisation of any contract and then subsequently at least on an annual basis.
We seek to place new business with reinsurers with a minimum credit rating of ''A''.
For certain reinsurance treaties, the reinsurers share of annuity insurance liabilities is backed by investments deposited back with the Group, or held in trust for the beneficial ownership of the Group. In this way, the Group's exposure to the credit risk relating to the reinsurer is significantly reduced. The investment risk on investments deposited back with the Group, or held in trust for the beneficial ownership of the Group, is borne by the reinsurers.
The following table analyses the credit exposure of the Group by type of asset and includes the credit risk arising out of reinsurance exposures, based on the credit ratings of the reinsurer, as published by Standard & Poor's, or an equivalent rating from another recognised rating agency.
| Credit rating | |||||||
|---|---|---|---|---|---|---|---|
| At 31 December 2013 | AAA £000's |
AA £000's |
A £000's |
BBB £000's |
Below BBB/ Unrated £000's |
Total £000's |
|
| Financial investments |
601,351 | 257,263 | 1,170,898 | 1,033,628 | 10,824 | 3,073,964 | |
| Derivative assets | — | — | — | — | 36,413 | 36,413 | |
| Loans backed by mortgages | — | — | — | — | 840,066 | 840,066 | |
| Reinsurance assets |
— | 1,240,280 | 1,600,469 | — | — | 2,840,749 | |
| Insurance and other receivables | — | 29 | 9,010 | — | 55,437 | 64,476 | |
| Total |
601,351 | 1,497,572 | 2,780,377 | 1,033,628 | 942,740 | 6,855,668 |
| Credit rating | |||||||
|---|---|---|---|---|---|---|---|
| At 31 December 2012 | AAA | AA | A | BBB | Below BBB/ Unrated |
Total | |
| £000's | £000's | £000's | £000's | £000's | £000's | ||
| Financial investments |
621,927 | 220,684 | 1,036,267 | 759,049 | 8,070 | 2,645,997 | |
| Derivative assets | — | — | — | — | 34,907 | 34,907 | |
| Loans backed by mortgages | — | — | — | — | 478,097 | 478,097 | |
| Reinsurance assets | — | 1,353,220 | 1,059,331 | — | — | 2,412,551 | |
| Insurance and other receivables | — | — | 5,627 | — | 89,254 | 94,881 | |
| Total | 621,927 | 1,573,904 | 2,101,225 | 759,049 | 610,328 | 5,666,433 |
The following table presents an aging analysis of financial assets by payment due status:
| Past due but not impaired | |||||||
|---|---|---|---|---|---|---|---|
| As at 31 December 2013 | Not past due |
Less than 1 month |
1–3 months |
3–6 months |
More than 6 months |
Impaired | Total |
| £000's | £000's | £000's | £000's | £000's | £000's | £000's | |
| Commodity Trade Finance |
6,350 | — | 742 | 3,732 | — | — | 10,824 |
| Loans secured by mortgages | 840,066 | — | — | — | — | — | 840,066 |
| Other financial assets | 6,008,985 | — | — | — | — | — | 6,008,985 |
No other financial assets were past due at 31 December 2012.
Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Partnership Assurance Board sets limits on the minimum amount of highly liquid assets to be available to meet such obligations.
Short-term cash requirements are monitored on a daily basis to ensure sufficient funds are available to meet immediate payments. The nature of the Group's business means that, in general, cash flows into the Group (through up-front premium payments) before annuity payments become due. Annuity payments are substantially fixed in nature, and consequently the cash requirements are not subject to excessive uncertainty.
In accordance with PRA (formerly the FSA) regulations, the Group's assets are reviewed to ensure they are of sufficient amount and of an appropriate currency and term to ensure that the cash inflows from those assets will meet the expected cash outflows from the Group's insurance and other financial liabilities.
In the following table expected cash outflows for:
The following table includes insurance and financial liabilities that are exposed to liquidity risk.
| Expected cash flows (undiscounted) | Carrying | ||||
|---|---|---|---|---|---|
| At 31 December 2013 | less than one year |
one to five years |
five to ten years |
more than ten years |
value (discounted) |
| £000's | £000's | £000's | £000's | £000's | |
| Net insurance liabilities | 131,727 | 457,257 | 464,853 | 1,285,066 | 1,506,839 |
| Payables arising from reinsurance contracts | 1,831,083 | 735,336 | 792,792 | 1,934,163 | 2,169,109 |
| Derivative liabilities |
584 | 10,252 | 14,381 | 15,596 | 32,391 |
| Total |
1,963,394 | 1,202,845 | 1,272,026 | 3,234,825 | 3,708,339 |
| Expected cash flows (undiscounted) | Carrying | ||||
|---|---|---|---|---|---|
| At 31 December 2012 | less than one year |
one to five years |
five to ten years |
more than ten years |
value (discounted) |
| £000's | £000's | £000's | £000's | £000's | |
| Net insurance liabilities |
109,715 | 368,737 | 354,809 | 969,614 | 1,310,747 |
| Payables arising from reinsurance contracts | 114,153 | 576,795 | 619,048 | 1,496,027 | 1,728,998 |
| External borrowings | — | — | — | 365,539 | 365,539 |
| Derivative liabilities | 8,406 | 27,856 | 5,142 | 11,971 | 49,767 |
| Total | 232,274 | 973,388 | 978,999 | 2,843,151 | 3,455,051 |
The maximum exposure to credit risk is equal to the balance sheet value of debt instruments/ derivatives.
Property risk is the risk that property values do not rise sufficiently to recover the full value of equity release loans made plus accrued interest. The initial loan value is restricted to a maximum ''loan to value'' ratio that limits the risk exposure for the Group.
Loans backed by mortgages represent little credit risk as the debt is ultimately repayable from the proceeds of the sale of the property on death of the policyholder or on their transfer to long-term care.
The Group manages its capital to ensure that entities within the Group will be able to continue to operate as going concerns, and to ensure that where a subsidiary is subject to regulatory capital requirements, that entity maintains an adequate capital surplus to ensure compliance with those requirements. The Group's capital consists of equity attributable to equity holders of the Parent Company. For the purposes of regulatory capital requirements, certain assets are restricted, or are inadmissible.
One subsidiary, Partnership Assurance Life Assurance Company Limited, is required to comply with minimum capital requirements calculated at the level of its EEA Parent Company level, as well as its own single entity level. It must also calculate its available capital at the ultimate Parent Company level, but as failure to cover the minimum capital requirement at this level has no consequence for the entity, or the Group, it is not a measure used to manage capital and hence is not disclosed in this note. The table below shows the available capital resources at the level of the EEA Parent Company as this is the number by which we assess the Group's capital adequacy. These capital requirements are determined in accordance with the PRA regulations and the EU directives, for insurance and other PRA regulated business. Any changes or release of capital from long-term funds is subject to there being an established surplus shown by an actuarial investigation.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Total equity of EEA Parent Company |
598,549 | 457,703 |
| Minority interest in equity for regulated business | (66) | — |
| Adjustments in respect of regulatory capital basis: | ||
| Inadmissible intangible assets |
(16,401) | (12,343) |
| Inadmissible goodwill | (126,207) | (126,207) |
| Inadmissible deferred tax asset |
(424) | (158) |
| Equity and reserves related to non-regulated entities (excluded from regulatory | ||
| capital calculation), adjusted for inadmissible assets already adjusted above . |
13,031 | 9,157 |
| Total available capital resources (regulatory basis) | 468,483 | 328,152 |
| Group minimum capital requirement (regulatory basis) | (191,630) | (163,213) |
| Surplus over regulatory capital requirement |
276,853 | 164,939 |
Movements in equity are shown in the consolidated statement of changes in equity.
Throughout the year, each regulated subsidiary has maintained capital resources in excess of the minimum required by the PRA regulations and the EU directives.
As part of the ''Global Offer'' and admission of the Company to the London Stock Exchange on the 12 June 2013, the Group has undertaken certain reorganisation steps as detailed below.
Immediately prior to admission on 12 June 2013:
As a result of the above steps the Company obtained control of PAG Holdings Limited and its subsidiaries. The accounting treatment of this is set out in note 2. Also as a result of the above steps Cinven Funds, certain Directors, certain members of Senior Management and other individuals hold ordinary shares in each case in proportion to the value of the shareholder instruments in the Group held by them immediately prior to the reorganisation.
Pursuant to the Global Offer and following admission on 12 June 2013:
The transaction costs relating to the Global Offer in the six months period to 30 June 2013 amounted to £19.6m. £4.0m of these costs are directly associated with the issue of new shares and have therefore been set-off against the share premium associated with those shares. £3.8m of these costs have been paid during the period to 30 June 2013.
The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly attributable to the issue of the ordinary shares are recognised in equity, net of tax.
On 12 June 2013, immediately prior to admission on the London Stock Exchange, the Company acquired a 100% shareholding in PAG Holdings Limited, the top holding company of the Group at that point in time.
The allocated and issued share capital of PAG Holdings Limited and Partnership Assurance Group plc, the top holding companies of the Group as at 31 December 2012 and 31 December 2013 respectively are detailed below:
| At 31 December 2012 | Share capital |
Share premium |
|---|---|---|
| £000's | £000's | |
| The authorised share capital of the Company is: | ||
| ''A'' ordinary shares of £0.01 each . |
25 | — |
| ''B'' ordinary shares of £0.01 each | 3 | — |
| ''C'' ordinary shares of £0.01 each | 5 | 182 |
| ''D'' ordinary shares of £1 each | 3 | — |
| Total | 36 | 182 |
In the year to 31 December 2012:
As detailed in note 32, immediately prior to admission on 12 June 2013, all of the A, B and C ordinary shares in PAG Holdings Limited were transferred to the Company in exchange for the allotment and issue of ordinary shares in the Company of £0.10 each. This resulted in the creation of the Merger Reserve as a result of the Group electing to account for the acquisition of its 100% shareholding in PAG Holdings Limited as a Group reconstruction as described under the UK GAAP accounting standard, Financial Reporting Standard 6, ''Acquisitions and Mergers'' In addition, the capital redemption reserve was transferred to this Merger Reserve as part of the same transaction.
| As at 31 December 2013 | Number of shares |
Share capital |
Share premium |
|---|---|---|---|
| £000's | £000's | ||
| The allotted and issued share capital of Partnership Assurance | |||
| Group plc: | |||
| On incorporation, ordinary shares of £1.00 each | 50,000 | 50 | — |
| On 12 June 2013: | |||
| Shares subdivided into 500,000 ordinary shares of £0.10 each | 450,000 | — | — |
| Exchange of the A and B loan notes | 69,212,294 | 6,921 | 259,547 |
| Exchange of C loan notes | 15,397,726 | 1,540 | 57,742 |
| Share for share exchange of A, B and C ordinary shares in PAG | |||
| Holdings Limited for ordinary shares in Partnership Assurance | |||
| Group plc |
282,358,446 | 28,236 | — |
| New issue of shares as part of Global Offer | 32,467,532 | 3,247 | 121,752 |
| New ordinary shares issued to senior management | 51,948 | 5 | 195 |
| New ordinary shares issued to EBT | 12,025 | 1 | 45 |
| Share issue costs |
— | — | (4,032) |
| As at 31 December 2013, ordinary shares of £0.10 each | 399,999,971 | 40,000 | 435,249 |
The Company was incorporated on 26 February 2013 with an issued share capital of £50,000 divided into 50,000 ordinary shares of 100 pence each. On 12 June 2013, the 50,000 ordinary shares of 100 pence each were subdivided into 500,000 ordinary shares of 10 pence each. Immediately following the completion of
the Global Offer, and as a result of a number of steps undertaken prior to admission described in note 32, the issued share capital of the Company was increased to £39,999,997, comprising 399,999,971 ordinary shares of 10 pence each, all of which will be fully paid or credited as fully paid.
The ordinary share entitles the holder to dividends declared by the Board which are not cumulative. The ordinary share entitles the holder to one vote for every share held.
Where an employee trust acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including attributable transaction costs, net of tax) is shown as a deduction from the owners' equity. Gains and losses on sales of shares held by the employee trust are charged or credited to the own shares account in equity.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Employee benefit trust | (58) | (33) |
Prior to the Global Offer, the PAG Holdings Limited Employee Benefit trust, which was established in 2008, and is a discretionary employee benefit trust, held shares to satisfy awards granted to employees of the Group.
As part of the Group restructuring prior to the Global Offer, the shares in PAG Holdings Limited held by the EBT were exchanged for £283,000 of ordinary shares in Partnership Assurance Group plc. Following the admission of the Group onto the London Stock Exchange via a Premium Listing, £271,000 of these shares were sold to fund the vesting of the options under the Group's previous Employee Share Option Plan with the remainder of the shares transferred to a new employee benefit trust.
In addition, during the year, £46,000 of new shares were issued by the Company to the new employee benefit trust. The number of shares held by the new employee trust as at 31 December 2013 was 136,884 (31 December 2012: PAG Holdings Limited trust: 33,000).
The Group has annual commitments in respect of non-cancellable operating leases as follows:
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Leases expiring not later than one year | 3,645 | 2,859 |
| Leases expiring between one and five years | 11,671 | 10,489 |
| Leases expiring in more than five years | 9,453 | 13,246 |
| Total lease commitments | 24,769 | 26,594 |
Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
During the period, the Group entered into transactions, in the ordinary course of business, with other related parties. Transactions entered into and balances outstanding at the end of each reporting date are detailed below.
Prior to the Group reorganisation in 2013 and as described in note 32, the Fourth Cinven Fund was the ultimate shareholder of the Group.
The Group issued a number of loan notes to the Fourth Cinven Fund. These included the A, B and C loan notes. Details of these loan notes are described in note 12 and the outstanding balances at the end of each reporting period are disclosed in the table below:
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| A and B loan notes |
— | 232,702 |
| C loan notes | — | 53,978 |
| Total | — | 286,680 |
During the year, as described in note 32 above, the A, B and C loan were transferred on a pound-for-pound basis to the Company in exchange for the allotment and issue of ordinary shares in the Company.
The amounts accruing to the Fourth Cinven Funds in respect of these loan notes are detailed below:
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Interest accrued on loan notes |
18,629 | 29,640 |
| Monitoring fee payments |
216 | 450 |
| Total | 18,845 | 30,090 |
The monitoring fee payments up to February 2013 include fees for two of the Group's non-executive Directors who are also employees of Cinven Capital Management.
In addition, as part of the IPO, ordinary shares in the Company were issued to Cinven and Directors as explained in note 32.
Key management personnel consist of the directors of the Company. The key management personnel changed during the year 2013 reflecting the Group reorganisation. The remuneration of the directors, who are the key management personnel of the Group, is set out below
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Short-term employee benefits | 2,060 | 2,129 |
| Post-employment benefits | 55 | 114 |
| Share-based payments |
— | — |
| Total | 2,115 | 2,243 |
A number of directors who are defined as key management personnel of the Company held loans during the period. The loans owed to/by the directors are detailed as follows
| As at 31 December | 2013 £000's |
2012 £000's |
|---|---|---|
| Amounts owed to directors: | ||
| B loan notes |
— | 12,216 |
| Vendor loan notes |
— | 878 |
| Total | — | 13,094 |
| Amounts owed by directors: | ||
| Loan advances | 289 | 378 |
| Total | 289 | 378 |
The terms of the B and Vendor loan notes are detailed in note 32, and, as set out in that note, the loan notes were exchanged for ordinary shares in the Company as part of the IPO.
The loan advances to directors accrue interest fixed at 4% p.a. and are repayable in whole or in part at any time.
The amounts accruing to/from the directors in respect of these loan notes are detailed below:
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Interest accrued on B and Vendor loan notes |
663 | 1,421 |
| Interest accrued on Directors' loan advances | 6 | — |
| Total | 669 | 1,421 |
During the year the Group entered into transactions with other entities controlled by Cinven Limited as set out below. All transactions were on a commercial basis.
| As at 31 December | 2013 | 2012 |
|---|---|---|
| £000's | £000's | |
| Transaction expense (services received) |
558 | — |
| Total | 558 | — |
As at 31 December 2013 a majority of the Company's ordinary shares are held by the partnerships comprising the Fourth Cinven Funds (the ''Cinven Funds''), being funds managed and advised by Cinven Limited, a company incorporated under the laws of England and Wales. Accordingly, the Directors consider the Company's ultimate controlling party to be Cinven Limited, the manager and adviser to the Cinven Funds.
Subsequent to 31 December 2013, the directors proposed a final dividend for 2013 of 3.0 pence per ordinary share (2012: nil), amounting to £12.0m (2012: nil) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 30 May 2014 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2014.
We have audited the Market Consistent Embedded Value supplementary information (the ''MCEV supplementary information'') of Partnership Assurance Group plc for the year ended 31 December 2015 which comprises the Group MCEV Analysis of Earnings, Covered Business Analysis of Movement in Embedded Value reconciliation of Group IFRS net assets to MCEV and the related notes 1 to 5. The financial reporting framework that has been applied in their preparation is the Market Consistent Embedded Value principles issued in June 2008 by the European CFO Forum and supplemented by an amendment to the MCEV principles issued by the same body in October 2009 (the ''MCEV principles'').
This report is made solely to the Company's directors in accordance with our engagement letter and solely for the purpose of expressing an opinion as to whether the MCEV supplementary information for the year ended 31 December 2015 has been properly prepared in accordance with the MCEV principles. Our audit work has been undertaken so that we might state to the Company's directors those matters we are required to state to them in an independent auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our audit work, for this report, or for the opinions we have formed.
As explained more fully in the Directors' Responsibility Statement in respect of the MCEV supplementary information, the directors are responsible for the preparation of the MCEV supplementary information. Our responsibility is to audit and express an opinion on the MCEV supplementary information in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practice Board's Ethical Standards for Auditors.
An audit involves obtaining evidence about the amounts and disclosures in the MCEV supplementary information sufficient to give reasonable assurance that the supplementary information is free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the supplementary information. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited MCEV supplementary information and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies, we consider the implications for our report.
In our opinion, the MCEV supplementary information for the year ended 31 December 2015 has been properly prepared in accordance with the MCEV principles using the methodology and assumptions set out in notes 1 and 2.
We have reported separately on the statutory financial statements of Partnership Assurance Group plc for the year ended 31 December 2015. The information contained in the MCEV supplementary information should be read in conjunction with the group financial statements prepared in accordance with International Financial Reporting Standards as adopted in the European Union.
Paul Stephenson BA FCA (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom
10 March 2016
For the year ended 31 December 2015
| Year ended 31 December 2015 | Year ended 31 December 2014 |
||||
|---|---|---|---|---|---|
| Note | Covered business MCEV |
Non covered business IFRS |
Total Group MCEV |
Total Group MCEV |
|
| £000's | £000's | £000's | £000's | ||
| Opening Group MCEV | 557,532 | 18,754 | 576,286 | 519,633 | |
| Opening adjustments | — | — | — | — | |
| Adjusted opening Group MCEV | 557,532 | 18,754 | 576,286 | 519,633 | |
| Operating MCEV earnings | 3 | 46,067 | — | 46,067 | 86,502 |
| Non-operating MCEV earnings | 3 | (33,812) | (5,461) | (39,273) | (17,071) |
| Total MCEV earnings | 12,255 | (5,461) | 6,794 | 69,431 | |
| Other movements in IFRS net equity |
4 | — | 56,229 | 56,229 | 1,222 |
| Closing adjustments | 3 | — | (6,000) | (6,000) | (14,000) |
| Closing Group MCEV |
569,787 | 63,522 | 633,309 | 576,286 |
| Year ended 31 December 2015 | Year ended 31 December 2014 |
|||||
|---|---|---|---|---|---|---|
| Note | Free Surplus |
Required Capital |
VIF | MCEV | MCEV | |
| £000's | £000's | £000's | £000's | £000's | ||
| Opening MCEV | 30,834 | 418,238 | 108,460 | 557,532 | 463,494 | |
| Opening adjustments | — | — | — | — | — | |
| Adjusted opening MCEV | 30,834 | 418,238 | 108,460 | 557,532 | 463,494 | |
| New business value | 3 | (44,558) | 52,485 | 21,961 | 29,888 | 56,072 |
| Expected existing business contribution (reference rate & in excess of reference rate) |
3 | — | — | 4,909 | 4,909 | 4,106 |
| Transfers from VIF and required capital to free surplus |
3 | 23,525 | (10,667) (10,003) | 2,854 | 3,469 | |
| Experience variances | 3 | 1,753 | 467 | (609) | 1,611 | (1,087) |
| Assumption changes |
40,460 | (46,961) | 2,754 | (3,747) | (481) | |
| Other operating variances |
3 | 5,997 | 8,472 | (3,917) | 10,552 | 24,423 |
| Operating MCEV earnings |
27,177 | 3,795 | 15,094 | 46,067 | 86,502 | |
| Economic variances | 3 | (15,427) | (937) (11,402) (27,766) | (3,994) | ||
| Other non-operating variances | 3 | (26,581) | 6,885 | 13,650 | (6,046) | (11,471) |
| Total MCEV earnings | (14,831) | 9,744 | 17,342 | 12,255 | 71,038 | |
| Closing adjustments | 3 | — | — | — | — | 23,000 |
| Closing MCEV | 16,003 | 427,982 | 125,803 | 569,787 | 557,532 |
| Year ended 31 December 2015 | Year ended 31 December 2014 | |||||
|---|---|---|---|---|---|---|
| Covered Non Covered Business Business Adjusted Adjusted Net Worth Net Worth |
Group | Covered Business Adjusted Net Worth |
Non Covered Business Adjusted Net Worth |
Group | ||
| £000's | £000's | £000's | £000's | £000's | £000's | |
| Group Net Assets as reported | ||||||
| under IFRS | 450,321 | 190,497 | 640,818 | 458,961 | 145,729 | 604,690 |
| Goodwill | (1,332) | (124,875) | (126,207) | (1,332) | (124,875) | (126,207) |
| Intangibles | (1,000) | (2,100) | (3,100) | (1,000) | (2,100) | (3,100) |
| Adjustments to IFRS | (4,005) | — | (4,005) | (7,557) | — | (7,557) |
| MCEV Net Worth |
443,984 | 63,522 | 507,506 | 449,072 | 18,754 | 467,826 |
| VIF . |
125,803 | — | 125,803 | 108,460 | — | 108,460 |
| MCEV (net of taxation) | 569,787 | 63,522 | 633,309 | 557,532 | 18,754 | 576,286 |
The supplementary information which comprises the group MCEV analysis of earnings (net of tax), covered business analysis of movement in embedded value (net of tax), reconciliation of group IFRS net assets to MCEV and the related notes 1 to 5 has been prepared on a Market Consistent Embedded Value (MCEV) basis and results for non-covered business on the International Financial Reporting Standards (IFRS) basis.
The MCEV methodology adopted is in accordance with the MCEV Principles published by the CFO Forum in October 2009.
The MCEV calculations cover all lines of insurance business within PLACL. No other group companies contain any covered business and the value of these companies has been included in the group MCEV at IFRS net asset value, less the value of goodwill and intangibles, to the extent that their recovery is supported by future profits.
The group MCEV includes the value of sub-ordinated debt, at the fair value, within covered business.
Under the MCEV methodology, profit is recognised as it is earned over the life of products defined within covered business. The total profit recognised over the lifetime of a policy is the same under MCEV and IFRS, but the timing of recognition is different.
The embedded value is the sum of the adjusted net worth of the group companies plus the value of in-force on the covered business, this being the present value of profits that will emerge over time.
The embedded value is calculated net of the impacts of reinsurance and allows for taxation based on current legislation and known future changes.
The net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the long-term business fund. This is the net assets on a regulatory basis for the life company and the IFRS net asset value for other group companies, less the value of goodwill and intangibles, to the extent that their recovery is supported by future profits.
The net worth is equal to the sum of the required capital and free surplus in the Group.
Required capital is the market value of assets attributed to the covered business in excess of assets required to back liabilities for covered business, and for which distribution to shareholders is restricted. The level of required capital is set equal to the higher of:
This methodology reflects the level of capital considered by the directors to be appropriate to manage the business, and includes any additional shareholder funds not available for distribution. The same definition of required capital is used for both existing and new business.
The level of required capital is disclosed as the percentage of the EU minimum capital requirement (Capital Resources Requirement).
The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date.
(iii) Value of in-force covered business (VIF)
The value of in-force covered business consists of the following components:
The PVFP is the present value of the distributable profits to shareholders arising from the in-force covered business projected on a best estimate basis. Distributable profits generally arise when they are released following actuarial valuations. These valuations are carried out in accordance with PRA statutory requirements designed to ensure and demonstrate solvency in long-term business funds. Future distributable profits will depend on experience in a number of areas such as investment return, mortality, lapse rates and administration costs. Releases to shareholders arising in future years from the in-force covered business and associated required capital can be projected using assumptions of future experience.
Future profits are projected using best estimate non-economic assumptions and market consistent economic assumptions. In principle, each cash flow is discounted at a rate that appropriately reflects the riskiness of that cash flow, so higher risk cash flows are discounted at higher rates. In practice, the PVFP is calculated using the 'certainty equivalent' approach, under which the reference rate is used for both the investment return and the discount rate. This approach ensures that asset cash flows are valued consistently with the market prices of assets without options and guarantees. Further information on the risk-free rates is in the following pages.
The PVFP calculation is based on a single (base) economic scenario; however, a single scenario cannot appropriately allow for the effect of certain asset features. If an option or guarantee affects shareholder cash flows in the base scenario, the impact is included in the PVFP and is referred to as the intrinsic value of the option guarantee; however, future investment returns are uncertain and the actual impact on shareholder profits may be higher or lower. The covered business does not contain any significant policyholder options or guarantees and therefore the TVOG is zero.
The assets backing the covered business include mortgages secured against individual domestic property (Equity release mortgages). The mortgages contain guarantees where if the value of the property is lower than the mortgage balance at the time of death or entry into a care home, then the lower of the property value and mortgage balance is repaid. The time value of this option and guarantee is allowed for in the asset valuation using closed form calculations.
The additional costs to a shareholder of holding the assets backing required capital within an insurance company rather than directly in the market are called frictional costs. They are explicitly deducted from the PVFP. The additional costs allowed for are the taxation costs and any additional investment expenses on the assets backing the required capital. The level of required capital has been set out in the net worth section.
Frictional costs are calculated by projecting forwards the future levels of required capital. The projection of the required capital has been based on an approximate method assuming that the required capital is a constant proportion of the Long Term Insurance Capital Requirement. Tax on investment return and investment expenses are payable on the assets backing required capital, up until the point that they are released to shareholders.
The cost of residual non-hedgeable risks (CoRNHR) covers risks not already allowed for in the time value of options and guarantees or the PVFP. The allowance includes the impact of both non-hedgeable financial and non-financial risks. The most significant risks not included in the PVFP are operational risks and equity release property risks.
Asymmetric risks allowed for in the PVFP are described earlier in the basis of preparation. No allowance has been made within the cost of non-hedgeable risk for symmetrical risks as these are diversifiable by investors. The CoRNHR includes an allowance for non-modelled non-hedgeable risks. For ease of comparison the CoRNHR is expressed as percentage cost of non-hedgeable capital.
All annuity business is written on a single premium basis. Premium increments received following policy issue are excluded from the value of new business. Single and regular premium protection business is included in new business.
Point of sale economic and non-economic assumptions are used to value the new business. Any variances or changes in assumptions after the point of sale are recorded within the analysis of the MCEV earnings as operating experience variances or operating assumption changes.
The Group does not contain any policies where the policyholders participate in the profits of the business.
Reference rates are calculated using corporate bond, equity release and commercial mortgage liquidity premiums added to the swap curve. The liquidity premium on corporate bond assets is calculated by deducting an allowance for credit default, individually assessed for each bond based on credit rating, and comparing the resulting risk adjusted internal rate of return on the portfolio to the swap curve.
The equity release assets are valued using a mark to model approach that allows for the cost of the no negative equity guarantee, where relevant, with the liquidity premium calculated on a consistent basis.
The commercial mortgage assets are valued using a mark to model approach that allows for the risk from change in tenant behaviour and property value, where relevant, with the liquidity premium calculated on a consistent basis.
For protection business, cash flows are assumed to be liquid and as such are discounted with no allowance for a liquidity premium.
The liquidity premiums used for the annuity in-force business are as follows:
| Liquidity premium |
|
|---|---|
| 31 December 2015 | 230 bps |
| 31 December 2014 | 211 bps |
The liquidity premium on new business is determined using an approach consistent with that for the in-force business. For new business, the liquidity premium in excess of swaps is derived on a daily basis using the prevailing market conditions.
The weighted average liquidity premiums used for the new business MCEV calculations are as follows:
| Liquidity premium |
|
|---|---|
| 31 December 2015 | 262 bps |
| 31 December 2014 | 273 bps |
The swap curve is constructed from cash rates, future strips, and semi-annual swap rates sourced from a variety of counterparties and brokers with flat interpolation beyond 50 years.
The table below sets out the swap rates used for the MCEV valuations as at period end. These rates have been supplied by PLACL's investment manager.
| 6 months | 1 year | 2 years | 5 years | 10 years | 15 years | 20 years | |
|---|---|---|---|---|---|---|---|
| 31 December 2015 | 0.84% | 0.84% | 1.10% | 1.60% | 2.04% | 2.22% | 2.25% |
| 31 December 2014 |
0.74% | 0.74% | 0.93% | 1.46% | 1.87% | 2.11% | 2.24% |
For operating earnings, PLACL uses the risk adjusted yield on the asset portfolio backing liabilities in order to determine the total existing business contribution. This represents management's long-term expectations of total return on the portfolio.
The expected return has been calculated by reference to the internal rate of return on the backing assets less an appropriate risk margin.
Assumed future mortality, morbidity and lapse rates have been derived from PLACL's historical experience data. The assumption is set as a best estimate of future experience. Improvements in annuitant longevity have been included in this best estimate.
Maintenance expenses are based on the costs allocated or recharged to the PLACL in-force business. No credit for future productivity gains or economies of scale has been included in the MCEV.
Non-recurring expenses, associated with the covered business, are charged to the non-operating earnings in the year incurred and are excluded from the per policy maintenance expense assumptions. These amounted to £23.4m for the year to 31 December 2015 (31 December 2014: £16.3m).
Best estimate expense inflation applied as at 31 December 2015 was 4.5% p.a. (31 December 2014: 4.5%).
The current and future tax rates are corporation tax rates as published by HM Treasury and take into account both taxes enacted by legislation and those disclosed in budget announcements. The effective tax rate in PLACL is marginally greater larger than the corporation tax rate in 2015 because a tax reclaim of £0.3m in respect of research and development credits on prior years has increased the tax credit available on the loss. The effective tax rate for 2015 was 24.2% (31 December 2014: 13.4%).
For the purposes of modelling tax on future profits, a calendar assumption is set using a pro rata method based on months at each effective rate. This is implemented as prescribed by HMRC.
The blended corporation tax rates used were as follows:
| Year ended 31 December 2015 |
Year ended 31 December 2014 |
|
|---|---|---|
| 2014 |
21.50% | 21.50% |
| 2015 |
20.25% | 20.25% |
| 2016 |
20.00% | 20.00% |
| 2017 |
19.25% | 20.00% |
| 2018 |
19.00% | 20.00% |
| 2019 |
19.00% | 20.00% |
| 2020 |
18.25% | 20.00% |
| 2021 |
18.00% | 20.00% |
Residential property and commercial property volatility are the only direct volatility inputs to the MCEV calculations. Residential property volatility is used in the evaluation of the ''No Negative Equity Guarantee (''NNEG'') on Equity release assets. As at 31 December 2015 the assumption was set to 12% (31 December 2014: 12%). Commercial property volatility is used to model property prices of properties backing commercial mortgage loans. As at 31 December 2015 the assumption was set to 11% (31 December 2014: 11%).
Correlations between the risks inherent in the business are used for the calculation of the CoRNHR total non-hedgeable risk capital. The correlations are consistent with the Group's Economic Capital assumptions which are based on historic correlations with adjustment for prudence as required.
For the balance sheet and operating profit, a charge of 0.9% (31 December 2014: 0.9%) has been applied to the non-hedgeable capital required for a 1-in-200 year basis over the remaining lifetime of in-force business. The charge includes an allowance for all material non-hedgeable risks identified which are not already included in the PVFP calculation.
The capital levels used are consistent with those used in the Economic Capital calculation for those risks covered. Diversification benefits are included between non-hedgeable risks of the covered business. No diversification credit has been taken with hedgeable risks in the covered or non-covered business. The capital has been projected as running off over the remaining lifetime of the covered business in line with the capital resources requirement.
The required capital has been set to be 184% of the capital resources requirement (31 December 2014: 190%). The required capital has been projected as running off over the remaining lifetime of the covered business in line with the capital resources requirement.
The total frictional cost allowance for investment expenses and tax on investment income earned on the required capital is 0.5% as at 31 December 2015 (31 December 2014: 0.5%).
The lower new business volumes in 2015 compared to 2014 resulted in a reduction in MCEV earnings from the value of new business written. The total expected existing business contribution, transfers from VIF and required capital to free surplus have increased marginally in the period as a result of the growth in the portfolio.
Experience variances in the period are positive in aggregate as a result of heavier than expected mortality experience. The assumptions changes adopted in the year reduced MCEV by £3.7m. The increased in free surplus and reduction in required capital from assumption changes reflect the release of some prudence within the economic capital balance sheet.
Other operating variances also include expected long-term return on excess assets (after tax) of £11.6m (£12.8m at 31 December 2014).
The £(27.8)m economic variance on MCEV includes the impact of a provision against the current and potential maximum future cost of our interest rate hedging strategy, the impact of trading activity in Q4 2015 to get the portfolio aligned for Solvency II which was partially offset by the lower valuation of the subordinated debt under MCEV which is valued at fair value compared to IFRS which is valued at amortised cost.
Non-operating variance free surplus predominantly consists of non-recurring expenses further detail of which is provided in note 1 to the consolidated financial statements presented with this supplementary information. The increase in VIF from non-operating variances arises since future interest payments due on the subordinated debt reduce future profits. Therefore, future profit with value equivalent to the value of the future interest payments will be tax exempt.
The principal changes in the value of non-covered business are a capital raise in September 2015 of £53m, offset by dividends paid of £6.0m (includes the 2014 final dividend and the 2015 interim dividend).
The other movements in IFRS net equity have arisen as a result of the capital raise in September 2015 and an increase to the share based payment reserve which has increased to reflect the charge arising from the Group's non-cash employee benefits and reduced to where awards have crystallised in the year .
No future management actions are modelled following the change to the assumptions. The results are shown net of tax. The Required Capital has not been recalculated in each scenario and is modelled as a level percentage of the Capital Resources Requirement (CRR) (although the CRR will have increased or decreased as a result of any change in IFRS reserves and will impact on the FCoRC).
The sensitivity of the embedded value and the value of new business to changes in economic and non-economic assumptions is as follows:
| In-force | New business | ||||
|---|---|---|---|---|---|
| 31 December 2015 Sensitivity | Impact on MCEV |
Change in MCEV |
Impact on MCEV |
Change in MCEV |
|
| £'000's | % | £'000's | % | ||
| Embedded Value (Base) |
569,787 | 29,888 | |||
| Interest rate environment +100 bps | (29,375) | (5%) | n/a | n/a | |
| Interest rate environment 100 bps |
59,998 | 11% | n/a | n/a | |
| Swaption implied volatilities + 25% | — | 0% | n/a | n/a | |
| Property volatilities +25% | (42,212) | (7%) | (3,993) | (13%) | |
| Property Values 10% | (31,707) | (6%) | n/a | n/a | |
| Lapses 10% (including equity release) |
4,956 | 1% | n/a | n/a | |
| Mortality 5% (annuities) | (23,010) | (4%) | (3,812) | (13%) | |
| Expenses 10% | 6,367 | 1% | 141 | 0% | |
| Mortality improvements +0.25% (best estimate only) | (13,709) | (2%) | (2,507) | (8%) | |
| Decrease in liquidity premium 25 bps |
(80,951) | (14%) | (9,387) | (31%) | |
| Required capital set to be 100% of CRR | 10,428 | 2% | 1,269 | 4% |
| In-force | New business | |||
|---|---|---|---|---|
| 31 December 2014 Sensitivity | Impact on MCEV |
Change in MCEV |
Impact on MCEV |
Change in MCEV |
| £'000's | % | £'000's | % | |
| Embedded Value (Base) | 557,532 | 56,072 | ||
| Interest rate environment +100 bps | (25,447) | (5%) | n/a | n/a |
| Interest rate environment 100 bps |
26,177 | 5% | n/a | n/a |
| Swaption implied volatilities + 25% | — | 0% | n/a | n/a |
| Property volatilities +25% | (39,445) | (7%) | (5,339) | (10%) |
| Property Values 10% |
(29,763) | (5%) | n/a | n/a |
| Lapses 10% (including equity release) |
4,771 | 1% | n/a | n/a |
| Mortality 5% (annuities) |
(21,603) | (4%) | (1,825) | (3%) |
| Expenses 10% |
6,663 | 1% | 180 | 0% |
| Mortality improvements +0.25% (best estimate only) | (11,254) | (2%) | (1,747) | (3%) |
| Decrease in liquidity premium 25 bps | (79,212) | (14%) | (12,595) | (22%) |
| Required capital set to be 100% of CRR | 10,995 | 2% | 2,927 | 5% |
the probability of default on the loan. The sensitivity also allows for the corresponding change in liabilities as a result of the yield change.
We have audited the consolidated Group market consistent embedded value supplementary information (the ''MCEV supplementary information'') of Partnership Assurance Group plc for the year ended 31 December 2014 which comprises the Group MCEV Analysis of Earnings, Covered Business Analysis of Movement in Embedded Value, reconciliation of Group IFRS net assets to MCEV and the related notes 1 to 5. The financial reporting framework that has been applied in their preparation is the market consistent embedded value principles issued in June 2008 by the European CFO Forum and supplemented by an amendment to the MCEV principles issued by the same body in October 2009 (the ''MCEV principles'').
We have reported separately on the statutory Group financial statements of Partnership Assurance Group plc for the year ended 31 December 2014. The information contained in the MCEV supplementary information should be read in conjunction with the Group financial statements prepared on an IFRS basis.
This report is made solely to the Company's directors in accordance with our engagement letter and solely for the purpose of expressing an opinion as to whether the MCEV supplementary information for the year ended 31 December 2014 has been properly prepared in accordance with the MCEV principles. Our audit work has been undertaken so that we might state to the Company's Directors those matters we are required to state to them in an independent auditor's report and for no other purpose. To the fullest extent permitted by law, we will not accept or assume responsibility to anyone other than the Company, for our audit work, for this report, or for the opinions we have formed.
As explained more fully in the Directors' Responsibility Statement in respect of the MCEV supplementary information, the Directors are responsible for the preparation of the MCEV supplementary information. Our responsibility is to audit and express an opinion on the MCEV supplementary information in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
An audit involves obtaining evidence about the amounts and disclosures in the MCEV supplementary information sufficient to give reasonable assurance that the supplementary information is free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the supplementary information. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies, we consider the implications for our report.
In our opinion, the MCEV supplementary information for the year ended 31 December 2014 has been properly prepared in accordance with the MCEV principles using the methodology and assumptions set out in notes 1 and 2.
Partnership Assurance Stephenson BA ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom
2 March 2015
| Year ended 31 December 2014 | Year ended 31 December |
||||
|---|---|---|---|---|---|
| Note | Covered business MCEV |
Non covered business IFRS |
Total Group MCEV |
2013 Total Group MCEV |
|
| £000's | £000's | £000's | £000's | ||
| Opening Group MCEV | 463,494 | 56,139 | 519,633 | 9,890 | |
| Operating MCEV earnings | 3 | 86,502 | — | 86,502 | 107,236 |
| Non-operating MCEV earnings | 3 | (15,464) | (1,607) | (17,071) | (54,225) |
| Total MCEV earnings | 71,038 | (1,607) | 69,431 | 53,011 | |
| Other movements in IFRS net equity |
4 | — | 1,222 | 1,222 | 456,732 |
| Capital and dividend flows | 3 | 23,000 | (37,000) | (14,000) | — |
| Closing Group MCEV |
557,532 | 18,754 | 576,286 | 519,633 |
| Year ended 31 December 2014 | Year ended 31 December |
|||||
|---|---|---|---|---|---|---|
| Note | Free surplus |
Required capital |
VIF | MCEV | 2013 MCEV |
|
| £000's | £000's | £000's | £000's | £000's | ||
| Opening MCEV |
58,840 | 354,330 | 50,324 | 463,494 | 383,600 | |
| New business value | 3 | (41,879) | 72,299 | 25,652 | 56,072 | 81,094 |
| Expected existing business contribution (reference rate & in excess of reference |
||||||
| rate) | 3 | — | — | 4,106 | 4,106 | 2,800 |
| Transfers from VIF and required capital to | ||||||
| free surplus | 3 | 27,044 | (17,263) | (6,313) | 3,469 | 5,226 |
| Experience variances | 3 | (770) | — | (317) | (1,087) | (301) |
| Assumption changes |
4,171 | (6,529) | 1,877 | (481) | 9,799 | |
| Other operating variances |
3 | 15,081 | (8,196) | 17,537 | 24,423 | 8,618 |
| Operating MCEV earnings |
3,647 | 40,311 | 42,542 | 86,502 | 107,236 | |
| Economic variances | 3 | (41,297) | 22,856 | 14,447 | (3,994) | 1,734 |
| Other non-operating variances | 3 | (13,357) | 739 | 1,147 | (11,471) | (4,076) |
| Total MCEV earnings | (51,007) | 63,906 | 58,136 | 71,037 | 104,894 | |
| Capital and dividend flows | 3 | 23,000 | — | — | 23,000 | (25,000) |
| Closing MCEV | 30,833 | 418,236 | 108,460 | 557,531 | 463,494 |
| Year ended 31 December 2014 | Year ended 31 December 2013 | |||||
|---|---|---|---|---|---|---|
| Covered business adjusted net worth |
Non- covered Covered business business adjusted adjusted net worth Group net worth |
Non covered business adjusted net worth |
Group | |||
| £000's | £000's | £000's | £000's | £000's | £000's | |
| Group Net Assets as reported under | ||||||
| IFRS | 458,959 | 145,729 | 604,688 | 415,501 | 183,114 | 598,615 |
| Goodwill | (1,332) | (124,875) | (126,207) | (1,332) | (124,875) | (126,207) |
| Intangibles | (1,000) | (2,100) | (3,100) | (1,000) | (2,100) | (3,100) |
| Adjustments to IFRS | (7,555) | — | (7,555) | — | — | — |
| MCEV Net Worth | 449,071 | 18,754 | 475,381 | 413,169 | 56,139 | 469,308 |
| VIF . |
108,460 | — | 108,460 | 50,325 | — | 50,325 |
| MCEV (net of taxation) | 557,357 | 18,754 | 576,286 | 463,494 | 56,139 | 519,633 |
The supplementary information which comprises the Group MCEV analysis of earnings (net of tax), covered business analysis of movement in embedded value (net of tax), reconciliation of Group IFRS net assets to MCEV and the related notes 1 to 5 has been prepared on a Market Consistent Embedded Value (MCEV) basis and results for non-covered business on the International Financial Reporting Standards (IFRS) basis.
The MCEV methodology adopted is in accordance with the MCEV Principles published by the CFO Forum in October 2009.
The MCEV calculations cover all lines of insurance business within PLACL. No other Group companies contain any covered business and the value of these companies has been included in the Group MCEV at IFRS net asset value, less the value of goodwill and intangibles, to the extent that their recovery is supported by future profits.
The Group MCEV includes the value of external debt, at the outstanding face value, within the net worth of Group companies outside of PLACL. The Group has been debt free during 2014 and does not make use of any financial reinsurance.
Under the MCEV methodology, profit is recognised as it is earned over the life of products defined within covered business. The total profit recognised over the lifetime of a policy is the same under MCEV and IFRS, but the timing of recognition is different.
The embedded value is the sum of the adjusted net worth of the Group companies plus the value of in-force on the covered business, this being the present value of profits that will emerge over time.
The embedded value is calculated net of the impacts of reinsurance and allows for taxation based on current legislation and known future changes.
(i) Net worth The net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the long-term business fund. This is the net assets on a regulatory basis for the life company and the IFRS net asset value for other Group companies, less the value of goodwill and intangibles, to the extent that their recovery is supported by future profits.
The net worth is equal to the sum of the required capital and free surplus in the Group.
This methodology reflects the level of capital considered by the Directors to be appropriate to manage the business, and includes any additional shareholder funds not available for distribution. The same definition of required capital is used for both existing and new business.
The level of required capital is disclosed as the percentage of the EU minimum capital requirement (Capital Resources Requirement).
The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date.
(iii) Value of in-force covered business (VIF)
The value of in-force covered business consists of the following components:
The PVFP is the present value of the distributable profits to shareholders arising from the in-force covered business projected on a best estimate basis. Distributable profits generally arise when they are released following actuarial valuations. These valuations are carried out in accordance with PRA statutory requirements designed to ensure and demonstrate solvency in long-term business funds. Future distributable profits will depend on experience in a number of areas such as investment return, mortality, lapse rates and administration costs. Releases to shareholders arising in future years from the in-force covered business and associated required capital can be projected using assumptions of future experience.
Future profits are projected using best estimate non-economic assumptions and market consistent economic assumptions. In principle, each cash flow is discounted at a rate that appropriately reflects the riskiness of that cash flow, so higher risk cash flows are discounted at higher rates. In practice, the PVFP is calculated using the ''certainty equivalent'' approach, under which the reference rate is used for both the investment return and the discount rate. This approach ensures that asset cash flows are valued consistently with the market prices of assets without options and guarantees. Further information on the risk-free rates is in the following pages.
The PVFP calculation is based on a single (base) economic scenario; however, a single scenario cannot appropriately allow for the effect of certain asset features. If an option or guarantee affects shareholder cash flows in the base scenario, the impact is included in the PVFP and is referred to as the intrinsic value of the option guarantee; however, future investment returns are uncertain and the actual impact on shareholder profits may be higher or lower. The covered business does not contain any significant policyholder options or guarantees and therefore the TVOG is zero.
The assets backing the covered business include mortgages secured against individual domestic property (loans secured by residential mortgages). The mortgages contain guarantees where if the value of the property is lower than the mortgage balance at the time of death or entry into a care home, then the lower of the property value and mortgage balance is repaid. The time value of this option and guarantee is allowed for in the asset valuation using closed form calculations.
The additional costs to a shareholder of holding the assets backing required capital within an insurance company rather than directly in the market are called frictional costs. They are explicitly deducted from the PVFP. The additional costs allowed for are the taxation costs and any additional investment expenses on the assets backing the required capital. The level of required capital has been set out in the net worth section.
Frictional costs are calculated by projecting forwards the future levels of required capital. The projection of the required capital has been based on an approximate method assuming that the required capital is a constant proportion of the Long Term Insurance Capital Requirement. Tax on investment return and investment expenses are payable on the assets backing required capital, up until the point that they are released to shareholders.
The cost of residual non-hedgeable risks (CoRNHR) covers risks not already allowed for in the time value of options and guarantees or the PVFP. The allowance includes the impact of both non-hedgeable financial and non-financial risks. The most significant risks not included in the PVFP are operational risks and equity release property risks.
Asymmetric risks allowed for in the PVFP are described earlier in the basis of preparation. No allowance has been made within the cost of non-hedgeable risk for symmetrical risks as these are diversifiable by investors. The CoRNHR includes an allowance for non-modelled non-hedgeable risks. For ease of comparison the CoRNHR is expressed as percentage cost of non-hedgeable capital.
All annuity business is written on a single premium basis. Premium increments received following policy issue are excluded from the value of new business. Single and regular premium protection business is included in new business.
Point of sale economic and non-economic assumptions are used to value the new business. Any variances or changes in assumptions after the point of sale are recorded within the analysis of the MCEV earnings as operating experience variances or operating assumption changes.
The Group does not contain any policies where the policyholders participate in the profits of the business.
Reference rates are calculated by adding the liquidity premium of corporate bonds, loans secured by residential mortgages and loans secured by commercial mortgages liquidity premiums to the swap curve. The liquidity premium on corporate bond assets is calculated by deducting an allowance for credit default, individually assessed for each bond based on credit rating, and comparing the resulting risk adjusted internal rate of return on the portfolio to the swap curve.
Loans secured by residential mortgages are valued using a mark to model approach that allows for the cost of the NNEG, where relevant, with the liquidity premium calculated on a consistent basis.
Loans secured by commercial mortgages are valued using a mark to model approach that allows for the risk from change in tenant behaviour and property value, where relevant, with the liquidity premium calculated on a consistent basis.
For protection business, cash flows are assumed to be liquid and as such are discounted with no allowance for a liquidity premium. The liquidity premiums used for the annuity in-force business are as follows:
| Liquidity premium |
|
|---|---|
| Wednesday, December 31, 2014 | 211 bps |
| Tuesday, December 31, 2013 |
180 bps |
The liquidity premium on new business is determined using an approach consistent with that for the in-force business. For new business, the liquidity premium in excess of swaps is derived on a daily basis using the prevailing market conditions.
The weighted average liquidity premiums used for the new business MCEV calculations are as follows:
| Liquidity premium |
|
|---|---|
| Wednesday, December 31, 2014 | 273 bps |
| Tuesday, December 31, 2013 |
216 bps |
The swap curve is constructed from cash rates, future strips, and semi-annual swap rates sourced from a variety of counterparties and brokers with flat interpolation beyond 50 years.
The table below sets out the swap rates used for the MCEV valuations as at period end. These rates have been supplied by PLACL's investment manager.
| 6 months | 1 year | 2 years | 5 years | 10 years | 15 years | 20 years | |
|---|---|---|---|---|---|---|---|
| Wednesday, December 31, 2014 |
0.74% | 0.74% | 0.93% | 1.46% | 1.87% | 2.11% | 2.24% |
| Tuesday, December 31, 2013 |
0.71% | 0.71% | 1.03% | 2.17% | 3.10% | 3.47% | 3.57% |
For operating earnings, PLACL uses the risk adjusted yield on the asset portfolio backing liabilities in order to determine the total existing business contribution. This represents management's long-term expectations of total return on the portfolio.
The expected return has been calculated by reference to the internal rate of return on the backing assets less an appropriate risk margin.
Assumed future mortality, morbidity and lapse rates have been derived from PLACL's historical experience data. The assumption is set as a best estimate of future experience. Improvements in annuitant longevity have been included in this best estimate.
Maintenance expenses are based on the costs allocated or recharged to the PLACL in-force business. No credit for future productivity gains or economies of scale has been included in the MCEV.
Non-recurring expenses, associated with the covered business, are charged to the non-operating earnings in the year incurred and are excluded from the per policy maintenance expense assumptions. These amounted to £16.4m for the year to 31 December 2014 (31 December 2013: £5.2m).
Best estimate expense inflation applied as at 31 December 2014 was 4.5% p.a. (31 December 2013: 4.8%).
The current and future tax rates are corporation tax rates as published by HM Treasury and take into account both taxes enacted by legislation and those disclosed in budget announcements. The effective tax rate in PLACL is lower than the corporation tax rate in 2014 due to a £1.9m research and development tax reclaim on prior years. All significant external debt, which had previously produced interest costs that were used to reduce the effective tax rate in PLACL, was repaid in 2013. The effective tax rate for 2014 was 13.4% (31 December 2013: 17.1%).
For the purposes of modelling tax on future profits, a calendar assumption is set using a pro rata method based on months at each effective rate. This is implemented as prescribed by HMRC.
The blended corporation tax rates used were as follows:
| Year ended 31 December |
||
|---|---|---|
| 2014 | 2013 | |
| 2014 | 21.50% 21.50% | |
| 2015 | 20.25% 20.25% | |
| 2016+ | 20.00% 20.00% |
Residential property and commercial property volatilities are the only direct volatility inputs to the MCEV calculations. Residential property volatility is used in the evaluation of the NNEG on loans secured by residential mortgages. As at 31 December 2014 the assumption was set to 12% (31 December 2013: 12%). Commercial property volatility is used to model property prices of properties backing commercial mortgage loans. As at 31 December 2014 the assumption was set to 11%.
Correlations between the risks inherent in the business are used for the calculation of the CoRNHR total non-hedgeable risk capital.
The correlations are consistent with the Group's Economic Capital assumptions which are based on historic correlations with adjustment for prudence as required.
For the balance sheet and operating profit, a charge of 0.9% (31 December 2013: 1.2%) has been applied to the non-hedgeable capital required for a 1-in-200 year basis over the remaining lifetime of in-force business. The charge includes an allowance for all material non-hedgeable risks identified which are not already included in the PVFP calculation.
The capital levels used are consistent with those used in the Economic Capital calculation for those risks covered. Diversification benefits are included between non-hedgeable risks of the covered business. No diversification credit has been taken with hedgeable risks in the covered or non-covered business. The capital has been projected as running off over the remaining lifetime of the covered business in line with the capital resources requirement.
The required capital has been set to be 190% of the capital resources requirement (31 December 2013: 185%). The required capital has been projected as running off over the remaining lifetime of the covered business in line with the capital resources requirement.
The total frictional cost allowance for investment expenses and tax on investment income earned on the required capital is 0.5% as at 31 December 2014 (31 December 2013: 1.1%).
The key driver of the reduction in MCEV earnings in respect of new business written over the year was the lower business volumes in 2014 compared to 2013.
The total expected existing business contribution has increased in the period as a result of continued growth in the portfolio. Experience variances in the period are negligible in aggregate.
Assumption changes includes the net impact of basis changes in 2014 including a complete review of our longevity basis. The overall impact of the basis review was small.
During the period the methodology for the calculation of frictional cost of capital has been reassessed to more accurately reflect the assets backing required capital, resulting in a one-off increase in MCEV of £10.1m that has been included in other operating variances.
Other operating variances include expected long-term return on excess assets of £12.8m (£9.5m at 31 December 2013).
An adjustment to the provision for tax in the calculation of required capital has contributed to the movement in the allocation of required capital and free surplus in other non-operating variances but does not result in an overall change to MCEV.
Economic variances on MCEV predominantly relate to a reduction in risk-free rates over the period. The reduction in net worth was partially offset by the increase in VIF due to economic variances.
Non-operating variance is predominantly related to exceptional expenses incurred over 2014. £23.0m of capital was injected from non-covered business into covered business in 2014.
The £37.0m dividend and capital flows are due to the payment of the 2013 final dividend (£12.0m) and the 2014 interim dividend (£2.0m) and the £23.0m capital injection into covered business.
Most of the £1.6m non-operating MCEV losses in the period have arisen due to an increased effective tax rate on non-covered business. The research and development claim on prior years, that prompted a credit to the covered business, produced a smaller deferred tax charge on non-covered business.
The other movements in IFRS net equity have arisen as the share-based payment reserve has been increased to reflect the charge arising from the Group's non-cash employee benefits.
No future management actions are modelled following the change to the assumptions. The results are shown net of tax. The Required Capital has not been recalculated in each scenario and is modelled as a level percentage of the Capital Resources Requirement (CRR) (although the CRR will have increased or decreased as a result of any change in IFRS reserves and will impact on the FCoRC).
The sensitivity of the embedded value and the value of new business to changes in economic and non-economic assumptions is as follows:
| In-force | New Business | |||
|---|---|---|---|---|
| 31 December 2014 Sensitivity | Impact on MCEV |
Change in MCEW |
Impact on MCEV |
Change in MCEV |
| £000's | % | £000's | % | |
| Embedded Value (Base) | 557,532 | 56,072 | ||
| Interest rate environment +100 bps | (5,714) | (1)% | n/a | n/a |
| Interest rate environment 100 bps |
828 | 0% | n/a | n/a |
| Swaption implied volatilities +25% |
— | 0% | n/a | n/a |
| Property volatilities +25% | (23,055) | (4)% | (1,166) | (2)% |
| Property Values 10% |
(29,763) | (5)% | n/a | n/a |
| Lapses 10% (including equity release) |
4,771 | 1% | n/a | n/a |
| Mortality 5% (annuities) |
(21,603) | (4)% | (1,825) | (3)% |
| Expenses 10% |
6,663 | 1% | 180 | 0% |
| Mortality improvements +0.25% (best estimate only) | (11,254) | (2)% | (1,747) | (3)% |
| Decrease in liquidity premium 25 bps | (79,212) | (14)% | (12,595) | (22)% |
| Required capital set to be 100% of CRR | 10,995 | 2% | 2,927 | 5% |
| In-force | New Business | |||
|---|---|---|---|---|
| 31 December 2013 Sensitivity | Impact on MCEV |
Change in MCEW |
Impact on MCEV |
Change in MCEV |
| £000's | % | £000's | % | |
| Embedded Value (Base) | 463,494 | 81.094 | ||
| Interest rate environment +100 bps | 760 | 0% | n/a | n/a |
| Interest rate environment 100 bps |
(4,802) | (1)% | n/a | n/a |
| Swaption implied volatilities +25% . |
n/a | n/a | n/a | n/a |
| Property volatilities +25% | (23,601) | (5)% | (4,100) | (5)% |
| Property Values 10% |
(17,364) | (4)% | n/a | n/a |
| Lapses 10% (including equity release) |
1,861 | 0% | n/a | n/a |
| Mortality 5% (annuities) |
(16,892) | (4)% | (3,179) | (4)% |
| Expenses 10% |
5,842 | 1% | 1,322 | 2% |
| Mortality improvements +0.25% (best estimate only) | (7,149) | (2)% | (1,986) | (2)% |
| Decrease in liquidity premium 25 bps | (60,529) | (13)% | (17,363) | (22)% |
| Required capital set to be 100% of CRR | 16,813 | 4% | 6,466 | 8% |
increases the probability of default on the loan. The sensitivity also allows for the corresponding change in liabilities as a result of the yield change.
Part A: Report on a financial information reconciliation in accordance with the Listing Rules
2NOV201514335849 Deloitte LLP Hill House, 1 Little New Street London EC4A 3TR Tel+44 (0)20 7936 3000 www.deloitte.co.uk
The Board of Directors on behalf of Just Retirement Group plc Vale House Roebuck Close Bancroft Road Reigate Surrey RH2 7RU
Barclays Bank plc 5 North Colonnade Canary Wharf London E14 4BB
14 March 2016
Dear Sirs
We report on the reconciliation of net profit for each of the years in the three-year period ended 31 December 2015 and of the Total equity as at 31 December 2013, 31 December 2014 and 31 December 2015, together the ''Financial Information'', as previously reported in the financial statements of the Target prepared under International Financial Reporting Standards, showing the adjustments necessary to restate it on the basis of the Company's accounting policies used in preparing the Company's last annual financial statements (the ''Reconciliation''), set out in Part V of the Class 1 circular of the Company dated 14 March 2016. This report is required by Listing Rule 13.5.27R(2)(a) of the United Kingdom Listing Authority and is given for the purpose of complying with that Listing Rule and for no other purpose.
It is the responsibility of the directors of the Company (the ''Directors'') to prepare the Reconciliation in accordance with Listing Rule 13.5.27R(2)(a).
It is our responsibility to form an opinion, as required by Listing Rules 13.5.27R2(a), as to whether:
and to report that opinion to you.
Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have to the ordinary shareholders of the Company as a result of the inclusion of this report in the Circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6), consenting to its inclusion in the circular.
In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial statements used in the compilation of the Reconciliation, nor do we accept responsibility for such reports or opinions beyond that owed to those to who those reports or opinions were addressed at the date of their issue.
We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying Financial Information, consisted primarily of checking whether the unadjusted Financial Information of the Target has been accurately extracted from an appropriate source, assessing whether all adjustments necessary for the purpose of presenting the Financial Information on a basis consistent in all material respects with the Company's accounting policies have been made, examination of evidence supporting the adjustments in the Reconciliation and checking the arithmetical accuracy of the calculations within the Reconciliation.
We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Reconciliation has been properly compiled on the basis stated and that the adjustments are appropriate for the purpose of presenting the Financial Information (as adjusted) on a basis consistent in all material respects with the Company's accounting policies.
Our work has not been carried out in accordance with auditing or other standards and practices generally accepted outside the United Kingdom, including the United States of America and accordingly should not be relied upon as if it has been carried out in accordance with those standards and practices.
In our opinion:
Yours faithfully
Deloitte LLP Chartered Accountants
Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (''DTTL''), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.
Unaudited reconciliation of Partnership Assurance's net profit for the years ended 31 December 2015, 2014 and 2013
| Note | Year to 31 Dec 2015 |
Year to 31 Dec 2014 |
Year to 31 Dec 2013 |
|
|---|---|---|---|---|
| £m | £m | £m | ||
| Net (loss)/ profit after tax as previously reported by | ||||
| Partnership Assurance under Partnership Assurance's | ||||
| accounting policies |
(14.1) | 18.9 | 59.4 | |
| Accounting Policy Adjustments: | (a) | |||
| Gross premiums written |
(25.1) | 30.7 | 69.3 | |
| Change in insurance liabilities (Gross amount) | 25.1 | (30.7) | (69.3) | |
| Net (loss)/ profit after tax under Just Retirement's | ||||
| accounting policies |
(14.1) | 18.9 | 59.4 |
Unaudited reconciliation of Partnership Assurance's Total equity as at 31 December 2015, 31 December 2014 and 31 December 2013
| Note | 31 Dec 2015 £m |
31 Dec 2014 £m |
31 Dec 2013 £m |
|
|---|---|---|---|---|
| Total equity as previously reported by Partnership | ||||
| Assurance under Partnership Assurance's accounting | ||||
| policies | 640.8 | 604.7 | 598.5 | |
| Accounting Policy Adjustments: | (a) | |||
| Debtors arising out of insurance contracts |
(25.1) | 30.7 | 69.3 | |
| Long Term Business Provision | 25.1 | (30.7) | (69.3) | |
| Total equity under Just Retirement's accounting policies | 640.8 | 604.7 | 598.5 |
The adjustments to net profit and total equity arise due to differences in the revenue recognition accounting policies for Gross Premiums Written between Just Retirement Group plc and Partnership Assurance.
Partnership Assurance's accounting policy notes that ''Premiums are written at the point an insurance policy comes into force'', whereas Just Retirement Group plc's accounting policy is ''Premium revenue in respect of single premium insurance contracts is accounted for when the premiums are received''.
In 2012 Partnership Assurance changed the terms of its offer to potential policyholders such that the insurance contract came into force at the point the policyholder accepted the insurer's terms. Pre-2012 the legal terms of Partnership Assurance's underlying insurance contracts were consistent with those of Just Retirement Group plc.
The identified difference between the two accounting policies results in the earlier recognition of premiums in the financial statements of Partnership Assurance compared to Just Retirement Group plc, as the point at which the policyholder accepts the insurer's terms occurs before premiums are received.
There is no overall impact on Net profit or Total equity because Partnership Assurance makes a corresponding adjustment to the Long Term Business Provision which means that no profit is recognised on these contracts until the premiums are received, which is in line with the point in time at which Just Retirement Group plc recognises profits on its contracts.
The adjustments shown in the tables above have been extracted from the Partnership Assurance financial statements for the years ended 31 December 2013 (note 1c to the IFRS financial statements), 31 December 2014 (note 1c to the IFRS financial statements) and 31 December 2015 (note 1c to the IFRS financial statements).
The unaudited pro forma income statement, pro forma statement of net assets, pro forma EEV balance sheet and the related notes thereto set out in Section A, Section B and Section D of this Part VI (Unaudited pro forma financial information of the Combined Group) (together, the ''Unaudited pro forma Financial Information'') have been prepared on the basis of the notes set out below to illustrate the effect of the Proposed Merger on the income statement of the Just Retirement Group as if it had taken place on 1 January 2015, and on the net assets and EEV balance sheet of the Just Retirement Group as if it had taken place on 31 December 2015.
The Unaudited pro forma Financial Information has been prepared in accordance with Annex II of the Prospectus Directive Regulation and in a manner consistent with the accounting policies adopted by the Just Retirement Group in preparing its consolidated financial statements for the period ended 31 December 2015.
The Unaudited pro forma Financial Information has been prepared for illustrative purposes only and because of its nature, addresses a hypothetical situation and, therefore, does not represent the Just Retirement Group's, the Partnership Assurance Group's or the Combined Group's actual financial position or results. It does not purport to represent what the Combined Group's financial position or results of operations actually would have been if the Proposed Merger had been completed on the dates indicated, nor does it purport to represent the results of operations for any future period or financial position at any future date.
The Unaudited pro forma Financial Information does not constitute financial statements within the meaning of Section 434 of the Companies Act. Prospective investors should read the whole of this Circular and not rely solely on the summarised financial information contained in this Part VI (Unaudited pro forma financial information of the Combined Group). KPMG LLP's reports on the Unaudited pro forma Financial Information are set out in Section C and Section E of this Part VI (Unaudited pro forma financial information of the Combined Group).
| Adjustments | |||||
|---|---|---|---|---|---|
| All figures stated in £ millions | Just Retirement Group for the year ended 30 June 2015 |
Partnership Assurance Group for the year ended 31 December 2015 |
Adjustments to align accounting policies |
Proposed Merger adjustments |
Pro forma |
| Revenue | (Note 1) | (Note 2) | (Note 3) | (Note 4 to 6) | |
| Gross written premium Reinsurance premiums ceded Reinsurance recapture |
1,099.0 (122.9) 950.9 |
651.4 (217.6) — |
(25.1) — — |
— — — |
1,725.3 (340.5) 950.9 |
| Net premium revenue | 1,927.0 | 433.8 | (25.1) | — | 2,335.7 |
| Net investment income | 635.2 | 51.3 | — | — | 686.5 |
| Other operating income | 5.1 | 0.2 | — | — | 5.3 |
| Total revenue | 2,567.3 | 485.3 | (25.1) | — | 3,027.5 |
| Expenses | |||||
| Gross claims paid | (498.6) | (413.1) | — | — | (911.7) |
| Reinsurers' share of claims paid | 248.1 | 263.5 | — | — | 511.6 |
| Net claims paid Change in insurance liabilities |
(250.5) | (149.6) | — | — | (400.1) |
| Gross amount | (956.7) | (193.7) | 25.1 | — | (1,125.3) |
| Reinsurers' share |
(188.3) | (42.0) | — | — | (230.3) |
| Reinsurance capture | (950.9) | — | — | — | (950.9) |
| (2,095.9) | (235.7) | 25.1 | — | (2,306.5) | |
| Change in investment contract liabilities | (3.5) | — | — | — | (3.5) |
| Acquisition costs | (18.5) | (3.1) | — | — | (21.6) |
| Other operating expenses |
(127.6) | (91.2) | — | (14.9) | (233.7) |
| Investment expenses and charges | — | (14.8) | — | — | (14.8) |
| Finance costs |
(100.9) | (7.3) | — | — | (108.2) |
| Total claims and expenses |
(2,596.9) | (501.8) | 25.1 | (14.9) | (3,088.5) |
| (Loss) / Profit before tax | (29.6) | (16.4) | — | (14.9) | (60.9) |
| Income tax | 4.8 | 2.3 | — | 3.1 | (10.2) |
| (Loss) / profit for the period | (24.8) | (14.1) | — | (11.8) | (50.7) |
(1) The figures for Just Retirement Group have been extracted, without material adjustment, from Just Retirement's Annual Report & Accounts 2015.
(2) The figures for Partnership Assurance Group have been extracted, without material adjustment, from Partnership Assurance's Audited Results 2015.
In preparing the unaudited pro forma income statement no account has been taken of the trading activity of Just Retirement Group since 30 June 2015 and of Partnership Assurance Group since 31 December 2015. All of the adjustments described in Note 3 to Note 6 of the unaudited pro forma income statement will have a continuing impact with exception of the adjustments in relation to the estimated transaction costs, as described in Note 4 and Note 5 above.
| SECTION B: UNAUDITED PRO FORMA STATEMENT OF NET ASSETS | ||
|---|---|---|
| All figures stated in £ millions | Just Retirement Group as at 31 December 2015 |
Partnership Assurance Group as at 31 December 2015 |
Adjustments to align accounting policies |
Proposed Merger adjustments |
Pro forma |
|---|---|---|---|---|---|
| (Note 1) | (Note 2) | (Note 4) | (Note 5 to 6) | ||
| Assets | |||||
| Intangible assets (Note 3) | 73.1 | 138.4 | — | 27.7 | 239.2 |
| Equipment | 10.1 | 9.3 | — | — | 19.4 |
| Financial investments | 9,542.5 | 4,886.6 | — | — | 14,429.1 |
| Reinsurance assets | 2,546.8 | 3,204.1 | — | — | 5,750.9 |
| Deferred tax assets | 3.6 | 0.9 | — | — | 4.5 |
| Current tax assets | 20.7 | — | — | — | 20.7 |
| Prepayments and accrued | |||||
| income | 131.2 | 3.5 | — | — | 134.7 |
| Insurance and other receivables | 2.0 | 90.4 | (25.1) | — | 67.3 |
| Investment in JVs and | |||||
| associates | — | 0.3 | — | — | 0.3 |
| Cash and cash equivalents |
21.9 | 453.0 | — | — | 474.9 |
| Total assets | 12,351.9 | 8,786.5 | (25.1) | 27.7 | 21,141.0 |
| Total equity | 921.5 | 640.8 | — | 27.7 | 1,590.0 |
| Liabilities | |||||
| Insurance liabilities | 8,214.6 | 5,424.8 | (25.1) | — | 13,614.3 |
| Investment contract liabilities | 211.9 | — | — | — | 211.9 |
| Loans and borrowings |
98.1 | 107.3 | — | — | 205.4 |
| Other financial liabilities | 2,718.5 | 2,561.3 | — | — | 5,279.8 |
| Deferred tax liabilities |
25.1 | 0.9 | — | — | 26.0 |
| Other provisions. | 1.5 | — | — | — | 1.5 |
| Current tax liabilities |
14.5 | 4.0 | — | — | 18.5 |
| Accruals and deferred income | 22.7 | — | — | — | 22.7 |
| Insurance and other payables . . |
123.5 | 47.4 | — | — | 170.9 |
| Total liabilities | 11,430.4 | 8,145.7 | (25.1) | — | 19,551.0 |
| Total equity and liabilities |
12,351.9 | 8,786.5 | (25.1) | 27.7 | 21,141.0 |
(1) The figures for Just Retirement Group have been extracted, without material adjustment, from Just Retirement's Interim Results 2016.
(2) The figures for Partnership Assurance Group have been extracted, without material adjustment, from Partnership Assurance's Audited Results 2015.
(3) The Balance Sheet format for both the Company and Partnership Assurance have been abridged. Intangible assets comprises goodwill and other intangible assets.
(4) This column reflects the effect of the material differences between Partnership Assurance's accounting policies and the accounting policies applied by the Company.
(5) Under IFRS acquisition accounting it is necessary to fair value the consideration paid and all of the assets and liabilities of the acquired business. In the context of the Proposed Merger a significant part of that adjustment will be for fair valuation of the projected cash flows attaching to the Partnership Assurance Group's in-force life assurance contracts which will not be undertaken until completion of the Proposed Merger.
In the pro forma statement of net assets no adjustments have been made to the fair values of the individual net assets of the Partnership Assurance Group to reflect any remeasurement to fair value which may arise on the Proposed Merger as this exercise will not be undertaken until after the completion of the Proposed Merger.
Note 6 below shows the derivation of indicative goodwill and other intangible assets adjustment, which is based on the difference between the total consideration and Partnership Assurance Group's net assets.
(6) The goodwill and other intangible assets adjustment arising on the basis described in Note 6 above has been calculated as follows:
| £m | |
|---|---|
| Total consideration | 668.5 |
| Less: Value of the Partnership Assurance Group net assets | (640.8) |
| Goodwill and other intangible assets | 27.7 |
Based on the Closing Price of Just Retirement Shares of 199 pence on 10 August 2015 (being the last practicable date prior to the date of the Firm Offer Announcement) and the Exchange Ratio of 0.834 Partnership Assurance Shares for each New Just Retirement Share, the Proposed Merger represents an indicative value of 166 pence per Partnership Assurance Share and values the entire issued and to be issued ordinary share capital of Partnership Assurance at approximately £668.5 million.
In preparing the unaudited pro forma statement of net assets, no account has been taken of the trading activity of Just Retirement Group since 31 December 2015 and of Partnership Assurance Group since 31 December 2015.
The Directors Just Retirement Group plc Vale House Roebuck Close Bancroft Road Reigate, Surrey RH2 7RU
14 March 2016
Ladies and Gentlemen
We report on the pro forma financial information (the 'Pro forma financial information') set out in Section A and Section B of Part VI (Unaudited pro forma financial information of the Combined Group) of the Class 1 circular dated 14 March 2016, which has been prepared on the basis described in the notes to the Pro forma financial information, for illustrative purposes only, to provide information about how the acquisition of Partnership Assurance by Just Retirement might have affected the financial information presented on the basis of the accounting policies adopted by Just Retirement in preparing the financial statements for the period ended 31 December 2015. This report is required by paragraph 13.3.3R of the Listing Rules of the Financial Conduct Authority and is given for the purpose of complying with those paragraphs and for no other purpose.
It is the responsibility of the directors of Just Retirement to prepare the Pro forma financial information in accordance with paragraph 13.3.3R of the Listing Rules of the Financial Conduct Authority.
It is our responsibility to form an opinion, as required by paragraph 7 of Annex II of the Prospectus Directive Regulation, as to the proper compilation of the Pro forma financial information and to report that opinion to you.
In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial information used in the compilation of the Pro forma financial information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.
Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have as a result of the inclusion of this report in the Class 1 circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6), consenting to its inclusion in the Class 1 circular.
We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro forma financial information with the directors of Just Retirement.
We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro forma financial information has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of Just Retirement.
Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in the United States of America or other jurisdictions and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.
In our opinion:
Yours faithfully
All figures stated in £ millions
| Just Retirement Group for the year ended 31 December 2015 |
Partnership Assurance Group for the year ended 31 December 2015 |
Pro forma |
|
|---|---|---|---|
| (Note 1) | (Note 2) | ||
| EEV Balance Sheet | 1,143.8 | 633.3 | 1,777.1 |
(1) The figures for the Just Retirement Group have been extracted, without material adjustment, from the EEV Supplementary Financial Statements contained within Just Retirement's Interim Results 2016.
(2) The figures for the Partnership Assurance Group have been extracted, without material adjustment, from the MCEV Supplementary Information contained within Partnership Assurance's Audited Results 2015.
In preparing the unaudited pro forma statement of net assets, no account has been taken of the trading activity of the Just Retirement Group since 31 December 2015 and of Partnership Assurance Group since 31 December 2015.
The Directors Just Retirement Group plc Vale House Roebuck Close Bancroft Road Reigate, Surrey RH2 7RU
14 March 2016
Ladies and Gentlemen
We report on the European Embedded Value ('EEV') pro forma information (the 'EEV pro forma financial information') set out in Part VI (Unaudited pro forma financial information of the Combined Group) of the Class 1 circular dated 14 March 2016, which has been prepared on the basis described in the notes to the EEV pro forma financial information, for illustrative purposes only, to provide information about how the acquisition of Partnership Assurance by Just Retirement might have affected the EEV supplementary financial information presented on the basis of the Just Retirement's accounting policy for European Embedded Value ('EEV Accounting Policy') which follows the EEV Principles issued in May 2004 by the CFO Forum of European Insurance Companies and expanded by the Additional Guidance on EEV Disclosures issued in October 2005 'the EEV Principles'. This report is required by paragraph 13.3.3R of the Listing Rules of the Financial Conduct Authority and is given for the purpose of complying with those paragraphs and for no other purpose.
It is the responsibility of the directors of Just Retirement to prepare the EEV pro forma financial information in accordance with paragraph 13.3.3R of the Listing Rules of the Financial Conduct Authority.
It is our responsibility to form an opinion, as required by paragraph 7 of Annex II of the Prospectus Directive Regulation, as to the proper compilation of the EEV pro forma financial information and to report that opinion to you.
In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial information used in the compilation of the EEV pro forma financial information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.
Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have as a result of the inclusion of this report in the Class 1 circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6), consenting to its inclusion in the combined Class 1 circular.
We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the EEV pro forma financial information with the directors of Just Retirement.
We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the EEV pro forma financial information has been properly compiled on the basis stated and that such basis is consistent with the EEV Accounting Policy.
Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in the United States of America or other jurisdictions and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.
In our opinion:
Yours faithfully
KPMG LLP
The Firm Offer Announcement included statements of estimated cost savings and synergies arising from the Proposed Merger (the ''Quantified Financial Benefits Statement'') which are repeated and described further in paragraph 3 of Part I (Letter from the Chairman of Just Retirement) of this Circular.
A copy of the Quantified Financial Benefits Statement is set out below:
''The Just Retirement Board expects the Proposed Merger to result in pre-tax cost savings of at least £40 million per annum. These synergies are expected to be implemented following completion of the Proposed Merger with the full run-rate being achieved in 2018 (the third year following completion), assuming the Conditions to completion of the Proposed Merger are satisfied, and are expected to require one-off integration costs of approximately £60 million over two years.
The cost savings represent approximately one third of the combined addressable cost base and are expected to be derived from the following key areas:
The identified synergies will accrue as a direct result of the Proposed Merger and would not be achieved on a standalone basis.''
In addition to the targeted cost savings, the Just Retirement Board believes there is the potential for additional financial benefits to be achieved over time.
These synergy estimates consider only costs and exclude any potential benefits from increasing operational gearing, improved commercial terms with business partners or access to financial markets.
Further information on the bases of belief supporting the Quantified Financial Benefits Statement, including the principal assumptions and sources of information, is set out below.
In determining the quantum and timing of expected cost savings and integration costs, the following steps have been undertaken:
Key individuals involved in the Synergy Development Team are listed in the Appendix VI of the Firm Offer Announcement. The process and meetings have been open and co-operative although commercially sensitive material was not discussed or shared (e.g. pricing; underwriting);
• the cost savings set out in this announcement are additional to the cost savings announced by Just Retirement and Partnership Assurance respectively in 2014 in response to the 2014 Pensions freedoms budget, which are assumed to have been saved in determining the combined cost base.
On 11 August 2015, KPMG, as reporting accountants to Just Retirement, provided a report under Rule 28.1(a) of the Code.
On 11 August 2015, Barclays, as lead financial adviser to Just Retirement, and Fenchurch, as financial adviser to Just Retirement, provided a joint report for the purposes of the Code.
Copies of these reports were included in Appendix V to the Firm Offer Announcement.
As required by Rule 27.2(d)(ii) of the Code, the Just Retirement Directors confirm that there have been no material changes to the Quantified Financial Benefits Statement.
As required by Rule 27.2(d)(ii) of the Code, each of KPMG, Barclays and Fenchurch, confirms that their respective reports produced in connection with the Quantified Financial Benefits Statement continue to apply.
The Solvency II capital position of the Just Retirement Group at 31 December 2015, produced on the basis of the full internal model approved by the PRA on 5 December 2015, was:
| Total eligible own funds to meet the consolidated group solvency capital requirement Solvency capital requirement |
1,076 |
|---|---|
| 811 | |
| Excess capital resources | 265 |
| Capital ratio | 133% |
| Solvency II sensitivities | £m |
| Excess capital resources . +100bps rise in interest rates +10% early redemption 40% equity markets +100bps credit spreads 5% property values . 100bps fall in interest rates(1) . +5% longevity |
265 72 7 0 (26) (56) (59) (105) |
(1) Assumes transitionals are recalculated.
The Solvency II capital position of the Partnership Assurance Group, produced on a standard formula basis at 31 December 2015 was:
| £m | |
|---|---|
| Capital Resources (Own Funds) . |
585 |
| Capital Required (SCR) | 407 |
| Capital Surplus. | 178 |
| Capital Coverage | 144% |
| Breakdown of SII Capital Resources | £m |
| Tier 1 . |
479 |
| Tier 2 . |
101 |
| Tier 3 . |
5 |
| Total | 585 |
| SII Sensitivities | £m |
| SII Capital Surplus 144% |
178 |
| Change in SII Capital Surplus +100bps rise in interest rates . 39% |
109 |
| 100bps fall in interest rates(1) (14)% |
(37) |
| +100bps credit spread widening 14% |
32 |
| +5% longevity shock . (10)% |
(40) |
20% property value (1)% |
(2) |
| Reconciliation of IFRS net equity to SII capital resources (''Own Funds'') | £m |
| IFRS net equity | 641 |
| Asset valuation differences | (132) |
| Liability valuation differences | (25) |
| Sub-debt contribution to capital resources | 101 |
| SII capital resources (''Own Funds'') | 585 |
| Reconciliation of Economic Capital Surplus to Solvency II Surplus | £m |
| EC Surplus | 444 |
| Own fund's differences | (218) |
| Required capital differences . |
(48) |
| Solvency II surplus | 178 |
(1) Assumes transitionals are recalculated.
Just Retirement and the Just Retirement Directors, whose names appear in Part I (Letter from the Chairman of Just Retirement), accept responsibility for the information contained in this Circular. To the best of the knowledge and belief of Just Retirement and the Just Retirement Directors (who have taken all reasonable care to ensure that such is the case), the information contained in this Circular is in accordance with the facts and does not omit anything likely to affect the import of such information.
The following sections of the Prospectus (which is available at www.justretirementgroup.com) are incorporated by reference into this Circular:
| Information | Sections of the Prospectus incorporated by reference into this Circular |
Page number(s) |
|---|---|---|
| Information on Just Retirement | ||
| Incorporation | Part 16, paragraph 2 | 242 |
| Directors' and Proposed Directors' terms of employment |
Part 16, paragraph 7 | 253–263 |
| Material contracts and other offer-related arrangements of Just Retirement |
Part 16, paragraph 11 | 274–286 |
| Information on Partnership Assurance | ||
| Material contracts of Partnership Assurance | Part 16, paragraph 12 | 286–287 |
(a) The following table sets out the interests in the share capital of the Company of the Just Retirement Directors, the Proposed Directors and Senior Management (including beneficial interests or interests of a person connected with a Just Retirement Director or a member of Senior Management), (1) as at 11 March 2016 (being the Last Practicable Date); and (2) immediately following Admission, based on the assumptions that the holdings of the following persons in the Company or Partnership Assurance (as relevant) as at 11 March 2016 (being the Last Practicable Date) do not change, 369,893,501 New Just Retirement Shares are issued in connection with the Proposed Merger and that no other issues of Just Retirement Shares or Partnership Assurance Shares occur between the Last Practicable Date and Admission:
| As at the Last Practicable Date(1) | Immediately following Admission | |||
|---|---|---|---|---|
| Director / Proposed Director / Member of Senior Management |
Number of Just Retirement Shares |
Percentage of Just Retirement's issued share capital |
Number of JRP Group Shares |
Percentage of JRP Group plc's issued share capital |
| Kate Avery | 50,080 | 0.009 | 50,080 | 0.005 |
| Christopher Berryman | 2,115,048 | 0.375 | 2,115,048 | 0.226 |
| Rodney Cook | 2,772,165 | 0.491 | 2,772,165 | 0.297 |
| Tom Cross Brown | 725,000 | 0.128 | 725,000 | 0.078 |
| Michael Deakin |
22,536 | 0.004 | 22,536 | 0.002 |
| Shayne Deighton |
1,167,486 | 0.207 | 1,167,486 | 0.125 |
| Alex Duncan |
125,176 | 0.022 | 125,176 | 0.013 |
| James Fraser |
0 | — | 0 | — |
| Steve Kyle |
1,639,465 | 0.290 | 1,639,465 | 0.175 |
| David Cooper | 1,304,899 | 0.231 | 1,304,899 | 0.140 |
| Hugh McKee | 15,037 | 0.003 | 15,037 | 0.002 |
| Steve Melcher |
39,439 | 0.007 | 39,439 | 0.004 |
| Keith Nicholson | 29,775 | 0.005 | 29,775 | 0.003 |
| Anne Ridge | 168,348 | 0.030 | 168,348 | 0.018 |
| Simon Thomas | 1,056,786 | 0.187 | 1,056,786 | 0.113 |
| Paul Turner |
0 | — | 0 | — |
| Chris Gibson-Smith | 0 | — | 582,788 | 0.062 |
| David Richardson | 0 | — | 358,172 | 0.038 |
| Paul Bishop | 0 | — | 0 | — |
| Peter Catterall |
0 | — | 0 | — |
| Ian Cormack |
0 | — | 10,831 | 0.001 |
| Clare Spottiswoode | 0 | — | 0 | — |
Note:
(1) The interests of the Executive Directors and members of Senior Management do not include rights to acquire Just Retirement Shares that have been awarded to such persons under the LTIP, DSBP or SAYE but do include any Just Retirement Shares held through the SIP.
(b) Details of awards under the Just Retirement Employee Share Plans (including where applicable, adjustments made to the outstanding awards following the completion of the Just Retirement Placing and Open Offer) held by the Directors and members of the Senior Management as at 11 March 2016 (being the Last Practicable Date) are set out below:
| Director/Member of Senior Management | Plan | Number of Just Retirement Shares over which options granted |
Exercise price (if any) |
Vesting date |
|---|---|---|---|---|
| Kate Avery | — | — | — | — |
| Christopher Berryman | LTIP (2013) | 129,173 | Nil | 15 Nov 2016 |
| LTIP (2014) | 209,396 | Nil | 25 Sept 2017 | |
| LTIP (2015) | 179,549 | Nil | 6 Nov 2018 | |
| DSBP (2014) | 47,070 | Nil | 25 Sept 2017 | |
| DSBP (2015) | 59,067 | Nil | 6 Nov 2018 | |
| SAYE | 15,038 | £1.1969 | 1 June 2017 | |
| Rodney Cook | LTIP (2013) | 503,218 | Nil | 15 Nov 2016 |
| LTIP (2014) | 815,737 | Nil | 25 Sept 2017 | |
| LTIP (2015) | 706,025 | Nil | 6 Nov 2018 | |
| DSBP (2014) | 130,000 | Nil | 25 Sept 2017 | |
| DSBP (2015) | 157,023 | Nil | 6 Nov 2018 | |
| SAYE | 15,038 | £1.1969 | 1 June 2017 | |
| Tom Cross Brown | — | — | — | — |
| Michael Deakin |
— | — | — | — |
| Shayne Deighton |
LTIP (2013) | 222,405 | Nil | 15 Nov 2016 |
| LTIP (2014) | 360,526 | Nil | 25 Sept 2017 | |
| LTIP (2015) | 310,407 | Nil | 6 Nov 2018 | |
| DSBP (2014) | 68,543 | Nil | 25 Sept 2017 | |
| DSBP (2015) SAYE |
88,207 25,064 |
Nil £1.1969 |
6 Nov 2018 1 June 2019 |
|
| Alex Duncan |
LTIP (2013) | 146,023 | Nil | 15 Nov 2016 |
| LTIP (2014) | 236,708 | Nil | 25 Sept 2017 | |
| LTIP (2015) | 202,373 | Nil | 6 Nov 2018 | |
| DSBP (2014) | 34,414 | Nil | 25 Sept 2017 | |
| DSBP (2015) | 44,060 | Nil | 6 Nov 2018 | |
| SAYE | 15,038 | £1.1969 | 1 June 2017 | |
| James Fraser |
— | — | — | — |
| Steve Kyle |
LTIP (2013) | 103,900 | Nil | 15 Nov 2016 |
| LTIP (2014) | 168,427 | Nil | 25 Sept 2017 | |
| LTIP (2015) | 144,552 | Nil | 6 Nov 2018 | |
| DSBP (2014) | 27,877 | Nil | 25 Sept 2017 | |
| DSBP (2015) | 32,320 | Nil | 6 Nov 2018 | |
| SAYE | 15,038 | £1.1969 | 1 June 2017 | |
| David Cooper | LTIP (2013) | 129,173 | Nil | 15 Nov 2016 |
| LTIP (2014) LTIP (2015) |
209,396 182,592 |
Nil Nil |
25 Sept 2017 6 Nov 2018 |
|
| DSBP (2014) | 48,475 | Nil | 25 Sept 2017 | |
| DSBP (2015) | 61,477 | Nil | 6 Nov 2018 | |
| SAYE | 25,064 | £1.1969 | 1 June 2019 | |
| Hugh McKee | LTIP (2014) | 209,396 | Nil | 25 Sept 2017 |
| LTIP (2015) | 178,788 | Nil | 6 Nov 2018 | |
| DSBP (2015) | 58,825 | Nil | 6 Nov 2018 | |
| SAYE | 23,693 | £1.2661 | 1 June 2020 | |
| Steve Melcher |
— | — | — | — |
| Keith Nicholson | — | — | — | — |
| Anne Ridge | LTIP (2013) | 95,476 | Nil | 15 Nov 2016 |
| LTIP (2014) | 103,179 | Nil | 25 Sept 2017 | |
| LTIP (2015) | 132,379 | Nil | 6 Nov 2018 | |
| DSBP (2014) | 22,848 | Nil | 25 Sept 2017 | |
| DSBP (2015) SAYE |
28,511 15,038 |
Nil £1.1969 |
6 Nov 2018 1 June 2017 |
|
| Director/Member of Senior Management | Plan | Number of Just Retirement Shares over which options granted |
Exercise price (if any) |
Vesting date |
|---|---|---|---|---|
| Simon Thomas | LTIP (2013) | 222,405 | Nil | 15 Nov 2016 |
| LTIP (2014) | 360,526 | Nil | 25 Sept 2017 | |
| LTIP (2015) | 310,407 | Nil | 6 Nov 2018 | |
| DSBP (2014) | 73,583 | Nil | 25 Sept 2017 | |
| DSBP (2015) | 85,267 | Nil | 6 Nov 2018 | |
| SAYE | 15,038 | £1.1969 | 1 June 2017 | |
| Paul Turner |
LTIP (2014) | 200,291 | Nil | 25 Sept 2017 |
| LTIP (2015) | 174,984 | Nil | 6 Nov 2018 | |
| DSBP (2015) | 50,856 | Nil | 6 Nov 2018 |
(c) Insofar as it is known to the Company, the following persons are, or will be at Admission, interested directly or indirectly in three per cent. or more of the voting rights in respect of the issued ordinary share capital of the Company or JRP Group plc (as applicable), based on the assumptions that the holdings of the following persons in the Company or Partnership Assurance (as relevant) as at 11 March 2016 (being the Last Practicable Date) do not change, 369,893,501 New Just Retirement Shares are issued in connection with the Proposed Merger and that no other issues of Just Retirement Shares or Partnership Assurance Shares occur between the Last Practicable Date and Admission:
| As at the Last Practicable Date(1) | Immediately following Admission | |||
|---|---|---|---|---|
| Name | Number of Just Retirement Shares |
Percentage of Just Retirement's issued share capital |
Number of JRP Group Shares |
Percentage of JRP Group plc's issued share capital |
| Avallux | 273,057,001 | 48.38 | 273,057,001 | 29.23 |
| Schroders plc(1) |
32,042,792 | 5.68 | 32,042,792 | 3.43 |
| Kames Capital plc(1) | 25,063,589 | 4.44 | 25,063,589 | 2.68 |
| Cinven Funds |
0 | — | 182,479,326 | 19.53 |
Note:
(1) Disregarding any existing shareholding in Partnership Assurance.
Subject to paragraph 5(c) of this Part IX (Additional Information), Paragraph 11 of Part 16 (Additional Information) of the Prospectus contains a summary of:
Subject to paragraph 5(d) of this Part IX (Additional Information), paragraph 12 of Part 16 (Additional Information) of the Prospectus contains a summary of:
The Company and Barclays entered into a Circular Sponsor Agreement dated 5 November 2015 and as amended and restated on 14 March 2016, pursuant to which Barclays agreed to act as sponsor to the Company in connection with the publication of this Circular.
The Company has given certain customary representations, warranties and undertakings to Barclays including, inter alia, warranties in relation to the business of the Company and the Combined Group, compliance by the Company and the Combined Group with all applicable laws and regulations of the United Kingdom and all relevant foreign countries, the accounting records of the Company, the accuracy of the information contained in this Circular and the accuracy of information publicly disclosed by the Company prior to the date of the Circular Sponsor Agreement. The Company has also agreed to indemnify and hold harmless Barclays (and each of its affiliates, subsidiaries and all directors, officers, employees, advisers and agents of such affiliates and subsidiaries) for any losses or claims that are suffered or incurred by it or which arise in connection with the Proposed Merger or the Circular Sponsor Agreement.
In addition, Barclays may at any time prior to Admission and by notice to the Company terminate the Circular Sponsor Agreement in certain circumstances, including, but not limited to, where the Company has, in the good faith opinion of Barclays, materially breached any of its obligations under the Circular Sponsor Agreement, or where any of the warranties on the part of the Company if repeated at any time prior to Admission would be untrue, inaccurate or misleading and which, in the good faith opinion of Barclays, would cause Barclays to be unable to fulfil its sponsor obligations to the FCA.
On 25 September 2015, Partnership Assurance entered into a placing agreement (the ''Partnership Assurance Placing Agreement'') with J.P. Morgan Cazenove and Morgan Stanley (together, the ''Banks''), pursuant to which Partnership Assurance appointed the Banks as joint bookrunners in connection with the placing of 39,995,997 new Ordinary Shares (the ''Placing Shares''), representing approximately 9.99 per cent. of the then existing issued share capital of Partnership Assurance (the ''Partnership Assurance Placing'').
Under the Partnership Assurance Placing Agreement, each of the Banks agreed severally to use its reasonable endeavours to procure placees for the Placing Shares in such number and at such price as may be agreed between Partnership Assurance and the Banks. To the extent that placees were not procured for the Placing Shares, or in the event of any default by any placee in taking up the Placing Shares allocated to it, the Banks severally agreed to take up such Placing Shares in their agreed proportions at an agreed backstop price. Following an accelerated bookbuilding process on 25 September 2015, 39,995,997 new Ordinary Shares, representing approximately 9.99 per cent. of the then existing issued share capital of Partnership Assurance, were placed by the Banks at a price of 135 pence per Placing Share, raising gross proceeds of approximately £54 million.
In consideration of their services provided under the Partnership Assurance Placing Agreement, Partnership Assurance agreed to pay the Banks a base commission of 1.5 per cent. of the amount equal to the product of the placing price of 135 pence and the aggregate number of Placing Shares (excluding any shares issued to Cinven in the Placing) together with any VAT chargeable thereon and an additional commission, at Partnership Assurance's sole and absolute discretion, of 0.5 per cent. of the amount equal to the product of the placing price of 135 pence and the aggregate number of Placing Shares (excluding any shares issued to Cinven in the Placing) together with any VAT chargeable thereon. In addition, Partnership Assurance agreed to pay the Banks' out-of-pocket expenses incurred for the purpose of or in connection with the Placing.
Partnership Assurance has given certain customary representations, warranties and undertakings to the Banks in the Partnership Assurance Placing Agreement including, inter alia, warranties in relation to the business of Partnership Assurance, compliance by Partnership Assurance with all applicable laws and regulations of the United Kingdom and all relevant foreign countries, the accounting records of Partnership Assurance, the accuracy of the information publicly disclosed by Partnership Assurance prior to the date of the Partnership Assurance Placing Agreement. Partnership Assurance has also agreed to indemnify and hold harmless each Bank (and each of its affiliates, subsidiaries and all directors, officers, employees, advisers and agents of such affiliates and subsidiaries) for any losses or claims that are suffered or incurred by it or which arise in connection with admission, the Placing or otherwise in connection with the Partnership Assurance Placing Agreement.
In addition, Partnership Assurance agreed that it will not, from the date of the Partnership Assurance Placing Agreement to the date falling 180 days from admission of the Placing Shares to the premium listing segment of the Official List of the UKLA and to trading on the Main Market of the London Stock Exchange, without the prior written consent of the Banks, directly or indirectly, issue, allot, offer, sell, contract to sell, lend, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, deposit into any depositary receipt facility or otherwise transfer or dispose of any Partnership Assurance Shares or any securities convertible into or exercisable or exchangeable for Partnership Assurance Shares or file any registration statement under the United States Securities Act of 1933, as amended with respect to any of the foregoing (or publicly announce the same) or enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of Partnership Assurance Shares, whether any such swap or transaction described above is to be settled by delivery of Partnership Assurance Shares or such other securities, in cash or otherwise except:
In addition, pursuant to an option agreement and a subscription and transfer agreement each dated 25 September 2015 between Partnership Assurance, J.P. Morgan Securities plc and Paul (Capital) Jersey Limited (a company incorporated in Jersey, ''JerseyCo'')), Partnership Assurance and J.P. Morgan Securities plc each subscribed for ordinary shares in JerseyCo. Following the completion of the Placing, J.P. Morgan Securities plc applied monies received from placees (after deduction of relevant commissions and expenses) to subscribe for redeemable preference shares in JerseyCo. Partnership Assurance allotted and issued the Placing Shares to the placees in consideration of J.P. Morgan Securities plc transferring their holdings of redeemable preference shares and ordinary shares in JerseyCo to Partnership Assurance.
There has been no significant change in the financial or trading position of the Just Retirement Group since 31 December 2015, being the end of the period for which the Just Retirement Group's last unaudited interim financial statements were published.
There has been no significant change in the financial or trading position of the Partnership Assurance Group since 31 December 2015, being the end of the period for which the Partnership Assurance Group's last audited financial statements were published.
In the opinion of the Company, the working capital available to the Combined Group is sufficient for its present requirements, that is for at least the next 12 months following the date of this Circular.
Save as disclosed in the related party note to the financial statements of the Just Retirement Group for the financial years ended 30 June 2013, 30 June 2014 and 30 June 2015 and the six months ended 31 December 2015, the Just Retirement Group has not entered into any related party transactions during the financial years ended 30 June 2013, 30 June 2014 and 30 June 2015 and during the period up to the date of this Circular.
There are no governmental, legal or arbitration proceedings (including such proceedings which are pending or threatened of which the Company is aware) during the 12 months preceding the date of this Circular, which may have, or have had a significant effect on the Company's and/or the Just Retirement Group's financial position or profitability.
There are no governmental, legal or arbitration proceedings (including such proceedings which are pending or threatened of which the Company is aware) during the 12 months preceding the date of this Circular, which may have, or have had a significant effect on Partnership Assurance's and/or the Partnership Assurance Group's financial position or profitability.
Barclays has given and has not withdrawn its written consent to the inclusion of references to its name in this Circular and its confirmation in paragraph 3 of Part I (Letter from the Chairman of Just Retirement) and Part VII (Quantified Financial Benefits Statement), in each case, in the form and context in which they appear.
Deutsche Bank has given and has not withdrawn its written consent to the inclusion of references to its name in this Circular in the form and context in which they appear.
Nomura has given and has not withdrawn its written consent to the inclusion of references to its name in this Circular in the form and context in which they appear.
Fenchurch has given and has not withdrawn its written consent to the inclusion of references to its name in this Circular and its confirmation in paragraph 3 of Part I (Letter from the Chairman of Just Retirement) and Part VII (Quantified Financial Benefits Statement), in each case in the form and context in which they appear.
KPMG has given and has not withdrawn its written consent to the inclusion in this Circular of its reports set out in Part VI (Unaudited pro forma financial information of the Combined Group) and references to its name in paragraph 3 of Part I (Letter from the Chairman of Just Retirement) and Part VII (Quantified Financial Benefits Statement), in each case, in the form and context in which they appear.
Deloitte has given and has not withdrawn its written consent to the inclusion in this Circular of its report on the reconciliation of Partnership Assurance's financial information on the basis of the accounting policies of Just Retirement set out in Part A of Part V (Reconciliation of Partnership Assurance Financial Information on the Basis of Accounting Policies of Just Retirement) in the form and context in which it appears.
Evercore has given and has not withdrawn its written consent to the inclusion of references to its name in this Circular in the form and context in which they appear.
Copies of the following documents will be available for inspection during usual business hours on any weekday (Saturdays, Sundays and public holidays excepted) for a period of 12 months following Admission at the offices of Clifford Chance LLP at 10 Upper Bank St, London E14 5JJ:
Dated: 14 March 2016.
The following definitions apply throughout this Circular unless the context requires otherwise:
| ''2014 Budget'' | the Budget speech given by the UK Chancellor of the Exchequer to the UK Parliament on 19 March 2014 |
|---|---|
| ''Admission'' | admission of the New Just Retirement Shares to the Official List with a premium listing and to trading on the London Stock Exchange's main market for listed securities. |
| ''Avallux'' | ` Avallux S.a r.l., an entity wholly owned by limited partnerships and other entities which together constitute the Permira IV Fund. |
| ''Avallux Relationship Agreement'' | the relationship agreement entered into between the Company and Avallux on 12 November 2013 |
| ''Barclays'' | Barclays Bank PLC, acting through its Investment Bank |
| ''Board'' | the board of directors of a company |
| ''Business Day'' . |
a day (other than a Saturday, Sunday, public or bank holiday) on which banks are generally open for business in London |
| ''Capital Raise'' |
the Just Retirement Placing and Open Offer and the Partnership Assurance Placing, further details of which are provided at paragraph 6 of Part I (Letter from the Chairman of Just Retirement) of this Circular |
| ''Cinven'' | Cinven Limited |
| ''Cinven Entities'' | Cinven and the Cinven Funds |
| ''Cinven Funds'' | Fourth Cinven Fund (No.1) Limited Partnership, Fourth Cinven Fund (No.2) Limited Partnership, Fourth Cinven Fund (No.3— VCOC) Limited Partnership, Fourth Cinven Fund (No.4) Limited Partnership, Fourth Cinven Fund FCPR, Fourth Cinven Fund (UBTI) Limited Partnership, Fourth Cinven Fund Co-Investment Partnership and Fourth Cinven (MACIF) Limited Partnership |
| ''Cinven Relationship Agreement'' | the relationship agreement entered into between Just Retirement, the Cinven Funds and Cinven Limited on 11 August 2015 |
| ''Circular Sponsor Agreement'' |
the sponsor agreement entered into between Just Retirement and Barclays on 5 November 2015 and amended and restated on 14 March 2016 in connection with the publication of this Circular |
| ''clearances'' | all consents, approvals, clearances, permissions, waivers and/or filings that are necessary in order to satisfy the Conditions and all consents, approvals, clearances, permissions, waivers and/or filings that are necessary and all waiting periods that may need to have expired, from or under the laws or practices applied by any regulatory authority in connection with the implementation of the Proposed Merger |
| ''Closing Price'' |
the closing middle market price on a particular trading day as derived from the Daily Official List |
| ''CMA'' |
Competition and Markets Authority of the UK |
| ''CMA Pre-Condition'' |
the pre-condition relating to the CMA clearance, as set out in Appendix I to the Firm Offer Announcement |
| ''Code'' |
the City Code on Takeovers and Mergers |
|---|---|
| ''Combined Group'' | the combined group following the Proposed Merger, comprising the Just Retirement Group and the Partnership Assurance Group |
| ''Companies Act'' | the Companies Act 2006, as amended from time to time |
| ''Company'' |
Just Retirement Group plc, registered in England and Wales with registered number 8568957, whose registered office is at Vale House, Roebuck Close, Bancroft Road, Reigate, Surrey, RH2 7RU, United Kingdom |
| ''Conditions'' |
the conditions of the Proposed Merger as set out in Appendix II to the Firm Offer Announcement |
| ''Confidentiality and Joint Defence | |
| Agreement'' | the confidentiality and joint defence agreement dated 26 June 2015 between Just Retirement, Partnership Assurance, Clifford Chance LLP and Freshfield Bruckhaus Deringer LLP |
| ''Co-operation Agreement'' |
the agreement dated 11 August 2015 between Just Retirement and Partnership Assurance and relating, among other things, to the implementation of the Proposed Merger |
| ''Court'' | the High Court of Justice in England and Wales |
| ''Court Sanction Date'' | the date of the Scheme Court Hearing at which the Court is asked to sanction the Scheme |
| ''CREST'' | the system for the paperless settlement of trades in securities and the holding of uncertificated securities, operated by Euroclear in accordance with the CREST Regulations |
| ''CREST Manual'' |
the CREST manual consisting of the CREST reference manual; CREST international manual; CREST central counterparty service manual; CREST rules; CCSS operations manual and CREST glossary of terms, available at https://www.euroclear.com |
| ''CREST Proxy Instruction'' . |
a properly authenticated CREST message appointing and instructing a proxy to attend and vote in place of a Just Retirement Shareholder at the Just Retirement General Meeting and containing the information required to be contained in the CREST Manual |
| ''CREST Regulations'' | the Uncertificated Securities Regulations 2001 (SI 2001/3755), as amended |
| ''Deutsche Bank'' | Deutsche Bank AG, acting through its London branch |
| ''Disclosure and Transparency Rules'' | the Disclosure and Transparency Rules of the FCA in its capacity as the UKLA under FSMA and contained in the UKLA's publication of the same name |
| ''DSBP'' | the share bonus plan of the Company or Partnership Assurance, as the context requires |
| ''EBT'' | the Employee Benefit Trust of the Company or Partnership Assurance, as the context requires |
| ''EEA'' | the European Economic Area |
| ''EEV'' | European Embedded Value |
| ''Effective'' | in the context of the Proposed Merger: (i) if the Proposed Merger is implemented by way of the Scheme, the Scheme having become effective pursuant to its terms; or (ii) if the Proposed Merger is implemented by way of the Takeover Offer, the Takeover Offer having been declared or having become unconditional in all respects in accordance with the requirements of the Code |
|---|---|
| ''Effective Date'' | the date on which: |
| (a) the Scheme becomes Effective in accordance with its terms; or |
|
| (b) if Just Retirement elects to implement the Proposed Merger by way of a Takeover Offer, the date the Proposed Merger becomes or is declared unconditional in all respects |
|
| ''EPS'' | earnings per share |
| ''Equiniti'' |
Equiniti Limited |
| ''Evercore'' | Evercore Partners International LLP |
| ''EU'' or ''European Union'' |
the European Union |
| ''Euroclear'' | Euroclear UK & Ireland Limited |
| ''Exchange Ratio'' | 0.834 New Just Retirement Shares for each Partnership Assurance Share held |
| ''Executive Directors'' | the executive Directors of the Company |
| ''FCA'' or ''Financial Conduct Authority'' |
the UK Financial Conduct Authority, or its successor from time to time |
| ''Fenchurch'' | Fenchurch Advisory Partners LLP |
| ''Firm Offer Announcement'' | the joint announcement made by Just Retirement and Partnership Assurance dated 11 August 2015 in relation to the Proposed Merger pursuant to Rule 2.7 of the Code |
| ''Form of Proxy'' | the form of proxy enclosed with this Circular, for use by Just Retirement Shareholders in connection with the Just Retirement General Meeting |
| ''FSA'' | the Financial Services Authority |
| ''FSMA'' |
the Financial Services and Markets Act 2000 (as amended) |
| ''Good Leaver'' | a participant's employment with the Combined Group terminating by reason of: (i) redundancy; (ii) death; (iii) ill health, injury or disability evidenced to the satisfaction of the JRP Group Board; (iv) any other reason as determined by the JRP Group Board in its sole discretion |
| ''HMRC'' | HM Revenue & Customs |
| ''HM Treasury'' |
Her Majesty's Treasury, which is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy |
| ''IFRS'' |
International Financial Reporting Standards as adopted by the EU |
| ''Insurance Groups Directive'' | the Directive on the Supplementary Supervision of Insurance Companies in an Insurance Group (1998/78/EC) |
| ''IPO'' | initial public offering |
|---|---|
| ''IT'' |
information technology |
| ''JRP Group Board'' | the board of directors of JRP Group plc collectively |
| ''JRP Group Shareholders'' | following completion of the Proposed Merger, holders of JRP Group Shares from time to time |
| ''JRP Group Shares'' |
the ordinary shares, of 10 pence each, in the share capital of JRP Group plc |
| ''Just Retirement'' |
Just Retirement Group plc, registered in England and Wales with registered number 8568957, whose registered office is at Vale House, Roebuck Close, Bancroft Road, Reigate, Surrey, RH2 7RU, United Kingdom |
| ''Just Retirement's Annual Report & | |
| Accounts 2014'' | the annual report and audited financial statements of Just Retirement for the year ended 30 June 2014 |
| ''Just Retirement's Annual Report & | |
| Accounts 2015'' | the annual report and audited financial statements of Just Retirement for the year ended 30 June 2015 |
| ''Just Retirement's Interim Results | |
| 2016'' | the unaudited financial statements of Just Retirement for the six months ended 31 December 2015 |
| ''Just Retirement's IPO Prospectus'' | Just Retirement's IPO prospectus dated 12 November 2013 |
| ''Just Retirement Board'' |
the board of directors of Just Retirement |
| ''Just Retirement Directors'' | the directors whose names are set out on page 4 of this Circular |
| ''Just Retirement Employee Share | |
| Plans'' |
the Just Retirement LTIP, the Just Retirement DSBP and the Just Retirement SAYE |
| ''Just Retirement General Meeting'' | the general meeting of Just Retirement to be held at 10.00 a.m. on 30 March 2016 at Reigate Town Hall, Castlefield Road, Reigate, Surrey RH2 0SH (and any adjournment thereof) for the purposes of considering and, if thought fit, approving each of the resolutions as set out in the notice of general meeting at the end of this Circular |
| ''Just Retirement Group'' |
Just Retirement and each of its consolidated subsidiaries and subsidiary undertakings |
| ''Just Retirement Placing and Open | |
| Offer'' |
the placing and open offer of 63,525,672 Just Retirement Shares completed by Just Retirement on 16 October 2015, further details of which are provided at paragraph 6 of Part I (Letter from the Chairman of Just Retirement) of this Circular |
| ''Just Retirement Resolutions'' |
the ordinary resolutions to be proposed at the Just Retirement General Meeting in connection with the Proposed Merger, including, inter alia, resolutions to (i) approve the Proposed Merger and (ii) authorise the issuance of the New Just Retirement Shares |
| ''Just Retirement Shareholders'' |
holders of Just Retirement Shares, from time to time |
| ''Just Retirement Shares'' | |
| the ordinary shares, of 10 pence each, in the share capital of Just Retirement |
| ''Last Practicable Date'' . |
11 March 2016, being the last practicable date prior to the date of this Circular |
|---|---|
| ''Listing Rules'' |
the listing rules and regulations made by the FCA under Part VI of FSMA, and contained in the UKLA's publication of the same name (as amended from time to time) |
| ''Lock-up Agreement'' | the lock-up agreement dated 11 August 2015 between Barclays, Avallux and the Cinven Funds |
| ''London Stock Exchange'' | London Stock Exchange plc |
| ''Long Stop Date'' | 30 April 2016 or such later date as Just Retirement and Partnership Assurance may agree, with the Panel's consent and the Court may approve (if such consent and/or approval is required) |
| ''LTIP'' |
the long-term incentive plan of the Company or Partnership Assurance, as the context requires |
| ''New Just Retirement Shares'' |
the new ordinary Just Retirement Shares proposed to be issued to Partnership Assurance Shareholders in connection with the Proposed Merger |
| ''Nomura'' | Nomura International plc |
| ''Official List'' |
the Official List of the FCA |
| ''PAFS'' | Pension Annuity Friendly Society |
| ''Panel'' | the Panel on Takeovers and Mergers |
| ''Partnership Assurance'' | Partnership Assurance Group plc, registered in England and Wales with registered number 08419490, whose registered office is at 5th Floor, 110 Bishopsgate, London, EC2N 4AY, United Kingdom |
| ''Partnership Assurance's Annual Report & Accounts 2013'' |
the annual report and audited financial statements of Partnership Assurance for the year ended 31 December 2013 |
| ''Partnership Assurance's Annual Report & Accounts 2014'' |
the annual report and audited financial statements of Partnership Assurance for the year ended 31 December 2014 |
| ''Partnership Assurance's Audited Results 2015'' |
the audited financial statements of Partnership Assurance for the year ended 31 December 2015 |
| ''Partnership Assurance Board'' | the board of directors of Partnership Assurance |
| ''Partnership Assurance Court Meeting'' |
the meeting or meetings of the Scheme Shareholders as may be convened pursuant to an order of the Court under section 896 of the Companies Act for the purposes of considering and, if thought fit, approving the Scheme (with or without amendment approved or imposed by the Court and agreed to by Just Retirement and Partnership Assurance) including any adjournment, postponement or reconvention of any such meeting, notice of which shall be contained in the Scheme Document |
| ''Partnership Assurance Directors'' . . |
the directors of Partnership Assurance, and ''Partnership Assurance Director'' means any one of them as required by the context |
| ''Partnership Assurance Employee Share Plans'' |
the Partnership Assurance LTIP, the Partnership Assurance DSBP and the Partnership Assurance SAYE |
|---|---|
| ''Partnership Assurance General Meeting'' |
the general meeting of Partnership Assurance Shareholders to be convened in connection with the Scheme to consider and if thought fit pass, inter alia, the Special Resolution, including any adjournment thereof |
| ''Partnership Assurance Group'' |
Partnership Assurance and its subsidiary undertakings and associated undertakings and, where the context permits, each of them |
| ''Partnership Assurance Meetings'' . . |
the Partnership Assurance Court Meeting and the Partnership Assurance General Meeting |
| ''Partnership Assurance Placing'' | the placing of 39,995,997 Partnership Assurance Shares completed by Partnership Assurance on 29 September 2015, further details of which are provided at paragraph 6 of Part I (Letter from the Chairman of Just Retirement) of this Circular |
| ''Partnership Assurance Shares'' | the ordinary shares of 10 pence each in the capital of Partnership Assurance |
| ''Partnership Assurance Shareholders'' |
holders of Partnership Assurance Shares from time to time |
| ''pence'', ''pounds sterling'', ''sterling'', ''£'' or ''p'' |
the lawful currency of the United Kingdom |
| ''Pension Reforms'' | the UK Government's pension reforms, implemented in April 2015 |
| ''PLACL'' | Partnership Assurance Life Assurance Company Limited |
| ''PRA'' or ''Prudential Regulation Authority'' |
the UK Prudential Regulation Authority or its successor from time to time |
| ''Prospectus'' | the prospectus dated 28 September 2015 prepared in connection with the Proposed Merger and the Just Retirement Placing and Open Offer |
| ''Prospectus Directive Regulation'' | the Commission Regulation (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements |
| ''Prospectus Rules'' | the prospectus rules and regulations made by the FCA under Part IV of the Financial Services and Markets Act 2000 (as amended), and contained in the UKLA's publication of the same name (as amended from time to time) |
| ''Proposed Directors'' | the proposed directors who will join the Just Retirement Board following completion of the Proposed Merger, whose names are listed under the heading ''Proposed Directors'' on page 4 of this Circular |
| ''Proposed Merger'' |
the proposed acquisition of the entire issued and to be issued share capital of Partnership Assurance by Just Retirement to be effected by the Scheme (or by the Takeover Offer under certain circumstances described in this announcement) |
| ''Quantified Financial Benefits | |
|---|---|
| Statement'' | as defined in Part VII of this Circular |
| ''Registrar of Companies'' | the Registrar of Companies in England and Wales |
| ''Registrars'' | Equiniti Limited |
| ''Regulatory Information Service'' . |
any channel recognised as a channel for the dissemination of regulatory information by listed companies as defined in the Listing Rules |
| ''Restricted Jurisdiction'' | any jurisdiction where local laws or regulations may result in a significant risk of civil, regulatory or criminal exposure if information concerning the Proposed Merger is sent or made available to Partnership Assurance Shareholders in that jurisdiction (in accordance with Rule 30.3 of the Code) |
| ''SAYE'' | the Save as You Earn Share Option Plan of the Company or Partnership Assurance, as the context requires |
| ''Scheme'' | the proposed scheme of arrangement under Part 26 of the Companies Act between Partnership Assurance and Partnership Assurance Shareholders to implement the Proposed Merger |
| ''Scheme Court Hearing'' |
the hearing by the Court to sanction the Scheme and to authorise the re-registration of Partnership Assurance as a private company under section 651 of the Companies Act |
| ''Scheme Court Order'' | the order of the Court sanctioning the Scheme under section 899 of the Companies Act |
| ''Scheme Document'' | the document dispatched to Partnership Assurance Shareholders on 5 November 2015 setting out the terms and conditions of the Proposed Merger including the particulars required by section 897 of the Companies Act |
| ''Scheme Record Time'' | 6.00 p.m. on the date of the Scheme Court Hearing |
| ''Scheme Shareholders'' |
holders of Scheme Shares |
| ''Scheme Shares'' | (a) Partnership Assurance Shares in issue at the date of the Scheme Document; |
| (b) any Partnership Assurance Shares issued after the date of the Scheme Document and prior to the Voting Record Time; and |
|
| (c) any Partnership Assurance Shares issued at or after the Voting Record Time and before the Scheme Record Time in respect of which the original or any subsequent holders thereof are, or shall have agreed in writing to be, bound by the Scheme, |
|
| in each case, save for any Partnership Assurance Shares legally or beneficially held by any member of the Just Retirement Group |
|
| ''SEC'' | the US Securities and Exchange Commission |
| ''Sell-down Agreement'' | the sell-down agreement dated 11 August 2015 between Avallux and the Cinven Funds |
| ''Senior Management'' |
those members of the management bodies of the Company and its subsidiaries who are relevant to establishing that the Company has the appropriate expertise and experience for the management of its business for the purposes of item 14.1 of Annex I of the Prospectus Rules |
| ''SIP'' |
share incentive plan of the Company or Partnership Assurance, as the context requires |
|---|---|
| ''Solvency II'' | the Solvency II Directive and any additional measures adopted to give effect to the Solvency II Directive (for the avoidance of doubt, whether implemented by way of a regulation, a directive or otherwise) |
| ''Solvency II Directive'' | Directive 2009/138/EC of the European Union of 25 November 2008 on the taking-up and pursuit of the business of insurance and reinsurance (Solvency II) and which must be transposed by Member States of the European Economic Area pursuant to Article 309 of Directive 2009/138/EC |
| ''Special Resolution'' | the special resolution to be proposed by Partnership Assurance at the Partnership Assurance General Meeting in connection with, amongst other things, the approval of the Scheme, the amendment of Partnership Assurance's articles of association and such other matters as may be necessary to implement the Scheme and the delisting of the Partnership Assurance Shares |
| ''Standard & Poor's'' |
Standard & Poor's Credit Market Services Europe Limited |
| ''subsidiary undertaking'', | |
| ''subsidiary'', ''associated undertaking'' and ''undertaking'' |
shall have the meaning given by the Companies Act (but for these purposes ignoring paragraph 20(1)(b) of Schedule 4A to the Companies Act) |
| ''Supplementary Prospectus'' | the supplementary prospectus dated 14 March 2016 prepared in connection with the Proposed Merger |
| ''Synergy Development Team'' | a team comprised of senior strategy and financial personnel from both Just Retirement and Partnership Assurance to assess the potential synergies available |
| ''Takeover Offer'' |
should the Proposed Merger be implemented by way of a takeover offer as defined in Chapter 3 of Part 28 of the Companies Act, the takeover offer to be made by or on behalf of Just Retirement to acquire the entire issued and to be issued share capital of Partnership Assurance and, where the context admits, any subsequent revision, variation, extension or renewal of such offer |
| ''third party'' | a central bank, government or governmental, quasi governmental, supranational, statutory, regulatory, professional, environmental, administrative, fiscal or investigative body, court, trade agency, association, institution, environmental body, employee representative body or any other body or person whatsoever in any jurisdiction or authority |
| ''treasury'' or ''treasury shares'' | shares held as Treasury shares as provided for in section 724 of the Companies Act |
| ''UK'' or ''United Kingdom'' | the United Kingdom of Great Britain and Northern Ireland |
| ''UK Corporate Governance Code'' . . |
UK Corporate Governance Code published by the Financial Reporting Council in September 2014, as amended from time to time |
| ''UKLA'' |
the Financial Conduct Authority acting in its capacity as the competent authority for listing under Part VI of FSMA |
| ''UK-US IGA'' |
intergovernmental agreement entered into between the UK and the United States to improve tax compliance, dated 12 September 2012 |
| ''Unaudited pro forma Financial | |
|---|---|
| Information'' | the unaudited pro forma income statement, pro forma statement of net assets and the related notes thereto set out in Section A and Section B of Part VI (Unaudited pro forma financial information of the Combined Group) of this Circular |
| ''US'' or ''United States'' | the United States of America, its possessions and territories, all areas subject to its jurisdiction or any subdivision thereof, any State of the United States and the District of Columbia |
| ''US Securities Act'' |
the US Securities Act of 1993, as amended |
| ''Voting Record Time'' | 6.00 p.m. on the date which is two Business Days prior to the date of the Partnership Assurance Meetings or any adjournment thereof (as the case may be) |
All times referred to are London (UK) time unless otherwise stated.
All references to legislation in this Circular are to the legislation of England and Wales unless the contrary is indicated. Any reference to any provision of any legislation shall include any amendment, modification, re-enactment or extension thereof.
Words importing the singular shall include the plural and vice versa, and words importing the masculine gender shall include the feminine or neutral gender.
(Incorporated under the Companies Act 2006 and registered in England and Wales with Registered No. 08568957)
Notice is hereby given that a general meeting of Just Retirement Group plc (the ''Company'') will be held at 10.00 a.m. on 30 March 2016 at Reigate Town Hall, Castlefield Road, Reigate, Surrey RH2 0SH (the ''General Meeting'') to consider and, if thought fit, pass the following resolutions. Resolutions 1 and 2 will be proposed as ordinary resolutions and Resolution 3 will be proposed as a special resolution.
Partnership Assurance in connection with the Proposed Merger) up to an aggregate nominal amount of £36,989,350.10 and which authority shall expire on the Long Stop Date (as defined in the Circular) (unless previously revoked, renewed, varied or extended by the Company in general meeting), save that the Company may before such expiry make an offer or enter into an agreement which would or might require shares to be allotted, or rights to subscribe for or to convert securities into shares to be granted, after such expiry and the Directors may allot shares or grant such rights in pursuance of such offer or agreement as if the authority conferred hereby had not expired.
THAT
Registered Office: Vale House Roebuck Close Bancroft Road Reigate Surrey RH2 7RU Registered in England number 08568957
By Order of the Board
Group Company Secretary
14 March 2016
The appointment of a proxy in each case must formally be received by the Company's registrar by no later than 10.00 a.m. on 24 March 2016 (or, in the case of an adjournment, not later than 48 hours (excluding non-working days) before the time fixed for the holding of the adjourned meeting).
To change your proxy instructions you may return a new proxy appointment using the methods set out above. Where you have appointed a proxy using the hard copy Form of Proxy and would like to change the instructions using another hard copy Form of Proxy, please contact Equiniti at Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA. The deadline for receipt of proxy appointments (see note 5 above) also applies in relation to amended instructions. Any attempt to terminate or amend a proxy appointment received after the relevant deadline will be disregarded. Where two or more valid separate appointments of proxy are received in respect of the same share in respect of the same meeting, the one which is last sent shall be treated as replacing and revoking the other or others. If the Company is unable to determine which is last sent, the one which is last received shall be so treated. If the Company is unable to determine either which is last sent or which is last received, none of them shall be treated as valid in respect of the relevant share(s).
Merrill Corporation Ltd, London 15ZCP78601
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