RNS Number : 5201S
Quilter PLC
12 March 2019
 

 

 

Statement of Directors' responsibilities

in respect of the preliminary announcement of the Annual report and accounts and the financial statements

The Directors confirm that to the best of their knowledge: 

·      The results in this preliminary announcement have been taken from the Group's 2018 Annual report and accounts, which will be available on the Company's website on 28 March 2019; and

·      The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group.

 

 

 

Paul Feeney                                          Tim Tookey
Chief Executive Officer                           Chief Financial Officer

11 March 2019

 

Consolidated income statement

 

For the year ended 31 December 2018

 

 

 

 

 

 

£m

 

Notes

Year ended

31 December

2018

Year ended

31 December

2017

Revenue

 

 

 

  Gross earned premiums

 

148

148

  Premiums ceded to reinsurers

 

(88)

(88)

Net earned premiums

 

60

60

Fee income and other income from service activities

6(a)

1,046

895

Investment return

6(b)

(3,482)

5,195

Other income

 

35

13

Total revenue

 

(2,341)

6,163

Expenses

 

 

 

Insurance contract claims and changes in liabilities

18(b)

(33)

(15)

Change in investment contract liabilities

18(d)

3,236

(4,308)

Fee and commission expenses, and other acquisition costs

 

(437)

(320)

Change in third party interest in consolidated funds

 

369

(673)

Other operating and administrative expenses

 

(772)

(816)

Finance costs

7

(17)

(39)

Total expenses

 

2,346

(6,171)

Profit on acquisitions

3(a)

-

3

Profit/(Loss) before tax from continuing operations

 

5

(5)

Tax credit/(expense) attributable to policyholder returns

 

158

(49)

Profit/(Loss) before tax attributable to equity holders

 

163

(54)

  Income tax credit/(expense)

8(a)

169

(41)

  Less: tax (credit)/expense attributable to policyholder returns

 

(158)

49

Tax credit attributable to equity holders

 

11

8

Profit/(Loss) after tax from continuing operations

 

174

(46)

Profit after tax from discontinued operations

3(c)

314

203

Profit for the period after tax

 

488

157

 

 

 

 

Attributable to:

 

 

 

Equity holders of Quilter plc

 

488

157

 

 

 

 

Earnings per ordinary share on profit attributable to ordinary shareholders of Quilter plc

Basic

 

 

 

From continuing operations (pence)

 

9.5

(2.5)

From discontinued operations (pence)

3(c)

17.1

11.1

Basic earnings per ordinary share (pence)

9(a)

26.6

8.6

Diluted

 

 

 

From continuing operations (pence)

 

9.4

(2.5)

From discontinued operations (pence)

3(c)

17.1

11.1

Diluted earnings per ordinary share (pence)

9(b)

26.5

8.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated statement of comprehensive income

For the year ended 31 December 2018

 

 

 

 

 

 

 

 

 

 

£m

 

Notes

Year ended

31 December

2018

Year ended

31 December

2017

Profit for the period

 

488

157

 

 

 

 

Other comprehensive income:

 

 

 

Exchange gains on translation of foreign operations1

 

-

3

Items that may be reclassified subsequently to income statement

 

-

3

Income tax on items that will not be reclassified subsequently to income statement2

 

-

3

Items that will not be reclassified subsequently to income statement

 

-

3

Total other comprehensive income, net of tax1

 

-

6

Total comprehensive income for the period

 

488

163

 

 

 

 

Attributable to:

 

 

 

Continuing operations

 

174

(47)

Discontinued operations

3(d)

314

210

Equity holders of Quilter plc

 

488

163

1In the year ended 31 December 2017, £3 million previously shown within the consolidated statement of changes in equity as a change in participation in subsidiaries has been reclassified to other comprehensive income, to conform with current year presentation.

2In the year ended 31 December 2017, £3 million previously shown within other comprehensive income for the period has been reclassified to income tax on items that will not be reclassified subsequently to income statement, to conform with current year presentation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of adjusted profit to profit after tax

For the year ended 31 December 2018

 

 

 

 

 

 

 

 

 

 

£m

 

Notes

Year ended

31 December

2018

Year ended

31 December

2017

Adjusted profit before tax

 

 

 

Advice and Wealth Management

 

102

82

Wealth Platforms

 

162

158

Head Office

 

(31)

(31)

Adjusted profit before tax

4(b)

233

209

 

 

 

 

Reconciliation of adjusted profit to Profit after tax

 

 

 

Adjusting for the following:

 

 

 

Goodwill impairment and impact of acquisition accounting

 

(50)

(54)

Profit on business acquisitions and disposals

 

-

3

Business transformation costs

 

(84)

(89)

Managed Separation costs

 

(24)

(32)

Finance costs

 

(13)

(39)

Policyholder tax adjustments

 

101

17

Voluntary customer remediation provision

 

-

(69)

Total adjusting items before tax

5(a)

(70)

(263)

Profit/(Loss) before tax attributable to equity holders

 

163

(54)

Income tax attributable to policyholder returns

 

(158)

49

Profit/(Loss) before tax from continuing operations

 

5

(5)

Income tax credit/(expense) on continuing operations

8(b)

169

(41)

Profit/(Loss) after tax from continuing operations

 

174

(46)

Profit after tax from discontinued operations

3(c)

314

203

Profit for the period after tax

 

488

157

 

 

 

 

Adjusted profit after tax attributable to ordinary shareholders of Quilter plc

 

 

 

£m

 

Notes

Year ended

31 December

2018

Year ended

31 December

2017

Adjusted profit before shareholder tax

 

233

209

Shareholder tax on adjusted profit

8(c)

(6)

(14)

Adjusted profit after tax attributable to ordinary shareholders of Quilter plc

9(c)

227

195

Adjusted weighted average number of ordinary shares used to

calculate adjusted basic earnings per share (millions)

9(c)

1,832

1,830

Adjusted basic earnings per share (pence)

9(c)

12.4

10.7

Adjusted weighted average number of ordinary shares used to

calculate adjusted diluted earnings per share (millions)

9(c)

1,839

1,830

Adjusted diluted earnings per share (pence)

9(c)

12.3

10.7

Basis of preparation of adjusted profit

Adjusted profit is one of the Group's Alternative Performance Measures and reflects the Directors' view of the underlying performance of the Group. It is used for management decision making and internal performance management and is the profit measure presented in the Group's segmental reporting. Adjusted profit is a non-GAAP measure which adjusts the IFRS profit for specific agreed items as detailed in note 5(a): Adjusted profit adjusting items.

Adjusted profit excludes significant costs or income that are non-operating or one-off in nature, including the impairment of goodwill; amortisation and impairment of other intangibles acquired in business combinations; the profit or loss on business acquisitions and disposals; costs related to business transformation; Managed Separation costs; the effects of interest costs on borrowings; and voluntary customer remediation provisions. Adjusted profit also treats policyholder tax as a pre-tax charge (to offset against the related income collected from policyholders), though adjusted to remove the impact of non-operating tax items. 

Adjusted earnings applied in the calculation of adjusted earnings per share is calculated based on adjusted profit after tax. The calculation of the adjusted weighted average number of shares includes own shares held in policyholders' funds.

The Group Audit Committee regularly reviews the use of adjusted profit to confirm that it remains an appropriate basis on which to analyse the operating performance of the business. The Committee assesses refinements to the policy on a case-by-case basis, and where possible the Group seeks to minimise such changes in order to maintain consistency over time.

Consolidated statement of changes in equity

For the year ended 31 December 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

For the year ended 31 December 2018

Notes

Share

capital

Share

premium

Merger

reserve

Share-based payments reserve

Other reserves

Retained earnings

Total

share-

holders'

equity

Balance at 1 January 2018

 

130

58

-

38

1

872

1,099

Profit for the period

 

-

-

-

-

-

488

488

Total comprehensive income

-

-

-

-

-

488

488

Dividends

10

-

-

-

-

-

(221)

(221)

Acquisition of entities due to managed separation restructure¹

17(b)

-

-

591

-

-

-

591

Issue of share capital

17

3

-

(3)

-

-

-

-

Movement in treasury shares

 

-

-

-

-

-

5

5

Equity share-based payment transactions²

 

-

-

-

7

-

35

42

Change in participation in subsidiaries

 

-

-

-

(12)

-

12

-

Aggregate tax effects of items recognised directly in equity

 

-

-

-

1

-

-

1

Total transactions with the owners of the Company

3

-

588

(4)

-

(169)

418

Balance at 31 December 2018

 

133

58

588

34

1

1,191

2,005

1Acquisition of the Skandia UK group of entities from Old Mutual plc.

2Equity share-based payment transactions include £27 million of IFRS 2 costs and £35 million transfer to retained earnings representing share-based payment schemes that have fully vested. In addition, £15 million was transferred in from liability accounts, mainly relating to cash settled awards that have been converted to equity settled awards.

 

 

 

 

 

 

 

 

 

£m

For the year ended 31 December 2017

Notes

Share

capital

Share

premium

Merger

reserve

Share-based payments reserve

Other reserves

Foreign currency

translation reserve

Retained earnings

Total

share-

holders'

equity

Balance at 1 January 2017

 

130

-

-

75

3

2

782

992

Profit for the year

 

-

-

-

-

-

-

157

157

Other comprehensive income

 

-

-

-

-

-

-

6

6

Total comprehensive income

 

-

-

-

-

-

-

163

163

Dividends

10

-

-

-

-

-

-

(210)

(210)

Issue of share capital

17(a)

200

58

-

-

-

-

-

258

Reduction of share capital

17(a)

(200)

-

-

-

-

-

200

-

Movement in treasury shares1

 

-

-

-

-

-

-

(99)

(99)

Equity share-based payment transactions2

 

-

-

-

(36)

-

-

31

(5)

Change in participation in subsidiaries

 

-

-

-

(1)

(2)

(2)

5

-

Total transactions with the owners of the Company

-

58

-

(37)

(2)

(2)

(73)

(56)

Balance at 31 December 2017

 

130

58

-

38

1

-

872

1,099

1Movement in treasury shares includes £99 million of treasury shares within the JSOP Employee Benefit Trust that transferred from Old Mutual plc to the Company during 2017.

2Equity share-based payment transactions include £18 million of IFRS 2 costs and £31 million transfer to retained earnings representing share-based payment schemes that have fully vested. In addition, £23 million was paid to employee benefit trusts in respect of share-based payment scheme settlements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated statement of financial position

At 31 December 2018

 

 

 

 

 

 

 

 

 

 

£m

 

Notes

At

31 December

2018

At

31 December

2017

Assets

 

 

 

Goodwill and intangible assets

11

550

574

Property, plant and equipment

 

17

18

Investments in associated undertakings2

 

2

1

Deferred acquisition costs1

 

11

611

Contract costs1

 

551

-

Contract assets1

 

44

-

Loans and advances

12

222

199

Financial investments2

13

59,219

64,250

Reinsurers' share of policyholder liabilities

18

2,162

2,908

Deferred tax assets

20

38

22

Current tax receivable

20(c)

47

-

Trade, other receivables and other assets

 

486

497

Derivative assets

 

46

87

Cash and cash equivalents

16

2,395

2,360

Assets of operations classified as held for sale

3(f)

-

446

Total assets

 

65,790

71,973

 

 

 

 

Equity and liabilities

 

 

 

Equity

 

 

 

Ordinary share capital

17(a)

133

130

Ordinary share premium reserve

17(a)

58

58

Merger reserve

17(b)

588

-

Share-based payments reserve

 

34

38

Other reserves

 

1

1

Retained earnings

 

1,191

872

Total equity

 

2,005

1,099

Liabilities

 

 

 

Long-term business insurance policyholder liabilities

18

602

489

Investment contract liabilities

18

56,450

59,139

Third-party interests in consolidated funds

 

5,116

7,905

Provisions

19

94

104

Deferred tax liabilities

20

59

190

Current tax payable

20(c)

5

38

Borrowings

21

197

782

Trade, other payables and other liabilities

 

999

1,331

Deferred revenue1

 

-

244

Contract liabilities1

 

226

-

Derivative liabilities

 

37

433

Liabilities of operations classified as held for sale

3(f)

-

219

Total liabilities

 

63,785

70,874

Total equity and liabilities

 

65,790

71,973

1The Group has initially applied IFRS 15 and IFRS 9 at 1 January 2018. It has applied IFRS 15 using the cumulative effect method, under which the comparative information is not restated. It has also taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in respect of IFRS 9's classification and measurement (including impairment) requirements.

2As at 31 December 2017, £2 million has been reclassified from investments in associated undertakings to financial investments to conform with current year presentation.

 

Consolidated statement of cash flows

For the year ended 31 December 2018

 

 

 

 

 

 

 

The cash flows presented in this statement cover all the Group's activities and include flows from both policyholder and shareholder activities. All cash and cash equivalents are available for use by the Group except for cash and cash equivalents in Consolidated Funds.

 

 

 

 

 

 

 

£m

 

Notes

Year ended

31 December

2018

Year ended

31 December

20172

Cash flows from operating activities

 

 

 

Profit before tax

 

321

227

Non-cash movements in profit before tax

 

584

3,151

Net changes in working capital1

 

(669)

980

Taxation paid

 

(92)

(9)

Total net cash flows from operating activities

 

144

4,349

Cash flows from investing activities

 

 

 

Net acquisitions of financial investments

 

(366)

(3,549)

Acquisition of property, plant and equipment

 

(7)

(8)

Acquisition of intangible assets

 

(4)

(9)

Acquisition of interests in subsidiaries

 

-

(33)

Cash added within acquisition of Skandia UK Limited

3(a)

25

-

Net proceeds from the disposal of interests in subsidiaries3

 

350

208

Total net cash used in investing activities

 

(7)

(3,391)

Cash flows from financing activities

 

 

 

Dividends paid to ordinary equity holders of the Company

 

(221)

(210)

Finance costs

 

(8)

(39)

Proceeds from issue of ordinary shares

 

-

258

Proceeds from issue of subordinated and other debt

 

497

-

Subordinated and other debt repaid

 

(516)

(57)

Total net cash used in financing activities

 

(248)

(48)

Net (decrease)/increase in cash and cash equivalents

 

(111)

910

Cash and cash equivalents at beginning of the year

 

2,507

1,595

Effects of exchange rate changes on cash and cash equivalents

 

(1)

2

Cash and cash equivalents at end of the period

16

2,395

2,507

 

Cash flows include both continuing and discontinued operations and cash held for sale.

1In the year end 31 December 2017, the cash flow statement has been amended to include cash of £147 million that was previously included in assets held for sale in respect of the Single Strategy Asset Management business which has subsequently been sold in 2018.

2A number of items within the 2017 comparatives have been reclassified to align with the presentation within the 2018 financial statements. There was no impact on cash and cash equivalents resulting from these reclassifications.

3Net proceeds from the disposal of interests in subsidiaries in 2018 includes the cash consideration on disposal of the Single Strategy Asset Management business of £540 million (see note 3(b)), less cash within the Single Strategy Asset Management business at the point of disposal of £170 million and £20 million transaction costs.

 



















 

 

General Information

Quilter plc (the 'Company'), a public limited company incorporated and domiciled in the United Kingdom ('UK'), together with its subsidiary undertakings (collectively, the 'Group') offers investment and wealth management services, life assurance and long-term savings, and financial advice through its subsidiaries and associates primarily in the UK with a presence in a number of cross-border markets.

The address of the registered office is Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ.

The Company was, until 25 June 2018, a wholly owned subsidiary of Old Mutual plc, a FTSE 100 listed group. The Company formed part of the Old Mutual Wealth division of Old Mutual plc, for which it acted as a holding company and delivered strategic and governance oversight. On 25 June 2018, Quilter plc was listed on the London and the Johannesburg Stock Exchanges and is no longer part of the Old Mutual plc group.

1: Basis of preparation

The results in this preliminary announcement have been taken from the Group's 2018 Annual report and accounts which will be available on the Company's website on 28 March 2019. The consolidated financial statements of Quilter plc for the year ended 31 December 2018 have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS.

Significant accounting policies applicable to the Group's consolidated financial statements can be found in note 4 of the consolidated financial statements within the 2018 Annual report and accounts.

The preliminary announcement for the year ended 31 December 2018 does not constitute statutory accounts as defined in Section 434 of the companies Act 2006. The consolidated financial statements for full year 2018 have been audited by KPMG. Pursuant to section 435 of the Companies Act 2006, the comparative figures for the financial year ended 31 December 2017 are not the Group's statutory accounts for that financial year. Those accounts were separate financial statements of the Company and have been reported on by the company's auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The comparative figures for the financial year 31 December 2017 are the same as those reported in the Group's listing prospectus dated 20 April 2018, which is available on the Group's website.

This is the first set of the Group's annual financial statements in which IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers have been applied. Changes in significant accounting policies to reflect these new IFRSs are explained in note 2. 

The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments, and are presented in pounds sterling, which is the currency of the primary economic environment in which the Group operates.  

Critical accounting estimates and judgements

The preparation of financial statements requires management to exercise judgement in applying accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. Critical accounting estimates and judgements are those that involve the most complex or subjective assessments and assumptions. Management uses its knowledge of current facts and circumstances and applies estimation and assumption setting techniques that are aligned with relevant actuarial and accounting guidance to make predictions about future actions and events. Actual results may differ significantly from those estimates.

The Group Audit Committee reviews the reasonableness of judgements and estimates applied and the appropriateness of significant accounting policies adopted in the preparation of these financial statements. The areas where judgements and estimates have the most significant effect on the amounts recognised in these financial statements are summarised below:

Area

Critical accounting judgements

Notes

Group accounting including the consolidation of investment funds

The Group has undertaken a number of acquisitions and disposals during the year including those as part of Managed Separation and the sale of the Single Strategy Asset Management business. Other than for common control transactions, the Group uses the acquisition method of accounting for business combinations where the cost is measured as the aggregate of the fair values (at the date of exchange) of assets acquired, liabilities incurred, and equity instruments issued for control of the acquirer. Judgement is applied in determining the fair value of the consideration and net assets acquired and also on the date at which the Group obtains or cedes control. In addition, the Group's interest in investment funds can fluctuate according to the Group's participation in them as clients' underlying investment choices change. Third-party interests in consolidated funds are classified as a liability rather than a non-controlling interest as they meet the liability classification requirement set out in IAS 32.

n/a1

Insurance contracts - classification

The Group is required to apply judgement in assessing the level of insurance risk transferred to the Group in determining whether a contract should be classified (and accounted for) as an insurance or investment contract. The majority of the contracts written by the Group do not meet the definition of an insurance contract as they do not transfer significant insurance risk and as such are accounted for as an investment contract.

18

Provisions - recognition

In assessing whether a provision should be recognised, the Group evaluates the likelihood of a constructive or legal obligation to settle an event that took place in the past and whether a reliable estimate can be made. Significant provisions have been in respect of the voluntary client remediation provision and the restructuring provision in respect of the sale of the Single Strategy Asset Management business.

19

Deferred tax - recognition

The timing and recognition of any deferred tax assets have been impacted as the Group has become standalone under Managed Separation. Due to ambiguities in tax law and the complex nature of the separation process, the tax treatment of specific potential tax assets are being discussed with the relevant tax authorities. Where management believe there is a significant risk that the tax authorities may take a different view no asset has been recognised. Management expects discussions with the tax authorities on Managed Separation transactions to be concluded during 2019.

20

1Refer to note 4(a) in the financial statements included within the Group's 2018 Annual report and accounts.

 

 

Critical accounting estimates and judgements continued

Area

Critical accounting estimates

Notes

Insurance contracts - measurement

Measurement involves significant use of assumptions including mortality, morbidity, persistency, expense valuation and interest rates.

18

Provisions - measurement

The amount of provision is calculated based on the Group's estimation of the expenditure required to settle the obligation at the statement of financial position date. The key assumptions in relation to the voluntary customer remediation provision have included the investment return used, the point at which customers are remediated and the timing of remediation. The provision includes estimates of the cost of future claims and programme remediation costs.

19

Deferred tax - measurement

 

The estimation of future taxable profits is performed as part of the annual business planning process, and is based on estimated levels of assets under management, which are subject to a large number of factors including worldwide stock market movements, related movements in foreign exchange rates and net client cash flow, together with estimates of expenses and other charges.

20

Goodwill and intangible assets

The valuation of goodwill and intangible assets that are recognised as the result of a business combination involves the use of valuation models. These have arisen principally on the acquisition of the Quilter Cheviot business, Intrinsic and on various adviser business acquisitions. In relation to goodwill impairment, the determination of a cash generating unit's ('CGUs') recoverable value is based on the discounted value of the expected future profits of each business. Significant estimates include forecast cash flows, new business growth and discount rates.

11

Valuation of investments

Where quoted market prices are not available, valuation techniques are used to measure financial investments. When valuation techniques use significant unobservable inputs they are subject to estimation uncertainty and are categorised as level 3 in the fair value hierarchy. Matching liabilities are similarly categorised as level 3.

15

2: New standards, amendments to standards, and interpretations adopted by the Group

The Group adopted IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers for the first time in 2018. Although significant standards, they did not have a material impact on the Group. The majority of the Group's financial assets and liabilities continue to be measured at fair value through profit or loss ('FVTPL') after the implementation of IFRS 9. In relation to IFRS 15 the Group was already largely compliant in the way it recognises fee and commission income. The impact of adopting these two new standards is explained in detail in note 4(r) of the consolidated financial statements within the Group's 2018 Annual report and accounts.

Other standards:

In addition to IFRS 9 and IFRS 15, the following amendments to the accounting standards, issued by the IASB and endorsed by the EU, have been adopted by the Group from 1 January 2018 with no material impact on the Group's consolidated results, financial position or disclosures:

 •               Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions

•               Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

•               Amendments to IAS 40 Transfers of Investment Property

•               Amendments to IFRS 1 and IAS 28 Annual improvements to IFRSs 2014-2016 cycle

•               IFRIC 22 Foreign currency transactions and advance consideration

3: Acquisitions, discontinued operations and disposal groups held for sale

This note provides details of the acquisitions and disposals of subsidiaries the Group has made during the period, together with details of businesses held for sale during that same period.

 

3(a) Business acquisitions completed during the period

Business acquisitions completed during year ended 31 December 2018

Acquisition of Skandia UK Limited from Old Mutual plc

On 31 January 2018, the Group acquired the Skandia UK Limited group of entities from Old Mutual plc which comprises seven Old Mutual plc group entities with a net asset value ('NAV') of £591 million. The transfer was effected by the issue of a share and with the balance represented by a merger reserve. No debt was taken on as a result of this transaction. The most significant asset within these entities is a £566 million receivable which corresponds to an equivalent payable within the Group's statement of financial position. The net effect of this transaction for the Group is to replace a payable due to Old Mutual plc with equity. For further information see note 17.

Acquisition of adviser businesses by Quilter Private Client Advisers ('QPCA') (formerly Old Mutual Wealth Private Client Advisers)

During the year, the Group continued its expansion of the QPCA business, aiming to develop a Quilter plc branded, employed adviser business focused upon servicing upper affluent and high net worth clients, offering a centrally-defined restricted advice proposition focused upon the Group's investment solutions and platform. In the year the Group completed the acquisition of fourteen adviser businesses as part of the expansion of the QPCA business. The total cash consideration paid was an initial £5.3 million with additional potential deferred consideration of £6.4 million which is expected to be paid in full (discounted to net present value for this and all other acquisitions listed below), dependent upon meeting certain performance targets generally relating to funds under management.

Net tangible assets of £0.2 million were acquired and goodwill of £5.1 million, other intangible assets of £7.4 million and a deferred tax liability of £1.0 million were recognised as a result of the transaction. The deferred consideration was capitalised in the calculation of goodwill recognised.

  

Business acquisitions completed during year ended 31 December 2017

Caerus Capital Group Limited ('Caerus')

On 1 June 2017, the Group, completed the acquisition of 100% of the share capital of Caerus, a UK based adviser network that operates in a similar manner to Intrinsic (another Group business within the Advice and Wealth Management segment) and which has approximately £4 billion of funds under advice and 300 advisers.

The total consideration of £22 million includes £15 million cash consideration and up to £3 million that has been deferred for two years and up to £4 million that has been deferred for three years. The deferred consideration has been included as part of the cost of the acquisition as there is no continuing employment condition applying to the sellers of the business. The deferred consideration payable is dependent on turnover targets post acquisition and is potentially reduced by the amount of any relevant claims arising from in-force business existing prior to the payment dates.

The purchase price has been allocated based on the fair value of assets acquired and liabilities assumed at the date of acquisition determined in accordance to IFRS 3 Business Combinations.

The carrying value of assets and liabilities in Caerus's consolidated statement of financial position on acquisition date approximates the fair value of these items determined by the Group. Net tangible assets of £1 million were acquired and in addition, the Group recognised identified intangible assets of £14 million and a deferred tax liability of £2 million relating to customer distribution channels. The value of the intangible assets was determined by applying cash flows to standard industry valuations models. Goodwill of £9 million was recognised on the acquisition which is attributable to the delivery of cost and revenue synergies that cannot be linked to identifiable intangible assets.

Transaction costs incurred of £1 million relating to the acquisition have been recognised within other expenses in the consolidated income statement, but not included within adjusted profit.

Acquisition of adviser businesses by Quilter Private Client Advisers ('QPCA')

During 2017, the Group completed the acquisition of eight adviser businesses as part of the expansion of its QPCA business that was launched in October 2015.

The purchase price has been allocated based on the fair value of assets acquired and liabilities assumed at the date of acquisition determined in accordance to IFRS 3 Business Combinations.

The aggregate estimated consideration payable was £18 million, of which £10 million was cash consideration and up to £8 million in deferred payments. The amount of deferred consideration is dependent upon meeting certain performance targets, generally relating to the value of funds under management and levels of on-going fee income. The deferred consideration has been included as part of the cost of the acquisition. Total other intangible assets of £13 million and a deferred tax liability of £2 million in respect of customer relationships have been recognised as a result of the acquisitions, together with goodwill of £7 million, £2 million of which has been transferred from intangibles to goodwill following a review of the purchase price allocations in 2018 (see note 11(a)).

Transaction costs incurred of £1 million relating to the acquisitions have been recognised within other operating expenses in the consolidated income statement, but not included within adjusted profit.

Attivo Investment Management Limited ('AIM')

On 29 March 2017, the Group completed the acquisition of 100% of the share capital of AIM, a UK based investment management business offering a comprehensive investment management service.

The fair value of the total estimated consideration was £8 million, of which £5 million was cash consideration and £3 million was deferred for two years. The deferred consideration is included within the cost of the acquisition because it is dependent on levels of assets under management being maintained, with no requirement for continuing employment applied to the sellers of the business.

The book value of total assets and total net assets of the acquired business were both less than £1 million.

The purchase price has been based on the fair value of assets acquired and liabilities assumed at the date of acquisition determined in accordance to IFRS 3 Business Combinations.

The carrying value of assets and liabilities in AIM's statement of financial position on acquisition date approximates the fair value of these items determined by the Group. Other intangible assets of £9 million and a deferred tax liability of £2 million, relating to customer relationships, were recognised as a result of the acquisition. No goodwill was recognised on this transaction.

Transaction costs incurred of £0.5 million relating to the acquisition have been recognised within other operating expenses in the consolidated income statement, but not included within adjusted profit.

Commsale 2000 Limited ('Commsale')

On 29 September 2017, the Group acquired Commsale from Old Mutual plc. Commsale is a UK based service company that runs the lease for the London head office building and is responsible for the payment of rent, rates and service charges relating to the building and recharging the costs to all tenants through a service charge. 

This represents a business combination involving entities or businesses under common control because the combining businesses are ultimately controlled by the same party or parties before and after the business combination. 

The total consideration was £0.3 million. The fair value of the identifiable assets at the date of acquisition was £0.5 million, with a gain on purchase of £0.2 million being recognised, representing assets not valued within the agreed consideration.   

Global Edge Technologies (Pty) Ltd ('GET')

On 30 November 2017, the Group acquired 100% of the issued share capital of GET from Old Mutual plc. GET is a service company incorporated in South Africa, with a branch in the UK that provides IT support for the Quilter Group's Platform business services.

This represents a business combination involving entities or businesses under common control because the combining businesses are ultimately controlled by the same party or parties before and after the business combination. 

The total consideration was £1 million. The fair value of the identifiable assets at the date of acquisition was £4 million, with a gain on purchase £3 million being recognised. The Group determined that the excess of book value over consideration paid was attributable to potential future integration costs which, if incurred, would be expensed in future periods. As potential future integrating activities do not qualify to be recognised as a liability in the application of the acquisition method of accounting, no such liability was recognised, and the Group recorded the excess as a bargain purchase gain.

3(b) Disposal of subsidiaries, associated undertakings and strategic investments

Year ended 31 December 2018

In December 2017, the Group announced that it had entered into an agreement to sell its Single Strategy Asset Management business ('Single Strategy business') to a special purpose vehicle ultimately owned by funds managed by TA Associates and certain members of the Single Strategy management team (together 'the Acquirer'). On 29 June 2018, the Group completed the sale for a total consideration of £583 million, comprising cash consideration of £540 million on completion, with an additional £7 million anticipated to be payable thereafter, to be paid primarily in 2019 to 2021 as surplus capital associated with the separation from the Group is released in the business. The deferred consideration is not subject to performance conditions. The remaining proceeds of £36 million were received in cash as a pre-completion dividend on 15 June 2018. Economic ownership of the Single Strategy business passed to the Acquirer effective from 1 January 2018 with all profits and performance fees generated up until 31 December 2017 for the account of Quilter plc. The results of the Single Strategy business continued to be included as part of the Group up until the date of sale on the 29 June 2018. The Group recognised a post tax profit on disposal of £292 million.

During the year an expense provision of £2 million in relation to the sale of Old Mutual Wealth Italy S.p.A. in the prior year (see below for details of this sale) was released as it is not expected to be incurred, giving rise to a £2 million increase in the profit on sale.

Year ended 31 December 2017

In August 2016, the Group announced that it had agreed to sell Old Mutual Wealth Italy S.p.A. to Ergo Previdenza S.p.A. ('Ergo'), a member of the Flavia insurance group. The sale completed on 9 January 2017. The consideration for the transaction was £221 million (€278 million) in cash, plus interest to completion recognising a profit on disposal of £80 million.

 

 

 

 

 

£m

 

Year ended

31 December

2018

Year ended

31 December

2017

 

Single Strategy business and Old Mutual Wealth Italy adjustment

Old Mutual Wealth Italy

Consideration received1

546

221

Less: transaction costs on the sale of Single Strategy

(20)

(4)

Plus: release of accrued expenses in relation to OMW Italy S.p.A. disposal

2

-

Net proceeds from sale

528

217

Carrying value of net assets disposed of

(238)

(137)

Profit on sale of operations before tax

290

80

Tax on disposals

4

-

Profit on sale of operations after tax

294

80

1Consideration received in respect of the Single Strategy business includes £540 million of cash received together with the discounted deferred consideration of £6 million, and excludes the £36 million pre-completion dividend received in June 2018.

 

3(c) Discontinued operations - Income statement

For the years ended 31 December 2018 and 31 December 2017, the Group's discontinued operations included the Single Strategy business (previously part of Old Mutual Global Investors). Old Mutual Wealth Italy S.p.A. is also included in discontinued operations up to the date its sale completed on 9 January 2017.

The table below sets out the trading results of the Group's discontinued operations and also any profit on the sale of discontinued operations during the period.

 

 

 

 

 

 

 

£m

 

Notes

Year ended

31 December

2018

Year ended

31 December

2017

Revenue

 

 

 

Fee income and other income from service activities

6(a)

136

389

Investment return

6(b)

-

7

Other income

 

2

3

Total revenue

 

138

399

Expenses

 

 

 

Fee and commission expenses, and other acquisition costs

 

(31)

(62)

Other operating and administrative expenses

 

(81)

(185)

Total expenses

 

(112)

(247)

Profit on the disposal of subsidiaries

3(b)

290

80

Profit before tax from discontinued operations

 

316

232

Tax (expense) attributable to equity holders

 

(2)

(29)

Profit for the period after tax from discontinued operations

 

314

203

 

 

 

 

Attributable to:

 

 

 

Equity holders of Quilter plc

 

314

203

 

 

 

 

Earnings per ordinary share on profit attributable to ordinary shareholders of Quilter plc

Basic - from discontinued operations (pence)

 

17.1

11.1

Diluted - from discontinued operations (pence)

 

17.1

11.1

 

3(d) Discontinued operations - Statement of comprehensive income

 

 

 

 

 

 

 

£m

 

 

Year ended

31 December

2018

Year ended

31 December

2017

Profit for the period

 

314

203

Other comprehensive income from discontinued operations:

 

 

 

Items that may be reclassified subsequently to income statement

 

 

 

Exchange gains on translation of foreign operations

 

-

4

Other comprehensive income for the period

 

-

3

Total other comprehensive income from discontinued operations, net of tax

 

-

7

Total comprehensive income for the period from discontinued operations

 

314

210

 

 

 

 

3(e) Discontinued operations - Net cash flows

 

 

 

 

£m

 

 

Year ended

31 December

2018

Year ended

31 December

2017

Total net cash flows from operating activities

 

(63)

(22)

Total net cash used in investing activities

 

131

137

Total net cash used in financing activities

 

(45)

-

Net increase in cash and cash equivalents

 

23

115

         

3: Acquisitions, discontinued operations and disposal groups held for sale continued

3(f) Assets and liabilities held for sale

Assets and liabilities held for sale

Assets and liabilities of operations classified as held for sale at 31 December 2017 relate to the Single Strategy business. The operation was classified as held for sale from December 2017 and, on 29 June 2018, the Group completed the sale. See note 3(b) above. The assets and liabilities held for sale are disclosed in the table below.

 

 

 

 

 

 

 

 

£m

 

Notes

At

31 December

2018

At

31 December

2017

Assets classified as held for sale

 

 

 

Goodwill and intangible assets

11(b)

-

82

Deferred acquisition costs

 

-

4

Deferred tax assets

20

-

9

Trade, other receivables and other assets

 

-

204

Cash and cash equivalents

16

-

147

Assets of operations classified as held for sale

 

-

446

 

 

 

 

Liabilities directly associated with assets classified as held for sale

 

 

 

Current tax payable

 

-

33

Trade, other payables and other liabilities

 

-

186

Liabilities of operations classified as held for sale

 

-

219

Net assets of operations classified as held for sale

 

-

227

4: Segmental information

4(a) Segmental presentation

The Group's operating segments comprise Advice and Wealth Management and Wealth Platforms, which is consistent with how the Group is managed. For all reporting periods, these businesses have been classified as continuing operations in the IFRS income statement and as core operations in determining the adjusted profit. Head Office includes certain revenues and central costs that are not allocated to the segments.

For the period ended 31 December 2018, the Group has classified the Single Strategy Asset Management business as discontinued. For the period ended 31 December 2017, the Group has classified the Italian business as discontinued. These businesses were sold or held for sale in these periods. Further detail is included in note 3(b).

There have been no changes to the basis of segment information for the period in these financial statements.

The Group's segmental results are analysed and reported on a basis with the way that management and the Board of directors of Quilter plc assess performance of the underlying businesses and allocate resources. Information is presented to the Board on a consolidated basis in pounds sterling (the presentation currency) and in the functional currency of each business.

Adjusted profit is one of the key measures reported to the Group's management and Board of directors for their consideration in the allocation of resources to, and the review of, the performance of the segments. As appropriate to the business line, the Board reviews additional measures to assess the performance of each of the segments. These typically also include net client cash flows, assets under management and administration, and revenue and operating margins.

Consistent with internal reporting, assets, liabilities, revenues and expenses that are not directly attributable to a particular segment are allocated between segments where appropriate and where there is a reasonable basis for doing so. The Group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices.

The revenues generated in each reported segment are provided in the analysis of profits and losses in note 4(b). The segmental information in this note reflects the adjusted and IFRS measures of profit or loss and the assets and liabilities for each operating segment as provided to management and the Board of directors. There are no differences between the measurement of the assets and liabilities reflected in the primary statements and that reported for the segments.

The Group is primarily engaged in the following business activities from which it generates revenue: investment and asset management, financial advice (revenue from fee income and other income from service activities), and life assurance (revenue from premium income). Investment return includes gains and losses on investment securities and other income includes other fees and miscellaneous income.  

The principal lines of business from which each operating segment derives its revenues are as follows:

Advice and Wealth Management

This segment comprises Quilter Investors, Quilter Cheviot Limited and Quilter Financial Planning, including Quilter Private Client Advisers ('QPCA').

Quilter Investors is a leading provider of investment solutions in the UK multi-asset market. It develops and manages investment solutions in the form of funds for Quilter plc and third party clients. It has several fund ranges which vary in breadth of underlying asset class. The business has primarily been accumulation focused, with recent development of decumulation solutions.

Quilter Cheviot Limited provides discretionary investment management in the United Kingdom with bespoke investment portfolios tailored to the individual needs of affluent and high-net worth customers, charities, companies and institutions through a network of branches in London and the regions. Investment management services are also provided by branches in Jersey, Channel Islands and the Republic of Ireland.

Quilter Financial Planning is a restricted and independent financial adviser network (including QPCA) providing mortgage and financial planning advice and financial solutions for both individuals and businesses through a network of intermediaries. They operate across all markets, from wealth management and retirement planning advice through to dealing with property wealth and personal and business protection needs.

Wealth Platforms

This segment comprises Quilter Wealth Solutions ('QWS') and Quilter Life Assurance ('QLA'), and Quilter International cross-border businesses.

QWS and QLA provide advice based predominantly unit-linked wealth management products and services in the UK, which serves a largely affluent customer base through advised multi-channel distribution. The QLA business is predominantly a closed book, made up of legacy products.  Protection and institutional pension products are also part of the business.

Quilter International is a cross-border business, focusing on high net worth and affluent local customers and expatriates in Asia, the Middle East, Europe and Latin America.

In addition to the two operating segments, Head Office comprises the investment return on centrally held assets, central function expenses, such as Group treasury and finance functions, along with central core structural borrowings and certain tax balances in the segmental statement of financial position.

 

4(b)(i): Adjusted profit statement - segmental information for the year ended 31 December 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

 

 

Adjusted profit - Continuing operations

Reconciliation to IFRS

 

 

 

Operating segments

 

 

 

 

 

 

Notes

 

Advice and Wealth Management

Wealth Platforms

Head Office

Adjusted profit

Consolidation Adjustments1

Adjusting items (Note 5(a))

IFRS Income Statement

Revenue

 

 

 

 

 

 

 

 

 

Gross earned premiums

 

 

-

148

-

148

-

-

148

Premiums ceded to reinsurers

 

 

-

(88)

-

(88)

-

-

(88)

Net earned premiums

 

 

-

60

-

60

-

-

60

Fee income and other income from service activities

6(a)

 

547

507

-

1,054

(8)

-

1,046

Investment return

 

 

9

(3,248)

3

(3,236)

(246)

-

(3,482)

Other income

 

 

2

101

6

109

(74)

-

35

Segmental revenue

 

 

558

(2,580)

9

(2,013)

(328)

-

(2,341)

Expenses

 

 

 

 

 

 

 

 

 

Claims and benefits paid

 

 

-

(87)

-

(87)

-

-

(87)

Reinsurance recoveries

 

 

-

60

-

60

-

-

60

Net insurance claims and benefits incurred

 

 

-

(27)

-

(27)

-

-

(27)

Change in reinsurance assets and liabilities

 

 

-

103

-

103

-

-

103

Change in insurance contract liabilities

 

 

-

(109)

-

(109)

-

-

(109)

Change in investment contract liabilities

 

 

-

3,236

-

3,236

-

-

3,236

Fee and commission expenses,

and other acquisition costs

 

 

(163)

(170)

-

(333)

(104)

-

(437)

Change in third-party interest in

consolidated funds

 

 

-

-

-

-

369

-

369

Other operating and administrative expenses

 

 

(290)

(347)

(40)

(677)

63

(158)

(772)

Finance costs

7

 

(3)

(1)

-

(4)

-

(13)

(17)

Segmental expenses

 

 

(456)

2,685

(40)

2,189

328

(171)

2,346

Adjusted profit/(loss) before all tax

 

 

102

105

(31)

176

-

(171)

5

Tax attributable to policyholders' funds

 

 

-

57

-

57

-

101

158

Adjusted profit/(loss) before tax attributable to equity holders

 

 

102

162

(31)

233

-

(70)

163

Reconciliation to IFRS:

 

 

 

 

 

 

 

 

 

Adjusted for non-operating items:

5(a)

 

 

 

 

 

 

 

 

Goodwill impairment and impact of acquisition accounting

 

 

(49)

(1)

-

(50)

 

 

 

Business transformation costs

 

 

(19)

(58)

(7)

(84)

 

 

 

Managed Separation costs

 

 

-

(1)

(23)

(24)

 

 

 

Finance costs

 

 

-

-

(13)

(13)

 

 

 

Policyholder tax adjustments

 

 

-

101

-

101

 

 

 

Reallocation of central costs2

 

 

-

(2)

2

-

 

 

 

Adjusting items before tax

 

 

(68)

39

(41)

(70)

 

 

 

Profit/(Loss) before tax attributable to equity holders

 

 

34

201

(72)

163

 

 

 

1Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.

2Reallocation of central costs reverses management reallocations included within adjusted profit to reconcile back to IFRS profit.

 

 

 

4(b)(ii): Adjusted profit statement - segmental information for the year ended 31 December 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

 

 

Adjusted profit - Continuing operations

Reconciliation to IFRS

 

 

 

Operating segments

 

 

 

 

 

 

Notes

 

Advice and Wealth Management

Wealth Platforms

Head Office

Adjusted profit

Consolidation Adjustments1

Adjusting items (Note 5(a))

IFRS Income Statement

Revenue

 

 

 

 

 

 

 

 

 

Gross earned premiums

 

 

-

148

-

148

-

-

148

Premiums ceded to reinsurers

 

 

-

(88)

-

(88)

-

-

(88)

Net earned premiums

 

 

-

60

-

60

-

-

60

Fee income and other income from service activities

6(a)

 

382

526

-

908

(13)

-

895

Investment return

 

 

3

4,412

1

4,416

779

-

5,195

Other income

 

 

2

83

3

88

(75)

-

13

Segmental revenue

 

 

387

5,081

4

5,472

691

-

6,163

Expenses

 

 

 

 

 

 

 

 

 

Claims and benefits paid

 

 

-

(76)

-

(76)

-

-

(76)

Reinsurance recoveries

 

 

-

54

-

54

-

-

54

Net insurance claims and benefits incurred

 

 

-

(22)

-

(22)

-

-

(22)

Change in reinsurance assets and liabilities

 

 

-

85

-

85

-

-

85

Change in insurance contract liabilities

 

 

-

(78)

-

(78)

-

-

(78)

Change in investment contract liabilities

 

 

-

(4,308)

-

(4,308)

-

-

(4,308)

Fee and commission expenses,

and other acquisition costs

 

 

(52)

(198)

-

(250)

(70)

-

(320)

Change in third-party interest in

consolidated funds

 

 

-

-

-

-

(673)

-

(673)

Other operating and administrative expenses

 

 

(253)

(336)

(35)

(624)

52

(244)

(816)

Finance costs

7

 

-

-

-

-

-

(39)

(39)

Segmental expenses

 

 

(305)

(4,857)

(35)

(5,197)

(691)

(283)

(6,171)

Profit on disposal of subsidiaries, associated  undertakings and strategic investments

 

 

-

-

-

-

-

3

3

Adjusted profit/(loss) before all tax

 

 

82

224

(31)

275

-

(280)

(5)

Tax attributable to policyholders' funds

 

 

-

(66)

-

(66)

-

17

(49)

Adjusted profit/(loss) before tax attributable to equity holders

 

 

82

158

(31)

209

-

(263)

(54)

Reconciliation to IFRS:

 

 

 

 

 

 

 

 

 

Adjusted for non-operating items:

5(a)

 

 

 

 

 

 

 

 

Goodwill impairment and impact of acquisition accounting

 

 

(53)

-

(1)

(54)

 

 

 

Net profit on business disposals and acquisitions

 

 

-

-

3

3

 

 

 

Business transformation costs

 

 

-

(89)

-

(89)

 

 

 

Managed Separation costs

 

 

-

-

(32)

(32)

 

 

 

Finance costs

 

 

-

-

(39)

(39)

 

 

 

Policyholder tax adjustments

 

 

-

17

-

17

 

 

 

Voluntary customer remediation provision

 

 

-

(69)

-

(69)

 

 

 

Adjusting items before tax

 

 

(53)

(141)

(69)

(263)

 

 

 

Profit/(Loss) before tax attributable to equity holders

 

 

29

17

(100)

(54)

 

 

 

1Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.

 

 

 

 

4(c)(i): Statement of financial position - segmental information at 31 December 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

Notes

Advice & Wealth Management

Wealth Platforms

Head Office

Consolidation Adjustments1

Total Continuing Operations

Discontinued Operations

Total

Assets

 

 

 

 

 

 

 

 

Goodwill and intangible assets

11

386

164

-

-

550

-

550

Property, plant and equipment

 

10

7

-

-

17

-

17

Investments in associated undertakings

 

-

-

2

-

2

-

2

Deferred acquisition costs

 

-

11

-

-

11

-

11

Contract costs

 

-

551

-

-

551

-

551

Contract assets

 

44

-

-

-

44

-

44

Loans and advances

12

27

188

7

-

222

-

222

Financial investments

13

3

54,636

2

4,578

59,219

-

59,219

Reinsurers' share of policyholder liabilities

18

-

2,162

-

-

2,162

-

2,162

Deferred tax assets

20

7

22

9

-

38

-

38

Current tax receivable

20(c)

-

46

1

-

47

-

47

Trade, other receivables and other assets

 

197

178

8

103

486

-

486

Derivative assets

 

-

-

-

46

46

-

46

Cash and cash equivalents

16

358

1,113

440

484

2,395

-

2,395

Inter-segment funding - assets

 

-

12

-

(12)

-

-

-

Total assets

 

1,032

59,090

469

5,199

65,790

-

65,790

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Long-term business insurance policyholder liabilities

18

-

602

-

-

602

-

602

Investment contract liabilities

18

-

56,450

-

-

56,450

-

56,450

Third-party interests in consolidated funds

 

-

-

-

5,116

5,116

-

5,116

Provisions

19

26

59

9

-

94

-

94

Deferred tax liabilities

20

40

19

-

-

59

-

59

Current tax payable

20(c)

9

14

(18)

-

5

-

5

Borrowings

21

-

-

197

-

197

-

197

Trade, other payables and other liabilities

 

340

579

20

60

999

-

999

Contract liabilities

 

1

225

-

-

226

-

226

Derivative liabilities

 

-

1

-

36

37

-

37

Inter-segment funding - liabilities

 

-

-

12

(12)

-

-

-

Total liabilities

 

416

57,949

220

5,200

63,785

-

63,785

Total equity

 

 

 

 

 

 

 

2,005

Total equity and liabilities

 

 

 

 

 

 

 

65,790

1Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.

 

 

 

4(c)(ii): Statement of financial position - segmental information at 31 December 2017

 

 

 

 

 

 

 

 

 

£m

 

Notes

Advice & Wealth Management

Wealth Platforms

Head Office

Consolidation Adjustments1

Total Continuing Operations

Discontinued Operations2

Total

Assets

 

 

 

 

 

 

 

 

Goodwill and intangible assets

11

412

162

-

-

574

-

574

Property, plant and equipment

 

9

9

-

-

18

-

18

Investments in associated undertakings3

 

-

-

1

-

1

-

1

Deferred acquisition costs

 

-

611

-

-

611

-

611

Loans and advances

12

18

180

1

-

199

-

199

Financial investments3

13

2

56,562

1

7,685

64,250

-

64,250

Reinsurers' share of policyholder liabilities

18

-

2,908

-

-

2,908

-

2,908

Deferred tax assets

20

6

15

1

-

22

-

22

Trade, other receivables and other assets

 

208

210

19

60

497

-

497

Derivative assets

 

-

1

-

86

87

-

87

Cash and cash equivalents

16

303

1,061

83

913

2,360

-

2,360

Assets of operations classified as held for sale

3(f)

-

-

-

-

-

446

446

Inter-segment funding - assets

 

4

12

-

(16)

-

-

-

Total assets

 

962

61,731

106

8,728

71,527

446

71,973

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Long-term business insurance policyholder liabilities

18

-

489

-

-

489

-

489

Investment contract liabilities

18

-

59,139

-

-

59,139

-

59,139

Third-party interests in consolidated funds

 

-

-

-

7,905

7,905

-

7,905

Provisions

19

10

89

5

-

104

-

104

Deferred tax liabilities

20

40

150

-

-

190

-

190

Current tax payable

20(c)

21

40

(23)

-

38

-

38

Borrowings

21

-

-

782

-

782

-

782

Trade, other payables and other liabilities

 

275

607

43

406

1,331

-

1,331

Deferred revenue

 

1

243

-

-

244

-

244

Derivative liabilities

 

-

-

-

433

433

-

433

Liabilities of operations classified as held for sale

3(f)

-

-

-

-

-

219

219

Inter-segment funding - liabilities

 

-

-

16

(16)

-

-

-

Total liabilities

 

347

60,757

823

8,728

70,655

219

70,874

Total equity

 

 

 

 

 

 

 

1,099

Total equity and liabilities

 

 

 

 

 

 

 

71,973

1Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.

2Discontinued operations includes the balances of the Group's Single Strategy Asset Management business.

3As at 31 December 2017, £2 million has been reclassified from investments in associated undertakings to financial investments to conform with current year presentation.

 

 

2017 comparatives for the segmental statement of financial position have been re-presented due to the reallocation of a UK holding company from Wealth Platforms to Head Office. This change was made to ensure that all material intercompany loan balances are reported (and eliminate) within Head Office.

 

 

4(d)(i): Geographic segmental information

In presenting geographic segmental information, revenue is based on the geographic location of our businesses. The Group has defined two geographic areas: UK and International.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

 

UK

International

 

 

 

 

For the year ended 31 December 2018

Notes

Advice and Wealth Management

Wealth Platforms

Head Office

Wealth Platforms

Consolidation adjustments

Total

continuing operations

Discontinued operations

Total Group

Revenue

 

 

 

 

 

 

 

 

 

Gross earned premiums

 

-

147

-

1

-

148

-

148

Premiums ceded to reinsurers

 

-

(87)

-

(1)

-

(88)

-

(88)

Net earned premiums

 

-

60

-

-

-

60

-

60

Premium based fees

 

87

15

-

77

-

179

-

179

Fund based fees1

 

460

243

-

102

-

805

136

941

Retrocessions received, intragroup

 

-

17

-

4

(21)

-

-

-

Fixed fees

 

-

4

-

28

-

32

-

32

Surrender charges

 

-

1

-

16

-

17

-

17

Other fee and commission income

 

-

-

-

-

13

13

-

13

Fee income and other income from service activities

6(a)

547

280

-

227

(8)

1,046

136

1,182

Investment return

 

9

(2,332)

3

(916)

(246)

(3,482)

-

(3,482)

Other income

 

2

98

6

3

(74)

35

2

37

Total revenue

 

558

(1,894)

9

(686)

(328)

(2,341)

138

(2,203)

1Income from fiduciary activities is included within fund based fees.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

 

UK

International

 

 

 

 

For the year ended 31 December 2017

Notes

Advice and Wealth Management

Wealth Platforms

Head Office

Wealth Platforms

Consolidation adjustments

Total

continuing operations

Discontinued operations

Total Group

Revenue

 

 

 

 

 

 

 

 

 

Gross earned premiums

 

-

147

-

1

-

148

-

148

Premiums ceded to reinsurers

 

-

(87)

-

(1)

-

(88)

-

(88)

Net earned premiums

 

-

60

-

-

-

60

-

60

Premium based fees

 

76

29

-

74

-

179

-

179

Fund based fees1

 

306

241

-

107

-

654

389

1,043

Retrocessions received, intragroup

 

-

17

-

6

(23)

-

-

-

Fixed fees

 

-

5

-

26

-

31

-

31

Surrender charges

 

-

1

-

20

-

21

-

21

Other fee and commission income

 

-

-

-

-

10

10

-

10

Fee income and other income from service activities

6(a)

382

293

-

233

(13)

895

389

1,284

Investment return

 

3

3,366

1

1,046

779

5,195

7

5,202

Other income

 

2

81

3

2

(75)

13

3

16

Total revenue

 

387

3,800

4

1,281

691

6,163

399

6,562

1Income from fiduciary activities is included within fund based fees.

 

 

 

 

 

 

5: Adjusted profit and adjusting items 

5(a): Adjusted profit adjusting items

In determining the adjusted profit for core operations, certain adjustments are made to profit before tax to reflect the underlying long-term performance of the Group. The following table shows an analysis of those adjustments before and after tax.

 

 

 

 

 

 

 

£m

 

Notes

Year ended

31 December

2018

Year ended

31 December 2017

Expense/(income)

 

 

 

Goodwill impairment and impact of acquisition accounting

5(b)

50

54

Profit on business acquisitions and disposals

5(c)

-

(3)

Business transformation costs

5(d)

84

89

Managed Separation costs

5(e)

24

32

Finance costs

5(f)

13

39

Policyholder tax adjustments

5(g)

(101)

(17)

Voluntary customer remediation provision

5(h)

-

69

Total adjusting items before tax

 

70

263

Tax on adjusting items

8(c)

(118)

(39)

Less: policyholder tax adjustments

 

101

17

Total adjusting items after tax

 

53

241

 

5(b) Goodwill impairment and impact of acquisition accounting

The recognition of goodwill and other acquired intangibles is created on the acquisition of a business and represents the premium paid over the fair value of the Group's share of the identifiable asset and liabilities acquired at the date of acquisition (as recognised under IFRS 3). The Group excludes from adjusted profit the impairment of goodwill, the amortisation and impairment of acquired other intangible assets as well as the movements in certain acquisition date provisions.

Costs incurred on completed acquisitions are also excluded from adjusted profit, including any finance costs related to discounted deferred consideration.

The effect of these adjustments to determine adjusted profit are summarised below:

For the year ended 31 December 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

 

Advice and Wealth Management

Wealth Platforms

Head office

Total Group

Impairment of other intangible assets

 

-

1

-

1

Amortisation of other acquired intangible assets

 

41

-

-

41

Acquisition costs1

 

5

-

-

5

Unwinding of discount on deferred consideration

 

3

-

-

3

Total goodwill impairment and impact of acquisition accounting

49

1

-

50

 

 

 

 

 

 

For the year ended 31 December 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

 

Advice and Wealth Management

Wealth Platforms

Head office

Total Group

Amortisation of other acquired intangible assets

 

39

-

-

39

Change in acquisition date provisions

 

-

-

1

1

Acquisition costs1

 

13

-

-

13

Unwinding of discount on deferred consideration

 

1

-

-

1

Total goodwill impairment and impact of acquisition accounting

53

-

1

54

 

1Acquisition costs include items such as transaction costs or deferred incentives arising on the acquisition of businesses.

 

 

5(c) Net profit/loss on business disposals and acquisitions

As part of the Group's Managed Separation from Old Mutual plc, the Group acquired Commsale 2000 Limited ('Commsale') from Old Mutual plc on 29 September 2017. The total consideration was £0.29 million. The NAV at the date of acquisition was £0.45 million, with a gain on purchase of £0.16 million being recognised, representing assets not valued within the agreed consideration.   

On 30 November 2017, the Company acquired 100% of the whole of the issued share capital of Global Edge Technologies (Pty) Ltd ('GET'), a company incorporated in South Africa, from OM Group (UK) Limited (part of the Old Mutual plc group) for £1 million. Along with recording the book values of the assets acquired and liabilities assumed of £4 million, the Company recognised a bargain purchase gain of £3 million.

We determined that the excess of book value over consideration paid was attributable to potential future integration costs which, if incurred, would be expensed in future periods. As potential future integrating activities do not qualify to be recorded as a liability in the application of the acquisition method of accounting, none were recorded.

5(d) Business transformation costs

Within business transformation costs are four items: costs associated with the UK Platform Transformation Programme, build out costs incurred within Quilter Investors as a result of the sale of our Single Strategy Asset Management business, Optimisation Programme costs and, in the prior period, certain one-off charges relating to the transformation of our business as we separated from Old Mutual plc. Each item is described in detail below.

UK Platform Transformation Programme - 31 December 2018: £58 million, 31 December 2017: £74 million

In 2013, the Group embarked on a significant programme to develop new platform capabilities and to outsource UK business administration. This involved replacing many aspects of the existing UK Platform, and on completion certain elements of service provision would be migrated to International Financial Data Services ('IFDS') under a long-term outsourcing agreement. The cost of developing the new technology did not meet the criteria for capitalisation and were expensed. These direct costs and the costs of decommissioning existing technology and migrating of services to IFDS are excluded from adjusted profit. The contracts with International Financial Data Services related to the UK Platform transformation came to an end by mutual agreement effective as of 2 May 2017. For the year ended 31 December 2018, these costs total £nil million (31 December 2017: £53 million). 

The Group conducted a comprehensive review of the options available to the UK Platform business and, in May 2017, entered into a new contract with FNZ, having concluded that FNZ's scale, market-proven and functionally-rich offering was the most suitable to meet the current and anticipated needs of the business. 

In partnership with FNZ, the Group expects to deliver all the existing functionality of the platform with increased levels of straight-through processing and enhanced functionality for new business and to migrate the in-force (UK Platform) business over time. For the period ended 31 December 2018, these costs totalled £58 million (31 December 2017: £21 million).

Quilter Investors' build out costs - 31 December 2018: £19 million, 31 December 2017: £nil

In March 2016, Old Mutual plc announced its Managed Separation strategy that sought to unlock and create significant long-term value for shareholders. As part of this strategy, Quilter's Multi-Asset (now renamed as Quilter Investors) and single strategy teams were to develop as separate distinct businesses, and the Single Strategy Asset Management business was sold to its management and TA Associates on 29 June 2018. As result, the Group has incurred £24 million of one-off costs in the year ended 31 December 2018, £5 million of which are included in profit on disposal within discontinued operations and £19 million is an adjusting item within continuing business.

One-off transformational costs as a result of Quilter's Managed Separation from Old Mutual plc - 31 December 2018: £nil, 31 December 2017: £15 million

The Group historically had a number of arrangements with the wider Old Mutual plc group's South African businesses. As a consequence of Managed Separation these arrangements were severed and, as a result, deferred acquisition cost balances totalling £10 million were written off (included within fee and commission expenses in the income statement), together with a loss incurred of £5 million on the cancellation of reinsurance arrangements (included within other costs within the income statement) in the year ended 31 December 2017. These charges are regarded as one-off and related to the transformation of the business to a standalone group.

Optimisation Programme costs - 31 December 2018: £7 million, 31 December 2017: £nil

Following the Group's Managed Separation from Old Mutual plc, the Group has initiated an Optimisation Programme focused on driving operational efficiencies, incurring £7 million of one-off project costs to date.

5(e) Managed Separation costs

One-off costs related to the implementation of Managed Separation recognised in the IFRS income statement have been excluded from adjusted profit on the basis that they are not representative of the operating activity of the Group. These costs relate to preparing the Group to operate as a standalone business and the execution of various transactions required to implement our Managed Separation strategy. They are not expected to persist in the long term as they relate to a fundamental restructuring of the Group, which is not operational in nature, rather than more routine restructuring activity which would be seen as part of the usual course of business. The treatment and the disclosure of these costs as an adjusting item are also intended to make these costs more visible to the readers of the financial statements in the context of publicly disclosed estimates previously given in relation to these items. For the period ended 31 December 2018, these costs totalled £24 million (31 December 2017: £32 million).

5(f) Finance costs

The nature of much of the Group's operations means that, for management's decision-making and internal performance management, the effects of interest costs on borrowings are removed when calculating adjusted profit. For year ended 31 December 2018, the finance costs totalled £13 million (31 December 2017: £39 million) - see note 7.

5(g) Policyholder tax adjustments

Adjustments to policyholder tax are made to remove distortions arising from market volatility that can in turn lead to volatility in the policyholder tax charge between periods. The significant market volatility during the year ended 31 December 2018 has resulted in a £96 million adjustment (31 December 2017: £(4) million). For a further explanation of the impact of markets on the policyholder tax charge see note 8(a). Adjustments are also made to remove distortions from other non-operating adjusting items that results in a further £5 million tax adjustment as at 31 December 2018 (31 December 2017: £21 million).

For the period ended 31 December 2018, the policyholder tax adjustments to adjusted profit total £101 million (31 December 2017: £17 million) as shown in note 8(c).
5(h) Voluntary Customer Remediation Provision

As detailed in Note 19, as part of its on-going work to promote fair customer outcomes, the Group conducted product reviews consistent with the recommendations from the Financial Conduct Authority's ('FCA') thematic feedback and the FCA's guidance 'FG16/8 Fair treatment of long-standing customers in the life insurance sector'. Following those reviews, the Group decided to commence voluntary remediation to customers in certain products, resulting in an additional provision raised during 2017 of £69 million.

During 2018 £31 million of this provision has been utilised against programme costs and pension remediation incurred.

The provision was recognised in the IFRS income statement but has been excluded from adjusted profit on the basis that it is not representative of the operating performance of the business.

6: Details of income

This note gives further detail on the items appearing in the income section of the consolidated income statement.

6(a): Fee income and other income from service activities

 

 

 

 

 

This note analyses the fees, commission and other income from service activities earned by the Group.

 

 

 

£m

 

 

Year ended

31 December

2018

Year ended

31 December

2017

Premium based fees1

 

179

179

Fund based fees1,2

 

805

654

Fixed fees

 

32

31

Surrender charges

 

17

21

Other fee and commission income

 

13

10

Fee income and other income from service activities - continuing operations

 

1,046

895

Fee income and other income from service activities - discontinued operations

 

136

389

Total fee income and other income from service activities

 

1,182

1,284

1A number of items have been reclassified in the prior year comparatives to conform with current year presentation.

 2Income from fiduciary activities is included within fund based fees.

6(b): Investment return

 

 

 

 

 

This note analyses the investment return from the Group's investing activities.

 

 

 

 

 

 

 

£m

 

 

Year ended

31 December

2018

Year ended

31 December

2017

Net investment income

 

 

 

Interest and similar income

 

 

 

  Investments and securities

 

59

53

  Cash and cash equivalents1

 

21

10

Total interest and similar income

 

80

63

Dividend income

 

99

83

Foreign currency gains and losses

 

2

3

Total gains on financial instruments at fair value through profit and loss

 

(3,663)

5,046

Mandatorily at fair value through profit and loss2

 

(3,658)

-

Designated at fair value through profit and loss2

 

(5)

5,046

Net investment income - continuing operations

 

(3,482)

5,195

Net investment income - discontinued operations

 

-

7

Total net investment income

 

(3,482)

5,202

1Included within interest on cash and cash equivalents is £2 million arising from assets held at amortised cost. The remainder is from assets at FVTPL.

2The Group has initially applied IFRS 9 at 1 January 2018 and has taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in respect of IFRS 9's classification and measurement (including impairment) requirements.

 

 

7: Finance costs

This note analyses the interest costs on our borrowings and similar charges, all of which are valued at amortised cost. Finance costs comprise:

 

 

 

 

£m

 

 

Year ended

31 December

2018

Year ended

31 December 2017

Term loans and other external debt

 

2

-

Subordinated debt securities (Tier 2 bond)

 

8

-

Loans from Old Mutual plc

 

3

39

Interest payable on borrowed funds

 

13

39

Other

 

4

-

Total finance costs - continuing operations

 

17

39

Finance costs represent the cost of interest and finance charges on the Group's borrowings from a number of relationship banks and Old Mutual plc. The Group has had no borrowings from Old Mutual plc since 28 February 2018. More details regarding borrowed funds, including the interest rates payable, are shown in note 21. These costs are excluded from adjusted profit within the 'Finance costs' adjusting item.

Including the impact of amortisation of bond set-up costs, the issuance of the Tier 2 Bond will result in expenses in the Head Office segment of approximately £10 million on an annual basis. This has replaced the £39 million of interest on the borrowings with Old Mutual plc in prior years.

Within other finance costs above is £3 million relating to the impact of unwinding the discount rate on deferred consideration payable as a result of various acquisitions. These costs are excluded from adjusted profit within the 'Goodwill impairment and impact of acquisition accounting' adjusting item as shown in note 5(b).

8: Tax

 

 

 

 

 

 

 

 

 

This note analyses the income tax expense recognised in profit or loss for the period and the various factors that have contributed to the composition of the charge.

 
 

8(a) Tax charged to the income statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

 

Notes

Year ended

31 December

 2018

Year ended

31 December 2017

 

Current tax

 

 

 

 

United Kingdom

 

6

43

 

International

 

4

3

 

Adjustments to current tax in respect of prior periods1

 

(25)

1

 

Total current tax

 

(15)

47

 

Deferred tax

 

 

 

 

Origination and reversal of temporary differences

 

(155)

2

 

Effect on deferred tax of changes in tax rates

 

(1)

(1)

 

Adjustments to deferred tax in respect of prior periods

 

2

(7)

 

Total deferred tax

 

(154)

(6)

 

Total tax (credited)/charged to income statement - continuing operations

 

(169)

41

 

Total tax charged to income statement - discontinued operations

3(c)

2

29

 

Total tax (credited)/charged to income statement

 

(167)

70

 

 

 

 

 

 

Attributable to policyholder returns

 

(158)

49

 

Attributable to equity holders

 

(9)

21

 

Total tax (credited)/charged to income statement

 

(167)

70

 

1The current year tax adjustment in respect of prior periods is £(25) million (31 December 2017: £1 million). This is primarily as a result of the carry back of policyholder capital losses in the life businesses as permitted under UK tax legislation resulting in tax credits in respect of 2016 and 2017.

Policyholder tax

Certain products are subject to tax on policyholders' investment returns. This 'policyholder tax' is an element of total tax expense. To make the tax expense more meaningful, tax attributable to policyholder returns and tax attributable to equity holders' profits is shown separately in the income statement.

The tax attributable to policyholder returns is the amount payable in the year plus the movement of amounts expected to be payable in future years. The remainder of the tax expense is attributed to shareholders as tax attributable to equity holders.

Significant market volatility during the year ended 31 December 2018 resulted in investment return losses of £623 million on products subject to policyholder tax. This loss is a component of the total 'investment return' loss of £3,482 million shown in the income statement. The impact of the £623 million investment return loss, together with the utilisation of brought forward capital losses, are the primary reasons for the £158 million tax credit attributable to policyholder returns for the year ended 31 December 2018 (31 December 2017: £49 million charge).

8(b) Reconciliation of total income tax expense

The income tax charged to profit or loss differs from the amount that would apply if all of the Group's profits from the different tax jurisdictions had been taxed at the UK standard corporation tax rate. The difference in the effective rate is explained below:

 
 

 

 

 

 

 

 

 

 

£m

 

 

Notes

Year ended

31 December

2018

Year ended

31 December

2017

 

Profit/(Loss) before tax

 

5

(5)

 

Tax at UK standard rate of 19% (2017: 19.25%)

 

1

(1)

 

Different tax rate or basis on overseas operations

 

(5)

(3)

 

Untaxed and low taxed income

 

(15)

(2)

 

Disallowable expenses

 

6

7

 

Adjustments to current tax in respect of prior years1

 

(25)

1

 

Net movement on deferred tax assets not recognised

 

(11)

(14)

 

Effect on deferred tax of changes in tax rates

 

(1)

(1)

 

Adjustments to deferred tax in respect of prior years

 

2

(7)

 

Income tax attributable to policyholder returns

 

(121)

61

 

Total tax (credited)/charged to income statement - continuing operations

 

(169)

41

 

Total tax charged to income statement - discontinued operations

3(c)

2

29

 

Total tax (credited)/charged to income statement

 

(167)

70

 

1The current year tax adjustment in respect of prior periods is £(25) million (31 December 2017: £1 million). This is primarily as a result of the carry back of policyholder capital losses in the life businesses as permitted under UK tax legislation resulting in tax credits in respect of 2016 and 2017.

 

8(c) Reconciliation of income tax expense in the IFRS income statement to income tax on adjusted profit.

 

 

 

 

 

£m

 

Year ended

31 December

2018

Year ended

31 December

2017

Income tax (credit)/expense on continuing operations

(169)

41

Tax on adjusting items

 

 

Goodwill impairment and impact of acquisition accounting

8

8

Business transformation costs

16

14

Managed Separation costs

2

4

Finance costs

2

8

Policyholder tax adjustments

101

17

Voluntary customer remediation provision

-

14

Other shareholder tax adjustments

(11)

(26)

Total tax on adjusting items

118

39

Tax attributable to policyholders returns

57

(66)

Tax charged on adjusted profit - continuing operations

6

14

Tax charged on adjusted profit - discontinued operations

5

29

Tax charged on adjusted profit

11

43

 

9: Earnings per share

The Group calculates earnings per share ('EPS') on a number of different bases as appropriate to prevailing International and UK practices and guidance. IFRS requires the calculation of basic and diluted EPS. Adjusted EPS reflects earnings per share that is consistent with the Group's alternative profit measure. The Group's EPS on these different bases are summarised below.

Disclosure of basic and diluted EPS is required by IAS 33 Earnings per Share. On 6 June 2018, the Board approved a reorganisation of the Company's share capital to enable the implementation of the Managed Separation before the initial public offering on 25 June 2018 and, consequently, both basic and diluted EPS for historical periods was not representative of the Group's current structure. In accordance with IAS 33, share transactions that change the number of shares in issue but do not result in any corresponding change to an entity's resources, such as share splits, bonus issues to existing shareholders and share consolidations are adjusted for in the EPS denominator as if these transactions had occurred at the start of the earliest period for which EPS is presented. Accordingly, the weighted average number of ordinary shares in issue at 31 December 2017 have been retrospectively restated to take account of the new share structure at listing. As a result, the Group's EPS has fallen relative to the position shown in the 31 December 2017 Historical Financial Information, within the listing prospectus, because the number of shares has increased on listing.

For further information on share capital refer to note 17.

 

 

 

 

 

 

 

 

 

 

 

Pence

 

Source of guidance

Notes

Year ended

31 December

2018

Year ended

31 December

2017

Basic earnings per share

IFRS

9(a)

26.6

8.6

Diluted basic earnings per share

IFRS

9(b)

26.5

8.6

Adjusted basic earnings per share

Group policy

9(c)

12.4

10.7

Adjusted diluted earnings per share

Group policy

9(c)

12.3

10.7

Headline earning per share (net of tax)

JSE Listing Requirements

9(d)

10.6

4.0

Diluted headline earning per share (net of tax)

JSE Listing Requirements

9(d)

10.5

4.0

 

 

 

 

 

9(a) Basic earnings per share (IFRS)

Basic EPS is calculated by dividing the profit for the financial period attributable to ordinary equity shareholders of the parent by the weighted average number of ordinary shares in issue during the year. The weighted average number of shares excludes the following treasury shares: Quilter plc shares held within Employee Benefit Trusts ('EBTs') to satisfy the Group's obligations under employee share awards; and Quilter plc shares held in consolidated funds. Treasury shares are deducted for the purpose of calculating both basic and diluted EPS.

(i) The profit attributable to ordinary shareholders is:

 

 

 

 

 

 

 

 

 

 

£m

 

 

Year ended

31 December

2018

Year ended

31 December

2017

Profit/(loss) after tax from continuing operations

 

174

(46)

Profit after tax from discontinued operations

 

314

203

Profit for the financial period for the calculation of earnings per share

 

488

157

 

The table below summarises the calculation of the weighted average number of ordinary shares for the purposes of calculating basic earnings per share:

 

 

 

 

 

 

Year ended

31 December

2018

Year ended

31 December

2017

Weighted average number of ordinary shares in issue (millions)

 

1,902

1,902

Treasury shares including those held in EBTs (millions)

 

(70)

(72)

Adjusted weighted average number of ordinary shares used to

calculate basic earnings per share (millions)

 

1,832

1,830

Basic earnings per ordinary share (pence)

 

26.6

8.6

 
9(b) Diluted earnings per share (IFRS)

Diluted EPS recognises the dilutive impact of shares and options awarded to employees under share-based payment arrangements (potential ordinary shares), to the extent they have value, in the calculation of the weighted average number of shares, as if the relevant shares were in issue for the full year. The table below summarises the calculation of weighted average number of shares for the purpose of deriving diluted EPS:

 

Notes

Year ended

31 December

2018

Year ended

31 December

2017

Profit attributable to ordinary equity holders (£m)

 

488

157

Diluted profit attributable to ordinary equity holders (£m)

 

488

157

Adjusted weighted average number of ordinary shares (millions)

9(a)

1,832

1,830

Adjustments for share options held by EBTs and similar trusts (millions)

 

7

-

Weighted average number of ordinary shares used to calculate

diluted earnings per share (millions)

 

1,839

1,830

Diluted earnings per ordinary share (pence)

 

26.5

8.6

 

 

 

 

There is no dilutive impact of potential shares on EPS for the period ended 31 December 2017 because the new sharebased payment arrangements, settled in Quilter plc shares, have only been in place since listing (25 June 2018).

 

9(c) Adjusted earnings per share

The following table presents a reconciliation of profit for the financial period to adjusted profit after tax attributable to ordinary equity holders and summarises the calculation of adjusted earnings per share:

 

 

 

 

 

 

+

£m

 

Notes

Year ended

31 December

2018

Year ended

31 December

2017

Profit for the financial period attributable to shareholders of the Company

 

488

157

Adjusting items

5

70

263

Income tax expense on adjusting items

8(c)

(118)

(39)

Less: Policyholder tax adjustments

8(c)

101

17

Less: Profit after tax from discontinued operations

3(c)

(314)

(203)

Adjusted profit after tax attributable to ordinary shareholders (£m)

 

227

195

Adjusted weighted average number of ordinary shares used to

calculate adjusted basic earnings per share (millions)

9(a)

1,832

1,830

Adjusted basic earnings per share (pence)

 

12.4

10.7

 

 

 

 

Adjusted weighted average number of ordinary shares used to

calculate diluted adjusted earnings per share (millions)

9(b)

1,839

1,830

Adjusted diluted earnings per share (pence)

 

12.3

10.7

 

9(d) Headline earnings per share

The Group is required to calculate headline earnings per share ('HEPS') in accordance with the Johannesburg Stock Exchange Limited ('JSE') Listing Requirements, determined by reference to the South African Institute of Chartered Accountants' circular 02/2015 'Headline Earnings'. The table below sets out a reconciliation of basic EPS and HEPS in accordance with that circular. Disclosure of HEPS is not a requirement of IFRS, but it is a commonly used measure of earnings in South Africa.

The table below reconciles the profit for the financial period attributable to equity holders of the parent to headline earnings and summarises the calculation of basic HEPS:

 

 

+

+

 

£m

 

 

Year ended

31 December

 2018

Year ended

31 December

 2017

 

 

Gross

Net of tax

Gross

Net of tax

Profit for the period attributable to shareholders of the Company

 

 

488

 

157

Adjusting items:

 

 

 

 

 

Less: Profit on disposals of subsidiaries

 

(290)

(294)

(83)

(83)

Headline earnings

 

(290)

194

(83)

74

Diluted headline earnings

 

 

194

 

74

Weighted average number of ordinary shares (millions)

 

 

1,832

 

1,830

Diluted weighted average number of ordinary shares (millions)

 

 

1,839

 

1,830

Headline earnings per share (pence)

 

 

10.6

 

4.0

Diluted headline earnings per share (pence)

 

 

10.5

 

4.0

10: Dividends

This note analyses the total dividends and other appropriations paid during the year. The table below does not include the final dividend proposed after the year end because it is not accrued in these financial statements.

 

 

 

£m

 

Payment

date

Year ended

31 December

2018

Year ended

31 December

2017

Ordinary dividends declared and charged to equity in the year

 

 

 

2017 Special dividend paid - 161.47p per ordinary share

9 January 2017

-

210

2018 Special interim dividend paid - 12.00p per ordinary share

21 September 2018

221

-

Dividends paid to ordinary shareholders

 

221

210

Subsequent to year ended 31 December 2018 the directors proposed a final dividend for 2018 of 3.3 pence per ordinary share amounting to £61 million in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 20 May 2019. In compliance with the rules issued by the Prudential Regulation Authority ('PRA') in relation to the implementation of the Solvency II regime and other regulatory requirements to which the Group is subject, the dividend is required to remain cancellable at any point prior to it becoming due and payable on 20 May 2019 and to be cancelled if, prior to payment, the Group ceases to hold capital resources equal to or in excess of its Solvency Capital Requirement, or if that would be the case if the dividend was paid. The directors have no intention of exercising this cancellation right, other than where required to do so by the PRA or for regulatory capital purposes.

Final and interim dividends paid to ordinary shareholders are calculated using the number of shares in issue at the record date less own shares held in Employee Benefit Trusts.

11: Goodwill and intangible assets

11(a): Analysis of goodwill and intangible assets

The table below shows the movements in cost, amortisation and impairment of goodwill and intangible assets.

 

 

 

 

£m

 

Goodwill

Software development costs4

Other intangible assets4

Total

Gross amount

 

 

 

 

At 1 January 2017

373

94

350

817

Acquisitions through business combinations1

15

-

30

45

Transfer to non-current assets held for sale2

(82)

(2)

(3)

(87)

Other movements

-

5

(6)

(1)

At 31 December 2017

306

97

371

774

Acquisitions through business combinations

5

-

9

14

Additions

-

4

-

4

Transfer to non-current assets held for sale

(1)

-

-

(1)

Other movements3

4

(1)

-

3

At 31 December 2018

314

100

380

794

 

 

 

 

 

Amortisation and impairment losses

 

 

 

 

At 1 January 2017

-

(90)

(73)

(163)

Amortisation charge for the year

-

(2)

(39)

(41)

Transfer to non-current assets held for sale

-

2

3

5

Other movements

-

(2)

1

(1)

At 31 December 2017

-

(92)

(108)

(200)

Amortisation charge for the year

-

(4)

(41)

(45)

Impairment of other acquired intangibles

-

-

(1)

(1)

Other movements

-

1

1

2

At 31 December 2018

-

(95)

(149)

(244)

 

 

 

 

 

Carrying amount

 

 

 

 

 

 

 

 

 

At 31 December 2017

306

5

263

574

At 31 December 2018

314

5

231

550

1Goodwill acquired through business combinations for the year ended 31 December 2017 of £15 million relates to the acquisition of Caerus Capital Group Limited (£10 million) and various acquisitions by the QPCA business (£5 million). Refer to note 3(a) for further information.

2Goodwill transferred to non-current assets held for sale relates to the Single Strategy Asset Management business (see note 3(f)).

3Goodwill has increased by £4 million in 2018 due to a review of the purchase price allocation ('PPA') calculation at 31 December 2017 year end relating to the QPCA acquisitions resulting in a reclassification from other intangibles to goodwill.

4In year ended 31 December 2017, £6 million has been reclassified from software development costs to other intangible assets to conform with current year presentation.

 

 

  The net carrying amount of other intangible assets at 31 December 2018 principally comprises:

·     £168 million (FY 2017: £196 million) relating to distribution channels in the Quilter Cheviot business (to be amortised over a further 6 years).

·     £19 million (FY 2017: £25 million) relating to mutual fund and asset management relationship assets in the Intrinsic business (to be amortised over a further 4 years).

·     £4 million (FY 2017: £7 million) relating to the Quilter Cheviot brand (to be amortised over a further 1 year).

·     £3 million (FY 2017: £3 million) relating to the acquisition of AAM Advisory Pte Ltd (to be amortised over a further 7 years).

·     £9 million (FY 2017: £8 million) relating to customer distribution channels of Caerus Capital Group Limited (to be amortised over a further 6 years).

·     £20 million (2017: £16 million) relating to customer relationships of the QPCA business (to be amortised over 6-8 years).

·     £8 million (2017: £8 million) relating to customer relationships of Attivo Investment Management Limited (to be amortised over 6 years).

11(b): Allocation of goodwill to cash generating units ('CGUs') and impairment testing

 

 

 

Goodwill is allocated to the Group's CGUs, which are contained within the following operating segments as follows:

 

 

 

 

 

£m

 

At

31 December

2018

At

31 December

2017

Goodwill (net carrying amount)

 

 

Advice and Wealth Management

153

148

Wealth Platforms

161

158

Goodwill (as per the Statement of Financial Position)

314

306

Goodwill held for sale

-

82

Total goodwill

314

388

In accordance with the requirements of IAS 36 Impairment of Assets, goodwill in both the Advice and Wealth Management and Wealth Platforms CGUs is tested for impairment annually by comparing the carrying value of the CGU to which the goodwill relates to the recoverable value of that CGU, being the higher of that CGU's value-in-use or fair value less costs to sell. An impairment charge is recognised when the recoverable amount is less than the carrying value.

The value-in-use calculations for life assurance operations are determined as the sum of net tangible assets, the expected future profits arising from the in-force business, together with the expected profits from future new business derived from business plans. Future profit elements allow for the cost of capital needed to support the business.

The net tangible assets and future profits arising from the in-force business are derived from Solvency II ("SII") calculations. The value of in-force ("VIF") is calculated as the prospective value of future expected cash flows on all in-force policies at the valuation date on a policy-by-policy basis allowing for surrender or transfer payments, death claims, income withdrawals, maintenance expenses, fund-based fees, mortality charge/protection premiums and other policy charges. The underlying assumptions are based on the best estimate view for the future, which is largely based on recent business experience and any emerging trends. The unit fund growth rates (gross of investment charges) and the risk discount rates are set using the prescribed SII term-dependent risk-free interest rates. The SII calculations are adjusted for a risk margin using the prescribed SII rules.

The value-in-use calculations for asset management operations are determined as the sum of net tangible assets and the expected profits from existing and expected future new business.

The cash flows that have been used to determine the value-in-use of the cash generating units are based on three year business plans. These cash flows grow at different rates because of the different strategies of the CGUs. In cases where the CGUs have made significant acquisitions in the recent past, the profits are forecast to grow faster than the more mature businesses. Post the three year growth business plan, the growth rate used to determine the terminal value of the cash generating units approximates to the UK long-term growth rate of 2.1% (2017: 2.9%). Market share and market growth information are also used to inform the expected volumes of future new business.

The Group uses a single cost of capital of 10.8% (2017: 9.4%) to discount future expected business plan cash flows across its two CGUs because they are perceived to present a similar level of risk and are strongly integrated. Capital is provided to the Group predominantly by shareholders with only a small amount of debt. The cost of capital is the weighted average of the cost of equity (return required by shareholders) and the cost of debt (return required by bond holders). When assessing the systematic risk (i.e. beta value) within the calculation of the cost of equity, a triangulation approach is used that combines beta values obtained from historical data, a forward looking view on the progression of beta values and the external views of investors.

On business disposals, goodwill is allocated to the disposed business based on the relative value-in-use of the business from calculations used within the impairment reviews.

During the period, the Group updated its assessment of goodwill for potential impairment.  The recoverable amounts of goodwill allocated to the CGUs are determined from value-in-use calculations. There was no indication of impairment of goodwill during the period. The goodwill model is subject to certain stress tests, including sudden stock market falls, the absence of net client cash flow, and the impact of an increase in discount rates. None of these have resulted in any indication of impairment to goodwill.

 

12: Loans and advances

This note analyses the loans and advances the Group has made. The carrying amounts of loans and advances were as follows:

 

 

 

 

 

 

 

£m

 

 

At

31 December

2018

At

31 December

2017

Loans to policyholders

 

189

181

Loans to brokers and other loans to clients

 

27

19

Other loans

 

7

-

Gross loans and advances

 

223

200

Provision for impairments

 

(1)

(1)

Total net loans and advances

 

222

199

 

 

 

 

To be recovered within 12 months

 

199

190

To be recovered after 12 months

 

23

9

Total net loans and advances

 

222

199

The carrying amount of loans approximates to their fair value which is measured as the principal amounts receivable under the loan agreements.

Policyholder loans are amounts taken from an individual policyholder's unit-linked accounts and loaned to the same policyholder. Policyholder loans are non-interest bearing and are deemed to be risk free from a shareholder perspective as the policyholder retains all associated risks. Policyholder loans are available on demand as they have no repayment schedule. 

Included within loans to brokers and other loans to clients, are loans to advisers made on commercial terms.

Other loans represent a loan to TA Associates in respect of the deferred consideration receivable arising from the sale of the Single Strategy Asset Management business. The loan is repayable no later than 2022, but is expected to be repaid between 2019 and 2021 as surplus capital is released from that business.

The provision for impairments is a specific impairment relating to a balance due from a financial adviser that is not expected to be recovered. The impairment was recognised during 2016 under IAS 39; any future provisions will be recognised under IFRS 9 and disclosed in the expected credit loss model in note 23.

13: Financial investments

The table below analyses the investments and securities that the Group invests in, either for its own proprietary behalf (shareholder funds) or on behalf of third parties (policyholder funds).

 

 

 

 

 

 

 

£m

 

 

At

31 December

2018

At

31 December

2017

Government and government-guaranteed securities

 

1,175

2,427

Other debt securities, preference shares and debentures

 

2,095

2,401

Equity securities1

 

10,006

12,556

Pooled investments

 

45,931

46,455

Short-term funds and securities treated as investments

 

12

15

Other

 

-

396

Total financial investments

 

59,219

64,250

 

 

 

 

To be recovered within 12 months

 

59,044

64,074

To be recovered after 12 months

 

175

176

Total financial investments

 

59,219

64,250

1At 31 December 2017, £2 million has been reclassified from investments in associated undertakings to financial investments to aid comparability between periods.

The financial investments recoverability profile is based on the intention with which the financial assets are held. These assets, together with the reinsurers' share of investment contract liabilities, are held to cover the liabilities for linked investment contracts (net of reinsurance), all of which can be withdrawn by policyholders on demand.

13(a) Other debt securities, preference shares and debentures

All debt securities, preference shares and debentures are neither past due nor impaired. These debt instruments and similar securities are classified according to their local credit rating (Standard & Poor's or an equivalent), by investment grade. Further information of the credit rating of debt securities, preference shares and debentures is analysed in the table in note 23(b).

13(b) Equity securities

Equity securities are held to cover the liabilities for linked investment contracts. The majority of the listed securities are traded on the London Stock Exchange.

The majority of the Group's holdings of unlisted equity securities arise principally from private equity investments, held exclusively on behalf of policyholders.

 

14: Categories of financial instruments

The analysis of financial assets and liabilities into their categories as defined in IFRS 9 Financial Instruments is set out in the following tables. Assets and liabilities of a non-financial nature, or financial assets and liabilities that are specifically excluded from the scope of IFRS 9, are reflected in the non-financial assets and liabilities category.

For information about the methods and assumptions used in determining fair value please refer to note 15. The Group's exposure to various risks associated with financial instruments is discussed in note 23(c). 

 

At 31 December 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

Measurement basis

Fair value1

 

 

 

 

 

 

Mandatorily at FVTPL

Designated at FVTPL

 

Amortised cost

 

Non-financial assets and liabilities

Total

Assets

 

 

 

 

 

 

 

Investments in associated undertakings2

-

-

 

-

 

2

2

Reinsurers' share of policyholder liabilities

1,671

-

 

-

 

491

2,162

Contract assets

-

-

 

44

 

-

44

Loans and advances

189

-

 

33

 

-

222

Financial investments

59,052

167

 

-

 

-

59,219

Trade, other receivables and other assets

-

-

 

449

 

37

486

Derivative financial instruments

46

-

 

-

 

-

46

Cash and cash equivalents

1,361

-

 

1,034

 

-

2,395

Total assets that include financial instruments

62,319

167

 

1,560

 

530

64,576

Total other non-financial assets

-

-

 

-

 

1,214

1,214

Total assets

62,319

167

 

1,560

 

1,744

65,790

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Long-term business insurance policyholder liabilities

-

-

 

-

 

602

602

Investment contract liabilities

56,450

-

 

-

 

-

56,450

Third-party interest in consolidation of funds

5,116

-

 

-

 

-

5,116

Borrowings

-

-

 

197

 

-

197

Trade, other payables and other liabilities

-

-

 

840

 

159

999

Derivative financial instruments

37

-

 

-

 

-

37

Total liabilities that include financial instruments

61,603

-

 

1,037

 

761

63,401

Total other non-financial liabilities

-

-

 

-

 

384

384

Total liabilities

61,603

-

 

1,037

 

1,145

63,785

1The Group adopted IFRS 9 Financial Instruments for the first time in 2018. IFRS 9 introduces new classification and measurement categories. The Mandatorily at Fair Value Through Profit or Loss (FVTPL) category includes financial assets that are managed (and their performance evaluated) on a fair value basis, including those previously described as 'held for trading'. The majority of the Group's financial assets and liabilities continue to be measured at FVTPL. The Group has taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in respect of IFRS 9's classification and measurement (including impairment) requirements. 

2Investments in associated undertakings classified as non-financial assets and liabilities are equity accounted.

 

At 31 December 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

Measurement basis

Fair value1

 

Amortised cost

 

 

 

 

Held for trading

Designated at fair value through the profit or loss

 

Loans and receivables

Financial liabilities amortised cost

 

Non-financial assets and liabilities

Total

Assets

 

 

 

 

 

 

 

 

Investments in associated undertakings2,3

-

-

 

-

-

 

1

1

Reinsurers' share of policyholder liabilities

-

2,525

 

-

-

 

383

2,908

Loans and advances

-

180

 

19

-

 

-

199

Financial investments3

-

64,250

 

-

-

 

-

64,250

Trade, other receivables and other assets

-

-

 

154

-

 

343

497

Derivative financial instruments

87

-

 

-

-

 

-

87

Cash and cash equivalents4

-

412

 

1,948

-

 

-

2,360

Total assets that include financial instruments

87

67,367

 

2,121

-

 

727

70,302

Total other non-financial assets

-

-

 

-

-

 

1,225

1,225

Total assets net of held for sale

87

67,367

 

2,121

-

 

1,952

71,527

Total assets classified as held for sale

-

-

 

147

-

 

299

446

Total assets

87

67,367

 

2,268

-

 

2,251

71,973

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Long-term business insurance policyholder liabilities

-

-

 

-

-

 

489

489

Investment contract liabilities

-

59,139

 

-

-

 

-

59,139

Third-party interest in consolidation of funds

-

7,905

 

-

-

 

-

7,905

Borrowings

-

-

 

-

782

 

-

782

Trade, other payables and other liabilities

-

-

 

-

505

 

826

1,331

Derivative financial instruments

433

-

 

-

-

 

-

433

Total liabilities that include financial instruments

433

67,044

 

-

1,287

 

1,315

70,079

Total other non-financial liabilities

-

-

 

-

-

 

576

576

Total liabilities net of held for sale

433

67,044

 

-

1,287

 

1,891

70,655

Total liabilities classified as held for sale

-

-

 

-

-

 

219

219

Total liabilities

433

67,044

 

-

1,287

 

2,110

70,874

1The Group adopted IFRS 9 Financial Instruments for the first time in 2018. The Group has taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in respect of IFRS 9's classification and measurement (including impairment) requirements.

2Investments in associated undertakings classified as non-financial assets and liabilities are equity accounted.

3As at 31 December 2017, £2 million has been reclassified from investments in associated undertakings to financial investments to conform with current year presentation.

4As at 31 December 2017, £412 million money market collective investment funds has been reclassified from amortised costs to FVTPL level 1 to aid comparability between periods.

 

15: Fair value methodology

This section explains the judgements and estimates made in determining the fair values of financial instruments that are recognised and measured at fair value in the financial statements. Classifying financial instruments into the three levels below, prescribed under accounting standards, provides an indication about the reliability of inputs used in determining fair value.

15(a) Determination of fair value

The fair value of financial instruments that are actively traded in organised financial markets is determined by reference to quoted market exit prices for assets and offer prices for liabilities, at the close of business on the reporting date, without any deduction for transaction costs.

·     For units in unit trusts and shares in open ended investment companies, fair value is determined by reference to published quoted prices representing exit values in an active market.

·     For equity and debt securities not actively traded in organised markets and where the price cannot be retrieved, the fair value is determined by reference to similar instruments for which market observable prices exist.

·     For assets that have been suspended from trading on an active market, the last published price is used. Many suspended assets are still regularly priced. At the reporting date all suspended assets are assessed for impairment.

·     Where the assets are private company shares the valuation is based on the latest available set of audited financial statements where available, or if more recent, a statement of valuation provided by the private company's management.

 

There have been no significant changes in the valuation techniques applied when valuing financial instruments. The general principles applied to those instruments measured at fair value are outlined below:

Reinsurers' share of policyholder liabilities

Reinsurers' share of policyholder liabilities are measured on a basis that is consistent with the measurement of the provisions held in respect of the related insurance contracts. Reinsurance contracts which cover financial risk are measured at fair value of the underlying assets.

Loans and advances

Loans and advances include loans to policyholders, loans to brokers, and other secured and unsecured loans. Loans and advances to policyholders of investment linked contracts are measured at fair value. All other loans are stated at their amortised cost.

Financial investments

Financial investments include government and government-guaranteed securities, listed and unlisted debt securities, preference shares and debentures, listed and unlisted equity securities, listed and unlisted pooled investments (see below), short-term funds and securities treated as investments and certain other securities.

Pooled investments represent the Group's holdings of shares/units in open-ended investment companies, unit trusts, mutual funds and similar investment vehicles. Pooled investments are recognised at fair value. The fair values of pooled investments are based on widely published prices that are regularly updated.

Other financial investments that are measured at fair value are measured at observable market prices where available. In the absence of observable market prices, these investments and securities are fair valued utilising various approaches including discounted cash flows, the application of an earnings before tax interest depreciation and amortisation multiple or any other relevant technique.

Derivatives

The fair value of derivatives is determined with reference to the exchange traded prices of the specific instruments. In situations where the derivatives are traded over the counter the fair value of the instruments is determined by the utilisation of option pricing models.

Investment contract liabilities

The fair value of the investment contract liabilities is determined with reference to the underlying funds that are held by the Group.

Third-party interests in consolidation of funds

Third-party interests in consolidation of funds are measured at the attributable net asset value of each fund.

Borrowed funds

Borrowed funds are stated at amortised cost.

 

15(b) Fair value hierarchy

Fair values are determined according to the following hierarchy:

Description of hierarchy

Types of instruments classified in the respective levels

Level 1 - quoted market prices: financial assets and liabilities with quoted prices for identical instruments in active markets.

Listed equity securities, government securities and other listed debt securities and similar instruments that are actively traded, actively traded pooled investments, certain quoted derivative assets and liabilities, reinsurers' share of investment contract liabilities and investment contract liabilities directly linked to other Level 1 financial assets.

Level 2 - valuation techniques using observable inputs: financial assets and liabilities with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial assets and liabilities valued using models where all significant inputs are observable.

Unlisted equity and debt securities where the valuation is based on models involving no significant unobservable data.

Over the counter (OTC) derivatives, certain privately placed debt instruments and third-party interests in consolidated funds.

Level 3 - valuation techniques using significant unobservable inputs: financial assets and liabilities valued using valuation techniques where one or more significant inputs are unobservable.

Unlisted equity and securities with significant unobservable inputs, securities where the market is not considered sufficiently active, including certain inactive pooled investments.

The judgement as to whether a market is active may include, for example, consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. In inactive markets, obtaining assurance that the transaction price provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the asset or liability requires additional work during the valuation process.

The majority of valuation techniques employ only observable data and so the reliability of the fair value measurement is high. However, certain financial assets and liabilities are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable and, for them, the derivation of fair value is more judgemental. A financial asset or liability in its entirety is classified as valued using significant unobservable inputs if a significant proportion of that asset or liability's carrying amount is driven by unobservable inputs.

In this context, 'unobservable' means that there is little or no current market data available for which to determine the price at which an arm's length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value. Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant unobservable data may be attributable to observable inputs. Consequently, the effect of uncertainty in determining unobservable inputs will generally be restricted to uncertainty about the overall fair value of the asset or liability being measured.

15(c) Transfer between fair value hierarchies

The Group deems a transfer to have occurred between Level 1 and Level 2 or Level 3 when an active, traded primary market ceases to exist for that financial instrument. A transfer between Level 2 and Level 3 occurs when the majority of the significant inputs used to determine fair value of the instrument become unobservable.

There were transfers of financial investments of £13 million from Level 1 to Level 2 during the year (2017: £154 million). There were transfers of financial investments of £107 million from Level 2 to Level 1 during the year (2017: £20 million). These movements are matched exactly by transfers of investment contract liabilities. See note 14(e) for details of movements in Level 3.

15(d) Financial assets and liabilities measured at fair value, classified according to fair value hierarchy

The tables below present a summary of the Group's financial assets and liabilities that are measured at fair value in the consolidated statement of financial position according to their IFRS 9 classification. The Group has initially applied IFRS 9 at January 2018. Under the transition methods selected, comparative information is not restated.

The Group has not disclosed the fair value for financial instruments not measured at fair value because their carrying values are a reasonable approximation of fair value.

The majority of the Group's financial assets are measured using quoted market prices for identical instruments in active markets (Level 1) and there has been no significant change during the year.

The assets, together with the reinsurers' share of investment contract liabilities, are held to cover the liabilities for linked investment contracts (net of reinsurance). The difference between linked assets and linked liabilities is principally due to short term timing differences between policyholder premiums being received and invested in advance of policies being issued, and tax liabilities within funds which are reflected within the Group's tax liabilities.

 

At 31 December 2018

At 31 December 2017

 

£m

%

£m

%

Financial assets measured at fair value

 

 

 

 

Level 1

52,060

83.4%

58,357

86.5%

Level 2

9,272

14.8%

7,928

11.8%

Level 31

1,154

1.8%

1,169

1.7%

Total

62,486

100.0%

67,454

100.0%

Financial liabilities measured at fair value

 

 

 

 

Level 1

54,944

89.2%

57,399

85.1%

Level 2

5,508

8.9%

8,911

13.2%

Level 3

1,151

1.9%

1,167

1.7%

Total

61,603

100.0%

67,477

100.0%

1At 31 December 2017, £2 million has been reclassified from investments in associated undertakings to Level 3 financial assets to conform with current year presentation.

 

 

 

 

 

£m

At 31 December 2018

Level 1

Level 2

Level 3

Total

Financial assets measured at fair value

 

 

 

 

Mandatorily (fair value through profit or loss)

51,893

9,272

1,154

62,319

   Reinsurers' share of policyholder liabilities

1,671

-

-

1,671

   Loans and advances

189

-

-

189

   Financial investments

48,672

9,226

1,154

59,052

   Cash and cash equivalents

1,361

-

-

1,361

   Derivative financial instruments - assets

-

46

-

46

 

 

 

 

 

Designated (fair value through profit or loss)

167

-

-

167

   Financial investments

167

-

-

167

 

 

 

 

 

Total assets measured at fair value

52,060

9,272

1,154

62,486

Financial liabilities measured at fair value

 

 

 

 

Mandatorily (fair value through profit or loss)

54,944

5,508

1,151

61,603

   Investment contract liabilities

54,944

355

1,151

56,450

   Third-party interests in consolidated funds

-

5,116

-

5,116

   Derivative financial instruments - liabilities

-

37

-

37

 

 

 

 

 

Total liabilities measured at fair value

54,944

5,508

1,151

61,603

 

 

 

 

 

 

 

 

 

 

 

£m

At 31 December 2017

Level 1

Level 2

Level 3

Total

Financial assets measured at fair value

 

 

 

 

Held-for-trading (fair value through profit or loss)

-

87

-

87

   Derivative financial instruments - assets

-

87

-

87

 

 

 

 

 

Designated (fair value through profit or loss)

58,357

7,841

1,169

67,367

   Reinsurers' share of policyholder liabilities

2,525

-

-

2,525

   Loans and advances

180

-

-

180

   Financial investments1

55,240

7,841

1,169

64,250

   Cash and cash equivalents2

412

-

-

412

 

 

 

 

 

Total assets measured at fair value

58,357

7,928

1,169

67,454

Financial liabilities measured at fair value

 

 

 

 

Held-for-trading (fair value through profit or loss)

-

433

-

433

   Derivative financial instruments - liabilities

-

433

-

433

 

 

 

 

 

Designated (fair value through profit or loss)

57,399

8,478

1,167

67,044

   Investment contract liabilities

57,399

573

1,167

59,139

   Third-party interests in consolidated funds

-

7,905

-

7,905

 

 

 

 

 

Total liabilities measured at fair value

57,399

8,911

1,167

67,477

1At 31 December 2017, £2 million has been reclassified from investments in associated undertakings to Level 3 financial investments to conform with current year presentation.

2At 31 December 2017, £412 million money market collective investment funds has been reclassified from amortised costs to FVTPL Level 1 to aid comparability between periods.

15(e) Level 3 fair value hierarchy disclosure

The majority of the assets that are classified as Level 3 are held within linked policyholder funds. This means that all of the investment risk associated with these assets is borne by policyholders and that the value of these assets is exactly matched by a corresponding liability due to policyholders. The Group bears no risk from a change in the market value of these assets except to the extent that it has an impact on management fees earned. Also included within the assets classified as Level 3 is a shareholder investment in an unlisted equity of £3 million (2017: £2 million); this is not matched by a corresponding liability and therefore any changes in market value are taken to the Group's income statement.

 

The table below reconciles the opening balance of Level 3 financial assets to closing balance at the end of the year:

 

 

 

£m

 

At

31 December

2018

At

31 December

2017

At beginning of the year

1,169

581

Total net fair value gains recognised in:

 

 

   - profit or loss

54

(23)

Purchases

38

618

Sales

(25)

(23)

Transfers in

69

167

Transfers out

(151)

(152)

Foreign exchange and other

-

1

Total Level 3 financial assets

1,154

1,169

 

 

 

Unrealised fair value gains/(losses) relating to assets held at the year end recognised in:

 

 

   - profit or loss

54

(23)

 

Amounts shown as sales arise principally from the sale of private company shares and unlisted pooled investments and from distributions received in respect of holdings in property funds.

Transfers into Level 3 assets for the current period comprise £69 million (2017: £167 million) of stale priced assets that were previously shown within Level 2 and for which price updates have not been received for more than six months. Transfers out of Level 3 assets in the current period comprise £151 million (2017: £152 million) of stale priced assets that were not previously being repriced and that have been transferred into Level 2 as they are now actively priced.

 

 

The table below analyses the type of Level 3 financial assets held:

 

 

 

 

£m

 

 

At

31 December

2018

At

31 December

2017

Pooled investments

 

86

186

   Unlisted and stale price pooled investments

 

82

185

   Suspended funds

 

4

1

Private equity investments

 

1,068

983

Total Level 3 financial assets

 

1,154

1,169

All of the liabilities that are classified as Level 3 are investment contract liabilities which exactly match against the Level 3 assets held in linked policyholder funds.

The table below reconciles the opening balances of Level 3 financial liabilities to closing balances at the end of the year:

 

 

£m

 

At

31 December

2018

At

31 December

2017

At beginning of the year

1,167

581

Total net fair value gains recognised in:

 

 

   - profit or loss

53

(23)

Purchases

38

616

Sales

(25)

(23)

Transfers in

69

167

Transfers out

(151)

(152)

Foreign exchange and other

-

1

Total Level 3 financial liabilities

1,151

1,167

 

 

 

Unrealised fair value gains/(losses) relating to liabilities held at the year end recognised in:

 

 

   - profit or loss

53

(23)

 

15(f) Effect of changes in significant unobservable assumptions to reasonable possible alternatives

Favourable and unfavourable changes are determined on the basis of changes in the value of the financial asset or liability as a result of varying the levels of the unobservable parameters using statistical techniques. When parameters are not amenable to statistical analysis, quantification of uncertainty is judgemental.

When the fair value of a financial asset or liability is affected by more than one unobservable assumption, the figures shown reflect the most favourable or most unfavourable change from varying the assumptions individually.

The valuations of the private equity investments are performed on an asset-by-asset basis using a valuation methodology appropriate to the specific investment and in line with industry guidelines. Private equity investments are valued at the value disclosed in the latest available set of audited financial statements or if more recent information is available from investment managers or professional valuation experts at the value of the underlying assets of the private equity investment.

Details of the valuation techniques applied to the different categories of financial instruments can be found in note 15(a) above.

Management believe that in aggregate, 10% (31 December 2017: 10%) change in the value of the financial asset or liability represents a reasonable possible alternative judgement in the context of the current macro-economic environment in which the Group operates. It is therefore considered that the impact of alternative assumptions will be in the range of £115 million, both favourable and unfavourable (31 December 2017: £117 million). As described in note 15(e) above, changes in the value of level 3 assets held within linked policyholder funds are exactly matched by corresponding changes in the value of liabilities due to policyholders and therefore have no impact on the Group's net asset value or profit or loss, except to the extent that it has an impact on management fees earned.

15(g): Fair value hierarchy for assets and liabilities not measured at fair value

Certain financial instruments of the Group are not carried at fair value. The carrying values of these are considered reasonable approximations of their respective fair values, as they are either short term in nature or are repriced to current market rates at frequent intervals. Their classification within the fair value hierarchy would be as follows:

Contract assets                                                      Level 3

Trade, other receivables, and other assets           Level 3

Cash and cash equivalents                                   Level 1

Trade, other payables, and other liabilities            Level 3

Loans and advances are financial assets held at amortised cost and therefore not carried at fair value, with the exception of policyholder loans which are categorised as FVTPL. Loans and advances held at amortised cost would be classified as Level 3 in the fair value hierarchy.

Borrowed funds are financial liabilities held at amortised cost and therefore not carried at fair value. Borrowed funds relate to subordinated liabilities and would be classified as Level 2 in the fair value hierarchy.

 

16: Cash and cash equivalents

16(a) Total cash and cash equivalents can be broken down as follows:

 

 

 

£m

 

 

Year ended

31 December

2018

Year ended

31 December

2017

Cash at bank

 

550

1,036

Money market funds

 

1,361

412

Cash and cash equivalents in Consolidated Funds

 

484

912

Total cash and cash equivalents per statement of financial position

 

2,395

2,360

Cash within held for sale

 

-

147

Total cash and cash equivalents per consolidated statement of cash flows

 

2,395

2,507

 

 

 

 

Except for cash and cash equivalents subject to consolidation of funds of £484 million (2017: £912 million), management do not consider that there are any material amounts of cash and cash equivalents which are not available for use in the Group's day-to-day operations.

17: Share capital and merger reserve

17(a) Share capital

Financial instruments issued are classified as equity when there is no contractual obligation to transfer cash, other financial assets or issue a variable number of own equity instruments. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. The Parent Company's equity capital currently comprises 1,902,251,098 ordinary shares of 7p each with an aggregated nominal value of £133,157,577 (2017: 130,000,257 ordinary shares of 100p each with an aggregated nominal value of £130,000,257). 

 

This note gives details of the Company's ordinary share capital and shows the movements during the period:

 

 

 

£m

£m

 

 

Number of shares

Nominal value

Share premium

 

 

 

 

 

At 1 January 2017

 

130,000,256

130

-

  Issue of share capital1, 2

 

200,000,001

200

58

  Reduction of share capital3

 

(200,000,000)

(200)

-

At 31 December 2017

 

130,000,257

130

58

 

 

 

 

 

At 1 January 2018

 

130,000,257

130

58

  Issue of share capital4

 

1

-

-

 

 

130,000,258

130

58

  Sub-division of ordinary shares of 100p each to 1p each5

 

12,870,025,542

-

-

 

 

13,000,025,800

130

58

  Bonus shares issued to ordinary shareholders of 1p each6

 

315,731,886

3

-

 

 

13,315,757,686

133

58

  Conversion of ordinary shares of 1p each to 7p each7

 

(11,413,506,588)

-

-

At 31 December 2018

 

1,902,251,098

133

58

1On 3 May 2017, the Company allotted and issued 200 million £1 ordinary shares, for a consideration of £200 million, to its now former parent Old Mutual plc.

2On 21 December 2017, Old Mutual plc contributed £58 million to the Company in exchange for the issue of 1 share.

3On 27 November 2017, the Company carried out a share capital reduction, which cancelled the 200 million £1 ordinary shares.

4On 31 January 2018, the Company allotted and issued 1 ordinary share of £1.

On 6 June 2018, the Board approved a reorganisation of its share capital to enable the implementation of the Managed Separation and to ensure that existing shareholders of Old Mutual plc received one ordinary share for every three ordinary shares they hold in Old Mutual plc, as described in the prospectus document. The share capital reorganisation consisted of the following steps:

5 Each of the Company's existing 130,000,258 ordinary shares of £1.00 each was sub-divided into 100 ordinary shares of £0.01 each, following which the Company's share capital consisted of 13,000,025,800 ordinary shares of £0.01 each, with an aggregate nominal value of £130,000,258;

6 The Company allotted 315,731,886 bonus ordinary shares of £0.01 each to the existing shareholders of the Company (with any fractional entitlements arising to be aggregated and allotted to Old Mutual plc), following which the Company's share capital consisted of 13,315,757,686 ordinary shares of £0.01 each, with an aggregate nominal value of £133,157,577; and

7 The Company's 13,315,757,686 ordinary shares of £0.01 each were consolidated into ordinary shares of £0.07 each (with any fractional entitlements arising to be aggregated and allotted to Old Mutual plc), following which the Company's share capital consists of 1,902,251,098 ordinary shares of £0.07 each, with an aggregate nominal value of £133,157,577.

 

 

17(b) Merger reserve

On 31 January 2018, the Group acquired the Skandia UK Limited group of entities from its then parent company Old Mutual plc. This comprised of seven Old Mutual plc group entities with a net asset value of £591 million. The transfer was effected by the issue of one share and with the balance giving rise to a merger reserve of £591 million in the consolidated statement of financial position, being the difference between the nominal value of the share issued by the parent company for the acquisition of the shares of the subsidiaries and the subsidiaries' net asset value. No debt was taken on as a result of this transaction. The most significant asset within these entities is a £566 million receivable which corresponds to an equivalent payable within the Group's consolidated statement of financial position. The net effect of this transaction for the Group was to replace a payable due to Old Mutual plc with equity.

Following the acquisition the Company allotted 315,731,886 bonus ordinary shares of £0.01 each to the existing shareholders of the Company (with any fractional entitlements arising to be aggregated and allotted to Old Mutual plc), with a total nominal value of £3 million. This had the effect of reducing the merger reserve by £3 million to £588 million at 31 December 2018.

This transaction attracted merger relief under section 612 of the Companies Act 2006.

18: Insurance and investment contract liabilities

The following is a summary of the Group's insurance and investment contract provisions and related reinsurance assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

 

At 31 December 2018

At 31 December 2017

 

Notes

Gross

Re-insurance

Net

Gross

Re-insurance

Net

Life assurance policyholder liabilities

 

 

 

 

 

 

 

Long-term business insurance policyholder liabilities

 

 

 

 

 

 

 

   Life assurance policyholder liabilities

18(a)

588

(478)

110

480

(375)

105

   Outstanding claims

 

14

(13)

1

9

(8)

1

 

 

602

(491)

111

489

(383)

106

Investment contract liabilities

 

 

 

 

 

 

 

   Unit-linked investment contracts

18(d)

56,450

(1,671)

54,779

59,139

(2,525)

56,614

Total life assurance policyholder liabilities

 

57,052

(2,162)

54,890

59,628

(2,908)

56,720

 

18(a) Insurance contract liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Movements in the amounts outstanding in respect of life assurance policyholder liabilities, other than outstanding claims, are set out below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

 

 

At 31 December 2018

At 31 December 2017

 

 

Notes

Gross

Re-insurance

Net

Gross

Re-insurance

Net

 

Carrying amount at 1 January

 

480

(375)

105

402

(290)

112

 

Impact of new business

 

2

(10)

(8)

42

(55)

(13)

 

Impact of experience effects

 

38

(26)

12

30

(23)

7

 

Impact of assumption changes

 

69

(68)

1

7

(7)

-

 

Other movements

 

(1)

1

-

(1)

-

(1)

 

Movement shown in consolidated income statement

18(b)

108

(103)

5

78

(85)

(7)

 

Total insurance contract life assurance policyholder liabilities

 

588

(478)

110

480

(375)

105

 

18(b) Insurance contract claims and change in liabilities

 

 

 

 

 

 

 

 

£m

 

Notes

Year ended

31 December

2018

Year ended

31 December

2017

  Claims and benefits paid

 

(87)

(76)

  Reinsurance recoveries

 

59

54

Net insurance claims and benefits incurred

 

(28)

(22)

Change in reinsurance assets and liabilities

18(a)

103

85

Change in insurance contract liabilities

18(a)

(108)

(78)

Insurance contract claims and change in liabilities

 

(33)

(15)

                       

 

A presentational change has been made to the face of the consolidated income statement from the prior year. Details of the breakdown of insurance and investment expenses, which were previously shown on the face of the income statement, are now included in this note.

18(c) Assumptions - life assurance

The key assumptions considered are mortality/morbidity rates, maintenance expenses, interest rates, persistency rates and maintenance expense inflation. These assumptions are based on market data and internal experience data. External data is also used where either no internal experience data exists or where internal data is too sparse to give credible estimates of the true expectation of experience. Anticipated future trends have been allowed for in deriving mortality and morbidity assumptions.

The liabilities for non-linked contracts have been calculated using a gross premium discounted cash flow approach on a policy by policy basis, using the following assumptions:

 

Mortality/morbidity

Interest rates

Class of business

2018

2017

2018

2017

Non-linked protection business (pre 1 January 2013)1

Based on relevant CMI tables

Risk reinsurance rates

1.724%

1.610%

Non-linked protection business (post 31 December 2012)1

Based on relevant CMI tables

Risk reinsurance rates

 

1.378%

1.287%

Pension annuity payment

100% PA92 (C2030) ult. projected using the long-term cohort basis

1.420%

1.330%

1On 1 January 2013, the discount rate was impacted by Finance Act 2012 amendments to the life tax rules.

The Continuous Mortality Investigation ('CMI'), supported by the Institute and Faculty of Actuaries ('IFoA'), provides mortality and sickness rate tables for UK life insurers and pension funds.

The interest rate assumption is set with reference to a matching portfolio of gilts. During 2017, a modification was made to achieve a better match of the IFRS liabilities to available gilts. In aggregate, the non-linked protection business is expected to generate net income over the next 3 years. This net income has been excluded from the matching exercise and has instead been discounted using Bank of England forward rates of the relevant durations. Liabilities after these three years are matched and the rates provided above are used.

For non-linked contracts (defined as insurance contracts under IFRS 4), the margin of prudence for the individual assumptions is generally taken as the 60% confidence interval over a one year timeframe so that, broadly speaking, in 100 scenarios the reserves are expected to cover the liabilities in 60 of those scenarios. Overall, the level of confidence is likely to be greater than 60% on the basis that these margins are applied to several assumptions at the same time and prudence is applied to all future years.

The liability values do not make allowance for the amortisation of the DAC asset. A separate liability adequacy test is carried out on best estimate assumptions allowing for all of the cash flows used to derive the liability values and the run off of the DAC.

Impact of assumption changes

Assumptions are reviewed on an annual basis and updated as appropriate. The impact of the assumption changes on annual IFRS profit are as follows:

 

 

 

 

 

 

 

 

 

£m

2018

 

Impact on IFRS reported profit

(before reinsurance)

Impact of reinsurance

Impact on IFRS reported profit

(after reinsurance)

Assumption

 

 

 

 

Mortality/morbidity rates

 

(86.5)

81.4

(5.1)

Maintenance expense

 

1.9

(0.0)

1.9

Maintenance expense inflation

 

0.1

0.0

0.1

Interest rates

 

21.3

(18.3)

3.0

Persistency rates

 

(5.4)

4.6

(0.8)

 

 

(68.6)

67.6

(1.0)

 

 

 

 

 

 

 

 

 

£m

2017

 

Impact on IFRS

 reported profit

(before reinsurance)

Impact of

reinsurance

Impact on IFRS

 reported profit

(after reinsurance)

Assumption

 

 

 

 

Mortality/morbidity rates

 

10.1

(10.7)

(0.6)

Maintenance expense

 

3.1

(0.1)

3.0

Maintenance expense inflation

 

0.3

-

0.3

Interest rates

 

(15.1)

13.0

(2.1)

Persistency rates

 

(5.0)

4.8

(0.2)

 

 

(6.6)

7.0

0.4

 

The sensitivity of IFRS profit before tax to variations in key assumptions are shown below:

 

 

 

£m

(Decrease)/Increase in IFRS profit before tax

        2018

       2017

 

+10%

-10%

+10%

-10%

Mortality/morbidity rates

(3.3)

          3.4

(3.0)

             3.1

Maintenance expenses

(2.2)

          2.2

(2.6)

             2.6

Persistency rates

               2.6

  (2.8)

             2.4

(2.6)

The values have, in all cases, been determined by varying the relevant assumption as at the reporting date and considering the consequential impact assuming other assumptions remain unchanged.

 

18(d) Unit-linked investment contract liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Movements in the amounts outstanding in respect of unit-linked and other investment contracts are set out below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

At 31 December 2018

At 31 December 2017

 

Gross

Re-

insurance

Net

Gross

Re-

insurance

Net

Carrying amount at 1 January

59,139

(2,525)

56,614

51,265

(2,560)

48,705

Fair value movements

(4,119)

78

(4,041)

3,958

(330)

3,628

Investment income

805

-

805

680

-

680

Movements arising from investment return

(3,314)

78

(3,236)

4,638

(330)

4,308

Contributions received

7,117

774

7,891

9,718

365

10,083

Maturities

(183)

-

(183)

(220)

-

(220)

Withdrawals and surrenders

(6,091)

-

(6,091)

(5,682)

-

(5,682)

Claims and benefits

(234)

-

(234)

(217)

-

(217)

Other movements

(2)

2

0

(408)

-

(408)

Change in liability

(2,707)

854

(1,853)

7,829

35

7,864

Currency translation (gain)/loss

18

-

18

45

-

45

Total unit-linked investment contract policyholder liabilities

56,450

(1,671)

54,779

59,139

(2,525)

56,614

For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.

The benefits offered under the unit-linked investment contracts are based on the risk appetite of policyholders and the return on their selected investments and collective fund investments, whose underlying investments include equities, debt securities, property and derivatives. This investment mix is unique to individual policyholders.

The maturity value of these financial liabilities is determined by the fair value of the linked assets at maturity date. There will be no difference between the carrying amount and the maturity amount at maturity date.

The reinsurers' share of policyholder liabilities relating to investment contract liabilities of £1,671 million (2017: £2,525 million) were rated according to the table in note 23. None of these were past due as at 31 December 2018 (2017: £nil).

18(e) Methodology and assumptions - investment contracts

For unit-linked business, the unit liabilities are determined as the value of units credited to policyholders. Since these liabilities are determined on a retrospective basis no assumptions for future experience are required. Assumptions for future experience are required for unit-linked business in assessing whether the total of the contract costs asset and contract liability is greater than the present value of future profits expected to arise on the relevant blocks of business (the 'recoverability test'). If this is the case, then the contract costs asset is restricted to the recoverable amount. For linked contracts, the assumptions are on a best estimate basis.

 

19: Provisions

 

 

 

 

£m

Year ended 31 December 2018

Compensation

provisions

Sale of Single Strategy business

Other

Total

Balance at beginning of the period

82

-

22

104

Additions from business combinations

-

-

1

1

Charge to income statement

11

25

3

39

Utilised during the period

(31)

(5)

(5)

(41)

Unused amounts reversed

(4)

-

(1)

(5)

Reclassification within Statement of Financial Position

(4)

-

-

(4)

Balance at 31 December 2018

54

20

20

94

 

 

 

 

 

 

 

 

 

£m

Year ended 31 December 2017

Compensation

provisions

Sale of Single Strategy business

Other

Total

Balance at beginning of the year

13

-

16

29

Charge to income statement - Voluntary remediation

69

-

-

69

Charge to income statement - Other

7

-

6

13

Utilised during the year

(5)

-

(5)

(10)

Foreign exchange and other movements

(2)

-

5

3

Balance at 31 December 2017

82

-

22

104

 

Compensation provisions

Compensation provisions totalled £54 million (31 December 2017: £82 million). 

Voluntary client remediation provision

During 2017, as part of ongoing work to promote fair customer outcomes, the Group conducted product reviews consistent with the recommendations from the FCA's thematic feedback and the FCA's guidance 'FG16/8 Fair treatment of long-standing customers in the life insurance sector'. Following these reviews, the Group decided to commence voluntary remediation to customers of certain legacy products, establishing a provision in 2017 for £69 million.

The redress relates to early encashment charges and contribution servicing charges made on pension products and, following the re-introduction of annual reviews, compensation payable to a subset of protection plan holders.

During 2018, £27 million has been utilised against programme costs and pension remediation incurred. There was also a £4 million reclassification to 'liabilities for linked investment contracts', reflecting the capping of early encashment charges on live pension plans. The remaining provision includes £6 million of programme costs and £7 million of estimated interest. Of the total provision outstanding, £20 million is estimated to be payable after one year. 

Estimates and assumptions

Key assumptions in relation to the provision calculation are:

·      Investment return used within the protection remediation calculations;

·      Timing of protection customer remediation; and

·      The programme costs of carrying out the remediation activity.

The model used to calculate the costs of protection remediation assumes a generic annual investment return across the population of plans in scope. A sensitivity analysis has been calculated to determine the impact of adjusting the return rate.

The current model assumes protection customers will be compensated within a certain timeframe. Delays to the programme and more specifically, in locating customers and resolving complicated plan arrangements will increase the final cost of remediation.    

The programme costs of conducting the remediation activity are highly variable and are subject to a number of uncertainties. In calculating the best estimate of these costs, consideration has been given to such matters as the identification of impacted customers, likelihood of the customer contesting the offer, the complexity of the calculations, the level of quality assurance and checking, the ease of contacting and communicating with customers and the level of customer interactions. As a result of these uncertainties, the current provision for programme costs has been calculated as falling within a range of approximately £5 million to £7 million.

Sensitivities relating to the assumptions and uncertainties are provided in the table below:

Assumption/estimate

Change in assumption/estimate

Consequential change in provision      (£m)

Modelled investment return

+/- 2%

+/- 0.2

Timing of protection remediation

12 month delay

+ 2.0

 

Compensation provision (other)

The other compensation provision includes amounts relating to the cost of correcting deficiencies in policy administration systems, including restatements and clawbacks, any associated litigation costs and the related costs to compensate previous or existing policyholders. This provision represents best estimates based upon management's view of expected outcomes based upon previous experience. Due to the nature of the provision, the timing of the expected cash outflows is uncertain. Estimates are reviewed annually and adjusted as appropriate for new circumstances.

Sale of Single Strategy Asset Management business

A restructuring provision was recognised as a result of the sale of the Single Strategy Asset Management business to enable the remaining Quilter Investors business to function as a standalone operation going forward. The provision includes those costs directly related to replacing and restoring the operational capability that previously underpinned and supported both parts of the asset management business. Key parts of this capability had either been disposed of or disrupted as a consequence of the sale. The total provision established in the year was £19 million, of which £5 million has now been utilised. The carried forward provision at 31 December 2018 is £14 million. Further provisions may be established as the project progresses.

Additional provisions totalling £6 million have been made as a consequence of the sale of the Single Strategy Asset Management business. These have been made in relation to various sale related future commitments, the outcome of which was uncertain at the time of the sale and the most significant of which is in relation to the guarantee of revenues in future years.

Other provisions

Other provisions include amounts for the resolution of legal uncertainties and the settlement of other claims raised by contracting parties, property dilapidation provisions and indemnity commission provisions. Where material, provisions and accruals are discounted at discount rates specific to the risks inherent in the liability. The timing and final amounts of payments in respect of some of the provisions, particularly those in respect of litigation claims and similar actions against the Group, are uncertain and could result in adjustments to the amounts recorded.

Of the other provisions recorded above, £5 million (2017: £10 million) is estimated to be payable after one year.

20: Tax assets and liabilities

Deferred income taxes are calculated on all temporary differences at the tax rate applicable to the jurisdiction in which the timing differences arise.

Deferred tax summary

 

 

 

 

 

 

 

 

 

 

£m

 

Notes

At

31 December 2018

At

31 December 2017

Deferred tax asset

 

38

31

Less: amounts classified as held for sale

3(f)

-

9

Deferred tax assets

 

38

22

 

 

 

 

Deferred tax liabilities

 

59

190

 

 

 

 

Net deferred tax liability

 

21

168

 

20(a) Deferred tax assets

Deferred tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable, being where on the basis of all available evidence it is considered more likely than not that there will be suitable taxable profits against which the reversal of the deferred tax asset can be deducted.

The movement on the recognised deferred tax assets account is as follows:

 

 

 

 

 

£m

Year ended 31 December 2018

At beginning

of the year

Income

statement

(charge)/

credit

Acquisition

/disposal of

subsidiaries

At end of the year

Tax losses carried forward

6

13

-

19

Accelerated depreciation

(4)

-

Other temporary differences

-

Share based payments

-

Contract liabilities

(1)

-

Deferred expenses

24

11

-

35

Netted against liabilities

(34)

(5)

-

(39)

Deferred tax assets at 31 December 2018

22

16

-

38

 

 

 

 

 

 

 
 
 

 

 

 

 

 

 

 

 

£m

Year ended 31 December 2017

At

beginning

of the year

Income

statement

(charge)/

credit1

Acquisition

/disposal of

subsidiaries

At

end of the

year

Tax losses carried forward

6

-

-

6

Accelerated depreciation

-

17

-

17

Other temporary differences

9

(2)

(3)

4

Share based payments

-

2

-

2

Contract liabilities

4

(1)

-

3

Deferred expenses

27

(3)

-

24

Netted against liabilities

(38)

4

-

(34)

Deferred tax assets at 31 December 2017

8

17

(3)

22

1£5 million has been reclassified from acquisition/disposal of subsidiaries to income statement movements, to conform with current year presentation. Closing deferred tax assets are unchanged.

 Unrecognised deferred tax assets

 

 

 

 

 

 

 

 

 

The amounts for which no deferred tax asset has been recognised comprise:

 

 

 

 

 

 

 

 

 

£m

 

At 31 December 2018

At 31 December 2017

 

Gross amount

Tax

Gross amount

Tax

   Expiring in less than a year

-

-

-

-

   Expiring between one and five years

-

-

-

-

   Expiring after five years

663

112

471

80

Unrelieved tax losses

663

112

471

80

Accelerated capital allowances

93

16

108

18

Other timing differences

285

49

269

46

Total unrecognised deferred tax assets

1,041

177

848

144

Movements in unrecognised deferred tax assets

The unrelieved tax losses have increased by £192 million during the year which is mainly as a result of the reclassification of capital losses previously shown in 'Other timing differences' that have now crystallised. Other timing differences have increased due to the net impact of the reclassification of capital losses (as described above) and the addition of previously unrecognised assets on the acquisition of Skandia UK Limited under Managed Separation.

20(b) Deferred tax liabilities

 

 

 

 

The movement on the deferred tax liabilities account is as follows:

 

 

 

 

 

 

 

£m

Year ended 31 December 2018

At

beginning

of the year

Income statement (credit)/

charge

Acquisition/

disposal of subsidiaries

At end of

the year

Deferred acquisition costs

15

(4)

-

11

Other acquired intangibles

41

(8)

7

40

Other temporary differences

1

-

-

1

Investment gains

167

(121)

-

46

Netted against assets

(34)

(5)

-

(39)

Deferred tax liabilities at 31 December 2018

190

(138)

7

59

 
 

 

 

 

 

 

£m

Year ended 31 December 2017

At

beginning

of the year

Income statement (credit)/

charge

Acquisition/ disposal of subsidiaries

At end of

the year

Deferred acquisition costs

20

(5)

-

15

Other acquired intangibles

49

(8)

-

41

Other temporary differences

2

(1)

-

1

Investment gains

146

21

-

167

Netted against assets

(38)

4

-

(34)

Deferred tax liabilities at 31 December 2017

179

11

-

190

20(c) Current tax receivables and liabilities

Current tax receivables and current tax liabilities at 31 December 2018 were £47 million (2017: £nil) and £5 million (2017: £38 million), excluding amounts classified as held for sale in 2017 (see note 3(f)).

21: Borrowings

The following table analyses the Group's borrowed funds, repayable on demand and categorised in terms of IFRS 9 Financial Instruments as 'Financial liabilities amortised cost'. All amounts outstanding at 31 December 2018 are payable to a number of relationship banks. All amounts outstanding at 31 December 2017 were payable either to the Group's previous ultimate Parent Company, Old Mutual plc, or to other related entities within the Old Mutual plc group. 

 

 

£m

 

At

31 December

2018

At

31 December 2017

Subordinated debt

 

 

  Fixed rate loan at 5.50%1

-

566

  Fixed rate loan at 4.478%2

197

-

Other borrowed funds

 

 

  Floating rate loan at 6 month LIBOR + 0.25%3

-

93

  Floating rate loan at 3 month LIBOR + 0.10%4

-

80

  Fixed rate loan at 3.125%5

-

43

Total borrowings

197

782

1 Commenced on 25 February 2015 and was used to finance the acquisition of the Quilter Cheviot group.

2 Commenced on 28 February 2018 and used for general corporate purposes.

3 Commenced during 2014 and was used to finance the acquisition of Intrinsic Financial Services Limited.

4 Commenced in 2011 and was used to finance other historical corporate activity.

5 Commenced on 21 June 2016 and was used to finance one of the Group's employee benefit trusts.

On 23 February 2018, the Group entered into and fully drew down the New Term Loan, a £300 million senior unsecured term loan with 5 relationship banks with an annual coupon of 45 basis points above LIBOR, to be updated every three months. The New Term Loan was repaid in full using proceeds from the sale of the Single Strategy Asset Management business following the completion of the transaction in June 2018.

On 28 February 2018, the Group issued a £200 million subordinated debt security in the form of a 10-year Tier 2 bond with a one-time issuer call option after 5 years to J.P. Morgan Securities plc, paying a semi-annual coupon of 4.478% (the "Tier 2 Bond"). The bond was remarketed and sold to the secondary market in full on the 13th April 2018. It is now listed and regulated under the terms of the London Stock Exchange. In addition, the Group entered into a £125 million revolving credit facility which remains undrawn and is being held for contingent funding purposes across the Group.

As part of a series of internal transactions, £566 million of intercompany indebtedness to other companies within the Old Mutual plc group was equitised, with the effect of the intercompany indebtedness being cancelled and replaced with equity in the form of share capital and a merger reserve. The overall indebtedness also reduced by £16 million from ordinary course transactions.

The remaining £200 million intercompany indebtedness was repaid in full from the new facilities referred to above and from existing cash resources on 28 February 2018. On the same date, the £70 million revolving credit facility with Old Mutual plc was cancelled.

Borrowings at 31 December 2017 were borrowed from Old Mutual plc and were unsecured and were repayable on demand. The carrying amount approximates to fair value which is valued as the principal amount repayable.

22: Contingent liabilities

The Group, in the ordinary course of business, enters into transactions that expose it to tax, legal and business risks. The Group recognises a provision when it has a present obligation as a result of past events, it is probable that a transfer of economic benefits will be required to settle the obligation and a reliable estimate of the amount can be made (see note 19). Possible obligations and known liabilities where no reliable estimate can be made or it is considered improbable that an outflow would result are reported as contingent liabilities in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Tax

The Revenue authorities in the principal jurisdictions in which the Group operates routinely review historical transactions undertaken and tax law interpretations made by the Group. The Group is committed to conducting its tax affairs in accordance with the tax legislation of the jurisdictions in which they operate. All interpretations made by management are made with reference to the specific facts and circumstances of the transaction and the relevant legislation.

There are occasions where the Group's interpretation of tax law may be challenged by the Revenue authorities. The financial statements include provisions that reflect the Group's assessment of liabilities which might reasonably be expected to materialise as part of their review. The Board is satisfied that adequate provisions have been made to cater for the resolution of tax uncertainties and that the resources required to fund such potential settlements are sufficient.

Due to the level of estimation required in determining tax provisions, amounts eventually payable may differ from the provision recognised.

Complaints and disputes

The Group is committed to treating customers fairly and supporting its customers in meeting their lifetime goals. The Group does from time to time receive complaints, claims and have commercial disputes with service providers, in the normal course of business. The costs, including legal costs, of these issues as they arise can be significant and where appropriate, provisions have been established under IAS 37.

Contingent liabilities - acquisitions and disposals

The Group routinely monitors and reassesses contingent liabilities arising from matters such as litigation, warranties and indemnities relating to past acquisitions and disposals. These are not expected to result in any material provisions. 

 

23: Capital and financial risk management
23(a) Capital management

The Group manages its capital with a focus on capital efficiency and effective risk management. The capital objectives are to maintain the Group's ability to continue as a going concern while supporting the optimisation of return relative to the risks. The Group ensures that it can meet its expected capital and financing needs at all times having regard to the Group's business plans, forecasts and strategic initiatives and regulatory requirements in all businesses in the Group. The Group's overall capital risk appetite is set with reference to the requirements of the relevant stakeholders and seeks to:

·      Maintain sufficient, but not excessive, financial strength to support stakeholder requirements;

·      Optimise debt to equity structure to enhance shareholder returns; and

·      Retain financial flexibility by maintaining liquidity including unutilised committed credit lines.

The primary sources of capital used by the Group are equity shareholders' funds and subordinated debt. Alternative resources are utilised where appropriate. Risk appetite has been defined for the level of capital, liquidity and debt within the Group. The risk appetite includes long term targets, early warning thresholds and risk appetite limits. The dividend policy sets out the target dividend level in relation to profits.

The regulatory capital for the Group is assessed under Solvency II requirements.

23(a)(i) Regulatory capital

Solvency II is the European Union solvency regime for insurance undertakings and insurance groups which came into force on 1 January 2016. The Group is subject to Solvency II group supervision by the Prudential Regulation Authority ('PRA'). The Group is required to measure and monitor its capital resources under the Solvency II regulatory regime. 

The Group's insurance undertakings are included in the Group solvency calculation on a Solvency II basis. Other regulated entities are included in the Group solvency calculation according to the relevant sectoral rules. The Group's Solvency II surplus is the amount by which the Group's capital on a Solvency II basis (own funds) exceeds the Solvency II capital requirement (the Solvency Capital Requirement or 'SCR'). 

The Group's Solvency II surplus is £1,058 million at 31 December 2018 (2017: £651 million), representing a Solvency II ratio of 190% (2017: 154%) calculated under the standard formula. The Solvency II information in this results disclosure has not been audited.

The estimated SCR and corresponding eligible own funds for each period (unaudited) were as follows:

 

 

 

 

 

£m

 

At

31 December

20181

At

31 December

20172

Own Funds3

2,237

1,849

Solvency capital requirements (SCR)

1,179

1,198

Solvency II surplus

1,058

651

Coverage

190%

154%

1Based on preliminary estimates. Formal annual filing due to the PRA by 3 June 2019.

2As represented within the Annual 2017 Solvency II submission of the Old Mutual plc group, the group Quilter plc previously formed part of, to the PRA. Own funds include a £566 million subordinated loan from the parent company at the time. This subordinated loan was effectively converted to equity during H1 2018, following the acquisition of the entity holding the loan.

3Group own funds are stated after allowing for the impact of the proposed final dividend payment relating to 2018 of £61 million.

The Group own funds include the Quilter plc issued subordinated debt security which qualifies as capital under Solvency II. The composition of own funds by tier is presented in the table below for year ended 31 December 2018. At 31 December 2017, Solvency II group reporting was not required at a Quilter plc level and is therefore not included in the table below.

 

 

£m

Group own funds

At

31 December

2018

Tier 11

2,036

Tier 22

201

Total Group Solvency II own funds

2,237

1All Tier 1 capital is unrestricted for tiering purposes.

2Comprises a Solvency II compliant subordinated debt security in the form of a Tier 2 bond, which was issued at £200 million in February 2018.

The Group's EU insurance undertakings are also subject to Solvency II at entity level. The Group's asset management and advisory businesses are subject to group supervision under the Capital Requirement Directive IV ('CRD IV'). Other regulated entities in the Group are subject to the locally applicable entity-level capital requirements in the jurisdictions in which they operate. 

The solvency and the capital requirements for the Group and each of its regulated subsidiaries are reported and monitored through monthly Capital Management Forum meetings. Throughout 2018, the Group and each of its regulated subsidiaries have complied with the applicable regulatory capital requirements.

23(a)(ii) Loan covenants

Under the terms of the revolving credit facility agreement, the Group is required to comply with the following financial covenant: the ratio of total net borrowings to consolidated equity shareholders' funds shall not exceed 0.5.

 

 

£m

 

Notes

At

31 December

2018

Total external borrowings of the Company

21

197

Less: cash and cash equivalents of the Company

 

(281)

Total net external borrowings of the Company

 

(84)

Total shareholders' equity of the Group

 

2,005

Tier 2 bond

21

197

Total Group equity (including Tier 2 bond)

 

2,202

Ratio of Company net external borrowings to Group equity

 

-0.038

The Group has complied with the covenant since the facility was created in February 2018.

 

 

23(a)(iii) Own Risk and Solvency Assessment ('ORSA') and Internal Capital Adequacy Assessment Process ('ICAAP')

The Quilter Group ORSA process is an ongoing cycle of risk and capital management processes which provide an overall assessment of the current and future risk profile of the Group and demonstrates the relationship between business strategy, risk appetite, risk profile and solvency needs. These assessments support strategic planning and risk-based decision making.

The underlying ORSA processes cover the entire Quilter Group and consider how risks and solvency needs may evolve over the planning period. The ORSA includes stress and scenario tests, which are performed to assess the financial and operational resilience of the Group.

The Group ORSA report is produced annually. This report summarises the analysis, insights and conclusions from the underlying risk and capital management processes in respect of the Quilter Group. The ORSA report is submitted to the Prudential Regulation Authority ('PRA') as part of the normal supervisory process and may be supplemented by ad-hoc assessments where there is a material change in the risk profile of the Group outside the usual reporting cycle.

In addition to the Group ORSA process, entity level ORSA processes are performed for each of the solo insurance entities within the Quilter Group.

The Quilter Group ICAAP process is similar to the ORSA process although the ICAAP process is performed for a subset of the Group consisting of the investment and advisory firms within the Quilter Group (the 'ICAAP Group'). The Group ICAAP report is also produced annually. This report summarises the analysis, insights and conclusions from the underlying risk and capital management processes in respect of the ICAAP Group. The ICAAP report is submitted to the Financial Conduct Authority ('FCA') as part of the normal supervisory process and may be supplemented by ad-hoc assessments where there is a material change in the risk profile of the ICAAP Group outside the usual reporting cycle.

The conclusions of ORSA and ICAAP processes are reviewed by management and the Board throughout the year. 

23(b) Credit risk
Overall exposure to credit risk

Credit risk is the risk of adverse movements in credit spreads (relative to the reference yield curve), credit ratings or default rates leading to a deterioration in the level or volatility of assets, liabilities or financial instruments resulting in loss of earnings or reduced solvency. This includes counterparty default risk, counterparty concentration risk and spread risk.

The Group has established a credit risk framework that includes a Credit Risk Policy, Credit Risk Standard and Credit Risk Appetite Statement. This framework applies to all activities where the shareholder is exposed to credit risk, either directly or indirectly, ensuring appropriate identification, measurement, management, monitoring and reporting of the Group's credit risk exposures.  

The credit risk arising from all exposures is mitigated through ensuring the Group only enters into relationships with appropriately robust counterparties, adhering to the Group Credit Risk Policy. For each asset, consideration is given as to:

·      The credit rating of the counterparty, which is used to derive the probability of default;

·      The loss given default;

·      The potential recovery which may be made in the event of default;

·      The extent of any collateral that the firm has in respect of the exposures; and

·      Any second order risks that may arise where the firm has collateral against the credit risk exposure.

The credit risk exposures of the Group are monitored regularly to ensure that counterparties remain creditworthy, to ensure there is appropriate diversification of counterparties and to ensure that exposures are within approved limits. At 31 December 2018, the Group's material credit exposures were to financial institutions (primarily through the investment of shareholder funds), corporate entities (including external fund managers and reinsurers) and individuals (primarily through fund management trade settlement activities). 

There is no direct exposure to European sovereign debt (outside of the UK) within the shareholder investments. The Group has no significant concentrations of credit risk exposure. 

Reinsurance arrangements

The Group has reinsurance arrangements in place to mitigate the risk of excessive claims on unit-linked and non-linked protection contracts. Reinsurance arrangements are also used in respect of unit-linked institutional business to access specific funds not available through direct fund links and to provide liquidity.

Since the Group uses reinsurance as a means of mitigating insurance risk, reinsurance counterparties bear a significant financial obligation to the Group.

In general, credit risk is controlled through the use of risk premium reinsurance terms, where reinsurance cover is paid for as the cover is provided. In these arrangements credit risk is limited to the risk of being unable to recover amounts due as a result of claims arising over the latest quarter, since reinsurance accounts are settled quarterly in arrears. This risk is largely mitigated since the Group would be able to withhold amounts due to the reinsurer to offset amounts due from the reinsurer.

The Group also has reinsurance arrangements in which there is a timing difference between the reinsurance premium payment and the provision of cover, which results in prepayment for cover by the Group. In respect of these arrangements, a credit risk exposure can arise.

Reinsurance credit risk is managed by dealing only with reinsurance firms with credit ratings which meet the requirements of the Group's credit risk policy on inception of new reinsurance arrangements. The Group monitors the exposure to and credit rating of reinsurance counterparties regularly to ensure that these remain within acceptable limits. Legal agreements are in place for all reinsurance arrangements which set out the terms of the arrangement and the rights of both the Group and the reinsurance providers.

None of the Group's reinsurance assets are either past due or impaired. Of the reinsurance assets shown in the statement of financial position all are considered investment grade with the exception of £20 million of unrated exposures (2017: £51 million). Collateral is not taken against reinsurance assets or deposits held with reinsurers other than in limited circumstances. For further information see note 18.

Details of the age analyses and credit quality of reinsurance assets in respect of insurance contracts and investment contracts are included below.

Investment of shareholder funds

The risk of counterparty default in respect of the investment of shareholder funds is managed through:

·      Setting minimum credit rating requirements for counterparties;

·      Setting limits and key risk indicators for individual counterparties and counterparty concentrations;

·      Monitoring exposures regularly against approved limits; and

·      On-going monitoring of counterparties and associated limits.

Other credit risks

The Group is exposed to financial adviser counterparty risk through a number of loans that it makes to its advisers and the payment of upfront commission on the sale of certain types of business. The risk of default by financial advisers is managed through monthly monitoring of loan and commission debt balances.

The Group is exposed to the risk of default by fund management groups in respect of settlements and rebates of fund management charges on collective investments held for the benefit of policyholders. This risk is managed through the due diligence process which is completed before entering into any relationship with a fund group. Amounts due to and from fund groups are monitored for prompt settlement and appropriate action is taken where settlement is not timely.

Legal contracts are maintained where the Group enters into credit transactions with a counterparty.

Details of the credit quality of debt securities can be found in this note in the table below.

Impact of credit risk on fair value

Due to the limited exposure that the Group has to credit risk, credit risk does not have a material impact on the fair value movement of financial instruments for the year under review. The fair value movements on these instruments are mainly due to changes in market conditions.

 

Maximum exposure to credit risk

The table below represents the Group's maximum exposure to credit risk. The Group's maximum exposure to credit risk does not differ from the carrying value disclosed in the relevant notes to the financial statements. Exposure arising from financial instruments not recognised on the statement of financial position is measured as the maximum amount that the Group would have to pay, which may be significantly greater than the amount that would be recognised as a liability. The 'not rated' balances represent the pool of counterparties that do not require a rating. These counterparties individually generate no material credit exposure and this pool is highly diversified, monitored and subject to limits. 

The Group does not have any significant exposure arising from items not recognised on the statement of financial position.

 

 

 

 

 

 

 

 

£m

 

Credit rating relating to financial assets that are neither past due nor impaired

At 31 December 2018

AAA

AA

A

BBB

<BBB

Internally rated

Included through consolidation of funds

Carrying value

Financial investments at FVTPL

-

201

-

-

-

532

2,549

3,282

  Government and government-related securities

-

201

-

-

-

-

974

1,175

  Other debt securities, preference shares and debentures

-

-

-

-

-

520

1,575

2,095

  Short-term funds and securities

-

-

-

-

-

12

-

12

  Other investments and securities

-

-

-

-

-

-

-

-

Reinsurance assets

-

930

1,186

26

-

20

-

2,162

Cash and cash equivalents

1,358

60

451

1

6

35

484

2,395

Cash at amortised cost, subject to lifetime ECL

          -

60

451

1

3

35

484

1,034

Money market funds at FVTPL

1,358

-

-

-

3

-

-

1,361

 

 

 

 

 

 

 

 

 

Loans and advances

-

-

-

-

-

222

-

222

Loans and advances subject to 12 month ECL

          -

          -

          -

          -

          -

33

                     -

33

Loans and advances at FVTPL

          -

          -

          -

          -

          -

189

                     -

189

 

 

 

 

 

 

 

 

 

Other receivables

-

-

-

-

-

486

-

486

Other receivables subject to lifetime ECL

-

-

-

-

-

283

166

449

Prepayments and accruals

-

-

-

-

-

37

                    -

37

Contract assets subject to lifetime ECL

-

-

-

-

-

44

-

44

 

1,358

1,190

1,637

27

6

1,339

3,033

8,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

Credit rating relating to financial assets that are neither past due nor impaired

At 31 December 2017

AAA

AA

A

BBB

<BBB

Internally rated

Included

through consolidation

of funds

Carrying value

Financial investments

-

183

-

12

-

508

4,536

5,239

  Government and government-related securities

-

183

-

-

-

-

2,244

2,427

  Other debt securities, preference shares and debentures

-

-

-

-

-

505

1,896

2,401

  Short-term funds and securities

-

-

-

12

-

3

-

15

  Other investments and securities

-

-

-

-

-

-

396

396

Reinsurance assets

-

1,050

1,807

-

-

51

-

2,908

Loans and advances neither past due not impaired

-

-

-

-

-

199

-

199

 

-

1,233

1,807

12

-

758

4,536

8,346

 

The Group has initially applied IFRS 9 at 1 January 2018 and has taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in respect of IFRS 9's classification and measurement (including impairment) requirements. Refer to note 2 for further information.

 

 

 
Impairment allowance

Consistent with IFRS 9 Financial instruments, assets that are measured and classified as amortised costs are monitored for any expected credit loss (ECL) on either a 12 month or lifetime ECL model. The majority of such assets within the Group are measured on the lifetime ECL model, with the exception of some specific loans that are on the 12 month ECL model.

Changes in significant accounting policies, upon adoption of IFRS 9 the Group incurred an impairment allowance of £0.2 million. The table below shows a reconciliation of Group's total impairment allowance through to year end 31 December 2018.

 Impairment allowance

£m

Opening impairment allowance under IAS 39

(0.3)

Impact upon adoption of IFRS 9

(0.2)

Additions due to increased broker loans

(0.4)

At 31 December 2018

(0.9)

23(c) Market risk

Market risk is the risk of an adverse change in the level or volatility of market prices of assets, liabilities or financial instruments resulting in loss of earnings or reduced solvency. Market risk arises from changes in equity, bond and property prices, interest rates and foreign exchange rates. Market risk arises differently across the Group's businesses depending on the types of financial assets and liabilities held.

The Group has a market risk policy which set out the risk management framework, permitted and prohibited market risk exposures, maximum limits on market risk exposures, management information and stress testing requirements which are used to monitor and manage market risk. The policy is cascaded to the businesses across the Group and Group level governance and monitoring processes provide oversight of the management of market risk by the individual businesses.

The Group does not undertake any principal trading for its own account. The Group's revenue is however affected by the value of assets under management and consequently it has exposure to equity market levels and economic conditions. Scenario testing is undertaken to test the resilience of the business to severe but plausible events and to assist in the identification of management actions.

23(c)(i) Equity and property price risk

In accordance with the market risk policy, the Group does not invest shareholder assets in equity or property, or related collective investments, except where the exposure arises due to:

·      Mismatches between unitised fund assets and liabilities. These mismatches are permitted, subject to maximum limits, to avoid excessive dealing costs.

·      Seed capital investments. Seed capital is invested within new unit-linked funds at the time when these funds are launched. The seed capital is then withdrawn from the funds as policyholders invest in the funds.

The above exposures are not material. Due to the nature of the investments held there is no material exposure to equity and property price risk on non-linked assurance policyholder assets.

The Group derives fees (e.g. annual management charges) and incurs costs (e.g. adviser fund based renewal commissions) which are linked to the performance of the underlying assets. Therefore future earnings will be affected by equity and property market performance.

Equity and property price sensitivity testing

A movement in equity and property prices would impact the fee income that is based on the market value of the investments held for the policyholders. In this analysis, all linked renewal commission is assumed to be fund based and all gains are assumed to be realised gains. The sensitivity is applied as an instantaneous shock to equity and property prices at the start of the year. The sensitivity analysis is not limited to the unit-linked business and therefore reflects the sensitivity of the Group as a whole.

 

 

 

£m

 

Impact on profit after tax

 

At

31 December

2018

At

31 December

2017

Impact of 10% increase in equity and property prices

36

32

Impact of 10% decrease in equity and property prices

(36)

(31)

 

23(c)(ii) Interest rate risk

Interest rate risk arises primarily from investment in fixed interest government securities, which are exposed to fluctuations in interest rates and bank balances held with financial institutions.

Fixed interest UK government securities are held predominantly to match liabilities by durations for non-linked protection business determined on an IFRS basis. Therefore, on an IFRS basis there is low exposure to interest rate movements such that any movement in asset values is balanced by a movement in the insurance provision.

A rise in interest rates would also cause an immediate fall in the value of investments in fixed income securities within unit-linked funds. The unit-linked funds asset look-through analysis has revealed that less than 30% of the linked assets are invested in the fixed income securities which generally have short durations, resulting in a low material impact in fund based revenues.

Exposure of the IFRS income statement and statement of financial position equity to interest rates are summarised below.

 

 

Interest rate sensitivity testing

The impact of an increase and decrease in market interest rates of 1% is tested (e.g. if the current interest rate is 5%, the test allows for the effects of an instantaneous change to 4% and 6% from the start of the year). The test allows consistently for similar changes in investment returns and movements in the market value of assets backing non-linked liabilities. The sensitivity of profit to change in interest rates is provided.

 

 

 

£m

 

Impact on profit after tax

 

At

31 December

2018

At

31 December

2017

Impact of 1% increase in interest rates

19

20

Impact of 1% decrease in interest rates

(12)

(10)

23(c)(iii) Currency translation risk

Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group's functional currency is Sterling, which accounts for the majority of the Group's transactions, but the Group also has minor exposure to foreign exchange risk in respect to accounts receivable and future revenues denominated in US Dollars, Euros and Swedish Krona through its International business. The currency risk is mitigated using derivative financial instruments such as forward foreign exchange contracts. After risk mitigation, the Group does not have material foreign currency risk exposure.

23(d) Liquidity risk

Liquidity risk is the risk that there are insufficient assets or that assets cannot be realised in order to settle financial obligations as they fall due or that market conditions preclude the ability of the Group to trade in illiquid assets in order to maintain its asset and liability matching ('ALM') profile. The Group manages liquidity through:

·      Maintaining adequate high quality liquid assets and banking facilities, the level of which is informed through appropriate liquidity stress testing;

·      Continuously monitoring forecast and actual cash flows; and

·      Matching the maturity profiles of financial assets and liabilities, where possible.

Individual businesses maintain and manage their local liquidity requirements according to their business needs within the overall Group Liquidity Risk Framework that includes a Group Liquidity Risk Policy, Group Liquidity Risk Standard and Group Liquidity Risk Appetite Statement. The Group framework is applied consistently across all businesses in the Group to identify, manage, measure, monitor and report on all liquidity risks that have a material impact on liquidity levels. This framework considers both short-term liquidity and cash management considerations and longer-term funding risk considerations.

Liquidity is monitored centrally by Group Treasury, with management actions taken at a business level to ensure each business has liquidity to cover its minimum liquidity requirement, with an appropriate buffer.   

The Group maintains contingency funding arrangements to provide liquidity support to businesses in the event of severe liquidity stresses. Contingency Funding Plans are in place for each individual business in order to identify a comprehensive list of contingent funding sources and the order and speed in which they could be utilised in a stress scenario. The plans undergo an annual review and testing cycle to ensure they are fit for purpose and can be relied upon during a liquidity stress.  

Information on the nature of the investments and securities held is given in note 13.

Prior to separation from Old Mutual plc the Group had a £70 million revolving credit facility in place with Old Mutual plc which could be drawn down in a liquidity stress and utilised freely within the Group. On 28 February 2018 debt financing arrangements were put in place that allowed the Group to become financially independent from Old Mutual plc and maintain sufficient liquidity ahead of listing at the end of June 2018. This allowed the Group to terminate existing arrangements with Old Mutual plc. The debt financing consisted of the following:

·      £200 million Tier 2 Bond issuance details of which are given in note 21.

·      £300 million Term Loan that was repaid in full at the end of June following the sale of the Single Strategy Asset Management business.

·      £125 million 5 year Revolving Credit Facility with a 5 bank club that represents a form of contingency liquidity for the Group. No drawdown on this facility has been made since inception. The Group has the option to extend the facility for a further 2 year period.   

The financing arrangements are considered sufficient to maintain the target liquidity levels of the Group and offer coverage for appropriate stress scenarios identified within the liquidity stress testing undertaken across the Group.

Further details, together with information on the Group's borrowed funds, are given in note 21.

The Group does not have material liquidity exposure to special purpose entities or investment funds.

23(e) Insurance risk (risk arising within insurance contracts)

23(e)(i) Overview

The Group assumes insurance risk by issuing insurance contracts, under which the Group agrees to compensate the policyholder or other beneficiary in the event that a specified uncertain future event (the insured event) affecting the policyholder occurs. The Group offers life assurance, critical illness and other life protection business. The Group does not offer general insurance business and therefore does not take on other forms of insurance risk such as motor and property insurance risks.

Insurance risk arises through exposure to variable claims experience on life assurance, critical illness and other protection business and exposure to variable operating experience in respect of factors such as persistency levels and management expenses. Unfavourable persistency, expenses and mortality and morbidity claim rates, relative to the actuarial assumptions made in the pricing process, may result in profit margins reducing below the target levels included in the pricing process.

 

23(e) Insurance risk (risk arising within insurance contracts) continued

The Group has implemented an insurance risk policy which sets out the Group requirements for the management, measurement, monitoring and reporting of insurance risks. The Group has implemented 3 standards which sit within the insurance risk policy, as follows:

·              Underwriting and claims standard;

·              Reinsurance standard; and

·              Technical provisions standard.

The sensitivity of the Group's earnings and capital position to insurance risks is monitored through the Group's business planning and capital management processes. The insurance risk profile and experience is closely monitored relative to key risk metrics and defined tolerances.  

The Group manages its insurance risks effectively through the following mechanisms:

·              An agreed risk appetite for all risk types including insurance risks;

·              Pricing of insurance contracts utilising analysis of mortality, morbidity, persistency and expense experience;

·              Underwriting of mortality and morbidity risks;

·              Reinsurance, which is used to limit the Group's exposure to large single claims and catastrophes through transfer of insurance risk exposures;

·              The Group does not offer group insurance business in order to avoid risk concentrations of insurance risk.

Terms and conditions of life assurance and critical illness protection business

The terms and conditions for life assurance and critical illness protection business determine the level of insurance risk accepted by the Group. The following table outlines the general form of terms and conditions that apply to contracts for the key protection products offered by the Group, and the nature of the risk incurred by the Group.

Category

Essential terms

Main risks

Policyholder guarantees

Policyholder participation in investment return

Unit-linked life assurance

Mortality charges may be        re-priced

Mortality

The initial premium is guaranteed to sustain the original cover for the first

10 years

None

Unit-linked critical illness

Mortality and morbidity charges may be re-priced

Mortality, Morbidity

The initial premium is guaranteed to sustain the original cover for the first 10 years

None

Non-linked life assurance and critical illness

Premium rates defined at inception1

Mortality, Morbidity

Rates guaranteed for the life of the contract1

None

1Certain non-linked life assurance and critical illness contracts have premiums which are reviewable if the contract term is extended beyond the initial term.

Mortality and morbidity

Mortality and morbidity risk is the risk that death, critical illness and disability claims experience is higher than the rates assumed when pricing contracts. Possible causes are new and unexpected epidemics, reductions in the effectiveness of treatments such as antibiotics and widespread changes in lifestyle.

For unit-linked contracts, a risk charge is applied to meet the expected cost of the insured benefit (in excess of the unit value). This risk charge can be altered in the event of changes in the expectation for future claims experience, subject to the objective to provide fair customer outcomes.

Persistency

Persistency risk is the risk that policyholder surrenders, transfers or premium cessation on contracts occur at levels that are different to the levels expected and allowed for within the pricing process. Persistency statistics are monitored monthly and a detailed persistency analysis at a product level is carried out on an annual basis. Management actions may be triggered if persistency statistics indicate significant adverse movement or emerging trends in experience.

Expenses                       

Expense risk is the risk that actual expenses and expense inflation differ from the levels expected and allowed for within the pricing process. Expense levels are monitored quarterly against budgets and forecasts. Expense drivers are used to allocate expenses to entities and products. Some product structures include maintenance charges. These charges are reviewed annually in light of changes in maintenance expense levels and the market rate of inflation. This review may result in changes in charge levels.

23(e)(ii) Sensitivity analysis - life assurance

Changes in key assumptions used to value insurance contracts would result in increases or decreases to the insurance contract liabilities recognised, with impact on profit/(loss) and/or shareholders' equity.

Sensitivity analysis has been performed by applying the following parameters to the statement of financial position and income statement as at 31 December 2018 and 31 December 2017. Interest rate and equity and property price sensitivities are included within the Group market sensitivities above.

Expenses

The increase in expenses is assumed to apply to the costs associated with the maintenance and acquisition of insurance contracts. It is assumed that these expenses are increased by 10% from the start of the year, so is applied as an expense shock rather than a gradual increase. The only administrative expenses that are deferrable are sales bonuses but as new business volumes are unchanged in this sensitivity, sales bonuses and the associated deferrals have not been increased. Administrative expenses have been allocated equally between life and pensions. An increase in expenses of 10% would have decreased profit by £6.5 million after tax (2017: £9.1 million).

Mortality/morbidity

The impact on profit of an increase in mortality and morbidity claims rates of 5% is tested. This would affect the level of insurance contract claims and is assumed to apply throughout the year. An increase in mortality and morbidity claims of 5% each would have decreased profit after tax by £1.2 million (2017: £0.9 million).

23(f) Operational risk

Operational risk is the risk that failure of people, processes, systems or external events results in financial loss, damage to brand/reputation or adverse regulatory intervention, or government or regulatory fine. Operational risk includes all risks resulting from operational activities, excluding the risks already described above and excluding strategic risks and risks resulting from being part of a wider group of companies.

Operational risk includes the effects of failure of administration processes, IT maintenance and development processes, investment processes (including settlements with fund managers, fund pricing and matching and dealing), product development and management processes, legal risks (e.g. risk of inadequate legal contract with third parties), risks relating to the relationship with third party suppliers and outsourcers, and the consequences of financial crime and business interruption events.

In accordance with Group policies, management have primary responsibility for the identification, assessment, management and monitoring of risks, and the escalation and reporting on issues to executive management.

The Group executive management have responsibility for implementing the Group Operational Risk management methodologies and frameworks and for development and implementation of action plans to manage risk levels within acceptable tolerances and to resolve those issues identified.

23(g) Contractual maturity analysis

The following table is a maturity analysis of liability cash flows based on contractual maturity dates for investment contract liabilities and expected claim dates for insurance contracts. Investment contract policyholders have the option to terminate or transfer their contracts at any time and to receive the surrender or transfer value of their policies, and are therefore classified as less than three months maturity. Although these liabilities are payable on demand, the Group does not expect that all liabilities will be settled within this period.

 

 

 

 

 

 

£m

 

 

Undiscounted cash flows

At 31 December 2018

Carrying amount

Up to three months

Three months to one year

Between

one and five years

More than

five years

Total

Life assurance policyholder liabilities

 

 

 

 

 

 

Insurance contracts

602

21

11

46

992

1,070

Life assurance policyholder liabilities

588

7

11

46

992

1,056

Outstanding claims

14

14

-

-

-

14

Investment contracts

 

 

 

 

 

 

   Unit-linked investment contracts and similar contracts

56,450

56,450

-

-

-

56,450

Total policyholder liabilities

57,052

56,471

11

46

992

57,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

£m

 

 

Undiscounted cash flows

At 31 December 2017

Carrying amount

Up to three months

Three

months to one year

Between

one and five years

More than

five years

Total

Life assurance policyholder liabilities

 

 

 

 

 

 

Insurance contracts

489

15

8

34

855

912

Life assurance policyholder liabilities

480

6

8

34

855

903

Outstanding claims

9

9

-

-

-

9

Investment contracts

 

 

 

 

 

 

   Unit-linked investment contracts and similar contracts

59,139

59,139

-

-

-

59,139

Total policyholder liabilities

59,628

59,154

8

34

855

60,051

 

24: Related party transactions

In the normal course of business, the Group enters into transactions with related parties. These are conducted on an arm's length basis and are not material to the Group's results. There were no transactions with related parties during the current and prior year which had a material effect on the results or financial position of the Group except for the repayment of intercompany indebtedness with Old Mutual plc which has been disclosed in note 21: Borrowings. Except for these intra-group loan repayments, the nature of the related party transactions of the Group has not changed over the course of the year.

24(a) Transactions with previous Parent company, Old Mutual plc 

 

 

 

 

 

Prior to the Group's Managed Separation from Old Mutual plc in June 2018, the Group had various transactions with Old Mutual plc and other related entities within the Old Mutual group, all of which were in the normal course of business. All receivables and payables were settled at the point of separation, resulting in receivables and payables of £nil as at 31 December 2018 (2017: receivables were £28 million and payables were £790 million). In addition, the Group incurred £3 million of interest expense in relation to intercompany indebtedness at the time, paid to Old Mutual plc prior to separation in 2018 (2017: £60 million) and received £nil income (2017: £5 million in respect of other transactions with Old Mutual plc group).

 

       

 

25: Events after the reporting date

 On 14 February 2019, Intrinsic Financial Services Limited ("IFSL"), a subsidiary company, acquired the remaining equity of the Charles Derby Group Limited ("CDG"), having previously held a minority interest in CDG. The acquisition represents the next stage of Quilter's ambition to broaden out its national advice business. The acquisition complements the growth of Quilter Private Client Advisers which serves upper affluent and high net worth customers.

The provisional valuation of CDG at acquisition was £32 million. After deducting the existing holding (with a fair value of £2 million immediately prior to acquisition), the fair value of consideration for the remaining £30 million equity was £28 million comprising a cash payment of £21 million and deferred consideration of £9 million (discounted to present value of £7million) payable in 2 equal instalments, 18 and 36 months after the date of acquisition. The fair value of the existing equity investment in CDG immediately prior to the acquisition of the remaining equity was £2 million.

Intangible assets including the value of the distribution channel will be recognised at acquisition. Intangible assets are grossed up by the current tax rate, with a corresponding deferred tax liability created on the statement of financial position. Because the purchase price allocation ("PPA") model is not yet complete, the excess of acquisition cost over the net liabilities acquired has been apportioned on an estimated basis 50% to intangible assets, with the remainder being classified as goodwill. Provisional balances of £19 million for intangible assets, £(3) million for deferred tax liability and £15 million for goodwill will be recognised within the group consolidated financial statements at acquisition. During 2019, the allocation will be finalised, with the potential for a reallocation between intangible assets and goodwill.

The provisional consolidated statement of financial position for CDG at acquisition date comprised total assets of £1.4 million, total liabilities of £2.0 million and equity of £(0.6) million.

The goodwill is derived from the existing adviser base which at the date of completion was around 200 mostly self-employed Registered Financial Planners. Strong synergies exist between IFSL and CDG, with the CDG advisers operating within Intrinsic's advice processes and proposition. CDG has proven lead generation capability which will help to deliver Intrinsic's national growth strategy.

The deferred consideration payments are variable, subject to changes in the value of assets under administration and deduction for indemnity claims. The full estimated amount of deferred consideration is currently expected to be paid.


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END
 
 
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