ClearView Annual Report 2017

Plain-text annual report

Annual Report 2017 ClearView Results FY17 v FY16 % $30.4m 2 Underlying NPAT 1 $661.9m % Embedded Value 8 4 . 9 % 1 Sony Life October 2016 Life Insurance Advised sales $40.3m including $28.9m from IFA channel 16% 34% APLs 343 $24.9m UNPAT 2% 2 ClearView Annual Report 2017 ClearView Wealth Limited Contents Section Financial highlights FY17 Results summary Chairman’s Letter Managing Director’s Report Directors’ Report Operating and Financial Review Remuneration Report Auditor’s Independence Declaration Financial Report Directors’ Declaration Independent Auditor’s Report Shareholders’ Information Directory Page 4 5 6 8 10 16 48 65 66 147 148 153 155 Financial calendar FY17 Dividend Payment 29 September 2017 Annual General Meeting 10 November 2017 Half Year End 31 December 2017 Half Year Result Announcement February 2018 Year End 30 June 2018 Annual Report August 2018 Dates are subject to change. Wealth Management $3.9m UNPAT 44% $205m Net inflows 17% $2.5b FUM Financial Advice $2.2m UNPAT 47% 243 Advisers $8.9b FUMA $237m Premiums under advice ClearView Wealth Limited ClearView Annual Report 2017 3 2017 Financial highlights After Tax Profit by Segment, $m Life Insurance Wealth Management Financial Advice Listed entity and other Underlying NPAT1 Other adjustments11 NPATA4 Amortisation5 Reported NPAT Embedded Value2 Value of new business2 Net asset value3 Reported diluted EPS (cps) 7 Underlying diluted EPS (cps)7 DPS (cps)8 FY17 24.9 3.9 2.2 (0.7) 30.4 (9.0) 21.4 (8.2) 13.2 661.9 16.7 415.6 2.11 4.88 2.75 FY16 % Change6 24.5 2.7 1.5 (1.5) 27.2 5.5 32.7 (9.1) 23.6 624.1 19.0 411.8 4.27 4.92 2.50 2% 44% 47% 53% 12% Large (36%) 10% (44%) 8% (12%) 4% (51%) (1%) 10% Underlying NPAT growth adversely impacted in short term by implementing an enhanced actuarial IP10 claims reserving basis and lapse experience on IP10 portfolio following price increases to improve long-term profitability +12% 30.4 2.6 27.2 +21% 33.0 1.1 +25% 34.1 Key decisions to support long-term strategy 40 35 30 25 20 15 10 5 0 Actual Underlying NPAT FY16 Actual Underlying NPAT FY17 IP10 Claims Reserving Basis Change9 Adjusted Underlying NPAT FY17 (Post Balance Sheet Strengthening) IP10 Lapse Loss Adjusted Underlying NPAT FY17 1 2 Underlying NPAT consists of consolidated net profit after tax adjusted for amortisation (not including capitalised software), the effect of changing discount rates on insurance policy liabilities and costs considered unusual to the Group’s ordinary activities. Embedded Value (EV) and Value of New Business (VNB) at 4% discount rate margin. EV includes a value for future franking credits, accrued franking credits and ESP loans; EV % movement FY16 to FY17 adjusted for the FY16 cash dividend paid of $16.5m in September 2016 less ESP related items (-$6.2m). Net Asset Value as at 30 June 2017 excluding ESP Loans; % increase adjusted for the FY16 cash dividend paid of $16.5m in September 2016 less ESP related items (-$6.2m). NPATA is reported net profit after tax adjusted to exclude the non-cash amortisation of acquired intangibles (not including capitalised software). Amortisation is amortisation of acquired intangibles (not including depreciation and amortisation of software). Impacted by the effect of 59m shares issued in June 2016 as part of $50m Entitlement Offer. DPS is dividend per share. Enhancement in estimate in relation to IP claims in the course of payment pre 30 June 2016. Income protection policies. Other adjustments includes costs considered unusual to normal activities (includes $2.4m Direct closure provision) and changes in long term discount rates used to determine the insurance policy liabilities ($13.7m ‘swing’ between periods). 3 4 5 6 % movement FY16 to FY17, unless otherwise stated. 7 8 9 10 11 4 ClearView Annual Report 2017 ClearView Wealth LimitedFY17 Results summary Growth in distribution footprint building profit base... leveraging Life Insurance IFA channels for Wealth distribution Active Life APLs with ClearView Products Active Wealth APLs with ClearView Products Aligned financial advisers 350 300 250 200 150 100 50 0 343 256 191 119 74 FY13 FY14 FY15 FY16 FY17 35 30 25 20 15 10 5 0 30 9 5 1 1 FY13 FY14 FY15 FY16 FY17 245 210 175 140 105 70 35 0 235 243 89 91 221 82 102 81 21 FY13 117 98 19 FY14 127 138 143 12 FY15 8 FY16 9 FY17 Employed ClearView Self-Employed Matrix Self-Employed Growth and diversity in sales of contemporary product Life Insurance contemporary new business2 Wealth contemporary product net flows1 Total Life New Business by channel 50 40 30 $m 23.6 20 17.0 40.3 34.6 27.5 350 300 250 200 182 $m 153 353 335 275 10 0 FY13 FY14 FY15 FY16 FY17 150 100 50 0 FY13 FY14 FY15 FY16 FY17 $m 45 40 35 30 25 20 15 10 5 0 42.3 5% 68% 39.2 12% 55% 34.5 20% 42% 27.4 14% 38% 19.4 13% 23% 64% 48% 38% 33% 27% FY13 FY14 FY15 FY16 FY17 Aligned IFA Direct 2.2 2.2 2.2 Growth in the in-force base underpinning Embedded Value growth Life in-force Premium4 Wealth Management FUM3 Embedded Value ($M)5 $m 200 160 120 80 40 0 189.5 146.1 150.7 105.7 10.9 34.1 10.7 32.7 87.5 45.2 5.6 36.7 62.1 21.0 2.9 38.1 115.7 71.0 9.6 35.1 FY13 FY14 FY15 FY16 FY17 3.0 2.5 2.0 $b 1.5 1.0 0.5 0.0 1.53 0.23 1.30 1.66 0.41 1.25 1.90 0.11 0.61 1.18 0.12 0.06 2.50 0.30 1.08 2.13 0.20 0.80 1.07 1.00 FY13 FY14 FY15 FY16 FY17 700 600 500 400 300 200 100 0 662 104 37 624 92 40 522 492 494 69 36 389 445 57 29 359 365 50 24 291 FY13 FY14 FY15 FY16 FY17 Old Book Direct LifeSolutions Old Book WealthSolutions Embedded Value ESP Loans Franking Credits 2.2 2.2 WealthFoundations External Platforms 1 2 3 4 5 Wealth contemporary product net flows is defined as inflows less redemptions into FUM but excludes management fees outflow and ClearView Master Trust product net flows given that the product is not marketed to new customers. LifeSolutions contemporary new business or sales represents the amount of new annual written premium sold during the period, net of policies cancelled from inception and excludes age based/CPI increases. Includes non-advice sales that were discontinued in FY17. FUM includes Funds Under Management (ClearView Master Trust, WealthFoundations and ClearView Managed Investment Schemes), Funds Under Administration on WealthSolutions and FUM in ClearView MIS platform funds on external platforms. In-force premium is defined as annualised premium in-force at the balance date. Embedded Value at 4% discount rate margin, including a value for future franking credits, accrued franking credits and ESP loans; % movement FY16 to FY17 adjusted for the FY16 cash dividend paid of $16.5m in September 2016 less ESP related items ($6.2m). ClearView Annual Report 2017 5 ClearView Wealth LimitedChairman’s Letter Bruce Edwards Chairman ClearView’s management team and staff executed the company’s strategic plan with commitment and enthusiasm in 2017. The group’s core purpose continues to be building and protecting the financial futures of customers and their families by partnering with financial advisers. In the 2017 financial year, ClearView delivered another strong profit result and remains on track to achieve its strategic goals of: • Targeting 5% of the long-term life insurance profit pool; • Building a material wealth management business; and • Building a high quality financial advice business providing strategic advice to clients. Another key focus during the year was fostering closer relations with Sony Life which acquired a 14.9 per cent shareholding in ClearView in October 2016. The welcome emergence of Sony Life as the group’s major strategic partner followed Crescent Capital’s announcement that it intended to sell its shares in the company. During the year, ClearView and Sony Life also entered a mutually-beneficial Cooperation Agreement which formalised both parties’ commitment to sharing knowledge and experiences, and working together to drive efficiencies and growth. The Cooperation Agreement, which remains in place for so long as Sony Life holds at least 10 per cent of the issued share capital in ClearView, enables ClearView to benefit from Sony Life’s expertise in a range of areas including product development, distribution and marketing, technology and adviser training. Other key areas of focus include: • • Expanding ClearView’s distribution network in the IFA channel; Enhancing the quality of financial advice provided by aligned advisers; and • Recruiting high quality, skilful aligned advisers. As our relationship with Sony Life progresses, it’s increasingly clear that both organisations share much in common including a client-first focus and a strong commitment to delivering quality products and quality advice. Since its inception in 1979, Sony Life has promoted the value of advice and life insurance to provide financial security and stability for customers. Similarly, ClearView firmly believes that financial advisers play an important personal, social and economic role. They transform lives by providing objective advice and ongoing support to help clients get, and keep, their financial house in order and achieve their financial goals. But the environment advisers operate in is increasingly regulated and rapidly changing. The advice industry has been subject to numerous inquiries and ongoing reforms. Life Insurance Framework legislation will come into effect on 1 January 2018 and tough new professional standards laws begin on 1 January 2019 starting with new advisers requiring a degree before being able to advise. In response, advisory firms are lifting education and training standards, improving the disclosure and transparency of their remuneration and becoming more professional. ClearView is committed to supporting the IFA community and our aligned advisers on this journey. Across the group’s two dealer groups, Matrix Planning Solutions and ClearView Financial Advice, a growing number of advisers are adopting a holistic fee-based model. The Financial Advice business is driving the development and implementation of a strategic advice program, designed to help advisers diversify and grow their revenue by expanding the scope of their advice to cover life insurance, budgeting and cashflow management, superannuation, retirement planning, estate planning and aged care. The strategic advice program also supports ClearView’s agenda to capitalise on synergies arising from the convergence of life and wealth products. 6 ClearView Annual Report 2017 ClearView Wealth LimitedChairman’s Letter Continued Long-term strategy ClearView’s 2017 financial result reflects the company’s strong future with growth in sales, adviser relationships, funds under management and inforce premium, underpinning the company’s profile and driving embedded value. The result also demonstrated that ClearView is willing and able to make difficult decisions to support the company’s long-term strategy, despite the short-term impact. Income protection price increases introduced in October 2016 were necessary for the prudent management of margin over time but led to higher lapses in the short-term. We also strengthened the reserving basis for income protection claims in the course of payment. Both decisions adversely impacted ClearView’s 2017 profit result but position the company strongly for an exciting future. During the year, ClearView also closed its Direct Life Insurance business, after a comprehensive review of the business and the broader Direct life insurance landscape found the outlook for the sector had changed considerably. This move allows the group to focus on building stronger relationships with the financial adviser network. Profit, dividends and capital I’m pleased to report that ClearView’s Underlying Net Profit After Tax1 increased by 12 per cent to $30.4 million in the year to 30 June 2017. This represented 4.88 cents per share. Embedded Value of $662.0 million at 30 June 2017 included franking credits and Employee Share Plan loans. The Board has declared a fully franked final dividend of 2.75 cents per share for FY17 with a record date of 13 September 2017 and a payment date of 29 September 2017. FY17 Dividend 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2.0 2.1 2.75 2.5 FY14 FY15 FY16 FY17 At the end of the 2016 financial year, the group noted that it did not expect to raise further capital to support its organic growth plans and that continues to be the case. There are no plans to raise additional capital in the latest business plan. Board appointments and Sony Life In December 2016, Mr Satoshi Wakuya, General Manager, Head of Business Development Division for Sony Life joined the ClearView Board alongside experienced financial services executive Ms Susan Young. Both Mr Wakuya and Ms Young are experienced Directors who have quickly taken on their new role and responsibilities. Complementing the appointment of Mr Wakuya, two Sony Life executives were seconded to ClearView during the year, as part of the Cooperation Agreement. Acknowledgements On behalf of the Board, I would like to thank our customers, advisers, strategic partners and shareholders for their ongoing support. Importantly, I would like to recognise the work of ClearView’s senior management team and staff. Personally, I would like to thank the Directors of the group for their ongoing advice and support. Bruce Edwards Chairman 1 Underlying NPAT consists of consolidated profit after tax adjusted for amortisation (not including capitalised software), the effect of changing discount rates on insurance policy liabilities and costs considered unusual to the Group’s ordinary activities. ClearView Annual Report 2017 7 ClearView Wealth LimitedManaging Director's Report Simon Swanson Managing Director The 2017 financial year was another significant and I am proud to say that Matrix and CFA financial advisers exciting year in the ClearView story with strong sales are empowered to use their professional judgement and into the group’s flagship Life Insurance product, experience to examine their clients’ needs and, where LifeSolutions, driving significant growth in the in-force a product is appropriate, recommend the most optimal book; strong Wealth Management inflows; progress investment and/or life insurance solutions. Matrix and in lobbying for customer-focused reforms; and the CFA financial advisers, like most of the IFAs we partner establishment of many important relationships. with, enjoy a broad investment Approved Product List Over 340 third party financial planning groups can now (APL) and a completely open life insurance APL. recommend LifeSolutions to their clients - up from 256 in Unfortunately, that still isn’t the case for institutionally- 2016, and an increasing number of Independent Financial aligned financial advisers who are limited to the life insurers Advisers (IFAs) recommend ClearView’s contemporary wealth on the APL set by their institutional parent, which too often platforms and products. primarily carry related-party products. Our strategy and acute focus remains on partnering with ClearView continues to lobby for all financial advisers and financial advisers and strategic partners to help Australians their clients to have product choice in life insurance through protect and grow their wealth, achieve their goals and secure open APLs. a comfortable financial future. As a diversified financial services company, we understand the personal, social and economic benefits of Australians having a financial plan tailored to their needs; well- constructed and appropriately monitored life insurance protection; and an effective investment management strategy which is executed according to their financial plan. We partner with financial advisers to help their clients save, invest and plan for the future, provide for their families, make intelligent financial decisions and ultimately retire with confidence. ClearView offers a range of professionally- managed investment management solutions and our life insurance products provide financial protection and peace of mind against the risk of premature death, critical illness, disability and accidents. Our strategy and acute focus remains on partnering with financial advisers and strategic partners to help Australians protect and grow their wealth, achieve their goals and secure a comfortable financial future. Since inception, ClearView has been precluded from the APLs of institutional licensees that have a ‘pay-to-play’ model and demand hefty payments for APL inclusion because we refuse to pay shelf space fees. Open APLs should be mandated to crack down on these insidious conflicts of interest, foster competition and significantly improve the culture of vertically- integrated institutions in order to increase the financial In 2017, the number of financial advisers across our services industry’s contribution to all Australians. aligned dealer groups, Matrix Planning Solutions (Matrix) and ClearView Financial Advice (CFA), swelled to 243. Matrix was named the 2017 Licensee of the year by global independent research house Coredata. Diversified financial services ClearView is firmly on track to achieve its strategic goal of targeting 5 per cent of the long-term life insurance profit pool. 8 ClearView Annual Report 2017 ClearView Wealth LimitedLifeSolutions sales rose 16 per cent to $40.3 million in FY17, Being a relatively young, nimble player, ClearView has been of which 72 per cent, or $28.9 million, came from the IFA able to make and implement decisions quickly and capture channel. IFA support jumped 34 per cent during the period, timely opportunities that support the company’s long-term bolstering in-force premium by 26 per cent to $189.5 million. vision and growth. The group’s 2017 annual results also show significant In 2017 examples included the introduction of income progress in building a material Wealth Management protection price increases to ensure sustainability of product business and a high quality Financial Advice business. profitability; the adoption of an enhanced actuarial claims Wealth Management Underlying NPAT rose 44 per cent to $3.9 million in the year to 30 June 2017, driven by strong reserving basis on the income protection portfolio; and the closure of the Direct Life Insurance business. inflows into contemporary products. The Board concluded that the Direct Life Insurance landscape In Financial Advice, the development and roll-out of a strategic advice program is helping the group’s aligned financial advisers broaden and refine their client value had changed considerably in the past few years with multiple factors including increasing client acquisition costs and rising consumer expectations impacting the sector’s outlook. proposition, better meet the needs of their clients and These factors, when combined with society’s increasing grow their revenue. Sony Life expectations of financial services companies and heightened regulatory scrutiny, meant that the appropriate decision was to close the Direct Life Insurance business. Of all the relationships strengthened and forged this year, none is more significant than the emergence of Sony Life as a major strategic shareholder. Our partnership with Sony Life, and the Cooperation Agreement currently in place, positions ClearView strongly to continue competing effectively in an increasingly competitive environment. Our cultural similarities, particularly our shared focus on financial advisers and their clients, provide a strong foundation for a mutually-beneficial long-term relationship. In recent years, heightened M&A activity has seen a number of international players enter the Australian market and others are keen to join. ClearView has the right strategy, people and processes in place to continue successfully achieving profitable, sustainable growth. While the income protection price increase resulted in some short-term lapse losses and the move to an enhanced actuarial claims reserving basis adversely impacted the group’s reported Underlying NPAT, these decisions have been made from a position of strength because we want to be around for the long-term to meet our commitments to Through our strategic partnership with Sony Life, both parties our customers, financial advisers, staff and shareholders. benefit from open sharing and cooperation on a range of matters including product development, distribution and Outlook marketing, technology and innovation. I’m excited about the opportunities that lie ahead in 2018 In addition to the Sony Life partnership, ClearView has a and I believe that ClearView has the right strategy, people competitive advantage as a relative newcomer with no and processes in place to continue successfully achieving material legacy issues. LifeSolutions was launched in 2012 profitable, sustainable growth. and our contemporary wealth products are supported by modern technology. ClearView’s strong performance in FY17 reflects the significant investment made in the group’s three core The absence of out-dated product lines on old systems allows business segments in recent years. We continue to reap the us to focus on providing exceptional products and service to rewards of our investment and the hard work of ClearView’s new and existing clients. That said, ClearView is not immune to some of the challenges facing the broader industry such as regulatory change, subdued growth, and deterioration in lapse rates and claims but our strong relationships with financial advisers and the embedded value in our widening distribution footprint continues to underpin our growth profile. We are confident about the future as we are singularly- focused on the needs of our customers. talented management and staff. On behalf of the management team, I would like to thank ClearView’s staff for their dedication and great work in 2017. Simon Swanson Managing Director ClearView Annual Report 2017 9 ClearView Wealth LimitedDirectors’ Report The Directors of ClearView Wealth Limited (ASX:CVW, ClearView or the Company) submit their report, together with the financial report of the consolidated entity (the Group) for the year ended 30 June 2017 (the financial year): Directors The following persons were Directors of ClearView during the whole financial year and since the end of the financial year unless otherwise noted: • Bruce Edwards (Chairman) • Andrew Sneddon • David Brown • Gary Burg • Michael Alscher • Michael Lukin (Alternate to Mr Alscher) • Nathanial Thomson • Satoshi Wakuya (appointed 14 December 2016) • Simon Swanson (Managing Director) • Susan Young (appointed 14 December 2016) The biographies for the Directors of ClearView are detailed below. Current Directors Bruce Edwards BSc, MA, FIAA Independent Non-executive Chairman Bruce is a qualified actuary with over 25 years in actuarial consulting, including five years as Managing Director of KPMG Actuaries. In recent years, Bruce has held directorships with a number of life and general insurance companies and superannuation fund trustees, and has acted as Chairman for three life insurance distribution companies. Bruce is a director of Munich Re in Australia (a life and general reinsurance business and a direct general insurance company). Bruce also lectures in actuarial studies at Macquarie University and is a Past President and active member of the Rotary Club of Sydney. Bruce was appointed to the Board on 22 October 2012 and was the Chairman of the ClearView Board Audit Committee, the Board Risk and Compliance Committee and the Nomination and Remuneration Committee, up until his appointment as Chairman of the Board on 18 May 2016. Bruce remains a member of the Board Audit Committee, the Board Risk and Compliance Committee and the Nomination and Remuneration Committee. Andrew Sneddon BEC, CA Independent Non-executive Director Andrew was a Partner with PricewaterhouseCoopers for 18 years before retiring in 2008. He has worked across a broad range of industries and has extensive experience in mergers and acquisitions, business and strategic planning, audit, valuation and capital raising, with particular focus on fast growth and emerging technology companies. Andrew is the Chairman of TGR BioSciences Pty Limited and Elastagen Pty Limited and the former Chairman of Traditional Therapy Clinics Limited, Fusion Payments Limited and ServiceRocket Inc. Andrew is the Australian representative Director of ServiceRocket International Pty Limited. Andrew is also a Non-Executive Director of Innate Immunotherapeutics Limited, and a member of the Audit and Compliance Committees of the Crescent Capital Private Equity Funds. Andrew was an Alternate Director from 26 March 2013 until his appointment as Director on 3 December 2013. Andrew served as Chairman of the Board Risk and Compliance Committee and the Nomination and Remuneration Committee between 18 May 2016 and 30 June 2017, and is currently Chairman of the Board Audit Committee. David Brown BCom, MSc, Dip Inv, Dip Mktg, ASIP, MAICD, F Fin Independent Non-executive Director David has significant experience in investment management and asset allocation of superannuation and insurance funds. He is the Chief Investment Officer for National Superannuation Fund Ltd in Papua New Guinea and a director of the PNG Institute of Directors, the former Head of Private Markets for Victorian Funds Management Corporation and former Senior Funds Manager for Queensland Investment Corporation. David is a former director of LifeHealthcare Pty Limited and a former Chairman of the Australian Private Equity and Venture Capital Association Limited. David was appointed to the Board on 22 October 2012 and currently serves as a member of the Board Audit Committee and the Board Risk and Compliance Committee. Gary Burg B.ACC (Wits), MBA (Wits) Independent Non-executive Director Gary has significant experience in building life insurance businesses in South Africa and in Australia. Gary is Chairman of UCW Limited, an ASX listed company and is also a director of Alinta Energy Limited and Global Capital Holdings 10 ClearView Annual Report 2017 ClearView Wealth Limited Directors’ Report Continued (Australia) Pty Limited, a company which manages principal investments on behalf of various investors. He is a former director of, and investor in, 3Q Holdings Limited and South African listed Capital Alliance Holdings Limited (which owned Capital Alliance Life Limited and Capital Alliance Bank Limited). Gary is also a former director and investor in a number of Australian based financial services businesses, including PrefSure Life Limited and Insurance Line Holdings Pty Limited. Gary was appointed to the Board on 22 October 2012, and currently serves as a member of the Board Audit Committee, the Board Risk and Compliance Committee and the Nomination and Remuneration Committee. Michael Alscher BCom Non-executive Director Michael is the Managing Partner and founder of Crescent Capital Partners Management Pty Limited. Prior to founding Crescent Capital Partners, Michael was a consultant at Bain International and the LEK Partnership where he spent considerable time working across banking and insurance clients. After leaving consulting, Michael was the Chief Operating Officer and a Director of Gowings Bros Limited. Michael is the current Chairman of Cardno Limited, Director of Australian Clinical Laboratories Pty Limited and National Dental Care Pty Limited. He is also a former Chairman and Director of Cover-More Group Limited and a former Director of LifeHealthCare Group Limited and Metro Performance Glass Limited. Michael was appointed Alternate Director to Nathanial Thomson on 22 October 2012. His appointment as Alternate was revoked and he was appointed as a Director on 1 July 2013. Michael Lukin BSc (AppMaths) (Hons), CFA, AIAA Alternate Non-executive Director Michael is a Partner and Director of ROC Partners Pty Limited. Prior to this, Michael was the Managing Director of the Macquarie Investment Management Private Market business in Sydney. Michael has 18 years of private equities investment experience and serves on the advisory boards of five Australian private equity fund managers, and is a current Australian Private Equity and Venture Capital Association Limited (AVCAL) Council member. He is a Chartered Financial Analyst (CFA) and an Associate of the Institute of Actuaries of Australia. Before joining Macquarie, Michael was an asset consultant with Towers Perrin, providing advice on investment matters and manager selection to superannuation funds and master trust clients. Michael is also a Director of Baycorp Holdings Pty Limited, National Dental Care Pty Limited and Space-Time Research Pty Limited. Michael served as Alternate Director to Jennifer Newmarch from 1 July 2013 until his appointment was revoked on her resignation. Michael was appointed as Alternate Director to Michael Alscher on 18 May 2016. Nathanial Thomson BCom (Hons), LLB (Hons) Non-executive Director Nathanial is a partner of Crescent Capital Partners Management Pty Limited. Nathanial has significant consulting experience for financial institutions at McKinsey & Co. He is the former deputy Chairman of Cover-More Group Limited prior to its listing on the ASX, a former director of Metro Performance Glass Limited, prior to its listing on the ASX, and is currently a director of Cardno Limited, National Dental Care Pty Limited and National Home Doctor Service Pty Limited. Nathanial was appointed to the Board on 22 October 2012 and currently serves as a member of the Nomination and Remuneration Committee. Nathanial has previously served as a member of the Audit, Risk and Compliance Committee up until 30 June 2014. Satoshi Wakuya Bachelor of Liberal Arts Non-executive Director Satoshi is the General Manager, Head of Business Development Division for Sony Life. Satoshi has over 10 years’ experience in the life insurance industry in Japan and has held a number of senior management positions within Sony Life’s ultimate parent company, Sony Corporation. Prior to joining Sony, Satoshi held roles within the Japanese Ministry of Foreign Affairs and Sumitomo Mitsui Banking Corporation in which he engaged in Japan’s governmental loan aid and forex operations that developed his financial business background. Satoshi was appointed to the Board on 14 December 2016. Simon Swanson BEC, BBus, ANZIIF (Fellow), CIP, FCPA Managing Director Simon is an internationally experienced financial services executive having worked for over 35 years across life insurance, funds management, general insurance and health insurance. He has successfully led the largest life insurer (CommInsure, Sovereign and Colonial) in three countries and spent half of his career in the Asia Pacific region. ClearView Wealth Limited ClearView Annual Report 2017 11 Simon is a former Chairman of ANZIIF’s Life, Health and Retirement Income Faculty Advisory Board and former director of the Australian Literacy and Numeracy Foundation. Simon led the team that founded ClearView in its current form and was appointed as Managing Director on 26 March 2010. Susan Young BA (Hons), MA, FGIA, FCIS, MAICD, JP Independent Non-executive Director Susan has over 30 years’ experience in senior executive roles internationally, with 15 years of experience in investment banking, followed by senior management roles in the corporate and professional services sector. She retired as a Partner of Spencer Stuart, and previously held operational management roles as both a divisional CFO and Joint Venture CEO/President for a Lend Lease Group company. Susan currently serves on the board of the Westmead Institute for Medical Research and is Governor of WWF Australia. She has served as a Non-executive Director on ClearView’s superannuation trustee board over the last 6 years, including holding the position as its Chairperson over the last 2 years. Susan was appointed Chair of the Nomination and Remuneration Committee and Board Risk and Compliance Committee on 1 July 2017, and is a member of the Board Audit Committee. Company Secretary Athol Chiert, BCOM, BACC, CA was appointed Company Secretary on 4 November 2008. He is also the Chief Financial Officer at ClearView. Athol has a life insurance and private equity background. He was previously the CFO of PrefSure Holdings Limited and PrefSure Life Limited and also served as a director and executive of the Global Capital Group both in Australia and South Africa. Athol has over 20 years experience in the finance industry including holding directorships on investee and subsidiary entities. Athol commenced his professional career as an accountant with Arthur Andersen. Appointed Actuary of ClearView Life Assurance Limited Ashutosh Bhalerao B.Ec, FIAA is the Appointed Actuary of ClearView Life Assurance Limited (ClearView Life). Ash joined ClearView as Deputy Appointed Actuary in January 2014 and was appointed to his current role on 5 June 2014. Ash has over 20 years experience in the financial services industry, specialising in life insurance. In the five years prior to joining ClearView, Ash was the Appointed Actuary for Swiss Re Life & Health Australia Limited. Ash has also held other senior actuarial roles with TAL Limited, Challenger Limited and AMP Limited and has a wide range of experience in financial management and reporting, product pricing, capital management, asset-liability management, risk management and reinsurance. Chief Actuary and Risk Officer Greg Martin B.A, FIAA, FFIN, FAICD, CERA is the Chief Actuary and Risk Officer of ClearView. Greg has over 30 years’ experience specialising in life insurance and funds management and has held a number of Appointed Actuary roles during his career. Greg has fellowships with the Institute of Actuaries of Australia, FINSIA and the AICD, and is a Chartered Enterprise Risk Actuary. He has been a member of various regulatory, industry and professional committees and Boards, including past and ongoing membership of committees of the Institute of Actuaries of Australia and the International Actuarial Association, and has advised regulators and published a number of professional and industry papers and articles. Greg has a wealth of experience in the areas of risk and capital management, financial management and reporting, and product pricing and management. 12 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedDirectorships of other listed companies Directorships of other listed companies held by Directors in the three years preceding the end of the financial year are as follows: Name Company Period of Directorship Andrew Sneddon Traditional Therapy Clinics Limited 24 February 2015 – 4 August 2016 Gary Burg UCW Limited 24 March 2016 - current Innate Immunotherapeutics Limited 19 September 2013 – ongoing Michael Alscher Cover-More Group Limited 14 November 2013 – 30 April 2015 LifeHealthCare Group Limited 8 November 2013 – 23 February 2015 Metro Performance Glass Limited 31 March 2015 – 10 June 2016 Cardno Limited 6 November 2015 – current Nathanial Thomson Cardno Limited 6 November 2015 – 28 January 2016; and 24 May 2016 – current Meetings of Directors The number of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 30 June 2017, and the number of meetings attended by each Director were as follows: Board Board Audit Committee Board Risk and Compliance Committee Nomination and Remuneration Committee Eligible to Eligible to Eligible to Eligible to Attend Attended Attend Attended Attend Attended Attend Attended 10 10 10 10 10 10 4 4 10 10 10 9 9 9 10 4 4 10 5 5 5 5 - - - 2 - 5 5 4 4 - - - 2 - 5 5 5 5 - - - 2 - 5 5 4 4 - - - 2 - 4 4 - 4 - 4 - 2 - 4 4 - 4 - 4 - 2 - Bruce Edwards Andrew Sneddon David Brown Gary Burg Michael Alscher1 Nathanial Thomson Satoshi Wakuya2 Susan Young2 Simon Swanson 1 Michael Lukin is an alternate director to Mr Alscher. Mr Lukin did not attend any meetings on behalf of Mr Alscher in the financial year. 2 Mr Wakuya and Ms Young were appointed as Directors on 14 December 2016. ClearView Annual Report 2017 13 ClearView Wealth LimitedDirectors’ ReportContinuedDirectors’ shareholdings The following table sets out each Director’s relevant interest in shares and rights or options in shares of the Company or a related body corporate as at the date of this report. Director Andrew Sneddon Bruce Edwards David Brown Gary Burg Michael Alscher1 Michael Lukin1 Nathanial Thomson1 Satoshi Wakuya2 Susan Young Simon Swanson Fully Paid Ordinary Shares Executive Share Plan Shares 124,621 588,262 - 10,918,090 - - - - 79,217 4,549,021 - - - - - - - - - 10,000,000 1 Mr Alscher (alternate Mr Lukin) and Mr Thomson represent the interests of CCP Bidco Pty Limited and its Associates that non-beneficially hold 252,897,269 shares. 2 Mr Wakuya represents the interest of Sony Life Insurance Co., Ltd that hold 98,067,795 shares. Shares issued under the Executive Share Plan The following table sets out the shares issued under the Executive Share Plan (ESP) during the year ended 30 June 2017. Series Participant Grant Date Opening Balance (1 July 2016) No. of Shares Issued No. of Shares Forfeited/ Exercised Series 55 Contractor Participant 14-Jun-17 1,300,000 Total (Contractor Participant) 1,300,000 - - No. of Shares Total 60,743,527 1,300,000 1,300,000 Forfeited Exercised Closing Balance (30 June 2017) Exercised Closing Balance (24 August 2017) - - (3,693,143) (3,693,143) (2,143,307) (2,143,307) 1,300,000 (5,836,450) 56,207,077 (500,000) (500,000) (6,336,450) 55,707,077 For details of the ESP see Note 27 of the notes to the financial statements. As at the date of this report, ClearView has a total of 56,207,077 ESP shares on issue of which 30,577,174 have been issued to select financial advisers. In addition to being one of the few non-bank aligned participants in the market, the Group has to date been able to offer such financial advisers the opportunity to participate in the overall performance of ClearView through share ownership in the Company. In accordance with the provisions of the ESP, during the financial year 1,300,000 shares were granted to financial advisers with the grant dates set out above. 2,143,307 vested ESP shares were exercised during the financial year, of which 1,361,987 were transferred to the participants personal holdings and 781,320 of which were sold via an off market transfer to repay outstanding ESP loans attached to the vested ESP shares with the balance been paid to the participant. 3,693,143 ESP shares did not vest during the financial year and have been forfeited. These unvested shares were sold via an off market transfer with the full proceeds of the sale being received by the Company. Subsequent to 30 June 2017 a further 500,000 contractor participant ESP shares were exercised. 14 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedThe Directors are of the opinion that the services as disclosed in Note 10 to the financial statements do not compromise the external auditor’s independence, based on advice received from the Board Audit Committee, for the following reasons: • • All non-audit services comply with the ClearView audit independence policy and have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and None of the services undermine the general principles relating to auditor independence as set out in Code of Conduct APES 110 “Code of Ethics for Professional Accountants” issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and reward. Annual Corporate Governance Statement ClearView is committed to achieving high corporate governance standards. In accordance with the 3rd edition ASX Corporate Governance Council’s Principles and Recommendations, the Company’s annual Corporate Governance Statement, as approved by the Board, is published and available on the Company’s website at: www.clearview.com.au/about-clearview/corporate- governance. Indemnification of Directors and Officers During the period, the Company purchased Directors and Officers Liability Insurance to provide cover in respect of claims made against the Directors’ and Officers’ in office during the financial period and as at the date of this report, as far as is allowable by the Corporations Act 2001. The total amount of insurance premium paid and the nature of the liability cover provided are not disclosed due to a confidentiality clause within the contract. As at the date of this report, no amounts have been claimed or paid in respect of this indemnity and insurance, other than the premium referred to above. Directors’ and Officers’ Liability Insurance contributed a proportion of the total Group professional indemnity insurance premium. The Company has not, during or since the financial period, indemnified or agreed to indemnify the auditor of the Company against a liability incurred as an auditor. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191, dated 24 March 2016 and in accordance with that Corporations Instrument amounts in this report, and the financial report, have been rounded off to the nearest thousand dollars. Auditor’s independence declaration and non-audit services The Directors have received an independence declaration from the auditors, a copy of which is on page 65. Non-audit services Details of amounts paid or payable to the auditor for non-audit services provided during the year by the auditor are outlined in Note 10 to the financial statements. The Directors are satisfied that the provision of non-audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. ClearView Annual Report 2017 15 ClearView Wealth LimitedDirectors’ ReportContinuedDirectors’ Report Operating and Financial Review Business overview ClearView Wealth Limited is an ASX-listed diversified financial services company which partners with financial advisers and strategic partners to help Australians protect and grow their wealth, and achieve their financial goals. ClearView’s current operating structure which comprises of three core business segments: Life Insurance, Wealth Management and Financial Advice, was established in 2010 but the origins of the company date back to 1976. Life Insurance ClearView manufactures products for the Advised Life Insurance market which refers to life insurance products placed by financial advisers. ClearView competes in a subset of Australia’s $15.8bn1 life (risk) insurance market, namely the $9.5bn1 individual risk market (excluding group life). Our product suite is branded LifeSolutions. Policies are issued by ClearView Life or via the ClearView Retirement Plan (ClearView’s superannuation fund). In FY17, ClearView exited the Non-Advice (Direct) market segment, which represented only a small percentage of sales and revenue, which will allow us to focus on the Advised Life Insurance market. Financial Advice ClearView operates two Australian Financial Services Licences ClearView Financial Advice (CFA) and Matrix Planning Solutions (Matrix). CFA and Matrix provide licensing services and business support to 243 financial advisers. They, in turn, provide quality financial advice to retail clients. Recently, Matrix was named the 2017 Licensee of the Year by independent research house CoreData. In FY17, ClearView began work on a Strategic Advice program, designed to help practices implement a holistic advice proposition. This program aims to coach advisers to better look after their clients’ total financial needs and meet their ongoing regulatory obligations while diversifying and increasing their revenue. Wealth Management ClearView is a provider of wealth management products in Australia’s $1.1+ trillion2 retail funds management industry. Our product suite includes: WealthSolutions – A comprehensive superannuation and retirement income investment and administration platform issued via the ClearView Retirement Plan and an IDPS. The platform’s investment menu includes a Separately Managed Account option. WealthFoundations – A simple superannuation and retirement income investment and administration solution issued by the ClearView Retirement Plan and underwritten by ClearView Life. WealthFoundations offers a range of model portfolios. Managed investments - Actively-managed pooled investment funds issued by ClearView Financial Management Limited (CFML) as the ASIC-licenced Responsible Entity. These funds are available on WealthSolutions and selected external platforms. 1 2 Plan for Life data as at 31 March 2017. ABS 5655.0 data as at March 2017 (unconsolidated). Retail segment based on management estimates. 16 ClearView Annual Report 2017 ClearView Wealth Limited Business strategy ClearView’s growth strategy is focused on: • Capturing 5% of the long-term life insurance profit pool; • Establishing a material wealth management business; and • Building a high quality financial advice business. In FY17, ClearView continued to deliver strong growth and the company remains on track to achieve its near and medium-term strategic goals. ClearView generates its revenue by manufacturing and distributing life insurance, superannuation and investment products, and providing licensing and support services to financial advisory practices. Our purpose To partner with financial advisers to build and protect the financial futures of clients and their families. Strategy Win market share within profitable niches by delivering innovative products and exceptional service. Expanding distribution presence Expand our distribution footprint in the IFA market • • • • Build awareness of ClearView’s brand and capabilities Demonstrate competitiveness of products and services Expand existing IFA relationships and increase penetration of existing APLs1 Develop new IFA relationships and see ClearView products placed on new APLs1 • Cross sell products Increase profitability Target profitable market segments with innovative products • • Capitalise on structural competitive advantage by offering life insurance through superannuation to leverage convergence of product offerings Expand dealer group offering with a focus on strategic advice and improved adviser business efficiency Improve efficiency and reach Enhance margins over time • • • Ensure staff and advisers are highly engaged Enhance back office to increase automation and drive efficiency Enhance life insurance front-end to improve customer service and adviser efficiency Goals 1 2 3 Target 5% of the long-term life insurance profit pool Build a material wealth management business Build a high quality financial advice business providing strategic advice to clients 1 Approved Product Lists. ClearView Annual Report 2017 17 ClearView Wealth LimitedDirectors’ ReportContinuedSony Life The Board announced in October 2016 that Sony Life Insurance Co., Ltd (Sony Life) had acquired a 14.9% stake in ClearView from major shareholder, Crescent Capital Partners and its Associates (Crescent). In January 2017, ClearView and Sony Life entered into a mutually-beneficial Cooperation Agreement to share information and increase their coordination to drive efficiency and growth. In relation to the Cooperation Agreement, ClearView is focused on: • • Expanding its distribution footprint in the independent financial adviser (IFA) market; Continuously enhancing the quality of advice provided by the Group’s aligned advisers; • Recruiting skilled advisers into the dealer group; and • Exploring the development and use of relevant technology, products and services. To facilitate the sharing of knowledge and explore opportunities to leverage from each organisation, two Sony Life employees were seconded to ClearView in February 2017. The Cooperation Agreement is effective for so long as Sony Life holds at least 10% of the issued share capital in ClearView. In December 2016, Mr Satoshi Wakuya, General Manager, Head of Business Development Division for Sony Life, was appointed to the ClearView Board as a Non-executive Director. Mr Satoshi Wakuya has over 10 years’ experience in the life insurance industry in Japan and has held a number of senior management positions with Sony Life’s ultimate parent company Sony Corporation. Prudential regulation ClearView competes in highly regulated markets and is supervised by the following organisations: • The Australian Prudential Regulation Authority (APRA); and • The Australian Securities and Investments Commission (ASIC). Both organisations are independent Commonwealth Government bodies with extensive regulatory powers. Regulated Group entities are shown in the diagram below. ClearView is regulated as a Non-Operating Holding Company (NOHC) by APRA under the Life Insurance Act 1995 and, via its subsidiaries, it holds an APRA life insurance licence, an APRA registrable superannuation entity (RSE) licence, an ASIC funds manager responsible entity (RE) licence and operates two Australian Financial Services Licensees (AFSLs). ClearView Wealth Limited (NOHC) ClearView Life Assurance Limited (Life Company) ClearView Life Nominees Pty Ltd (RSE) ClearView Financial Management Limited (RE) ClearView Financial Advice Pty Limited (AFSL) Matrix Planning Solutions Limited (AFSL) Life Insurance Financial Advice Wealth Management Life insurance regulatory changes ClearView supports the recently enacted Bill and regulations in respect to life insurance remuneration arrangements. We believe that the life insurance reforms will provide greater certainty and stimulus for the industry in the long-run. However, there are additional areas that need to be addressed to ensure good public policy outcomes, including: 1. 2. All grandfathering relief in respect to adviser remuneration should cease by 2021 to discourage poor behaviour such as leaving clients in legacy products to preserve volume based/lapse rate bonuses. Financial advisers should have access to all life insurance products issued by APRA-regulated insurance companies. This requires all Approved Product Lists (APL) to be open. Unrestricted APLs will ensure that advisers are 18 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinued3. 4. 5. not inherently conflicted but instead are able to provide objective advice in their clients’ best interests. ClearView’s position is that, given there are only around 11 APRA- regulated insurers operating in the Advised Life Insurance market, open APLs must be mandated to protect consumers and support professional adviser culture and outcomes. The industry should work with ASIC to get the Life Code of Conduct approved in accordance with RG 183 to ensure that it is meaningful and contractually enforceable by consumers. This would lead to critical behavioural change in the financial services industry and go a long way to improving the industry’s reputation. Adviser education standards should be raised to ensure that advisers are appropriately trained and possess the necessary skills and expertise to provide sound, quality financial advice. ClearView strongly supports reforms to enhance the professional, ethical and education standards of financial advisers. Group insurance should be offered on an “opt-in” basis and the current automatic acceptance, “opt-out” model should be disbanded. Requiring super fund members to consciously “opt-in” for insurance cover will maximise the probability of them understanding the level and type of cover they have, and gaining adequate protection and value for money. It would lead to a substantial improvement in the understanding of members regarding what they are, and are not, covered for. It would also stop the current cross subsidies within the existing model. Material business risks ClearView’s operations expose it to a variety of financial and non-financial risks. Risk management is an integral part of the Group’s management processes and the Board continuously reviews material business risks. The Board has adopted a formal Risk Management and Capital Strategy (RMCS) and a structured Risk Management Framework (RMF) to ensure the early identification of risks and adequate management of key risks, particularly those with the potential to impact the Company’s future financial prospects and strategic imperatives. The RMCS and RMF are fundamental to business decisions including resource allocation and prioritisation of activities. Details of the Group’s risk management practices including risk mitigation strategies are set out in Note 5 to the Financial Statements on page 93. Competitive strengths The Australian life insurance industry has recently been in a state of flux due to stagnant sales, worsening lapses rates, mounting claims and ongoing regulatory and public scrutiny; all against a backdrop of merger and acquisition activity. Intense consolidation over the past 15 years, driven by the desire of the large incumbents to ‘purchase’ market share, created the need for new entrants to increase choice and competition. The large vertically-integrated institutions chronically underinvested in their life insurance businesses during this period. Many of these businesses are therefore afflicted by legacy issues such as multiple administration platforms and old higher-margin in-force portfolios, making it difficult for them to innovate. This has created opportunities for challengers like ClearView which are nimble and operate with no material legacy issues. ClearView has an integrated business model that positions it well to be an effective disrupter in the Australian life insurance and wealth management industry. The larger institutions are increasingly focused on returning to core business lines, with an emergence of foreign institutions looking to invest in the Australian life insurance industry. This is likely to drive investment back into the life insurance sector. ClearView remains well-positioned with its strategic shareholder, Sony Life. ClearView is also strongly positioned to capitalise on the current market disruption, particularly around life insurance reforms. The market is still dominated by institutionally- owned AFSLs with limited APLs, precluding open competition. Regulatory pressure on AFSLs to open up risk APLs is increasing. ClearView continues to lobby for reforms to increase competition and open risk APLs which would in turn lead to a stepped change in its distribution profile. Our key competitive strengths include: • • • The integrated structure of our business model which combines life insurance, wealth management and financial advice; The strength of our relationships with the IFA community which have been developed by delivering innovative solutions and exceptional service; and No material legacy issues such as pricing, products and systems. ClearView Annual Report 2017 19 ClearView Wealth LimitedDirectors’ ReportContinuedOperating review Life Insurance ClearView has built a strong foundation for ongoing growth in the Advised Life Insurance market. Our strategy is focused on expanding our IFA footprint by delivering superior products, features and service through strong adviser relationships. From a standing start in FY12, LifeSolutions has become a well-regarded and highly competitive product that’s recognised for its innovative features. Ongoing refinements and product upgrades have resulted in consistent top quartile product ratings for LifeSolutions. Our approach Recruit quality advisers into our aligned dealer groups and, based on merit, earn the right for LifeSolutions to be sold to their clients. Exit from Direct Life Insurance In FY17, ClearView closed its Direct operation for a range of reasons including: • • • Changes in market’s attitude and appetite for telephone based non-advice models – no longer economically viable or socially acceptable due to increasing client acquisition costs, rising consumer expectations and likely heightened regulatory scrutiny. Immaterial contribution to group but with considerable future investment required to continue business line. Improves focus on ClearView’s three core segments: Advised Life Insurance, Wealth Management and Financial Advice. Historically, ClearView distributed a suite of life insurance, accidental death, injury, funeral and trauma products through its Direct channel. Sales were predominantly made via an outbound call centre model with leads gathered including from distribution agreements with strategic partners. Continue to avoid paying material shelf space fees and volume bonuses to licensees because the pay-to-play model doesn’t lead to optimal client outcomes. Since HY15, Direct sales have progressively reduced due to a deliberate decision to exit the lower socio demographic market. Gain inclusion on new third party APLs while increasing our share of wallet on existing APLs. ClearView continues to work with several strategic partners for personal advice referrals. Upgrade systems and automate manual back-office processes as part of a continuous improvement program to drive operational efficiencies and ensure it’s easy for advisers to do business with us. Key findings • • • The Direct outbound and “lead generation” model is no longer economically viable or socially acceptable. A comprehensive strategic review initially led to the closure of the outbound call centre and ultimately the full exit from inbound activity. Direct operations will take a fundamentally different approach in the future – we have the ability to re-enter the market at a later time off a “clean” base. • • • • 20 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedPerformance The following graphs illustrate the performance of the Life Insurance business and the growth profile of the business. Chart 1: Life Insurance segment performance Active Life APLs with ClearView Products Life In-Force Premium1 Life New Business2 350 300 250 200 150 100 50 0 343 256 191 119 74 FY13 FY14 FY15 FY16 FY17 $m 200 160 120 80 40 0 189.5 150.7 105.7 146.1 $M 10.9 34.1 10.7 32.7 87.5 45.2 5.6 36.7 62.1 21.0 2.9 38.1 115.7 71.0 9.6 35.1 FY13 FY14 FY15 FY16 FY17 50 40 30 20 10 0 42.3 2.0 40.3 39.2 4.5 34.7 34.5 7.0 27.5 27.4 3.8 23.6 19.4 2.4 17.0 FY13 FY14 FY15 FY16 FY17 Old Book Direct LifeSolutions LifeSolutions Direct Sales diversification ClearView’s distribution universe consists of two national aligned dealer groups and a rapidly growing network of IFAs. The main distribution channel for LifeSolutions has strategically shifted to the IFA channel as part of a strategy to rapidly diversify sales and create material embedded growth. Chart 2: Life Insurance sales by channel Type $m 45 40 35 30 25 20 15 10 5 0 42.3 5% 68% 39.2 12% 55% 34.5 20% 42% 27.4 14% 38% 19.4 13% 23% 64% 48% 38% 33% 27% FY13 FY14 FY15 FY16 FY17 Aligned IFA Direct 2.2 2.2 Our journey 2.2 • ClearView entered the Advised market in 2012. • • • • After being precluded from APLs, ClearView focused on recruiting advisers to its aligned dealer groups and working hard to earn the right for LifeSolutions to be sold by advisers. The aligned groups (Matrix and CFA) provide a strong sales base but third party APLs represent an increasing share of sales, reinforcing the competitiveness of LifeSolutions. In FY14, the distribution strategy shifted to focus on expanding third party IFA sales which now account for 72% of LifeSolutions sales. ClearView is still in the earlier stages of penetrating the IFA channel but continues to gain access to new APLs and increase its share of wallet on existing APLs, especially where LifeSolutions has been on the APL for greater than 12 months. • Sales growth continues to outperform the market. • Significant, future organic growth opportunities will come from the maturation of relatively new APLs; access to new APLs; and subject to a successful lobbying outcome, the potential opening up of APLs that are currently closed or restricted via regulatory reforms. 1 2 In-force premium is defined as annualised premium in-force at the balance date. Life insurance new business or sales represents the amount of new annual written premium sold during the period, net of policies cancelled from inception and excludes age based/CPI increases. ClearView Annual Report 2017 21 ClearView Wealth LimitedDirectors’ ReportContinuedFY18 Priorities • • • Expanded distribution reach and embedded growth via the third party IFA market. Invest incrementally in the core life advice market and product portfolio. This includes upgrading the online quote, application system and investment in the back office to make it easier for financial advisers to do business with us. Continue lobbying for sensible reforms and good public policy such as unrestricted APLs. If open APLs are mandated and advisers are able to recommend all APRA-regulated insurers, there will be a stepped change in ClearView’s distribution universe. ClearView will be able to reach institutionally-aligned advisers. • Further enhance ClearView’s reputation and pay all genuine claims as quickly as possible. The following table outlines ClearView’s life cycle of maturing an APL in the independant adviser market: Stage 1 Stage 2 Stage 3 Stage 4 Get on third party APL Educate individual advisers about ClearView product Advisers write test policies Advisers place meaningful business with ClearView h t g n e L e m i t f o - e r P s e t i s u q e r i n o i t p i r c s e D Up to 12 months Ongoing process. Typically 3 - 6 months. Typically 3 - 6 months. • • • • • • • • • • Non-institutionally aligned AFSL Unrestricted APL IT / administration capabilities ClearView leverages relationships with gate openers to get on APL No ability to get on closed APLs currently (requires regulatory change) On APL Knowledgeable BDMs Marketing support and material ClearView BDMs meet with individual advisers BDMs promote the strength of ClearView’s products, features and service • • • • • • BDMs establishing trust and rapport with advisers Advisers write a small number of policies to gauge the quality of underwriting, administration and service During this stage, they are testing ClearView’s customer service and underwriting processes Strong pipeline of AFSLs in Stage 2 and Stage 3 Ongoing process but uptick in support around 1-2 years Successful test policies written with ClearView Advisers discover that ClearView is a quality product provider and begin to write meaningful business Share of wallet increases over time 22 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinued Wealth Management ClearView’s strategy is to provide first-class, exceptional investment and administration services. This is consistent with our approach in Life Insurance. ClearView is gaining traction in Wealth Management, although this segment is tracking behind the Life Insurance business given the company’s initial focus on Life Insurance. The group only began focusing on its wealth offering in FY15, having established a foundation in the life insurance market. While 98% of inflows into ClearView’s contemporary wealth solutions come from the aligned adviser network, the Group has commenced work to broaden its Wealth Management distribution footprint. This includes further investment in contemporary platforms to improve back office efficiency and automation. Performance The following graphs illustrate the performance of the Wealth Management business and the growth profile of the business. Chart 1 – Wealth Management segment performance FY13-FY17 Active Wealth APLs with ClearView Products Wealth In-Force FUM1 35 30 25 20 15 10 5 0 30 9 5 1 1 FY13 FY14 FY15 FY16 FY17 3.0 2.5 2.0 $b 1.5 1.0 0.5 0.0 1.53 0.23 1.30 1.66 0.41 1.25 1.90 0.11 0.61 1.18 0.12 0.06 2.50 0.30 1.08 2.13 0.20 0.80 1.07 1.00 FY13 FY14 FY15 FY16 FY17 Old Book WealthSolutions WealthFoundations External Platforms 2.2 Wealth Net Flows2 Wealth Underlying NPAT3 $m 250 200 150 100 50 0 -50 212 205 3.8 112 2.4 17.0 -16 23.6 -8 FY13 FY14 FY15 FY16 FY17 2.2 $m 8 6 4 2 0 6.6 2.8 3.8 5.9 2.9 3.0 3.9 2.3 1.6 2.7 1.4 1.3 1.8 0.7 1.1 FY13 FY14 FY15 FY16 FY17 1H 2H 1 2 3 FUM includes Funds Under Management (ClearView Master Trust, WealthFoundations and ClearView Managed Investment Schemes), Funds Under Administration on WealthSolutions and FUM in ClearView MIS platform funds on external platforms. FUM net flows is defined as inflows less redemptions into FUM but excludes management fees outflow. Wealth Underlying NPAT consists of consolidated net profit after tax adjusted for amortisation (not including capitalised software) and costs considered unusual to the Group’s ordinary activities. ClearView Annual Report 2017 23 ClearView Wealth LimitedDirectors’ ReportContinuedProducts Our journey • • WealthSolutions – A full-service wrap platform that enables investors to access all major asset classes and a wide range of managed funds and direct equities. The platform provides consolidated tax and portfolio reporting, empowering advisers to effectively manage their client’s accounts. WealthFoundations – Launched in FY15 for mid-level clients, this platform features 14 professionally-managed investment strategies. Advisers can choose the strategy, or combination of strategies, that best meets their clients’ needs. This product aims to capitalise on the convergence of life and superannuation by providing a cross-selling opportunity for life insurance clients. • External platforms – From FY16, ClearView MIS platform funds have been placed on selected external third party platforms. In addition to the contemporary product suite, ClearView operates a Master Trust issued by the ClearView Retirement Plan and ClearView Life. This product is not open to new clients. Our investment management approach ClearView’s investment team builds and actively manages a range of model portfolios (including SMAs1), which are made up of strategically selected independent asset manager funds. Key benefits of model portfolios are: • • • • Advisers can efficiently meet the investment needs of their clients by providing well-researched, diversified multi-manager portfolios that are designed to meet specific investment objectives, for example, asset protection or moderate risk; Top quartile performance, leading to growing acceptance among advisers; Flexible, simple fee structure with ClearView earning a margin on funds under management by negotiating discounted wholesale asset management fees from portfolio managers and earning a model portfolio fee; and Access to specialist wholesale funds managed by independent fund managers for advisers and their clients. • Acquisition of wealth-focused dealer group Matrix in FY15. • Launch of contemporary WealthFoundations platform in FY15. • Ongoing development and refinement of wealth products. • • • • Contemporary products including the development of SMA capabilities to support both aligned and third-party advisers. The ability to place inhouse model portfolios on external platforms. Growth in the number of third party APLs carrying ClearView wealth products increasing to 30 by leveraging the life insurance distribution network. ClearView is a positive net flow business (material to its FUM balances). This has been driven by: • • • The launch of new, client-focused products and the placement of in-house model portfolios on external platforms; Material investment in FY15 to build a compliant and functional platform coinciding with the launch of WealthFoundations; and Stronger inflows and scale benefits for WealthSolutions with continued support for WealthFoundations, albeit at a slower pace. FY18 Priorities • • • • • Leverage off the life insurance distribution network to establish relationships with IFAs and get on third party APLs. Roll out the ClearView platform funds into the external platform market. Continue investing in our contemporary platform to round out the product suite and improve back office efficiency and automation. Migrate the Master Trust business onto the contemporary platform over time to enhance the client experience (project commenced in 2H FY17). Capture opportunities from the convergence of life and wealth by providing and developing products that improve adviser efficiency and customer experience. 1 Separately Managed Account. 24 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinued Financial Advice • • • • • • Aligned Network Primarily self-employed advisers operating under the CFA and Matrix licences At 30 June 2017, 243 advisers (91 Matrix and 152 CFA) Focused on recruiting professional advisers with the right cultural fit but no targets are in place CFA and Matrix have $8.9 billion of FUMA1 and $237 million of Premiums Under Advice (PUA)2 Intention to gradually roll out the strategic advice program across the network and support the business efficiency of adviser practices Strong compliance focus and committed to helping advisers to adapt to regulatory changes and transition to the ‘new advice world’ The geographical spread of the ClearView financial advisers is outlined in the diagram below: Geographical Adviser Composition 26 13 4 44 105 15 36 Our journey FY18 Priorities • • Recruit quality, professional advisers by continuously refining and improving the dealer services proposition. Support existing advisers to grow their businesses, including the development and rollout of the strategic advice program. • • • • • • The aligned advice network was originally focused on attracting specialist risk advisers. In FY14 and FY15, that focus shifted to recruiting holistic advisers who provided advice on both life and wealth. That focus was the primary driver behind the acquisition of Matrix Planning Solutions in 2014. In FY17, ClearView began work on a Strategic Advice program, designed to help practices develop and implement a holistic advice proposition that looked after a client’s total financial needs. Matrix was named 2017 Licensee of the Year by global independent research house CoreData. Strong compliant culture is embedded in the Group’s aligned network of advisers. 1 2 FUMA includes FUM and funds under advice that are externally managed and administered. Premiums Under Advice is life insurance in-force premium that are externally managed and administered (Third Party Products) and in-force LifeSolutions premium. ClearView Annual Report 2017 25 ClearView Wealth LimitedDirectors’ ReportContinuedFY17 Results overview Overview of result The ClearView Group achieved the following results for the year ended 30 June 2017: After Tax Profit by Segment, $M Life Insurance Wealth Management Financial Advice Listed Entity and Other Underlying NPAT1 Other adjustments9 NPATA4 Amortisation5 Reported NPAT Embedded Value2 Value of new business2 Net asset value3 Reported diluted EPS (cps)7 Underlying diluted EPS (cps)7 DPS (cps)8 Chart 1: Group performance FY13-FY17 Underlying NPAT1 ($M) Embedded Value2 ($M) 32.0 24.6 17.2 16.0 0.2 0.8 6.6 8.4 9.8 2.4 -5.0 19.7 3.5 5.9 10.8 (0.5) FY13 FY14 30.4 2.2 3.9 24.9 27.2 1.5 2.7 24.5 (0.5) (1.0) FY16 (0.5) (0.2) FY17 20.5 4.4 1.8 15.3 (0.6) (0.4) FY15 Life Insurance Wealth Management Financial Advice Listed Entity Interest expense (After Tax) FY17 $M 24.9 3.9 2.2 (0.7) 30.4 (9.0) 21.4 (8.2) 13.2 FY16 $M 24.5 2.7 1.5 (1.5) 27.2 5.5 32.7 (9.1) 23.6 661.9 624.1 16.7 19.0 415.6 411.8 2.11 4.88 2.75 4.27 4.92 2.50 % Change6 2% 44% 47% 53% 12% Large (36%) 10% (44%) 8% (12%) 4% (51%) (1%) 10% 700 600 500 400 300 200 100 0 662 104 37 624 92 40 522 492 494 69 36 389 445 57 29 359 365 50 24 291 FY13 FY14 FY15 FY16 FY17 Embedded Value ESP Loans Franking Credits 1 2 Underlying NPAT consists of consolidated net profit after tax adjusted for amortisation (not including capitalised software), the effect of changing discount rates on insurance policy liabilities and costs considered unusual to the Group’s ordinary activities. Embedded Value (EV) and Value of New Business (VNB) at 4% discount rate margin. EV includes a value for future franking credits, accrued franking credits and ESP loans; EV % movement FY16 to FY17 adjusted for the FY16 cash dividend paid of $16.5m in September 2016 less ESP related items (-$6.2m). Net Asset Value as at 30 June 2017 excluding ESP Loans; % increase adjusted for the FY16 cash dividend paid of $16.5m in September 2016 less ESP related items (-$6.2m). NPATA is reported net profit after tax adjusted to exclude the non-cash amortisation of acquired intangibles (not including capitalised software). Amortisation is amortisation of acquired intangibles (not including depreciation and amortisation of software). Impacted by the effect of 59m shares issued in June 2016 as part of $50m Entitlement Offer. DPS is dividend per share. Other adjustments includes costs considered unusual to normal activities (includes $2.4m Direct closure provision) and changes in long term discount rates used to determine the insurance policy liabilities ($13.7m ‘swing’ between periods). 3 4 5 6 % movement FY16 to FY17, unless otherwise stated. 7 8 9 26 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedUnderlying net profit after tax (UNPAT) - $30.4 million (+12%) The FY17 result reflects strong fundamentals in the Group’s underlying operating businesses and the delivery of strong, profitable and sustainable growth: • • • Life Insurance remains the key profit driver with further expansion of the IFA distribution footprint leading to strong Advised sales and a material increase in the in-force portfolio which is underpinning the company’s growth profile. Wealth Management is a net flow positive business with growth in earnings now emerging, following the recently-completed ‘build phase’. Financial Advice is committed to building a high quality aligned advice business and helping advisers run more efficient and profitable practices. The FY17 result includes the impact of key decisions to support the longer-term strategy. They are detailed below: • The LifeSolutions adverse claims experience includes the impact of adopting an enhanced actuarial claims reserving basis (statistical model) on the income protection (IP) portfolio in FY17(-$2.6 million1). While the IP2 portfolio remains profitable, this was a key driver in the adverse overall “swing” in claims experience between FY17 and FY16. • • IP2 price increases (10% on average) were implemented in October 2016 following market price increases, to ensure prudent management of margin over time but has resulted in some short-term elevated lapses on the IP portfolio (-$1.1 million3). IP price changes improves the long-term sustainability of product profitability. Closure of the Direct operation reflects changes in the market’s attitude and appetite for non-advice models. A review of the business concluded that the model is no longer economically viable or socially acceptable due to increasing client acquisition costs, rising consumer expectations and likely heightened regulatory scrutiny. The closure of the Direct business, which made an immaterial contribution to the overall group, allows ClearView to sharpen its focus on Advised Life Insurance. The waterfall chart below reflects the company’s underlying performance. Chart 2: Adjusted UNPAT - Year ended 30 June 2017 +12% 30.4 2.6 27.2 +21% 33.0 1.1 +25% 34.1 Key decisions to support long-term strategy 40 35 30 25 20 15 10 5 0 Actual Underlying NPAT FY16 Actual Underlying NPAT FY17 IP2 Claims Reserving Basis Change1 Adjusted Underlying NPAT FY17 (Post Balance Sheet Strengthening) IP2 Lapse Loss3 Adjusted Underlying NPAT FY17 1 2 3 Enhancement in estimate in relation to IP claims in the course of payment pre 30 June 2016. Income protection policies. FY17 income protection portfolio lapse loss. ClearView Annual Report 2017 27 ClearView Wealth LimitedDirectors’ ReportContinuedUNPAT is the Board’s main measure of Group profitability and a key factor in dividend payment decisions. In FY17, UNPAT increased 12% to $30.4 million (FY16: $27.2 million). Adjusted UNPAT ($34.1m, +25%) removes the impact of the adoption of an enhanced actuarial IP claims reserving basis and lapse losses on the IP portfolio. Results highlights include: • • • • Life Insurance UNPAT up 2% to $24.9 million (FY16: $24.5 million) compared to expected growth of 24%2. Lower-than-expected growth attributable to adverse impact on FY17 UNPAT from prudent decisions made by the Board to support the Group’s long term strategy (including the adoption of an enhanced IP claims reserving basis and IP price increases). A long term pricing strategy was implemented in 1H FY17 (10% price increases) to manage margin but has caused some short term elevated lapses. The expected growth of 24% would have been broadly in line with FY17 inforce portfolio growth. Importantly, the underlying performance of the Life Insurance segment remains strong with in-force book growth of 26% and sales of the flagship LifeSolutions product up 16%. The IFA distribution footprint continues to expand, diversifying sales and creating material embedded growth. Wealth Management UNPAT up 44% to $3.9 million (FY16: $2.7 million). Growth in earnings is emerging following material investment in the contemporary wealth platform and products in FY15. The contemporary products continue to build to scale with FUM increasing 17% and net flows of $353 million (+5%). Financial Advice UNPAT up 47% to $2.2 million (FY16: $1.5 million). Changes to the revenue model and disciplined expense control drove the increase in UNPAT, notwithstanding the acquisition of a practice, increased compliance (and related) costs and investment in the development and roll out of the strategic advice program. Listed UNPAT incurred a loss of $0.7 million (FY16: -$1.5 million). A decrease in investment earnings was broadly offset by a related reduction in after-tax interest expenses given the repayment of $45.5 million of corporate debt in 2H FY16. The proceeds of a $50 million capital raising in June 2016 was used to repay the debt. The improved performance was driven by a reduction in listed entity costs and an R&D development tax rebate in relation to FY16 (+$0.3 million). Other adjustments and amortisation The additional items below impacted the statutory net profit after tax. Reconciling items are outlined in the following table. Reconciling Items ($M) (Net of Tax) Amortisation of intangibles Policy liability discount rate effect Costs Associated with Sony Life becoming strategic shareholders FY17 (8.2) (5.9) % Change1 10% FY16 (9.1) 7.8 Large (0.7) (0.4) Large Your Insure impairment Direct closure provision Total - (1.9) (2.4) - Large Large (17.2) (3.6) Large • • Amortisation of intangibles ($8.2 million) is associated with the acquisition of the wealth management and life insurance businesses from Bupa, the ComCorp financial advice business and Matrix Planning Solutions. These are separately reported to remove the non-cash effect of the write-off of these acquired intangibles. However, amortisation associated with capitalised software is reported as part of UNPAT. The policy liability discount rate effect is the result of changes in the long-term discount rates used to determine insurance policy liabilities. The Life Insurance policy liability (based on AIFRS) is discounted using market discount rates that typically vary at each reporting date and create volatility in the policy liabilities, and consequently, earnings. ClearView separately reports this volatility which represents a timing difference in the release of profit and has no impact on underlying earnings. This movement in policy liability creates a cash flow tax effect. The increase in long-term discount rates over FY17 caused an adverse after-tax impact of -$5.9 million (FY16: decrease in long-term discount rates +$7.8 million). • Costs that are considered unusual to ClearView’s ordinary activities, and therefore not reflected as part of UNPAT, related to: • Expenses incurred on the evaluation of strategic options and Sony Life becoming a new strategic shareholder ($0.7 million after tax). Ongoing costs associated with the Cooperation Agreement between ClearView and Sony Life will continue to be considered unusual to ordinary activities in FY18. 1 % change represents the movement from FY16 to FY17. 2 3 Expected Underlying NPAT of $29.3m (+24% FY16 to FY17) reflects expected profit margins on in-force portfolios based on actuarial assumptions. In respect of pre 30 June 2016 IP claims. 28 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinued • • The closure of ClearView’s Direct operation ($2.4 million after tax). FY16 costs related to the write-off of ClearView’s investment in Your Insure, which incurred a net of tax cost of $1.9 million. Reported NPAT and Earnings per share (EPS) Reported NPAT decreased 44% to $13.2 million (FY16: $23.6 million) and reported diluted EPS decreased 51% to 2.11 cps (FY16: 4.27 cps). EPS calculations have been negatively impacted by an adverse swing of $13.7 million (after-tax) from the impact of changes in the long-term discount rates on policy liabilities between periods coupled with the FY17 impact of the shares issued in the $50 million capital raising in June 2016. Fully diluted Underlying EPS was broadly in line with the prior period at 4.88 cps (FY16: 4.92 cps). This was driven by an increase in UNPAT of $3.2 million offset by the impact from the shares issued under the capital raising (as noted above). Operating expenses overview Chart 3: Operating expense analysis FY16 vs FY17 Cost Base 3.0 1.3 0.1 0.7 0.7 78.1 75.5 1.0 2.1 $m 85 80 75 70 65 60 Fu nctional costs Direct Life H Y16 M anage m ent Restructure FY16 Cost Base Distribution Financial A dvice Support Costs Projects & Softw are A m ortisation Shared Services/Listed FY17 Cost Base The waterfall chart above shows a 3% increase in the operating cost base from $75.5 million in FY16 to $78.1 million in FY17. Key components of the movement included: • • Management restructure HY16 – Restructure costs incurred in HY16 relating to management changes in October 2015. Related savings flowing from 2H FY16. Functional costs – Increased costs in functional areas to support business growth including administration, call centre, claims and underwriting. This reflects underlying volume growth in both new business and the in-force base. Functional costs also include the incremental growth in IT support given the increasing number of software applications including costs associated with the automation of Life Insurance correspondence, new general ledger platform and the data warehouse. • Exit of Direct Life Insurance – Lower fixed cost base given strategic decision to reduce exposure to the Direct business. Annualised costs savings of approximately $4 million are expected from the closure of the business. ClearView Annual Report 2017 29 ClearView Wealth LimitedDirectors’ ReportContinued • • • Distribution costs – Increased business development costs reflecting a larger Life Insurance distribution presence to support the broader IFA footprint. Investment in Wealth Management’s ‘front-end’ to support business growth following the launch of contemporary platform and products remained broadly consistent between periods. Financial Advice support costs – Increased dealer services costs associated with the acquisition of an advisory practice under contractual arrangements, investment in the development and roll out of a strategic advice program and ongoing compliance, partially offset by the benefit of transitioning employed planners to a self-employed model. Project costs and software amortisation – An upgrade of the general ledger to a cloud-based solution resulted in additional costs in FY17. Software amortisation costs also increased as projects passed go-live dates, in particular the correspondence and data warehouse projects. A project to migrate the Master Trust onto the contemporary wealth platform commenced in 2H FY17 with cost benefits and efficiencies expected to flow from late FY18. Provision for the wealth migration of $1.1 million remains on balance sheet at 30 June 2017 and is expected to be progressively utilised in FY18. • Shared services / Listed entity – Increased shared services and business support costs should reduce on a per customer basis as the business grows and achieves further scale. Listed entity costs have reduced given changes in Board size and composition plus a reduction in investor relations costs in FY17. Expense over-runs ClearView has consistently invested in operations ahead of revenue to support growth including prioritising incremental costs above those required for ClearView’s current scale (expense overruns) to build capability for the future. This includes initial start-up costs and business investment costs that are being incurred prior to achieving scale. As ClearView continues to grow, the remaining expense overruns are likely to be absorbed. Expense overruns initially depress reported profits but begin to unwind as scale is achieved and underlying profit is realised as the in-force portfolio increases. In FY17, the non-deferred expense overruns across the Life Insurance and Wealth Management ‘manufacturing’ businesses had a negative impact on UNPAT of $3.1 million (FY16: $5.2 million). The movements between segments are shown in the corresponding graph which indicates that cost overruns continue to be absorbed. Chart 4: Non-deferred expense over-runs FY16 – FY17 10 8 6 4.5 $m 4 2 0 -2 1.2 0.4 9.1 4.6 2.7 4.0 2.7 5.2 3.1 Life Insurance Wealth Management Total FY15 FY16 FY17 30 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedGiven the current size of ClearView’s in-force business, these overruns are predominantly driven by: • • Significant investment in LifeSolutions. These overruns have progressively reduced ($0.4 million in FY17 versus $4.5 million in FY15) as LifeSolutions continues to grow and achieves scale. Investment in WealthFoundations and the contemporary wealth platform in FY15. WealthSolutions continues to build scale (FUM +34%) with WealthFoundations now contributing to growth and development costs (FUM +50%). Expense overruns decreased in FY17 due to increased FUM balances and a reduction in the Wealth Management operating cost base (-9%). A key driver of the overrun is that the expense allowances for the Master Trust are higher than contemporary products, in particular WealthSolutions where IT and administration is outsourced. As the Master Trust business runs off, albeit at a slower rate than anticipated, this has an adverse impact on the expense overruns until WealthFoundations achieves scale to support the cost base. Costs associated with the contemporary platform will be shared with the Master Trust once the migration project is completed. Expense overruns should therefore improve further as WealthFoundations FUM builds and the migration project is completed. The elimination of expense overruns along with achieving the business’ growth ambitions remains a key focus of management and the Board. Operating expense reconciliation The table below reconciles the operating expenses analysed in Chart 3 (page 29) with reported operating expenses in the annual financial statements. Reconciliation of operating expenses Operating expenses per waterfall chart Custody and investment management expenses Depreciation and software amortisation Reinsurance technology costs Stamp duty Medical costs Interest expense Loss on disposal of assets Costs associated with Sony Life becoming a strategic shareholder Direct closure provision / Your Insure impairment Recoverable Financial Advice compliance costs Other expenses on consolidation of unit trusts Operating expenses per financial statements FY17 $m 78.1 8.1 FY16 $m 75.5 6.8 (5.3) (4.7) 1.2 6.7 1.7 0.3 - 1.0 3.4 0.8 1.6 0.7 4.8 1.3 1.5 (0.3) 0.5 2.7 - 0.6 97.6 89.4 ClearView Annual Report 2017 31 ClearView Wealth LimitedDirectors’ ReportContinuedSegment analysis - Life Insurance Life Insurance UNPAT increased 2% to $24.9 million (FY16: $24.5 million), compared to expected growth of 24%3. Lower-than-expected growth attributable to adverse impact on FY17 UNPAT from prudent decisions made by the Board to support the Group’s long term strategy (including the adoption of an enhanced IP claims reserving basis and IP price increases). 2016 2017 % 12 Months to June 2017 ($m)1 Gross life insurance premiums Interest income Net claims incurred Reinsurance premium expense Commission and other variable expenses Operating expenses Movement in policy liabilities Underlying NPBT Income tax (expense) / benefit Underlying NPAT Amortisation of intangibles Policy liability discount rate effect (after tax) 1H 64.9 1.4 (7.5) (14.0) (21.9) (22.2) 16.6 17.3 (5.2) 12.1 (1.4) 0.7 2H FY16 73.4 138.3 1.4 2.8 (11.3) (16.8) (24.0) (22.0) 16.9 17.6 (5.2) 12.4 (1.4) 7.1 (18.8) (30.8) (45.9) (44.2) 33.5 34.9 (10.4) 24.5 (2.8) 7.8 29.5 1H 84.4 1.2 (11.8) (20.3) (27.8) (24.2) 16.7 18.2 (5.5) 12.7 (1.4) (6.9) 2H FY17 Change2 93.3 177.7 28% 1.1 2.3 (18%) (13.2) (24.0) (29.9) (23.7) 13.8 17.4 (5.2) 12.2 (1.4) (25.0) (44.3) (57.7) (47.9) 30.5 35.6 (10.7) 24.9 (2.8) 33% 44% 26% 8% (9%) 2% 2% 2% 0% 1.0 (5.9) (177%) 4.4 11.9 16.2 (45%) Reported NPAT 11.4 18.1 Analysis of Profit ($m) Expected Underlying NPAT3 Claims experience Lapse experience Expense experience Other Underlying NPAT Key Statistics And Ratios ($m) New business LifeSolutions Non-Advice In-force premium LifeSolutions Non-advice (closed to new business) Cost to income ratio 2016 2017 % 1H 11.4 1.7 (0.2) (0.9) 0.1 2H FY16 1H 2H FY17 Change2 12.3 (0.7) 0.7 (0.2) 0.3 23.7 14.2 15.1 29.3 24% 1.1 0.5 (1.2) 0.4 (0.6) (0.7) (0.3) 0.1 (1.3) (1.3) (0.1) (0.2) (1.9) (278%) (2.0) (505%) (0.4) (63%) (0.1) (128%) 12.1 12.4 24.5 12.7 12.2 24.9 2% 2016 1H 18.2 15.7 2.5 2H FY16 21.0 19.0 2.0 39.2 34.7 4.5 1H 22.1 20.6 1.5 2017 % 2H FY17 Change2 20.2 19.7 0.5 42.3 40.3 8% 16% 2.0 (56%) 132.0 150.7 150.7 171.0 189.5 189.5 86.7 45.3 105.7 105.7 126.1 146.1 146.1 45.0 45.0 44.9 43.4 43.4 26% 38% (3%) 34.2% 30.0% 32.0% 28.7% 25.4% 27.0% 1 Shareholder view excludes the life investments contracts (i.e. unit linked business) and deconsolidates retail unit trusts and reflects fees earned by the shareholder less expenses incurred. Inter-segment revenues/expenses are not eliminated in the shareholder view. 2 % change represents the movement from FY16 to FY17. 3 Expected Underlying NPAT of $29.3m (+24% FY16 to FY17) reflects expected profit margins on in-force portfolios based on actuarial assumptions. 32 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedKey performance indicators Major components of the movement in in-force premium from $150.7 million (at 30 June 2016) to $189.5 million in FY17 are illustrated in the waterfall chart below. Chart 1: Life Insurance in-force movement ($m) 220 195 42.3 (22.6) 189.5 $m 170 15.9 3.2 150.7 145 120 O pening CPI / A ge IP Pricing Increase N e w Business Lapses Closing • • Non-advice in-force book (closed to new business) is $10.7 million (-2%). The old Direct book had (business written pre-2011) in-force premium of $32.7 million (-4%) as at 30 June 2017. Non-advice sales dropped 56% in FY17, reflecting the intentional decision to exit the lower socio-demographic markets and subsequently to close the Direct business to new business. Notable points • • In-force premium growth was driven by strong new business growth with lapses partially offset by age-based premium increases and inflation (CPI) increases on insurance benefits. IP price increases were implemented and increased the in-force book by $3.2 million for those policies that subsequently renewed. The product mix making up the in-force book has changed significantly with LifeSolutions’ in-force premium now $146.1 million as at 30 June 2017 (+38%), representing 77% of the total life insurance in-force book (links to the margin shifts across the overall portfolio). • LifeSolutions sales growth reflecting: • • • Continued market outperformance with new business premium up 16% to $40.3 million; Focus on expanding IFA distribution network and embedded growth with LifeSolutions now available on 343 APLs, up 34%; and Strong growth and market outperformance in Advised market with 72% of LifeSolutions sales generated from IFA channel (IFA sales +34%). ClearView Annual Report 2017 33 ClearView Wealth LimitedDirectors’ ReportContinued Results review The following graphs reflect the planned profit margins inherent in the in-force portfolio and actual results achieved. Expected Life Insurance Underlying NPAT1 ($m) Life Insurance Underlying NPAT2 ($m) 30 25 20 15 10 5 0 29.3 15.1 14.2 23.7 12.3 11.4 19.2 9.9 9.3 15.1 8.3 6.8 30 25 20 15 10 5 0 24.5 24.9 12.4 12.2 12.1 12.7 15.3 8.0 8.0 7.3 7.3 10.8 6.1 4.7 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 1H 2H 1H 2H Claims Experience ($m) Lapse Experience ($m) Expense Experience ($m)3 1.5 0.5 1.1 1.0 1.5 0.5 0.1 0.5 -0.5 -1.5 -2.5 0.1 -0.5 (0.9) (1.9) (2.0) FY14 FY15 FY16 FY17 -1.5 -2.5 FY14 FY15 FY16 FY17 2.5 1.5 0.5 -0.5 -1.5 -2.5 -3.5 -4.5 -5.5 (0.4) (1.2) (4.5) (4.5) FY14 FY15 FY16 FY17 Claims experience Average claims experience Lapse experience Average lapse experience Expense experience Notable points • Expected UNPAT of $29.3m in FY17 is up 24%1 reflecting: • • Expected profit margins on the in-force portfolios based on actuarial assumptions; and Strong growth in the in-force portfolios (+26%) partially offset by the run-off of the higher margin old book. Actual Life Insurance UNPAT up 2% to $24.9 million compared to expected growth of 24%. Lower-than- expected growth attributable to adverse impact on FY17 UNPAT from prudent decisions made by the Board to support the Group’s long term strategy (including the adoption of an enhanced IP claims reserving basis and IP price increases). The expected growth of 24% would have been broadly in line with FY17 inforce portfolio growth. This is discussed in further detail below. • The underlying performance of the Life Insurance segment remains very strong with in-force book growth of 26% and LifeSolutions sales up 16%. This is largely due to the expanding IFA4 distribution footprint resulting in an increasingly diversified sales profile and material embedded growth. Expected Underlying NPAT of $29.3m (+24% FY16 to FY17) reflects expected profit margins on in-force portfolios based on actuarial assumptions. Life Insurance Underlying NPAT consists of consolidated profit after tax adjusted for amortisation (not including capitalised software), the effect of changing discount rates on insurance policy liabilities and costs considered unusual to the Group’s ordinary activities. Non deferred expenses. IFAs are independent financial advisers that write ClearView products that are placed on third party dealer group approved product lists. • 1 2 3 4 34 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinued • Adverse claims experience relative to the claims assumptions in the Life Insurance policy liability (determined at 30 June 2016) resulted in an experience loss of $1.9 million (after tax) relative to planned margins ($1.1 million profit in FY16). Consequently, there was an adverse swing of $3 million between periods. • • • • The adverse experience on the LifeSolutions portfolio (-$2.1 million) was partially offset by the positive net experience on the Direct portfolios which are closed to new business (+$0.2 million). LifeSolutions’ adverse claims experience was driven mainly by the IP portfolio (-$3.7 million) with lump sum reflecting a claims profit ($1.5 million). A material component of the IP claims loss arose from the adoption of an enhanced actuarial claims reserving basis which had an adverse impact (-$2.6 million1) in FY17. Notwithstanding this, the IP portfolio remains profitable. Actuarial claims assumptions have been updated to better reflect expected claims costs. As a result, the projected cost of IP claims has increased (post the reserving base changes) which is offset by a decrease in the projected cost of lump sum claims. Claims assumptions therefore had an overall net immaterial impact on the LifeSolutions portfolio. Given the current size of the Life Insurance portfolio and the reinsurance arrangements in place, which vary by product, some statistical claims volatility can be expected period-to-period. The claims experience is expected to average out over time based on actuarial best-estimate assumptions. The graph on the previous page outlines the overall net claims performance which broadly has nil impact over a four-year period (+$0.1 million). • Lapse experience loss relative to assumptions in the Life Insurance policy liability (determined at 30 June 2016) with an experience loss of $2.0 million in FY17 against planned margins ($0.5 million profit in FY16), reflect an adverse swing of $2.5 million between periods. Notable points include: • LifeSolutions portfolio had an overall adverse lapse experience loss relative to assumptions in FY17 (-$1.6 million); • • • IP price increases implemented to help manage margin over time but resulted in some short-term elevated lapses (-$1.1 million). IP price increases are designed to improve the long-term product profitability; LifeSolutions lapse actuarial assumptions were reshaped to better reflect actual and expected experience. This has an overall net immaterial impact on the future projected profitability or the Embedded Value; and Old Direct book (business written pre-2011) recorded a neutral lapse experience in FY17 while the Non-advice portfolio experienced lapse losses (-$0.4 million) albeit a significant improvement on FY16. Both portfolios are closed to new business. • • • • Although expense overruns initially depress reported profits, they should eliminate as scale is achieved thereby increasing underlying profit on the growing in-force portfolio. • Non-deferred expense experience loss decreased from $1.2 million in FY16 to $0.4 million in FY17, demonstrating that expense overruns are being absorbed as scale is achieved. Investment earnings were impacted by falling interest rates over the year, partially offset by the reallocation of shareholder cash to the Life Insurance segment (given the growth in the business and related capital requirements). The increased reinsurance expense is aligned to the growth in in-force portfolios given the upfront reinsurance support provided in year one of a policy by the reinsurer. Growth in Life Insurance initial commission in FY17 was driven by the upfront variable commission cost related to higher new business volumes. These acquisition costs are deferred and amortised within the policy liability over the expected life of the policies, in accordance with accounting standards. From 1 January 2018, life insurance reforms will be implemented with caps on upfront commission. • An increased variable expenses related to stamp duty and medical policy acquisition costs driven by increased new business volumes. 1 Enhancement in estimate in relation to IP claims in the course of payment pre 30 June 2016. ClearView Annual Report 2017 35 ClearView Wealth LimitedDirectors’ ReportContinued Segment analysis - Wealth Management Wealth Management UNPAT up 46% to $3.9 million (FY16: $2.7 million). Earnings growth is now emerging following recently-completed ‘build’ phase. Positive net flow business with $353 million flowing into contemporary products. 12 Months to June 2017 ($m)1 Fund management fees Interest income Variable expense3 Funds management expenses Operating expenses Underlying NPBT Income tax (expense)/benefit Underlying NPAT Amortisation of intangibles Reported NPAT 2016 2017 % 1H 15.7 0.2 (3.4) (3.5) (7.7) 1.3 0.0 1.3 (2.6) (1.3) 2H FY16 15.4 0.2 (3.3) (3.4) (7.5) 1.3 0.1 1.4 (2.7) (1.3) 31.1 0.4 (6.7) (6.9) (15.2) 2.6 0.1 2.7 (5.3) (2.6) 1H 16.3 0.2 (3.3) (4.1) (7.0) 2.1 (0.4) 1.6 (2.6) (0.9) 2H 16.5 0.2 (3.2) (4.0) (6.8) 2.6 (0.3) 2.3 (1.8) 0.5 FY17 Change2 32.8 6% 0.3 (12%) (6.5) (8.1) (13.8) 4.6 (2%) 18% (9%) 78% (0.7) (768%) 3.9 46% (4.4) (0.5) (17%) (82%) Key Statistics And Ratios ($m) 1H 2H FY16 1H 2H FY17 Change2 2016 2017 % Net Flows Master Trust WealthSolutions WealthFoundations External Platforms Total FUM ($b) Master Trust WealthSolutions WealthFoundations External Platforms Cost to Income Ratio 101.2 111.1 212.3 59.5 145.4 204.9 (58.1) (64.5) (122.6) (81.5) (66.3) (147.8) 112.7 46.6 - 1.98 1.11 0.72 0.15 - 75.3 45.8 54.5 2.13 1.07 0.80 0.20 0.06 188.0 92.4 54.5 2.13 1.07 0.80 0.20 0.06 86.6 42.1 12.3 2.28 1.03 0.93 0.25 0.07 112.5 199.1 45.7 53.5 2.50 1.00 1.08 0.30 0.12 87.8 65.8 2.50 1.00 1.08 0.30 0.12 49.0% 48.7% 49.0% 42.9% 41.4% 42.1% (3%) 21% 6% (5%) 21% 17% (7%) 34% 50% 117% 1 Shareholder view excludes the life investments contracts (i.e. unit linked business) and deconsolidates retail unit trusts and reflects fees earned by the shareholder less expenses incurred. Inter-segment revenues/expenses are not eliminated in the shareholder view. 2 % change represents the movement from FY16 to FY17. 3 Variable expense include the platform fee payable on WealthSolutions and the internal advice fee payable to the Financial Advice segment on the Master Trust product. 36 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedKey performance indicators Chart 1: Wealth Management in-force FUM movement FY16 – FY17 0.20 0.09 2.13 0.15 0.20 2.50 0.07 0.04 0.01 3.0 2.5 2.0 1.5 1.0 0.5 O pening FU M 1 Jul 2016 W ealth Solutions N etﬂo w W ealth Fou n dations N etﬂo w M aster Trust N etﬂo w External Platfor m s N etﬂo w M arket M ove m ent M anage m ent Fees Others Closing FU M 30 Ju ne 2017 • • FUM up 17% to $2.5 billion at 30 June 2017 with $1.5 billion in contemporary products including ClearView platform funds on external platforms. Top quartile investment performance across ClearView models remains key to attracting flows and supporting the Master trust FUM given that product is not actively marketed to new customers. Wealth Management was $205 million net flow positive in FY17 (-3%) with material net flows (relative to FUM balances) into contemporary products (+5%). This reflected: • • • • WealthSolutions net inflows of $199 million (+6%); FUM of $1.08 billion (+34%) WealthFoundations net inflows of $88 million (-5%); FUM of $0.3 billion (+50%) External platform net inflows of $66 million (+21%); FUM of $0.12 billion (+117%) Master trust net outflows of $148 million (+21%); FUM including closed MISs of $1.0 billion (-7%) Results review Notable points • • Wealth Management segment profitability is primarily driven by fees earned from FUM in inhouse product less expenses incurred. The positive impact on net fee income from FUM growth (+17%) was offset by margin compression from the gradual run-off of the Master trust product being replaced by lower margin new business written in new contemporary products (fee income +6% overall). • • • • Master Trust is effectively a closed book with a portion of FUM in pension phase Investment market performance key to supporting Master Trust FUM Investment market performance of 9% on FUM compared to a 4% investment return in FY16 Margin compression and run off from the Master Trust book is assumed in Embedded Value (EV) calculations • To date, WealthSolutions and WealthFoundations have primarily been distributed by aligned advisers: • • These products will be rolled out further across the Matrix dealer group as well as the IFA market Expanding Wealth Management’s distribution footprint broadly commenced in FY17 with WealthFoundations now available on 30 third-party APLs (+233%) • Decrease in variable expenses driven by: • • Inter-segment advice fee (50bps) paid to Financial Advice on Master trust FUM (in line with average Master Trust FUM); and Partially offset by higher platform fees payable on WealthSolutions (in line with growth in average WealthSolutions FUM). ClearView Annual Report 2017 37 ClearView Wealth LimitedDirectors’ ReportContinued • • Funds management expenses increased in line with the expanded wealth product range (WealthFoundations launch and MIS growth on platforms) and increased FUM between periods. Decrease in operating expenses (-9%) driven by a reduction in wealth administration functions due to greater efficiencies from growth in WealthFoundations and MIS FUM. Front-end costs to support business growth has remained broadly consistent (notwithstanding a 5% increase in contemporary new product new flows). The Master trust migration project commenced in 2H FY17 with cost benefits expected to flow through in late FY18. IT support and shared services costs allocated to the segment reduced in FY17 and have been absorbed by growth in the Life Insurance segment. • Expense overruns (after tax) decreased to $2.7 million in FY17 (FY16: $4.0m) driven by higher FUM balances (+17%) and a lower Wealth Management operating cost base (-9%). This is explained in further detail in the expense overrun section on page 30. • The tax benefit of $0.7 million in FY17 (FY16: $0.9 million) included: • Exempt fees in the Master trust product range; and • Positive impact from a tax benefit arising from superannuation insurance premium deductions. • Reduced investment earnings given the reallocation of shareholder cash between segments and lower market interest rates. 38 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinued Segment analysis - Financial Advice Financial Advice UNPAT up 47% to $2.2 million (FY16: $1.2 million) driven by net change in revenue model and disciplined expense control notwithstanding ongoing investment in strategic advice program and compliance costs. 2016 2017 % 12 Months to June 2017 ($m)1 Net financial planning fees Interest and other income Operating expenses Underlying NPBT Income tax (expense) / benefit Underlying NPAT Amortisation of intangibles Reported NPAT Key Statistics And Ratios FUMA ($b)4 PUA ($m)3 Financial advisers Chart 1: FY17 - Key Performance Indicators 1H 8.5 0.2 (7.7) 1.0 (0.3) 0.7 (0.5) 0.2 1H 8.1 203 221 2H 8.2 0.1 FY16 16.7 0.3 (7.2) (14.9) 1.1 (0.3) 0.8 (0.5) 0.3 2016 2H 8.2 215 235 2.1 (0.6) 1.5 (1.0) 0.5 FY16 8.2 215 235 1H 9.1 0.5 (7.9) 1.7 (0.5) 1.2 (0.5) 0.7 1H 8.5 223 243 2H 8.8 0.1 FY17 Change2 17.9 7% 0.6 102% (7.4) (15.3) 3% 53% 42% 47% 0% 3.2 (0.9) 2.2 (1.0) 1.2 140% 1.5 (0.4) 1.0 (0.5) 0.5 2017 % 2H 8.9 237 243 FY17 Change2 8.9 237 243 9% 10% 3% Adviser Force - Aligned Advisers Premiums Under Advice ($M)3 FUMA ($B)4 245 210 175 140 105 70 35 0 235 243 89 91 221 82 102 81 21 FY13 117 98 19 FY14 127 138 143 12 FY15 8 FY16 9 FY17 250 200 150 100 50 0 65 56 9 173 111 61 ClearView PUA Matrix PUA 237 167 70 Total 10 8 6 4 2 0 3.8 3.4 0.4 5.1 3.2 1.9 ClearView FUMA Matrix FUMA 8.9 6.5 2.4 Total Employed ClearView Self-Employed Matrix Self-Employed LifeSolutions Premiums Under Advice FUM FUA • • Aligned adviser numbers across CFA and Matrix up 3% to 243. Aligned FUMA up 9% to $8.9 billion and PUA3 up 10% to $237 million. This growth is due largely to positive market performance (impacts on FUMA) and change in adviser numbers and composition: • • Of the $8.9 billion in FUMA, $1.4 billion was in contemporary inhouse Wealth Management products and $1.0 billion was in the Master trust product Of the $237 million PUA in-force, $70 million was in LifeSolutions 1 Shareholder view excludes the life investments contracts (i.e. unit linked business) and deconsolidates retail unit trusts and reflects fees earned by the shareholder less expenses incurred. Inter-segment revenues/expenses are not eliminated in the shareholder view 2 % change represents the movement from FY16 to FY17 3 4 Premiums Under Advice is life insurance in-force premium that are externally managed and administered (Third Party Products) and in-force LifeSolutions premium FUMA includes FUM and funds under advice that are externally managed and administered ClearView Annual Report 2017 39 ClearView Wealth LimitedDirectors’ ReportContinued Results review Notable points • Growth in net financial planning fees (7%) primarily driven by: • • • Dealer service fees and membership revenue from new practices (including practice acquired under contractual arrangements) (+$0.3 million); Higher internal sponsorship revenue from LifeSolutions partially offset by run off of internal advice fee (50bps) earned on Master trust FUM (+$0.9 million); and Delegate and sponsorship revenue generated from the annual dealer group conference (+$0.2 million). • Increased operating expense of $0.5 million in FY17 (+3%) was primarily driven by: • • • Higher dealer group support costs due to the acquisition of a practice, increased compliance (and related) costs and investment in the development and roll out of the strategic advice program, partially offset by benefits associated with transitioning employed planners to a self- employed model; Increased dealer group conference costs, partially offset by sponsorship revenue; and Reduced allocation of marketing and other shared services costs to the dealer group. • Interest and other income related to the reallocation of shareholder cash between segments and lower market interest rates. Other income includes the potential recovery of certain compliance costs incurred (+$0.3 million). 40 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinued Segment analysis – Listed Entity / Other Result 12 Months to June 2017 ($M)2 Interest income Operating expenses Operating earnings NPBT Income tax (expense) / benefit Operating earnings NPAT Interest expense on corporate debt (after tax) Underlying NPAT Strategic review costs Your Insure impairment Direct closure provision Reported NPAT Result review Notable points • • • • Investment earnings on cash and investments held in the listed and central services entities and in the shareholders’ fund of ClearView Life, less costs associated with maintaining a listed entity. The Company manages capital at the listed entity level in accordance with its Internal Capital Adequacy Assessment Process (ICAAP) policy. Drop in investment earnings (-76%) is for the most part offset by a related reduction in after-tax interest expenses given the repayment of $45.5 million of corporate debt in 2H FY16. This was repaid using proceeds of a $50 million 1 for 10.2 pro-rata accelerated renounceable entitlement offer in June 2016. Lower operating expenses driven by a reduction in directors’ fees and investor relations costs. There were changes in Board size and composition between periods. Tax benefit of $0.1 million (FY16: tax charge $0.2 million) related to the research and development tax rebate in FY16 (+$0.3 million) partially offset by the non- deductibility of the Employee Share Plan expense that is absorbed within the Listed segment. As such, the Group effective tax rate for FY17 is 28%. 2016 1H 0.6 2H 0.6 FY16 1.2 (0.6) (0.6) (1.2) - (0.2) (0.2) (0.5) (0.7) - (1.9) - - (0.3) (0.3) (0.5) (0.8) (0.4) - - - (0.5) (0.5) (1.0) (1.5) (0.4) (1.9) - 1H 0.2 (0.4) (0.2) (0.1) (0.3) (0.1) (0.4) (0.5) - - (2.6) (1.2) (3.8) (0.9) 2017 2H 0.1 (0.6) (0.5) % FY17 Change1 0.3 (76%) (1.0) (0.7) (17%) Large 0.3 0.2 (142%) (0.2) (0.1) (0.3) (0.1) - (2.4) (2.8) (0.5) (0.2) (0.7) (0.6) - (2.4) (3.7) 8% (81%) (53%) 54% NM NM (2%) Statement of financial position The Group’s Statement of financial position, which is set out on page 68, reflects the key metrics below. • Net assets, adjusting for the FY16 final cash dividend, increased 4% to $415.6 million3 (June 2016: $411.8 million). Net assets increased by $3.8 million from 30 June 2016 comprising: • Reported profit of $13.2 million; • • • FY16 final cash dividend (-$16.5 million). No dividend reinvestment plan (DRP) was operative for the FY16 final dividend given that the $50 million capital raising had recently been completed in June 2016; Movements in the ESP Reserve due to the treatment of the ESP expense in accordance with the accounting standards (+$1.0 million), ESP loans settled through the FY16 final dividend and ESP participant proceeds from the sale of renounceable rights attached to ESP holders in the capital raising (+$1.0 million); and The proceeds from ESP shares sold via off-market transfer in June 2017, including repayment of ESP loans (+$5.1 million). • Net tangible assets increased to $371.0 million ($407.8 million including ESP loans) (June 2016: $363.4 million). 1 % change represents the movement from FY16 to FY17. 2 Shareholder view excludes the life investments contracts (i.e. unit linked business) and deconsolidates retail unit trusts and reflects fees earned by the shareholder less expenses incurred. Inter-segment revenues/expenses are not eliminated in the shareholder view. Net Asset Value as at 30 June 2017 excluding ESP Loans; % increase adjusted for the FY16 cash dividend paid of $16.5m in September 2016 less ESP related items (-$6.2m). 3 ClearView Annual Report 2017 41 ClearView Wealth LimitedDirectors’ ReportContinued • • Net asset value per share (including ESP loans) of 68.6 cents per share (June 2016: 68.6 cents per share). Net tangible asset value per share (including ESP loans) of 61.8 cents per share (June 2016: 61.2 cents per share). The net asset value per share and net tangible asset value per share are reflected above on a fully diluted basis, as ClearView ESP shares have been issued to employees and contractor participants as at 30 June 2017 (in accordance with the ClearView ESP Rules). The ClearView ESP shares on issue have a corresponding non-recourse loan from ClearView to facilitate the purchase of ClearView ESP shares by the participants. The shares and loans are not reflected in the statutory accounts as they are accounted for as an option in accordance with Australian Accounting Standards. If the loan is not repaid, the relevant ClearView ESP shares are cancelled or reallocated in accordance with the ClearView ESP Rules. Embedded Value Life Insurance and Wealth Management are long-term businesses that involve long-term contracts with customers and complex accounting treatments. Embedded Value (EV) represents the discounted value of the future net cash flows anticipated to arise from the in-force life policies, investment client balances and advice client recurrent revenue as at the valuation date. EV calculations at a range of risk discount margins is shown below. Chart 1: Embedded Value Movement Analysis @ 4%DM 624.1 92.0 494.4 39.6 (16.5) 6.2 613.8 92.0 39.6 492.4 482.2 32.3 16.7 (1.9) (2.0) (4.1) (3.1) 1.5 8.8 661.9 624.1 103.6 36.8 521.5 700 600 500 400 300 200 100 0 ESP Related Transactions EV - 30 Ju ne 2016 (As Published) EV After net capital applied FY16 Cash Dividen d Costs considered u n usual to Expected G ain I m pact of Claim s Value of N e w Business A d ded Franking Credits an d ESP Loans Total EV incl. ESP Loans & Franing Credits I m pact of M aintenance expenses I m pact of Discontin uances FU M A m ark to m arket nor m al activities Embedded Value ESP Loans Franking Credits 42 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedRisk Margin Over Risk Free Rate: ($M), (Unless Stated Otherwise) Life Insurance Wealth Management Financial Advice Value of In-Force (VIF) Net Worth Total EV ESP Loans Total EV including ESP Loans Franking Credits: Life Insurance Wealth Management Financial Advice Net Worth Total EV including Franking Credits and ESP Loans EV per Share including ESP Loans (cents) EV per Share including Franking Credits and ESP Loans (cents) 3% DM 4% DM 5% DM 390.6 367.6 347.2 63.1 28.1 59.8 26.4 56.8 24.9 481.8 453.8 428.8 67.8 67.8 67.8 549.6 521.5 496.6 36.8 36.8 36.8 586.3 558.3 533.4 64.7 16.8 8.0 19.3 60.8 15.9 7.6 19.3 57.3 15.1 7.1 19.3 695.2 661.9 632.3 89.1 84.8 105.6 100.6 81.0 96.1 • Net capital applied (-$16.5 million): driven by the FY16 • Strategic review costs (-$0.7 million): This relates final cash dividend paid in September 2016. The Dividend Reinvestment Plan (DRP) was not operative for the FY16 final dividend • ESP related items (+$6.2 million): Movements in the Share Based Payments Reserve due to the treatment of the ESP expense in accordance with the accounting standards, ESP loans settled through the FY16 final dividend, ESP participant proceeds from the sale of renounceable rights attached to ESP holders in the FY16 capital raising and from ESP shares sold via off-market transfer in June 2017 • Expected gain (+$32.3 million): Expected gain represents the expected unwind of the discount rate within the value of in-force and investment earnings on net worth • VNB added (+$16.7 million): The value added by new business written (Life Insurance and Wealth Management products) over the period. The current value of new business is suppressed by the growth costs incurred. The acquisition cost overruns should decrease as the business grows, providing it with operating leverage. The Non-Advice (Direct Life) business had a negative value of new business (-$4.5 million). This was exacerbated by a slow down in new business volumes given the refocus in strategy followed by the closure of the operation. LifeSolutions continues to be the key driver given increased scale and volumes, albeit impacted by the mix of business written (including commission type driven by the upcoming LIF reforms) to the FY17 strategic review costs incurred on the evaluation of strategic options for the potential change in major shareholder and Sony Life becoming a new strategic shareholder • Direct closure provision (-$2.4 million): The FY17 costs provided for relating to the closure of ClearView’s Direct business • The claims experience (-$1.9 million): Adverse claims experience loss (after tax) of $1.9 million (relative to planned margins) driven by the LifeSolutions portfolio (-$2.1 million) partially offset by positive experience on the closed Direct books (+$0.2 million). The LifeSolutions adverse claims experience in FY17 includes the impact (-$2.6 million) from the adoption of an enhanced actuarial claims reserving basis on the IP portfolio. Claims assumptions have been updated to reflect increased projected cost of IP claims, offset by decrease in projected cost of lump sum claims (overall net immaterial impact) • The impact of lapses on the life insurance book and FUMA discontinuances: (-$2.0 million): Life Insurance lapse impact was driven by higher-than-expected lapses for LifeSolutions (following the IP price increase). Lapses on Non-Advice reflect an improvement given the books are now closed to new business. For Wealth business, discontinuance rates overall were close to expected, notwithstanding an increase in outflows in the Master Trust product (relative to FY16) ClearView Annual Report 2017 43 ClearView Wealth LimitedDirectors’ ReportContinued• The adverse maintenance expense experience (-$3.2 million): This relates to maintenance expense overruns versus the long-term unit costs assumed in the EV. Emerging life insurers invest and incur overhead costs ahead of “getting to scale”. The expense rates assumed in the EV are based on longer term unit costs, as opposed to current “expense overrun” levels. As the business gets to scale, these costs are progressively supported by business volumes that creates operating leverage. Expense overruns depress the EV growth initially; these are eliminated as scale is achieved, thereby increasing underlying profit margins on the in-force portfolio and removing the drag on the EV • Listing expenses and interest expense (-$0.9 million): Expenses were impacted by the Group’s listed overhead Chart 2: Embedded Value (EV) Sensitivity Analysis1 @ 4%DM costs and line fee on corporate debt which are not allowed for in the Embedded Value. The Debt Funding Facility was settled in June 2016 by utilising the proceeds of the capital raising. Debt Funding Facility remains in place. • FUMA mark-to-market (+$1.5 million): This is predominantly driven by the net investment performance on FUMA, which resulted in higher fee income relative to expectations over the period and a higher present value of future fees at the end of the period • Other impacts (-$0.1 million): This relates to the net impact of capital reallocations by segment, modelling enhancements (including assumption changes), restatements, timing effects and tax impacts of the policy liability discount rate effect in the period. Claims +10%;-10% Discontinuance Rates +1%;-1% -20.7 Expenses +10%;-10% FUMA -10%; +10% Risk-free Rate +1%; -1% -20.9 -13.1 -13.2 -7.8 7.8 13.1 13.2 23.2 23.4 Inﬂation -0.5%;+0.5% -5.0 5.2 -25 -20 -15 -10 -5 00 5 10 15 20 25 Dividends The Board has declared a fully franked dividend in 2017 of $18.14 million (2016: $16.45 million). This equates to 2.75 cents per share (2016: 2.5 cents per share), representing approximately 60% of 2017 UNPAT in line with the Company’s dividend policy (+10% increase in the dividend per share). The Board seeks to pay dividends at sustainable levels and has a target payout ratio of between 40% and 60% of UNPAT. Furthermore, the Company intends to maximise the use of its franking account by paying fully franked dividends. As foreshadowed during the June 2016 capital raising, the Dividend Reinvestment Plan (DRP) was suspended and did not operate in respect to the FY16 final cash dividend. The DRP has been reactivated for the FY17 final dividend and will operate in accordance with the DRP rules below: • Shareholders will have the opportunity to reinvest into the Company while retaining capital within the Group; and • Given the illiquidity of the shares, it is not considered appropriate to minimise the dilutive impact of the DRP through the on-market purchase of the number of shares required to satisfy the DRP participation. Substantial shareholders have committed to participate in the DRP at a fixed price of $1.39 per share as follows: • • Crescent Capital and its associates for its entire share of the dividend; and Sony Life for its share of the dividend to the extent that its holding does not exceed 14.9% (given regulatory approvals are required for Sony Life to increase its holding above 15%). No interim dividend was paid during the year (2016: Nil). To date, the ability to pay an interim dividend has been limited by the effect on tax paid of the changes in long-term discount rates used to determine the insurance 1 Does not include the impact of management actions in response to sensitivities (for example, premium rate changes), or reinsurer response to sensitivities (for example, reinsurer rate changes). 44 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedpolicy liabilities between the half year period and year end. As a sufficient franking credit balance continues to be progressively established, the payment of interim dividends can be considered in future periods. ClearView’s ability to pay a franked dividend depends upon factors including profitability, availability of franking credits and funding requirements which in turn may be affected by trading and general economic conditions, business growth and regulation. As such, no assurance can be given as to the timing, extent and payment of dividends. Capital position ClearView is fully capitalised with Common Equity Tier 1 capital to fund its current business plans and anticipated medium-term growth. The Company entered into a new three-year, $60 million Debt Facility Agreement with National Australia Bank in July 2017 for the following key reasons: • • To provide future capital funding in the event that growth is materially above what is currently anticipated; To meet the liquidity needs of the Group or to capitalise on other opportunities should they arise. This replaced the $50 million facility that was due to expire in December 2017. The table below provides an analysis of reconciliation of the net assets in the Statement of Financial Position to the Group capital position. d e t a l u g e R A R P A s e i t i t n E h t l a e W e c i v d A l a i c n a n i F d e t a l u g e R C I S A s e i t i t n E d e t a l u g e R l l A s e i t i t n E r e h t O / 2 C H O N p u o r G h t l a e W r e h t O e f i L Group Capital Position ($M) Net Assets 330.5 13.0 3.9 347.4 7.5 18.7 26.2 373.6 42.1 415.6 Goodwill & Intangibles Net Tangible Assets Capital Base Adjustment: (10.1) (3.7) - (13.8) - (8.4) (8.4) (22.2) (22.4) (44.7) 320.4 9.3 3.9 333.6 7.5 10.2 17.7 351.4 19.6 371.0 Deferred Acquisition Costs (DAC) (272.0) (0.2) Other Adjustments to Capital Base (0.1) (0.1) - - (272.2) - (0.1) (0.1) - - - (272.2) - (272.2) (0.1) (0.2) (0.4) (0.6) Regulatory Capital Base 48.3 9.1 3.9 61.3 7.4 Prescribed Capital Amount (10.6) (3.5) (3.1) (17.2) (5.0) 10.2 (0.4) 17.6 79.0 19.2 98.2 (5.4) (22.6) - (22.6) Available Enterprise Capital 37.7 5.6 0.9 44.1 2.4 9.8 12.3 56.4 19.2 75.6 Internal Benchmarks Working Capital Risk Capital1 Excess/Deficit over internal Benchmarks Debt Funding Facility Net Capital Surplus/Position (7.0) (30.6) (2.7) (2.8) (0.8) (10.5) - - - (10.5) (6.5) (17.0) - (33.5) (2.0) (4.8) (6.8) (40.3) (5.4) (45.7) 0.1 - 0.1 0.1 - 0.1 0.1 - 0.1 0.2 - 0.2 0.4 - 0.4 5.0 - 5.0 5.4 - 5.4 5.6 - 5.6 7.3 12.9 - - 7.3 12.9 Under the APRA capital standards, adjustments are made to the capital base for various asset amounts that are deducted, for example, intangibles, goodwill and deferred tax assets (net of deferred tax liabilities). ClearView’s capital is currently rated Common Equity Tier 1 in accordance with APRA capital standards. 1 2 As at 30 June 2017, risk capital is held in regulated entities at 97.5% probability of adequacy (POA). Risk capital at 99% POA is held in the NOHC². NOHC is a non operating holding company regulated by APRA under the Life Insurance Act. ClearView Annual Report 2017 45 ClearView Wealth LimitedDirectors’ ReportContinued The regulated entities had $5.6 million of net assets in excess of internal benchmarks as at 30 June 2017. Internal benchmarks exceed regulatory capital requirements and include capital held for the protection of ClearView’s regulatory capital position for risk outcomes where the regulatory capital cannot be readily accessed and to protect the various regulated entities’ regulatory licences. Furthermore, a working capital reserve is the capital held to support the capital needs of the business beyond the risk- reserving basis. This includes the net capital that may be required to support the medium term new business plans (in accordance with the Internal Capital Adequacy Process). Internal benchmarks include a working capital reserve in the regulated entities of $10.5 million as at 30 June 2017 to fund anticipated new business growth over the medium-term. Internal benchmarks in the non-regulated entities include a further working capital reserve of $6.5 million as at 30 June 2017, providing a combined total of $17 million that is set aside across the Group to fund anticipated new business growth over the medium-term. The net capital position of the Group as at 30 June 2017 ($12.9 million) represents a decrease of $19.6 million since 30 June 2016. This decrease reflects the following key items: • The Underlying NPAT for the year (+$30.4 million); • • • • • • • • The net capital absorbed by the growth of the business over the period (-$40.8 million); The decrease in the working capital reserve (+$14.0 million) reflecting capital set aside to fund the anticipated new business growth over the medium term; Increase in regulatory and risk capital reserved due to increasing new business volumes (-$6.8 million), and the net impacts of capitalised software, acquired intangibles and deferred tax (-$4.0 million); Increase in asset concentration risk reserve given increased reinsurance asset concentration (-$2.1 million); Net impact of the share based payments expense and other items on the Share Based Payments Reserve (+$7.2 million); The after tax costs associated with the evaluation of strategic options and Sony Life becoming a new strategic shareholder, after tax interest cost on debt and the Direct Life insurance business closure provision (-$3.3 million); The net impacts of the tax effect on the change in policy liability discount rate (+$2.3 million); and The net impact of the final FY16 cash dividend paid in September 2016 (-$16.5 million). 46 ClearView Annual Report 2017 Share Buyback The Board continues to believe that buying back shares in circumstances where the share price is below the Company’s view of intrinsic value is in the best interests of shareholders. The Board has determined to extend its share buyback (has been in place since 19 December 2014) until December 2017. Existing buyback arrangements continue to apply. Since 30 June 2015, 83,572 shares have been bought back under the scheme. No shares were bought back in the year ended 30 June 2017. Outlook Market outlook • Long-term market growth fundamentals remain sound: • • Life Insurance: The Australian market is under-insured; growth is driven by population increases, inflation and real GDP growth. Wealth Management: Growth is underpinned by compulsory retirement savings regime (superannuation). • Short-term challenges and opportunities exist: • • • Group Life Insurance: ClearView intentionally does not participate in Group Life. The profitability of this segment appears to be improving driven by material price increases in recent years. Such increases have improved the competitive position of ClearView’s retail life products. Retail Income Protection: Industry participants have progressively increased prices driven by losses on IP portfolio (should improve profitability of product over time). ClearView increased prices in 1H FY17 to manage margin over time, resulting in some short-term devalued lapse losses. Notwithstanding the adoption of an enhanced claims reserving basis on its portfolio in FY17, ClearView’s IP portfolio remains profitable. Broader industry pricing cycle and performance of IP portfolios continues to be closely monitored. Direct Life Insurance: There has also been changes in the direct market’s appetite for telephone based non-advice models. These are no longer economically viable or socially acceptable due to increasing client acquisition costs, rising consumer expectations and likely heightened regulatory scrutiny. ClearView closed its Direct Life operation to new business 2H of FY17. ClearView Wealth LimitedDirectors’ ReportContinued • • • Regulatory changes: Key life insurance reforms will commence on 1 January 2018. The changes generally support more open competition and assist challenger brands like ClearView. M&A activity: The banks are increasingly focused on returning to core business lines, and there has been an emergence of foreign institutions looking to invest in the Australian life insurance industry. This is likely to drive investment in the life insurance sector. ClearView remains well-positioned with its strategic shareholder, Sony Life. • • • • Superannuation scrutiny: Heightened government and media scrutiny of the superannuation sector, government policy changes, expected lower investment returns over the short-to-medium term and fee pressure. ClearView portfolios remain defensively-tilted given the conservative nature of the client base and near-term economic outlook. As an integrated financial services company, ClearView is well-positioned to take advantage of the convergence of life insurance and wealth management. Life Insurance and Wealth Management products are highly complementary over the economic cycle. • • Life Insurance: Favourable given “fear” can drive strong sales momentum. Wealth Management: Impacts of the performance of investment markets on fee income and net investment flows. Business outlook • Life Insurance continues to be the key profit driver and ClearView is strongly positioned to outperform the market and generate material earnings growth, notwithstanding some claims volatility between periods. The current focus is on: • • • Leveraging the embedded growth in the Life Insurance distribution network; Capitalising on market disruption around life insurance reforms due to the fact ClearView has no material legacy issues; and Increasing scale over time thereby progressively reducing the expenses overruns and further improving the cost-to-income ratio. ClearView will continue to focus on building its Wealth Management business to capitalise on the significant investment made over the past two years. The ClearView dealer groups are focused on rolling out the strategic advice program and continue to assist adviser practices improve efficiency and revenues. ClearView will continue to leverage the Sony Life relationship and Cooperation Agreement. ClearView’s performance reflects strong momentum. The Group maintains a positive outlook and is committed to executing its high growth strategy which targets 5% of the long-term life insurance profit pool and focuses on building a material wealth management business and high quality financial advice business. Changes in state of affairs There were no other significant changes in the state of affairs of the Group during the year ended 30 June 2017. ClearView Annual Report 2017 47 ClearView Wealth LimitedDirectors’ ReportContinued Remuneration Report This Remuneration Report, which forms part of the Directors’ Report, sets out information about the remuneration of ClearView’s Directors and its Key Management Personnel (KMP) for the financial year ended 30 June 2017. Managing Director • Simon Swanson Managing Director Other Executive KMP The term “KMP” refers to those persons having authority and responsibility for planning, directing and controlling the activities of the consolidated entity, directly or indirectly, including any Director of the consolidated entity. The prescribed details for each person covered by this report are detailed below under the following headings: • Details of the Directors and KMP; • Overview of Remuneration Strategy and Objectives; • Remuneration Framework; • Remuneration of Directors and KMP including share based payments granted as compensation; and • Key terms of employment contracts. Details of the Directors and KMP The Non-executive Directors of the Group and Company during or since the end of the financial year were: • • • • • • • Christopher Blaxland-Walker General Manager, Distribution Athol Chiert Chief Financial Officer and Company Secretary Sarah Cummings General Manager, Development Todd Kardash Chief Executive Officer, Matrix Planning Solutions and ClearView Financial Advice Deborah Lowe General Manager, People and Operations Greg Martin Chief Actuary and Risk Officer Justin McLaughlin Chief Investment Officer Former Executive KMP Bruce Edwards (Chairman, Independent Non-executive Director) • David Charlton General Manager, ClearView Direct (Ceased 16 June 2017) • • • • • • • • • Andrew Sneddon (Independent Non-executive Director) David Brown (Independent Non-executive Director) Gary Burg (Independent Non-executive Director) Michael Alscher (Non-executive Director) Michael Lukin (Alternate Non-executive Director to Michael Alscher) Nathanial Thomson (Non-executive Director) Satoshi Wakuya (appointed 14 December 2016) (Non-executive Director) Susan Young (appointed 14 December 2016) (Independent Non-executive Director) The KMP of the Group and the Company in addition to the Non-executive Directors during or since the end of the financial year were: 48 ClearView Annual Report 2017 Overview of Remuneration Strategy and Objectives ClearView’s remuneration approach has the following objectives: • Attract, retain and motivate skilled employees; • • • • Reward and recognise employees for strong performance; Reward employees in a way that aligns remuneration with prudent risk-taking and the long-term financial soundness of the business, and with gains to its shareholders; Maintain a competitive, yet financially-viable salary structure; and Clarify responsibilities and decision-making authority in relation to remuneration at ClearView. Remuneration Framework Remuneration Governance ClearView’s Remuneration Policy (Policy) was updated on 1 July 2017 and is compliant with the obligations set out by the Australian Prudential Regulatory Authority (APRA) ClearView Wealth LimitedDirectors’ ReportContinuedunder Prudential Standards CPS 510 ‘Governance’ and SPS 510 ‘Governance’. It also forms part of ClearView’s Risk Management System and overall Risk Management Framework (in accordance with the Prudential Standards). The Board has approved this Policy and retains overall responsibility for all remuneration decisions in respect to persons relevant to each entity. The Policy is reviewed at least once every three years. Any changes to the Policy must also be approved by the Board. • • ClearView has an established Group Nomination and Remuneration Committee (Remuneration Committee) which, among other things, is responsible for overseeing the remuneration and human resource practices for the Group. Key responsibilities of the Remuneration Committee are as follows: • • • • • • • Reviewing and recommending to the Board ClearView’s Remuneration Policy, including its effectiveness and compliance with legal and regulatory requirements; Identifying any material deviations of remuneration outcomes from the intent of the Remuneration Policy, including any unreasonable or undesirable outcomes that flow from existing remuneration arrangements; Reviewing and making annual recommendations to the Board on the remuneration of the Managing Director, Senior Management Team (SMT) members (all of whom are KMP listed above) and other persons whose activities may, in the Remuneration Committee’s opinion, affect the financial soundness of ClearView; Reviewing and making annual recommendations to the Board on the remuneration structures, including risk-adjusted performance targets, for those persons or categories of persons which, in the Board’s opinion, could individually or collectively affect the financial soundness of ClearView, ensuring that due regard is given to the balance between the achievement of business objectives and the associated risk; Reviewing and making annual recommendations to the Board on the remuneration structures of external persons retained directly by ClearView under contract whose activities, individually or collectively, may affect the financial soundness of ClearView; Reviewing compliance with the relevant regulatory and prudential requirements; Ensuring it has the necessary experience and expertise in setting remuneration and sufficient industry knowledge and/or external advice to allow for effective alignment of remuneration with prudent risk-taking, supplementing its expertise with appropriate external expert advice; Reviewing and recommending to the Board (and if required to shareholders) any short-term and long-term incentive payments for the Managing Director and Senior Management Team (SMT); and Reviewing and providing recommendations to the Board (and if required to shareholders) in relation to any termination benefits for Non-executive Directors, Managing Director, other SMT members and key persons which exceed one year’s average base salary as defined in the Corporations Act 2001. ClearView’s Remuneration Policy is in place to: • • Outline employee obligations and ClearView’s obligations; Set out roles, responsibilities and accountabilities of the KMP; • Set out clear reporting and controls; • • Define various terms to ensure a common understanding; and Clarify what happens if this policy or associated procedures are breached. Relationship between Remuneration Policy and Company Performance The primary objectives of the Remuneration Policy are to ensure that remuneration is competitive, aligned with the Company’s business objectives in both the short term and the long term, and appropriate for the results delivered by the individual. In accordance with this objective, the Company has structured remuneration packages to provide an appropriate mix of fixed and performance based pay components which are based on both the individual’s performance and Group performance. By adopting a robust approach to remuneration, the Group aims to attract and retain top talent. The remuneration framework is also designed to reward prudent risk-taking, support effective risk management and prioritise the long term financial soundness of the business and its shareholders. Total KMP remuneration is made up of three components: • Fixed Remuneration; • Short Term Incentive (STI); and • Long Term Incentive (LTI). ClearView Annual Report 2017 49 ClearView Wealth LimitedDirectors’ ReportContinuedThe sources were the Financial Industry Remuneration Group (FIRG) and Aon Hewitt reports. Both are primary providers of data and the most appropriate for roles in the industry in which ClearView operates. The benchmarking reports were used as a guide, and were not a substitute for thorough consideration of all the issues by the Remuneration Committee. No formal consulting advice was sought from independent external research houses and Remuneration Consultants in setting the 2017 Fixed Remuneration. Further details on the engagement of independenct consultants is provided later in the report. Any increase to individual remuneration for the Managing Director, SMT and any other person whose activities may, in the Remuneration Committee’s opinion, affect the financial soundness of ClearView, must be approved by the Board on the recommendation of the Remuneration Committee after engaging and taking advice, where appropriate. Short Term Incentive (STI) plan The STI plan for KMP aims to provide a common motivation to act in the best interests of the Company to reach or exceed Company goals for the financial year. They are based on rewarding an individual with a bonus calculated as a percentage of Fixed Remuneration. Company performance targets are set for the KMP by the Remuneration Committee. For FY17, the award of the STI component for KMP is based on the achievement of three company goals weighted, as on the table on the following page. The design of remuneration structures and performance conditions will reflect ClearView’s key risks, as relevant to particular roles by: • • • • Ensuring that the components of remuneration appropriately balance risk and business outcomes, having regard to the percentage of “at risk” to “not at risk” remuneration that is, variable to fixed remuneration; Using appropriate risk-adjusted objectives in ClearView’s incentive awards for key persons and categories of persons; Appropriate use of long-term incentives to ensure performance can be suitably validated and the consequence of the risk to which ClearView has been exposed can be fully assessed; and Ensuring any sign-on and termination payments with respect to Directors, SMT members and other key personnel, comply with legislative requirements, are appropriate and prudent and contain suitable hurdles. Fixed Remuneration Fixed Remuneration is made up of base remuneration and superannuation. Base salary includes cash salary and any salary sacrifice items. The Group provides employer superannuation contributions of 10% of each KMP’s base salary, capped at the relevant maximum contribution base. The Fixed Remuneration is based on each employee’s experience, qualifications, capability and responsibility and not to specific performance conditions. An employee’s responsibility includes accountabilities, delegations, Key Performance Indicators (KPI’s) and risk profiles. To ensure an employee’s Fixed Remuneration is competitive, it is benchmarked against median salary survey results from a group of comparable Australian financial service companies. Fixed Remuneration is reviewed annually, following the end of the 30 June performance year. Independent market remuneration data was purchased from two independent sources and reviewed to benchmark the Fixed Remuneration for KMP for the 2017 financial year. 50 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedCompany Goal Description 1. Underlying Net Profit after Tax (UNPAT)1 2. Embedded Value Growth UNPAT is the Board’s key measure of group profitability and the basis on which dividend payments are determined. It consists of reported net profit after tax adjusted for amortisation (not including capitalised software), the effect of changing discount rates on insurance policy liabilities and costs which are considered unusual to the Group’s ordinary activities. Life insurance and wealth management are long term businesses that involve long term contracts with customers and complex accounting treatments. Embedded Value calculations are used as key measures to assess the performance of the business from period to period. An Embedded Value represents the discounted value of the future cash flows anticipated to arise from the in-force life policies and investment client balances as at the valuation date. 3. Value of New Business (VNB) The VNB is the measure of the economic value of the profits expected to emerge for new business net of the cost of supporting capital. VNB is the increase in Embedded Value over the period due to new business written over the relevant period. Min % Target % Max % % Achieved FY17 0% 50% 60% 46% 0% 25% 30% 25% 0% 25% 30% 21% 0% 100% 120% 92% Overall, 92% of the target STI range was achieved based on the range of outcomes. The result may vary from reported Underlying NPAT, Embedded Value and VNB given that for STI calculations the impacts of net capital raised, cash dividend payments, assumption and model changes between periods and any impacts of key longer term decisions made by the Board are excluded. Sound risk management practices acts as a gateway qualifying condition to the STI. Furthermore, underpinning the achievement of the financial goals is sound business strategy, leadership, client focus, product development, superior services and continuous improvement of systems and processes. As outlined in the table, STI outcomes fall within a range of 0% to 120% of the Target STI with 100% pegged to achieving target performance (as set out in the Board approved Business Plan). The resultant potential maximum STI awards for KMP range from 0% to 60% of Fixed Remuneration as follows: SMT Member Simon Swanson Athol Chiert Christopher Blaxland-Walker Deborah Lowe Gregory Martin Justin McLaughlin Sarah Cummings Todd Kardash Target STI % Maximum STI % Minimum STI % Actual Achieved % 50% 30% 30% 30% 30% 30% 30% 30% 60% 36% 36% 36% 36% 36% 36% 36% 0% 0% 0% 0% 0% 0% 0% 0% 46% 28% 28% 28% 28% 28% 28% 28% 1 UNPAT for the purposes of bonus calculations excludes the after tax interest on corporate debt. ClearView Annual Report 2017 51 ClearView Wealth LimitedDirectors’ ReportContinued The Managing Director sets specific key individual objectives for the KMP which support the achievement of Company goals. The individual performance targets are linked to a KMP’s position and/or team objectives and reflect the level of risk that ClearView is exposed to by the individual’s actions. Whilst the quantum of KMP STI is determined by Company goals, the Managing Director is responsible for assessing the performance of KMP and for recommending the total STI to be paid. Therefore, the Managing Director may recommend STI payments below or over and above the specified company outcomes in the case of below target or exceptional performance respectively. The Managing Director’s recommendations are presented to the Remuneration Committee for consideration and recommendations are made to the Board for approval. It is only when Board approval has been obtained that STI bonuses are payable. Given that the target STI component is considered moderate in the industry in which the Group operates it has to date not been considered appropriate to introduce deferral provisions for the STI component. Long Term Incentive Plan (LTIP) Existing Employee Share Plan (ESP) The Company has previously used its Employee Share Plan as a long term incentive for key employees and contractor participants. ClearView in its current form was created by the acquisition and successful integration of the life insurance, wealth management and financial advice businesses acquired from MBF Holdings Pty Limited (Bupa Australia) on 9 June 2010 (the Acquisition). Key attributes of the Acquisition were as follows: • • • Potential to use the platform acquired to create a new non-bank owned life insurance and wealth management company that could bring innovation to the market and challenge the incumbents; No material legacy issues, enabling speed to market; and No material exposure to group life, pre global financial crisis income protection or capital guaranteed products. ClearView was required to undertake a significant transformation to: • • Build out a new management team with a track record in growing life insurance, wealth management and financial advice businesses; Develop and launch advice based products providing access to new market segments; 52 ClearView Annual Report 2017 • • • Utilise the strong cash flow generated by the in-force portfolios at the time of the Acquisition to fund the initial growth phase in the Advice Life market and stem the outflows in the acquired Wealth Management in-force portfolios; Expand into the independent financial advice market, with products having the quality to be included on the Approved Product Lists of third party dealer groups; and Raise sufficient capital to fund the next phase of growth for the business. ClearView was therefore required to undergo a significant transformation, that has been achieved over the last seven years with the development of systems, launch of LifeSolutions (full suite of life insurance advice products), WealthSolutions (ClearView Wrap platform) and WealthFoundations (wealth mid-market product), the recruitment of employees, experienced self employed financial advisers and distribution partners. ClearView has an existing ownership-based compensation scheme for the Senior Management Team (SMT), key management and revenue generators of the Group to assist in the recruitment, rewarding, retention and motivation of employees. This scheme was designed to recognise leaders and reward those decisions and actions which have a direct and positive impact on the results that ClearView delivers for shareholders, at the time and in the future. The Executive Share Plan (ESP) was established to assist in the recruitment of the SMT and employees with deep life insurance and wealth management experience, to execute on a core strategy and thereby to show ClearView’s recognition of the employees’ contribution, by providing an opportunity to share in the future growth and profitability of ClearView. The ESP was set up in the context of the “start up phase” and the nature of the ClearView business at the time when the scope and the timing of any future success of the business was still unknown and uncertain. The ESP aligns the interests of participants more closely with the interests of shareholders including the extension of the ESP to financial advisers in November 2011. Benchmarking of the LTI for the SMT was last performed by PricewaterhouseCoopers (PwC), an independent Remuneration Consultant, in February 2013. The Board subsequent to this review decided in February 2013 to: • Remove any cap on the issue of shares under the ESP to retain the flexibility to use it as a recruitment tool for both employees and financial advisers; ClearView Wealth LimitedDirectors’ ReportContinued• • Remove the interest on the loans that had until this date been capitalised and treated as part of the limited recourse principal, except that after tax dividends on Shares issued under the ESP was applied towards reduction of the loan; and Issue further grants to participants where considered appropriate (aligned to the overall remuneration review of the SMT members by PwC). These further LTI grants were issued in a “lump sum” rather than on the basis of an annual grant and were aligned to the achievement of an increase in the share price of ClearView. The interest rate on the limited recourse loans had to that point effectively acted as an in built performance hurdle. The Board decided to remove the interest rate on the loans for all participants given that the interest imposed was significantly diluting the efficacy of the ESP as an employee recruitment and retention tool, in particular for those staff receiving the earlier grants of ESP shares and to achieve its purpose given the start up phase of the business at the time. The Board believed, notwithstanding the removal of the interest rate on the loans, that the long term interests are aligned given that value is only attributed to participants through an increase in the share price and that a key component of the STI component is also aligned to the longer term, being the Embedded Value and Value of New Business (refer to STI section above). The use of derivatives over ClearView Securities could distort the proper functioning of performance and vesting conditions of the ESP. Accordingly, derivatives over ClearView ESP shares are not permitted to be held in relation to any ClearView ESP shares that are unvested or the subject of a holding lock under the ESP. Overview of the Existing Executive Share Plan (ESP or Plan) In accordance with the provisions of the Plan, as approved by shareholders at the 2015 Annual General Meeting, the ownership-based compensation scheme allows participation in the Plan of: • • Employee Participants - These participants are key managers, members of the Senior Management Team and the Managing Director; and Contractor Participants - These participants are financial advisers. Eligible Employees under the Plan Rules therefore include both Employee Participants and Contractor Participants of the Company and its related body corporates. Non-executive Directors are ineligible to participate in the Plan in accordance with the Plan Rules. Offer and consideration Under the ESP, the Board may invite Eligible Employees to participate in an offer (Offer) of fully paid ordinary shares in ClearView, subject to the terms of conditions of the ESP. Each ClearView Share is issued at a price to be determined by the Board prior to making an Offer and this price is set out in the invitation (Invitation) to Eligible Employees. This price may be the market price of a Share (as defined in the ESP Rules) on the date of the Invitation. Taking into account the liquidity, volatility, and the average trading activities of the ClearView Shares, the Board determined in February 2013 that it is appropriate and reasonable for ClearView to adopt the Volume Weighted Average Price (VWAP) over a 3 month period to determine the market value of the ClearView Shares for the purposes of ESP issues. This has been implemented for all ESP Share issues since that date. Prior to this, no ESP Shares were issued at a price below 50 cents per share, being the price at which the original capital raising was completed in June 2010. Restrictions on offer Shares may not be offered under the ESP to an Eligible Employee if that Eligible Employee would hold, after the issue of the Shares, an interest in more than 5% of the issued Shares of ClearView or be able to control the voting rights of more than 5% of the votes that might be cast at a general meeting of ClearView. As at the date of this Report, the Board has not set a limit on the number of Shares that may be issued under the Plan. The Board or Board Authorised Delegates approve the issue of new ESP shares and monitors the overall quantum of ESP shares on issue, relative to the interests of existing shareholders and the overall objectives of the business. Financial assistance The Company may provide financial assistance to an Eligible Employee for the purposes of subscribing for Shares under the ESP. The financial assistance will be a limited recourse loan equal to the purchase value of the Shares and is repayable in accordance with the terms of the accompanying Invitation or as follows: • For Share issues prior to 14 February 2013 - within 60 days (or a longer period determined by the Board in its discretion) after the 5th anniversary of the grant of the financial assistance (unless it is required to be repaid at an earlier date owing to the operation of the Rules); or ClearView Annual Report 2017 53 ClearView Wealth LimitedDirectors’ ReportContinued• immediately in the event of certain “disqualifying circumstances” including failure to meet performance or vesting conditions, cessation of the Employee Participant’s employment in circumstances defined in the ESP Rules or termination of the Contractor Participant’s contract with a Group Company for the provision of services. For Employee Participants, the financial assistance is secured over the shares and rights attached to the shares. The Board has delegated authority to Mr Swanson, Mr Chiert and Mr Thomson to approve granting an extension to the loan term of all ESP participants who remain employees at the expiration of their loan term for a period until a Change in Control of the Company (as defined in the ESP Rules). Holding lock The shares granted under the ESP to participants are subject to a holding lock restricting the holder from dealing with the shares, unless otherwise provided under the Invitation. Where all performance conditions and/or vesting conditions (if any) attaching to the Shares issued prior to 14 February 2013 have been satisfied (or waived) a holding lock will cease to have effect if: • • The Board accepts a disposal request (as defined in the ESP Rules) (Disposal Request); or 5 years have passed from the Acquisition Date; or If the Participant: • • is an Employee Participant, their employment with the Group ceases, or is a Contractor Participant, their contractor agreement is terminated; or • The ESP is terminated, or • The holding lock period otherwise ceases; provided that the Financial Assistance and any interest that has been accrued have been repaid. For Share issues from 14 February 2013 the Holding Lock ceases on vesting or forfeiture of Shares. The holding lock is imposed through the share registry and in accordance with the ASX Listing Rules. Participants will not be able to sell their ESP Shares on ASX or have an off-market transfer registered (and are also otherwise prohibited from dealing in the shares) while the holding lock is in place. If the participant is a Contractor Participant, following the removal of the holding lock over the Shares of the participant, the participant may not sell, or otherwise deal with, any such Shares without the prior written consent of the Company, which consent the Company may give or withhold in its absolute discretion and which consent may be given subject to conditions. Eligible Employees are entitled under the ESP Rules to make a Disposal Request provided the performance and vesting conditions have been met (or waived). The holding lock applicable to their ESP shares will cease to have effect upon the Board (in its absolute discretion) accepting the Disposal Request. ClearView may dispose of these ESP shares on behalf of the participant in one or more of the following ways (at the discretion of the Board): • • Reallocate the Shares to give effect to acquisitions by other Eligible Employees under the ESP; Sell to the Company in accordance with buy-back provisions of the Corporations Act; or • Offer or sell to buyers on the ASX. The amount payable by these Eligible Employees to ClearView following such a disposal is the amount outstanding in relation to the financial assistance, including accrued interest. The Eligible Employees may retain any surplus proceeds. Change of Control Under the ESP Rules, all performance and vesting conditions in relation to Shares held by an Eligible Employee who is an Employee Participant are deemed to have been satisfied upon a Change of Control unless stated otherwise in the participants Invitation Offer. A Change of Control is defined under the ESP Rules as being: (a) Until 14 February 2013: • • • A person who did not Control the Company at the date of issue of the Plan Shares gains Control of the Company (but only if the person is not itself Controlled by another person who Controlled the Company at the date of issue); or Other circumstances occur which the Board determines in its absolute discretion are analogous to a Control transaction and justify removal of Performance Conditions and/or Vesting Conditions. “Control” is defined as where a person and its related bodies corporate holds more than 50% of the Shares in ClearView. (b) After 14 February 2013: • 12 months after a Change of Control; or • Circumstances occur which the Board determines in its absolute discretion are analogous to a Control transaction and justify removal of Performance Conditions and/or Vesting Conditions. 54 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedAn outcome of the Aon Hewitt review highlighted that the existing LTIP for the SMT is primarily vested and as such it was necessary to consider what would represent an appropriate new LTI, as part of the overall remuneration structure for SMT members. The value of the existing LTIP rested in the interest free component of the ESP loan backed plan, and receiving dividends on the ESP shares that are financed by these ESP loans. In considering a new LTI scheme, three key objectives were focused on: 1. 2. 3. Provides appropriate remuneration to the SMT to ensure a component of remuneration remains delivered in equity and is focused on longer term performance; Acts as an incentive to remain employed at ClearView (a delayed vesting mechanism); and Alignment of the interests of the key management with the interests of shareholders. PricewaterhouseCoopers (PwC) was engaged by the Remuneration Committee in 2017, to implement a new LTIP structure for the SMT. This advice was used as a guide, and was not a substitute for a thorough consideration of all the issues (including potential change of major shareholder) by the Remuneration Committee. Taking into account current market practice the Board felt that an LTI structure delivered via a grant of Performance Rights would be the most appropriate structure to achieve the key objectives. The LTI structure was approved by the Board, on recommendation of the Remuneration Committee, on 21 June 2017. However, it was proposed that the first awards under the new LTI would be made in FY18. The proposed key terms of the new plan are set out in the table on the following page. • “Control” is defined as Crescent Capital Partners and its Associated Entities no longer holding 20% of the voting rights of the Company. (c) After 1 July 2015: • • For ESP Shares issued to employee participants after 1 July 2015, unless stated otherwise in the participants Invitation Offer, all performance and vesting conditions in relation to these shares, are not deemed to have been met upon a Change of Control. “Control” is defined as Crescent Capital Partners and its Associated Entities no longer holding 20% of the voting rights of the Company. The above provisions concerning change of control apply only to Employee Participants and not Contractor Participants under the ESP. Services from consultants – 2018 review and new LTIP The Remuneration Committee seeks and considers advice from independent, external remuneration consultants where appropriate. Remuneration consultants are engaged directly by and report to the Remuneration Committee. The last external review was completed in 2013. Given that ClearView has grown significantly over the last four years, it was considered appropriate for the Remuneration Committee to engage Hewitt Associates Pty Ltd. (Aon Hewitt) in 2017 to benchmark overall remuneration for the SMT and non-executive Directors, with the intended implementation of these recommendations for the 2018 financial year (with effect from 1 July 2017). The advice from Aon Hewitt was used as a guide, and was not a substitute for a thorough consideration of all the issues by the Remuneration Committee. The cost of the advice and assistance provided by Aon Hewitt was $99,500 (excluding GST). Aon Hewitt was engaged by and reported to the Chair of the Remuneration Committee. The Board is therefore satisfied that the remuneration recommendation made by the Remuneration Consultants was free from undue influence by members of the KMP to whom the recommendation related. ClearView Annual Report 2017 55 ClearView Wealth LimitedDirectors’ ReportContinuedKey Design Elements Overview 1. Instruments 2. Eligibility 3. Quantum Performance Rights – being a right to receive one share for no consideration, contingent on the vesting conditions being met. Open to nominated SMT members. Each participant will have set LTI dollar value determined as part of their remuneration package. This dollar value will be converted into a set number of Performance Rights based on an agreed VWAP share price. 4. Performance Period The Performance Rights will be subject to a 2 year performance period. 5. Vesting Conditions The participants must remain employed by the ClearView Group as at the vesting date (30 June 2019), in addition to meeting performance based vesting conditions. The specifics of the vesting conditions are still being finalised, with consideration being given to the following structure: • 50% of the Performance Rights will be measured against an Embedded Value target • 50% of the Performance Rights will be measured against a relative Total Shareholder Return target, based on an agreed basket of peer companies. 6. Change of Control If there is a change of control event then the unvested Performance Rights will remain on foot and continue to be tested against the Embedded Value performance hurdle and a continuing employment service condition as noted above. Performance rights to be granted as compensation The proposed number of performance rights to be granted as compensation to each participant, as per the Board approvals and is accordance with the new LTIP (as noted earlier in the Report), is as follows: SMT Member Simon Swanson1 Athol Chiert Christopher Blaxland-Walker Deborah Lowe Gregory Martin Justin McLaughlin Sarah Cummings Todd Kardash Total Number of LTI Performance Rights 1,142,857 357,143 285,714 114,286 428,571 250,000 71,429 285,714 2,935,714 1 Performance rights to be granted to Simon Swanson will be satisfied by the on-market purchase of ClearView ordinary shares. If these shares cannot be purchased on-market, shareholder approval may be required for the grant of the performance rights at the 2017 AGM. In recognition of the proposed implementation of the abovementioned LTIP, the Remuneration Committee considered it appropriate for SMT members to be charged interest on ESP Loans attached to the existing LTIP. Interest will be charged on these ESP Loans, commencing from 30 November 2017, at the 3 years BBSY rate plus a 1% margin. 56 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinued Consequences of ClearView’s performance on shareholder wealth The following tables set out the summary information about the Group’s earnings and movements in shareholder wealth for five years to 30 June 2017: Revenue1 ($’000) Net profit after tax ($’000) Underlying Net Profit after Tax Dividend (Final) (cents) Dividend (Special) (cents)2 Basic EPS (cents) Diluted EPS (cents) Fully diluted Underlying EPS (cents) Embedded Value3 ($m) Embedded Value per share (cents)3 Share Price at the beginning of the year (cents) 30 Jun 17 30 Jun 16 30 Jun 15 30 Jun 14 30 Jun 13 333,503 295,828 253,640 190,301 172,278 13,150 30,362 23,615 27,235 12,572 20,533 13,880 19,738 1,876 16,014 2.75 - 2.20 2.11 4.88 662 100.6 95.0 2.50 - 4.39 4.27 4.92 624 94.8 95.0 95.0 2.10 - 2.43 2.36 3.85 494 84.7 80.0 95.0 2.00 - 3.13 3.10 4.41 445 81.6 59.0 80.0 1.80 2.20 0.46 0.46 3.65 365 80.5 46.0 59.0 Share Price at the end of the year (cents) 145.0 1 2 Revenue from continuing operations excludes net fair value gains/losses in financial assets. In accordance with the Implementation Agreement entered into between the Company and CCP Bidco, on 26 September 2012, ClearView declared an unfranked special dividend of 2.2 cents per share that was paid on 16 October 2012. 3 Embedded Value at 4% discount rate margin, including a value for future franking credits, franking credits included in the net worth and ESP loans. Franking credits have been included in the net worth and prior periods have been restated to reflect this. Remuneration of Directors and KMP Non-executive Directors’ remuneration Non-executive Directors are remunerated by way of one base fee (inclusive of Superannuation Guarantee) that is based on market rates for comparable companies for the time commitment and responsibilities undertaken by Non-executive Directors. The level of remuneration for each Non-executive Director is set by the Remuneration Committee, within the total annual remuneration limits approved by the Company and the shareholders at a general meeting. Any increase to individual Non-executive Director remuneration must be approved by the Board on the recommendation of the Remuneration Committee after engaging and taking advice, where appropriate. All reasonable out of pocket expenses incurred in connection with a Director’s duties on behalf of ClearView Wealth are reimbursed. There is no direct link between Non-executive Directors’ remuneration and the annual results of ClearView Wealth or its related entities. The Non-executive Director remuneration is based on the role of the individual director, their membership on Board Committees, and directorships of other ClearView entities. Non-executive Directors are not entitled to participate in equity schemes of the Company, and are not entitled to receive performance-based bonuses. Non-executive Directors are not entitled to retirement benefits other than in respect of any superannuation entitlements. The present limit on aggregate remuneration for Non-executive Directors is $1,000,000 including superannuation (2016: $1,000,000). Directors’ fees can be paid as superannuation contributions. The fee pool is the only source of remuneration for Non-executive Directors. As noted earlier in the report AON Hewitt benchmarked the Non-executive Directors fees as part of their review. It was concluded that notwithstanding that the comparable cost in total was considered appropriate, given the size and composition of the Board, that on average ClearView pays a lower Board fee per Director. No change to Directors fees was recommended, but it was noted if the Board size reduced going forward, that the fees per Board member would be reconsidered at that time. ClearView Annual Report 2017 57 ClearView Wealth LimitedDirectors’ ReportContinuedThe compensation of each Non-executive Director for the year ended 30 June 2017 is set out below: Short term employee benefits Post employment Share based payments Total 2017 Salary & Fees $ Non-executive Directors B Edwards D Brown G Burg M Lukin1 N Thomson1 A Sneddon M Alscher1 S Wakuya2 S Young3 Total 150,000 77,626 77,626 - 85,000 95,000 80,000 43,870 67,334 676,456 Bonus Non- monetary Termination Payment Superannua- tion $ - - - - - - - - - - $ - - - - - - - - - - $ - - - - - - - - - - $ - 7,374 7,374 - - - - - 6,397 21,145 Executive Share Plan of total remuneration $ - - - - - - - - - - $ 150,000 85,000 85,000 - 85,000 95,000 80,000 43,870 73,731 697,601 1 2 3 Mr Lukin is an alternate Director to Mr Alscher. Mr Thomson and Mr Alscher have agreed they will receive no fees as a Director although fees are payable to Crescent Partners Management Pty Ltd of which they are employees. Mr Wakuya was appointed as a Director on 14 December 2016. Mr Wakuya has agreed he will receive no fees as a Director although fees are payable to Sony Life Insurance Co., Ltd. Ms Young was appointed as a Director on 14 December 2016. Ms Young was also a Director of subsidiary ClearView Life Nominees Pty Limited for which $31,124 fees were received during the financial year. The compensation of each Non-executive Director for the year ended 30 June 2016 is set out below: Short term employee benefits Post employment Share based payments Total 2016 Salary & Fees $ Non-executive Directors G Weiss1 B Edwards2 D Brown G Burg J Newmarch3 M Lukin3 N Thomson4 A Sneddon M Alscher Total 167,428 101,490 77,626 73,613 - 70,393 85,000 86,244 80,000 Bonus Non- monetary Termination Payment Superannua- tion $ - - - - - - - - - $ - - - - - - - - - $ - - - - - - - - - $ 15,906 - 7,374 6,993 - - - - - Executive Share Plan of total remuneration $ - - - - - - - - - $ 183,334 101,490 85,000 80,606 - 70,393 85,000 86,244 80,000 741,794 - - - 30,273 - 772,067 1 Mr Weiss resigned as Chairman and as a Director on 17 May 2016. 2 Mr Edwards was appointed as Chairman on 18 May 2016. 3 Mr Lukin received fees as an alternate to Mrs Newmarch from 1 July 2015 to 17 May 2016. Mr Lukin and Mrs Newmarch have agreed they will receive no fees as a Director although fees are payable to ROC Partners. Upon Mrs Newmarch’s resignation on 17 May 2016 Mr Lukin was appointed as alternate Director to Mr Alscher. 4 Mr Thomson and Mr Alscher have agreed that they will receive no fees as a Director although fees are paid to Crescent Capital Partners Manangement Pty Limited of which they are employees. 58 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinued Managing Director and Senior Management Team remuneration The compensation of each member of the KMP of the Group for the year ended 30 June 2017 is set out below: Short term employee benefits Post employment Share based payments Total Salary & Fees Bonus Non- monetary Termination Payment Superannuation Executive Share Plan1 Performance based 2017 S Swanson A Chiert G Martin $ $ $ 635,610 292,121 13,980 380,556 104,915 10,876 385,204 110,425 13,980 J McLaughlin 328,732 92,504 - T Kardash D Charlton2 300,136 87,013 10,876 269,262 - - 141,692 C Blaxland-Walker 315,841 86,857 10,876 D Lowe 274,168 79,160 S Cummings 285,456 78,736 - - - - - $ - - - - - $ 19,616 19,616 34,991 26,417 34,943 18,861 19,616 32,631 19,616 $ - 48,300 48,300 - 19,564 21,680 8,697 16,100 13,592 % 30.4% 27.2% 26.8% 20.7% $ 961,327 564,263 592,900 447,653 23.6% 452,532 4.8% 451,495 21.6% 23.7% 23.2% 441,887 402,058 397,400 Total 3,174,965 931,731 60,588 141,692 226,307 176,233 23.5% 4,711,516 1 2 Benefit calculated under the Binomial model in respect of the future value of the ESP shares issued. Ceased General Manager, Direct on 16 June 2017. A termination payment of $141,692 was paid in July 2017. The compensation of each member of the KMP of the Group for the year ended 30 June 2016 is set out below: Short term employee benefits Post employment Share based payments Total Salary & Fees Bonus Non- monetary Termination Payment Superannuation Executive Share Plan1 Performance based 2016 S Swanson A Chiert C Robson2 G Martin $ $ $ 620,466 310,531 13,848 369,005 110,851 10,614 $ - - 128,162 - - 77,423 371,872 116,405 13,848 J McLaughlin 318,757 97,777 - T Kardash T Thomas3 D Charlton 294,394 93,123 10,614 115,031 - 283,666 85,128 - - C Blaxland-Walker 277,535 85,742 10,614 D Lowe4 S Cummings5 Total 236,186 258,737 74,838 78,600 - - - - - 172,096 - - - - $ 19,308 19,308 14,109 34,933 26,109 34,980 7,969 19,308 27,408 31,408 19,308 $ - 48,300 % 32.2% 28.5% $ 964,153 558,078 - 0.0% 219,694 48,300 - 28.1% 22.1% 585,358 442,643 9,629 23.2% 442,740 - 0.0% 295,096 22,856 9,169 8,050 10,759 26.3% 23.1% 23.6% 24.3% 410,958 410,468 350,482 367,404 3,273,811 1,052,995 59,538 249,519 254,148 157,063 24.0% 5,047,074 1 2 3 4 5 Benefit calculated under the Binomial model in respect of the future value of the ESP shares issued. Ceased General Counsel and Company Secretary on 11 November 2015. Upon cessation of employment Mr Robson exercised 1 million ESP shares. 249,657 of these were bought back and cancelled and the Company received $250,000 in cash in settlement of financial assistance granted. Ceased General Manager, Operations and Technology on 21 October 2015. Upon cessation of employment Mr Thomas’ 1.5 million ESP shares were bought back and cancelled. 260,278 of these shares were exercised. 1,239,722 shares (83% of total granted ESP shares) were forfeited due to not meeting the vesting conditions. Of the 260,278 shares that were exercised, 166,451 were used to settle the financial assistance granted. Appointed General Manager, People and Operations on 21 October 2015. Appointed as General Manager, Development on 21 October 2015. ClearView Annual Report 2017 59 ClearView Wealth LimitedDirectors’ ReportContinued Share Based Payments Granted As Compensation Limited recourse loans have been granted by the Company to the ESP Participants to fund the acquisition of shares under the ESP. The following tables outlines the ESP loans made to KMP or their related entities as at 30 June 2017 and 30 June 2016: 2017 S Swanson A Chiert G Martin J McLaughlin T Kardash D Charlton Balance at beginning 6,126,353 Loans Granted2 $ - 1,316,012 742,573 1,480,008 1,084,952 792,832 495,117 746,664 535,816 509,707 - C Blaxland-Walker 724,282 550,493 500,000 364,636 - - 12,560,494 3,408,951 Interest charged1 $ Repay- ments $ Loan Cancelled $ Balance at end $ Highest in period $ - - - - - - - - - - (127,500) (31,875) (38,250) (19,125) (19,125) (10,584) (30,583) (6,675) (5,908) - - - - - - - - - 5,998,853 6,126,353 2,026,710 2,026,710 2,526,710 2,526,710 1,268,824 1,268,824 1,263,355 1,263,355 499,123 509,707 1,244,192 1,244,192 493,325 358,728 500,000 364,636 (289,625) - 15,679,820 Loans Granted $ Interest charged1 $ Repay- ments $ Loan Cancelled $ Balance at end $ Highest in period $ Balance at beginning 6,233,453 1,342,787 1,512,138 480,984 808,897 762,729 899,700 517,150 737,643 - - - - - - - - - - 500,000 167,356 200,000 13,462,837 700,000 - - - - - - - - - - - - (107,100) (26,775) (32,130) - - - 6,126,353 6,233,453 1,316,012 1,342,787 1,480,008 1,512,138 (260,710) (220,274) - 480,984 (16,065) (16,065) - - 792,832 746,664 808,897 762,729 (16,065) (883,635) - 899,700 (7,443) (13,361) - (2,720) - - - - 509,707 724,282 517,150 737,643 500,000 500,000 364,636 364,636 (498,435) (1,103,909) 12,560,494 D Lowe S Cummings Total 2016 S Swanson A Chiert G Martin C Robson J McLaughlin T Kardash T Thomas D Charlton C Blaxland-Walker D Lowe S Cummings Total 1 In February 2013 the Board removed the interest payable on the limited recourse loans granted in relation to the ESP. The interest rate had until that point effectively acted as a perfor- mance hurdle. The Board decided to remove the interest rate on the loans for all participants given that the interest imposed was significantly diluting the efficacy of the ESP shares and to achieve its purpose given the start up phase of the business at the time. The Board believed, notwithstanding the removal of the interest rate on the loans, that the long term interests are aligned given that value is only attributed to participants through an increase in the share price and that a key component of the STI component is also aligned to the longer term, being the Embedded Value and Value of New Business. Given the proposed implementation of a new LTIP Post year end, these loans will become interest bearing from 30 November 2017 at 3 year BBSY rate plus a margin of 1%. 2 Limited recourse loans were granted to KMP ESP participants in May 2017. This limited recourse loan facility is secured by the ESP shares held and will become interest bearing from 30 November 2017 at 3 year BBSY rate plus a margin of 1%. This limited recourse facility is reflected as loans on balance sheet of the listed entity. 60 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedShares granted to KMP and equity holdings During and since the end of the financial year no shares (2016: 732,907) were granted by the Company to KMP under the ESP. The following table outlines the ESP shares issued to KMP or their related entities as at the date of this report: Share series Series 61,2,6,9 Series 71,2,6,9 Series 101,3,6,9 Series 111,4,6,9 Series 121,5,6,9 Series 151,5,9 Series 161,5,9 Director, KMP, to which the series relates Justin McLaughlin Athol Chiert / Justin McLaughlin Simon Swanson Simon Swanson Simon Swanson Greg Martin Todd Kardash Series 161,5,8,9 Chris Blaxland-Walker Series 267 Series 267 Series 267 Series 38 Series 39 Series 40 Series 438 Series 448 Series 458 Series 51a10 Series 51b10 Athol Chiert Greg Martin Todd Kardash David Charlton David Charlton David Charlton Chris Blaxland-Walker Chris Blaxland-Walker Chris Blaxland-Walker Deborah Lowe / Sarah Cummings Deborah Lowe / Sarah Cummings Fair value at grant date (pre- modification1) Fair value at grant date (post- modification1) Exercise price per share ($) Aggregate value at grant date ($) Expiry date 0.10 0.07 0.11 0.08 0.06 0.10 0.10 0.10 0.29 0.29 0.29 0.17 0.19 0.22 0.20 0.23 0.27 0.19 0.22 0.10 0.59 51,500 Change in Control 0.10 0.11 0.08 0.06 0.13 0.13 0.13 n/a n/a n/a n/a n/a n/a n/a n/a n/a 0.49 0.50 0.58 0.65 0.50 0.50 0.50 0.57 0.57 0.57 0.75 0.75 0.75 1.01 1.01 1.01 98,057 Change in Control 224,074 Change in Control 323,295 Change in Control 241,927 Change in Control 196,271 127,366 127,366 1/07/2016 1/09/2016 1/09/2016 289,798 Change in control 289,798 Change in control 144,899 Change in control 38,230 44,307 50,054 16,718 19,372 21,883 30/05/2018 30/05/2019 30/05/2020 26/11/2018 26/11/2019 26/11/2020 n/a 0.96 71,197 23/12/2020 n/a 0.96 81,501 23/12/2021 1 2 3 4 5 6 7 8 9 On the 14th February 2013, the Board approved a change to the rules of the ESP which changed the interest rate charged on the financial assistance granted to the ESP Participants from the RBA official cash rate plus 25 basis points to zero percent. This resulted in changes to the inputs of the option pricing model which had an impact on the fair value of the option at the date of the change. Change of control provision was triggered on 23 October 2009 by Guiness Peat Group (GPG) increasing its shareholding above 50%. As a result, the vesting conditions for employees that were issued shares prior to the date of change of control were accelerated. Shares vested 1 year from date of commencement of employment on 26 March 2011. Shares vested 2 years from date of commencement of employment on 26 March 2012. Change of control provision was triggered on 26 September 2012 by CCP Bidco obtaining a shareholding above 50%. The Board approved granting an extension of the loan term until such time as there is a change of control in the Company. Special condition relating to shares issued to KMP in Series 26: the shares may be sold on change of control with 50% of the funds held for in escrow for a period of 12 months. Chris Blaxland-Walker became KMP on 13 October 2014. Vesting conditions have been met up to the date of this report. 10 Deborah Lowe and Sarah Cummings became KMP on 21 October 2015. ClearView Annual Report 2017 61 ClearView Wealth LimitedDirectors’ ReportContinued The following table summaries the performance and vesting conditions for shares issues to Employee Participants under the ESP as at the date of this report are: Series Vesting Conditions Performance Conditions Series 6 – 30 June 2008 Issue Series 7 – 29 September 2009 Issue Series 10 – 25 June 2010 Issue Series 11 – 25 June 2010 Issue Series 12 – 25 June 2010 Issue Series 15 – 18 August 2011 Issue Series 16- 6 October 2011 Issue Series 17-1 March 2012 Series 24- 22 August 2012 Issue Series 26- 16 April 2013 Issue Nil1 Nil1 Nil2 Nil2 Nil2,4 Nil4 Nil4 Nil4 Nil4 Upon a change in control of the company3 Series 27- 16 April 2013 Issue First year anniversary upon the change in control Series 31- 14 October 2013 Issue Upon a change in control of the company Series 32- 14 October 2013 Issue First year anniversary upon the change in control Series 35- 31 January 2014 Issue Upon a change in control of the company Series 36- 31 January 2014 Issue First year anniversary upon the change in control Series 38- 30 May 2014 Issue Series 39- 30 May 2014 Issue Series 40- 30 May 2014 Issue Series 43- 26 November 2014 Issue Series 44- 26 November 2014 Issue Series 45- 26 November 2014 Issue Series 46- 30 March 2015 Issue Series 47- 30 March 2015 Issue Series 48- 30 March 2015 Issue Series 50a - 30 July 2015 Issue Series 50b - 30 July 2015 Issue Series 50c - 30 July 2015 Issue Series 51a & 51b - 23 December 2015 Issue Remain an employee of the company for 4 years from Grant date of shares Remain an employee of the company for 5 years from Grant date of shares Remain an employee of the company for 6 years from Grant date of shares Remain an employee of the company for 4 years from Grant date of shares Remain an employee of the company for 5 years from Grant date of shares Remain an employee of the company for 6 years from Grant date of shares Remain an employee of the company for 4 years from Grant date of shares Remain an employee of the company for 5 years from Grant date of shares Remain an employee of the company for 6 years from Grant date of shares Remain an employee of the company for 4 years from Grant date of shares Remain an employee of the company for 5 years from Grant date of shares Remain an employee of the company for 6 years from Grant date of shares Upon a change in control of the company 62 ClearView Annual Report 2017 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil ClearView Wealth LimitedDirectors’ ReportContinuedSeries Vesting Conditions Performance Conditions Series 52 - 27 April 2016 Issue Series 54 - 20 June 2016 Issue Remain an employee of the company for 4 years from Grant date of shares Remain an employee of the company for 4 years from Grant date of shares Nil Nil 1 2 3 Change of control provision was triggered on 23 October 2009 by GPG increasing its shareholding above 50%. In accordance with Mr Swanson’s employment contract, Mr Swanson is entitled to a long term incentive comprising 10 million Shares in accordance with the ESP, and vesting progressively over three years from the commencement date of his contract as follows: Series 10: 2 million shares at an issue price of 50 cents vesting on 26 March 2011 (vested); Series 11: 4 million shares at an issue price of 58 cents vesting on 26 March 2012 (vested); and Series 12: 4 million shares at an issue price of 65 cents vesting on 26 September 2012 (vested) on change of control of ClearView. The Shares issued to Mr Swanson have vested progressively each year as outlined above. Special condition relating to shares issued to KMP in Series 26: 100% of the shares may be sold on change of control, but 50% are held in escrow after employment for 1 year thereafter. 4 Change of control provision was triggered on 26 September 2012 by CCP Bidco obtaining a shareholding above 50%. Unless explicitly stated in the Participants Offer Documentation all unvested Shares will automatically vest in accordance with the rules of the Plan upon a change of control as outlined above. The following table outlines the fully paid ordinary shares of the Company (including those held under the ESP) owned by the Directors and KMP as at 30 June 2017: s n o i t i d n o c g n i t s e v o t t c e j b u s s e r a h S . o N - - - - g n i t s e v o t t c e j b u s . o N s n o i t i d n o c t o n s e r a h S t a e c n a l a B i f o g n n n g e b i . o N r a e y l a i c n a n fi . o N n o i t a s n e p m o c s a d e t n a r G . o N r a e y l a i c n a n fi f o d n e e c n a l a B g n i t s e v o t t c e j b u s . o N s n o i t i d n o c d l e h e c n a l a B . o N s e g n a h c r e h t o t e N - 588,262 - 10,918,090 - - 124,621 79,217 - 588,262 - 10,918,090 - - 124,621 79,217 - - - - d e t s e v e c n a l a B . o N d n e r a e y t a - - - - t e y t o n t u b d e t s e V . o N e l b a s i c r e x e - - - - . o N e l b a s i c r e x e d n a d e t s e V - - - - 2017 B Edwards G Burg A Sneddon S Young S Swanson A Chiert D Charlton J McLaughlin T Kardash G Martin - 10,000,000 14,549,021 1,000,000 1,500,000 2,899,247 695,000 - 735,000 - 1,500,000 1,647,060 500,000 1,000,000 1,647,059 1,000,000 2,000,000 3,719,900 C Blaxland-Walker 247,525 1,000,000 1,247,525 S Cummings D Lowe 463,402 523,505 - - 508,834 588,445 - - - - - - - - - - - - - - 14,549,021 - 10,000,000 - 10,000,000 - 2,899,247 1,000,000 1,500,000 - 1,500,000 - 735,000 695,000 - - - - 1,647,060 - 1,500,000 - 1,500,000 - 1,647,059 500,000 1,000,000 - 3,719,900 1,000,000 2,000,000 - 1,247,525 247,525 1,000,000 1,000,000 2,000,000 1,000,000 - - 508,834 463,402 588,445 523,505 - - - - - - ClearView Annual Report 2017 63 ClearView Wealth LimitedDirectors’ ReportContinued Key terms of employment contracts The following contractual and other arrangements are in place in respect of the KMP as at the date of this report. KMP Simon Swanson Notice period by either the employee or the Company Other Term Ongoing 6 months notice If, in the 6 months following a change of control, Mr Swanson’s remuneration or his duties and responsibilities are reduced through no fault of his own, then Mr Swanson will have a right to terminate the contract with immediate effect. In this case, and in addition to vesting of Mr Swanson’s ESP Shares, the Company will be obliged to pay Mr Swanson 6 months base salary plus the maximum short term incentive amount for that calendar year. Target Incentive % of base salary Maximum Incentive % of base salary 50% 60% Athol Chiert Ongoing 6 months notice for the first 3 years of employment, 3 months notice after 3 years Todd Kardash Ongoing 13 weeks Greg Martin Ongoing 13 weeks For all terminations after the first 3 years of employment an additional 26 week payment is payable. 30% 36% In the case of redundancy, a severance payment of 13 weeks' base salary (or any greater payment required under the National Employment Standards). In the case of redundancy, a severance payment of 3 months’ base salary (or any greater payment required under the National Employment Standards). 30% 36% 30% 36% For all terminations after the first 3 years of employment an additional 26 week payment is payable. 30% 36% Ongoing 12 months notice for the first 3 years of employment, 6 months notice after 3 years Justin McLaughlin Christopher Blaxland- Walker Sarah Cummings Ongoing 13 weeks In the case of redundancy, a severance payment of 13 weeks’ base salary (or any greater payment required under the National Employment Standards). 30% 36% Ongoing 13 weeks Deborah Lowe Ongoing 13 weeks In the case of redundancy, a severance payment of 3 months’ base salary (or any greater payment required under the National Employment Standards). In the case of redundancy, a severance payment of 3 months’ base salary (or any greater payment required under the National Employment Standards). 30% 36% 30% 36% All current Directors are subject to re-election by shareholders at least every 3 years. All current KMP contracts provide for an annual review of Fixed Remuneration. Signed in accordance with a resolution of the Board of Directors made pursuant to s298(2) of the Corporation Act 2001. On behalf of the Directors Mr Bruce Edwards Chairman 24 August 2017 64 ClearView Annual Report 2017 ClearView Wealth LimitedDirectors’ ReportContinuedAuditor’s Independence Declaration Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au The Board of Directors ClearView Wealth Limited Level 15, 20 Bond Street Sydney NSW 2000 24 August 2017 Dear Directors ClearView Wealth Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of ClearView Wealth Limited. As lead audit partner for the audit of the financial statements of ClearView Wealth Limited for the financial year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Max Murray Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited. ClearView Wealth Limited ClearView Annual Report 2017 65 2017 Financial Report Contents Statement of Profit or Loss and other Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the financial statements 1 General information 67 68 69 71 72 22 Payables 23 Provisions 24 Deferred tax balances 25 Policy liabilities 26 Issued capital 27 Share-based payments 28 Shares granted under the employee share plan 2 Application of new and revised Accounting Standards 72 29 Dividends 3 Significant accounting policies 4 Critical accounting judgments and key sources of estimation uncertainty 5 Risk management 6 Capital adequacy 7 Segment information 8 Fee and other revenue 9 Investment income 10 Operating expenses 11 Income tax 12 Movements in reserves 13 Sources of profit 14 Earnings per share 15 Cash and cash equivalents 16 Investments 17 Receivables 18 Fixed interest deposits 19 Goodwill 20 Intangible assets 21 Property, plant and equipment 30 Reconciliation of net profit for the year to net cash flows from operating activities 31 Subsidiaries 32 Related party transactions 33 Financial instruments 34 Disaggregated information by fund 35 Investment in controlled unit trusts 36 Leases 37 Contingent liabilities and contingent assets 38 Capital commitments 39 Guarantees 40 Subsequent events Directors’ Declaration Independent Auditor’s Report Shareholders’ Information Directory 74 87 93 97 99 101 101 101 102 104 105 106 106 107 107 108 108 109 110 The Financial Report was authorised for issue by the Directors on 24 August 2017. 111 112 113 115 116 117 125 126 126 127 128 130 140 144 144 145 146 146 146 147 148 153 155 66 ClearView Annual Report 2017 ClearView Wealth Limited Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June 2017 Continuing operations Revenue from continued operations Premium revenue from insurance contracts Outward reinsurance expense Net life insurance premium revenue Fee and other revenue Investment income Operating revenue before net fair value gains on financial assets Net fair value gains on financial assets Net operating revenue Claims expense Reinsurance recoveries revenue Commission and other variable expenses Operating expenses Depreciation and amortisation expense Loss from disposal of property, plant and equipment Change in life insurance policy liabilities Change in reinsurers’ share of life insurance liabilities Change in life investment policy liabilities Movement in liability of non-controlling interest in controlled unit trusts Profit before income tax expense Income tax expense/(benefit) Total comprehensive income for the year Attributable to: Equity holders of the parent Earnings per share Basic (cents per share) Diluted (cents per share) To be read in conjunction with the accompanying Notes. Consolidated Note 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 177,674 (43,130) 134,544 116,462 82,497 138,289 (30,146) 108,143 110,875 76,810 333,503 295,828 - - - - - - - 5 21,154 21,154 17,733 17,738 62,432 (4,670) - - 395,935 (72,206) 47,182 291,158 (44,484) 25,696 (120,510) (109,382) (97,570) (13,637) (89,440) (13,802) - (287) 21,879 170 (100,419) (44,593) 16,231 3,081 13,150 55,374 (10,796) (56,383) (14,768) 32,886 9,271 23,615 21,154 17,738 - - - - - - (5,680) (5,848) - - - - - - - - - - - - 15,474 (2,034) 17,508 11,890 (1,537) 13,427 13,150 23,615 17,508 13,427 2.20 2.11 4.39 4.27 - - - - 8 9 10 10 25 25 25 11 14 ClearView Wealth Limited ClearView Annual Report 2017 67 Consolidated statement of financial position For the year ended 30 June 2017 Consolidated Note 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 Assets Cash and cash equivalents Investments Receivables Fixed interest deposits Reinsurers’ share of life insurance policy liabilities Current tax assets Deferred tax asset Property, plant and equipment Goodwill Intangible assets Total assets Liabilities Payables Current tax liabilities Provisions Life insurance policy liabilities Life investment policy liabilities Liability to non-controlling interest in controlled unit trusts Deferred tax liabilities Total liabilities Net assets Equity Issued capital Retained losses Executive Share Plan Reserve Profit reserve General reserve Total equity To be read in conjunction with the accompanying Notes. 15 16 17 18 25 24 21 19 20 22 23 25 25 24 26 12 12 12 12 222,197 217,673 5,880 20,889 1,814,049 1,615,226 377,159 354,158 13,689 11,855 37,947 78,327 15,338 - 16,097 79,584 (703) 641 - - - 10,509 10,801 310 1,425 20,452 24,202 1,823 19,952 28,428 - - - - - 641 573 - - - 2,224,446 1,989,522 397,038 388,116 39,909 35,619 523 8,460 - 5,215 (207,632) (203,830) 1,177,290 1,152,554 788,427 587,205 1,819 996 1,808,796 1,577,759 352 523 18 - - - 591 1,484 780 - 26 - - - - 806 415,650 411,763 395,554 387,310 421,717 (15,648) 10,068 417,850 (12,344) 8,342 - - (487) (2,085) 421,717 (61,379) 10,068 25,635 (487) 417,850 (57,887) 8,342 21,090 (2,085) 415,650 411,763 395,554 387,310 68 ClearView Annual Report 2017 ClearView Wealth Limited Consolidated statement of changes in equity For the year ended 30 June 2017 Consolidated Balance at 1 July 2015 Profit for the year Total comprehensive income for the year Recognition of share based payments Dividend paid Dividend Reinvestment Plan Dividend Reinvestment Plan Costs Share buy back (inclusive of costs) Entitlement offer Entitlement offer costs (net of tax) ESP share buy back ESP loans settled through dividend ESP shares vested/(forfeited) Balance at 30 June 2016 Profit for the year Total comprehensive income for the year Recognition of share based payments Dividend paid (inclusive of costs) Entitlement offer costs related to prior year ESP loans settled through dividend/sale of renounceable rights ESP shares vested/(forfeited) Balance at 30 June 2017 To be read in conjunction with the accompanying Notes. General reserve Profit reserve Retained losses Attributable to the owners of the parent $’000 $’000 $’000 $’000 Share capital $’000 355,970 - - - - 12,301 (35) (75) 50,136 (579) (249) - 381 Executive share plan reserve $’000 6,607 - - 1,201 - - - - - - - 652 (118) (2,085) - - - - - - - - - - - - 417,850 8,342 (2,085) - - - (3) (12) - - - 1,012 - - 1,011 - - - - - - 3,882 (297) 1,598 421,717 10,068 (487) - - - - - - - - - - - - - - - - - - - - - - (23,659) 336,833 23,616 23,616 - (12,301) - - - - - - - - 23,616 23,616 1,201 (12,301) 12,301 (35) (75) 50,136 (579) (249) 652 263 (12,344) 411,763 13,150 13,150 - 13,150 13,150 1,012 (16,454) (16,457) - - - (12) 1,011 5,183 (15,648) 415,650 ClearView Wealth Limited ClearView Annual Report 2017 69 Consolidated statement of changes in equity For the year ended 30 June 2017 Continued Company Balance at 1 July 2015 Profit for the year Total comprehensive loss for the year Recognition of share based payments Dividend paid Dividend Reinvestment Plan Dividend Reinvestment Plan Costs Share buy back (inclusive of costs) Entitlement offer Entitlement offer costs (net of tax) ESP share buy back ESP loans settled through dividend ESP shares vested/(forfeited) Balance at 30 June 2016 Profit for the year Total comprehensive loss for the year Recognition of share based payments Dividend paid (inclusive of costs) Entitlement offer costs related to prior year ESP loans settled through dividend/sale of renounceable rights ESP shares vested/(forfeited) Balance at 30 June 2017 To be read in conjunction with the accompanying Notes. Share capital $’000 355,970 - - - - 12,301 (35) (75) 50,136 (579) (249) - 381 Executive share plan reserve $’000 6,607 - - 1,201 - - - - - - - 652 (118) Profit reserve Retained losses Attributable to the owners of the parent $’000 $’000 General reserve $’000 (2,085) 16,391 (54,314) 322,567 - - - - - - - - - - - - 17,000 (3,573) 17,000 (3,573) - (12,301) - - - - - - - - - - - - - - - - - - 13,427 13,427 1,201 (12,301) 12,301 (35) (75) 50,136 (579) (249) 652 263 417,850 8,342 (2,085) 21,090 (57,887) 387,310 - - - (3) (12) - - - 1,012 - - 1,011 - - - - - - 3,882 (297) 1,598 21,000 (3,492) 21,000 (3,492) - (16,454) - - - - - - - - 17,508 17,508 1,012 (16,457) (12) 1,011 5,183 421,717 10,068 (487) 25,635 (61,379) 395,554 70 ClearView Annual Report 2017 ClearView Wealth Limited Consolidated statement of Cash Flows For the year ended 30 June 2017 Continued Cash flows from operating activities Receipts from client and debtors Payments to suppliers and other creditors Receipts from/(payments to) Group entities Withdrawals paid to life investment clients Dividends and trust distributions received Interest received Interest on borrowings and other costs of finance Consolidated Note 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 472,320 415,100 - 5 (306,663) (288,464) - - (225,031) (184,560) 17,529 23,040 (827) 16,526 33,659 (1,958) (3,901) 10,028 - - 154 (257) (1,436) 9,620 - - 311 (1,474) Income taxes paid (5,350) (14,184) (5,350) (14,184) Net cash (utilised)/generated by operating activities 30 (24,982) (23,881) 674 (7,158) Cash flows from investing activities Net cash movement due to investment in subsidary - - (23,000) (36,000) Payments for investment securities Proceeds from sales of investment securities Net cash paid for business combination Acquisition of property, plant and equipment Acquisition of capitalised software Fixed interest deposits redeemed/(invested) Loans granted Convertible note drawn down Dividends received from subsidiary (1,967,063) (2,313,367) 1,863,056 2,173,882 (2,200) (240) (7,072) 1,257 (4,585) - - - (1,654) (5,510) 30,263 (162) (612) - - - - - - (3,409) - - - - - 8,479 - - (612) - 21,000 17,000 Net cash (utilised) by investing activities (116,847) (117,160) (5,409) (11,131) Cash flows from financing activities Net movement in liability of non-controlling interest in unit trusts Proceeds from share issues (net of expenses) Repayment of loan borrowings Share buy back (net of costs) Share issue expenses/DRP costs Repayment of ESP loans Payments for ESP shares reallocated/vested Cash dividend paid 156,627 153,213 - - - (12) 1,012 5,183 49,556 (45,500) (75) (35) 652 132 - - - - (12) 1,012 5,183 (16,457) - (16,457) - 49,556 (45,500) (75) (35) 652 132 - Net cash generated in financing activities 146,353 157,943 (10,274) 4,730 Net increase/(decrease) in cash and cash equivalents 4,524 16,904 (15,009) (13,558) Cash and cash equivalents at the beginning of the financial year 217,673 200,769 Cash and cash equivalents at the end of the financial year 15 222,197 217,673 20,889 5,880 34,447 20,889 To be read in conjunction with the accompanying Notes. ClearView Wealth Limited ClearView Annual Report 2017 71 Notes to the Financial Statements For the year ended 30 June 2017 1. General information ClearView Wealth Limited (the Company or Consolidated Entity) is a limited company incorporated in Australia. The address of its registered office is disclosed in the Directory at the back of the Annual Report. The principal activities of the Company and its subsidiaries (the Group) are described in Note 7. 2. Application of new and revised accounting standards The following new and revised Australian Accounting Standards and Interpretations have been adopted in the current year and have affected the amounts reported in these financial statements. 2.1 New and revised AASBs affecting amounts reported and/or disclosures in the financial statements In the current financial year, the Group has applied the below revised Accounting Standard issued by the Australian Accounting Standards Board (AASB) that was mandatorily effective for an accounting period that begins on or after 1 July 2016 AASB 2014-4 ‘Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation’ Introduces a rebuttable presumption that the use of revenue-based amortisation methods for intangible assets is inappropriate. Limited opportunity for presumption to be overcome. Clarifies that revenue-based depreciation for property, plant and equipment cannot be used. AASB 2014-9 ‘Amendments to Australian Accounting Standards – Equity Method in Separate Financial Statements’ Allows the use of the equity method in separate financial statements in the accounting for associates, joint ventures and subsidiaries. AASB 2015-1 ‘Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012-2014 Cycle’ Amendments to existing accounting standards, particularly in relation to: -IFRS 5 – guidance on changes in method of disposal -IFRS 7 – clarifies ‘continuing involvement’ for servicing contracts -IFRS 7 – clarifies offsetting disclosures are not specifically required in interim financial statements, but may be included under the general requirements of IAS 34 -IAS 19 – clarifies that discount rates used should be in the same currency as the benefits are to be paid, and -IAS 34 – clarifies that disclosures may be incorporated in the interim financial statements by cross-reference to another part of the interim financial report. The amendments do not require any significant change to current practice, but should facilitate improved reporting, including an emphasis on only including material disclosures, clarity on the aggregation and disaggregation of line items, the presentation of subtotals, the ordering of notes and the identification of significant accounting policies. AASB 2015-2 ‘Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101’ 72 ClearView Annual Report 2017 ClearView Wealth Limited 2. Application of new and revised accounting standards Continued 2.2 Standards and Interpretations in issue not yet adopted At the date of authorisation of the financial statements, the Standards and Interpretations listed below were in issue but not yet effective. Standard/Interpretation AASB 9 ‘Financial Instruments’, and the relevant amending standards1 AASB 15 ‘Revenue from Contracts with Customers’ and AASB 2014-5 ‘Amendments to Australian Accounting Standards arising from AASB 15’ Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 January 2018 1 January 2018 30 June 20222 30 June 2019 AASB 16 ‘Leases’ 1 January 2019 30 June 2020 1 The AASB has issued the following versions of AASB 9 and the relevant amending standards; • • • AASB 9 ‘Financial Instruments’ (December 2009), AASB 2009-11 ‘Amendments to Australian Accounting Standards arising from AASB 9’, AASB 2012-6 ‘Amendments to Australian Accounting Standards – Mandatory Effective Date of AASB 9 and Transition Disclosures’ AASB 9 ‘Financial Instruments’ (December 2010), AASB 2010-7 ‘Amendments to Australian Accounting Standards arising from AASB 9 (December 2010)’, AASB 2012-6 ‘Amendments to Australian Accounting Standards – Mandatory Effective Date of AASB 9 and Transition Disclosure’. In December 2014 the AASB issued AASB 2014-9 ‘Amendment to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments’, Part C – Financial Instruments. This amending standard has amended the mandatory effective date of AASB 9 to 1 January 2017. For annual reporting periods beginning before 1 January 2017, an entity may early adopt either AASB 9 (December 2009) or AASB 9 (December 2010) and the relevant amending standards. 2 The Group has elected to apply the temporary exemption available to insurance entities and defer the implementation of AASB 9 until IFRS 17 is applied in 2022. At the date of authorisation of the financial statements, the following IASB Standards and IFRIC Interpretations (for which Australian equivalent Standards and Interpretations have not yet been issued) were in issue but not yet effective. Standard/Interpretation Classification and Measurement of Share-based Payment Transactions (Amendment to IFRS 2) Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 January 2018 30 June 2019 IFRS 17 - Insurance Contracts 1 January 2021 30 June 2022 2.3 Impact of changes to Australian Accounting AASB 15 ‘Revenue from Contracts with Customers’ Standards and interpretations IFRS 17 ‘Insurance Contracts’ IFRS 17 requires insurance liabilities to be measured at a current fulfilment value and provides a more uniform measurement and presentation approach for all insurance contracts. These requirements are designed to achieve the goal of a consistent, principle-based accounting for insurance contracts. The Australian equivalent of IFRS 17 will supersedes AASB 1038 Insurance Contracts as of 1 January 2021. The Directors of the Company anticipate that the application of IFRS 17 in the future is likely to have a material impact on the amounts reported and disclosures made in the Group’s consolidated financial statements. The Group is in the process of putting a project in place to implement the new standard and it is therefore not practicable to provide a reasonable estimate of the effect of IFRS 17 at this time. AASB 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. AASB 15 will supersede the current revenue recognition guidance including AASB 118 ‘Revenue,’ AASB 111 ‘Construction Contracts’ and the related Interpretations when it becomes effective. The core principle of AASB 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition: • Step 1: Identify the contract(s) with a customer • Step 2: Identify the performance obligations in the contract • Step 3: Determine the transaction price ClearView Annual Report 2017 73 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 2. Application of new and revised accounting standards Continued • • Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation include Australia Accounting Standards. Compliance with Australian Accounting Standards ensures that the financial statements and notes of the Company and the Group comply with International Financial Reporting Standards (‘IFRS’). Under AASB 15, an entity recognises revenue when (or as) a performance obligation is satisfied, that is when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. AASB 15 applies to annual periods beginning on or after 1 January 2018. The Directors of the Company do not anticipate that the application of AASB 15 in the future will have a material impact on the amounts reported and disclosures made in the Group’s consolidated financial statements. However, it is not practicable to provide a reasonable estimate of the effect of AASB 15 until the Group performs a detailed review. AASB 16 ‘Leases’ AASB 16 provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. The accounting model for lessees will require lessees to recognise all leases on balance sheet, except for short-term leases and leases of low value assets. AASB 16 applies to annual periods beginning on or after 1 January 2019. The Directors of the Company do not anticipate that the application of AASB 16 in the future will have a material impact on the amounts reported and disclosures made in the Group’s consolidated financial statements. However, it is not practicable to provide a reasonable estimate of the effect of AASB 16 until the Group performs a detailed review. 3. Significant accounting policies (a) Statement of compliance These financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001, Accounting Standards and Interpretations, and comply with other requirements of the law. The financial statements comprise the consolidated financial statements of the Group and the separate financial statements of the parent entity. For the purpose of preparing the consolidated financial statements, the Company is a for-profit entity. Accounting Standards The financial statements were authorised for issue by the Directors on 24 August 2017. (b) Basis of preparation The consolidated financial statements have been prepared on the basis of historical cost, except financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair values of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of AASB 2, leasing transactions that are within the scope of AASB 117, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in AASB 2 or value in use in AASB 136. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • • • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. The Company is a company of the kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in 74 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued accordance with that Corporations Instrument, amounts in the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated. All amounts are presented in Australian dollars, unless otherwise noted. (c) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company and its subsidiaries. Control is achieved when the Company: • has power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including: • • • • the size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; potential voting rights held by the Company, other vote holders or other parties; rights arising from other contractual arrangements; and any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Changes in the Group’s ownership interests in existing subsidiaries Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company. When the Group loses control of a subsidiary, a gain or loss is recognised in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (that is, reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable AASBs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under AASB 139, when applicable, the cost on initial recognition of an investment in an associate or a joint venture. (d) Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value which is ClearView Annual Report 2017 75 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date, except that: • • • deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with AASB 112 Income Taxes and AASB 119 Employee Benefits respectively; liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with AASB 2 ‘Share-based Payment’ at the acquisition date; and assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 Non current assets Held for Sale and Discontinued Operations are measured in accordance with that Standard. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non- controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another Standard. 76 ClearView Annual Report 2017 Where the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the “measurement period” (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates in accordance with AASB 139, or AASB 137 “Provisions, Contingent Liabilities and Contingent Assets”, as appropriate, with the corresponding gain or loss being recognised in profit or loss. Where a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date (i.e. the date when the Group attains control) and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as at the acquisition date that, if known, would have affected the amounts recognised as at that date. (e) Goodwill Goodwill arising on an acquisition of a business is carried ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued at cost as established at the date of the acquisition of the business less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in the statement of profit or loss and other comprehensive income. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. The Group’s policy for goodwill arising on the acquisition of an associate is described at (f) below. (f) Investments in associates and joint ventures An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The results and assets and liabilities of associates or joint ventures are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for in accordance with AASB 5. Under the equity method, an investment in an associate or a joint venture is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the associate or joint venture. When the Group’s share of losses of an associate or a joint venture exceeds the Group’s interest in that associate or joint venture (which includes any long- term interests that, in substance, form part of the Group’s net investment in the associate or joint venture), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. On acquisition of the investment in an associate or a joint venture, any excess of the cost of the investment over the Group’s share of the net fair value of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the period in which the investment is acquired. The requirements of AASB 139 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in an associate or a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with AASB 136 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with AASB 136 to the extent that the recoverable amount of the investment subsequently increases. The Group discontinues the use of the equity method from the date when the investment ceases to be an associate or a joint venture, or when the investment is classified as held for sale. When the Group retains an interest in the former associate or joint venture and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with AASB 139. The difference between the carrying amount of the associate or joint venture at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture is included in the determination of the gain or loss on disposal of the associate or joint venture. In addition, the Group accounts for all amounts previously recognised in other comprehensive income in relation to that associate or ClearView Annual Report 2017 77 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued joint venture on the same basis as would be required if that associate or joint venture had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by that associate or joint venture would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued. The Group continues to use the equity method when an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate. There is no remeasurement to fair value upon such changes in ownership interests. When the Group reduces its ownership interest in an associate or a joint venture but the Group continues to use the equity method, the Group reclassifies to profit or loss the proportion of the gain or loss that had previously been recognised in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities. When a group entity transacts with an associate or a joint venture of the Group, profits and losses resulting from the transactions with the associate or joint venture are recognised in the Group’s consolidated financial statements only to the extent of interests in the associate or joint venture that are not related to the Group. (g) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Fee revenue is recognised when: • The amount can be measured reliably; • It is probable that the future economic benefit associated with transactions will flow to the entity; and • The stage of completion can be measured reliably. Premium revenue Premium revenue only arises in respect of life insurance contracts. Premiums with a regular due date are recognised as revenue on a due basis. Premiums with no due date are recognised as revenue on a cash received or receivable basis. Unpaid premiums are only recognised as revenue during the days of grace and are included as Premiums Receivable (part of Receivables) in the statement of financial position. Premiums due after, but received before, the end of the financial year are shown as Life Insurance Premium 78 ClearView Annual Report 2017 in Advance (part of Payables) in the statement of financial position. Premiums and contributions on life investment contracts are treated as deposits and are reported as a movement in life investment contract liabilities. Management fee revenue Fee revenue comprising management fee revenue with respect to life investment contracts and Managed Investment Schemes is recognised in the statement of profit or loss and other comprehensive income on an accrual basis as the services are provided. A single management fee is applied for each Investment Option, which is based on the value of the assets held in each Investment Option. The fee is calculated each time an Investment Option is valued, but before the unit price is declared. The fee is treated as a reduction in the investment contract liabilities. Trustee administration and model (SMA1) fee revenue earned via the Wrap platform is recognised on an accrual basis to the extent that it is probable that the income benefit will flow to the Group and the revenue can be reliably measured. Ongoing fee revenue is recorded over the effective period in which customers’ funds are invested in products on the Wrap platform. Financial advice revenue Financial advice revenue is recognised on an accrual basis to the extent that it is probable that the income benefit will flow to the Group and the revenue can be reliably measured. Ongoing trail revenue is recorded over the effective period in which customers’ funds are invested in products. Dividend and interest revenue Dividend revenue from investments is recognised when the Group’s right to receive payment has been established. Interest revenue is recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition. Investment income Income on investment units and shares is deemed to accrue on the date the distributions are declared to be effective. ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued Distribution income Distribution income from investments in unit trusts is recognised on a receivable basis as of the date the unit value is quoted ex-distribution. Rental income The Group’s policy for recognition of revenue from operating leases is described in (h) below. (h) Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessee Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. (i) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: • • Where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or For receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified within operating cash flows. (j) Principles underlying the conduct of life insurance business The life insurance operations of the Group are conducted within separate statutory funds as required by the Life Insurance Act 1995 (Life Act) and are reported in aggregate with the shareholders’ funds in the statement of profit or loss and other comprehensive income, statement of financial position, statement of changes in equity and statement of cash flows. The life insurance operations consist of the provision of life insurance and life investment contracts. Life insurance contracts involve the acceptance of significant insurance risk. Insurance risk is defined as significant if, and only if, an insured event could cause an insurer to pay significant benefits in any scenario, excluding scenarios that lack commercial substance. Insurance contracts include those where the insured benefit is payable on the occurrence of a specified event such as death, injury or disability caused by accident or illness. The insured benefit is not linked to the market value of the investments held by the Group, and the financial risks are substantially borne by the Group. Any contracts issued by the Group and regulated under the Life Act that do not meet the definition of a life insurance contract are classified as life investment contracts. Life investment contracts include investment-linked contracts where the benefit is directly linked to the market value of the investments held in the particular investment linked fund. While the underlying assets are registered in the name of ClearView Life Assurance Limited (ClearView Life) and the investment-linked policy owner has no direct access to the specific assets, the contractual arrangements are such that the investment-linked policy owner bears the risks and rewards of the fund’s investment performance. A component of the life investment contracts includes a minimum unit price guarantee. ClearView Life derives fee income from the administration of investment linked funds. Life investment contracts do not contain any discretionary participation features (i.e. those where the amount or timing of allocation of the profit from the underlying investments is at the discretion of the insurer). ClearView Annual Report 2017 79 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued In accordance with AASB 1038 “Life Insurance Contracts”, financial assets backing policy liabilities are designated at fair value through profit and loss. ClearView Life has determined that all assets held within the statutory funds back policy liabilities. Financial assets backing policy liabilities consist of high quality investments such as cash, equities, fixed income securities, property trusts and infrastructure assets. The management of financial assets and policy liabilities is closely monitored to ensure that investments are appropriate given the expected pattern of future cash flows arising from the policy liabilities. (k) Claims Life insurance contracts Claims incurred relate to life insurance contracts and are treated as expenses. Claims are recognised upon notification of the insured event. The liability in respect of claims includes an allowance (estimate) for incurred but not reported claims and an allowance (estimate) for expected declinature of notified claims. Claims are shown gross of reinsurance recoverable. Any reinsurance recoveries applicable to the claims are included in receivables. Life investment contracts There is no claims expense in respect of life investment contracts. Surrenders and withdrawals which relate to life investment contracts are treated as a movement in life investment contract liabilities. Surrenders and withdrawals are recognised as at the date of redemption of policy units, which occurs once all documentation has been provided and completed. (l) Reinsurance Amounts paid to reinsurers under life insurance contracts held by ClearView Life are recorded as an outward reinsurance expense and are recognised in the statement of profit or loss and other comprehensive income from the reinsurance premium payment due date. Reinsurance recoveries receivable on claims incurred are recognised as revenue. Recoveries are assessed in a manner similar to the assessment of life insurance contract liabilities. Recoveries are measured as the present value of the expected future receipts, calculated on the same basis as the life insurance contract liabilities. 80 ClearView Annual Report 2017 (m) Policy acquisition costs The policy acquisition costs incurred are recorded in the statement of profit or loss and other comprehensive income and represent the fixed and variable costs of acquiring new business. The policy acquisition costs include commission, policy issue and underwriting costs, and related costs. The acquisition costs incurred in relation to life insurance contracts are capitalised in the valuation of policy liabilities. (n) Basis of expense apportionment All expenses of the life insurance business incurred by ClearView Life and charged to the statement of profit or loss and other comprehensive income have been apportioned in accordance with Part 6, Division 2 of the Life Act. The basis is as follows: • • • Expenses relating specifically to either the ClearView Life shareholder’s fund or a particular statutory fund are allocated directly to the respective funds. Such expenses are apportioned between policy acquisition costs and policy maintenance costs with reference to the objective when each expense is incurred and the outcome achieved. Other expenses are subject to apportionment under section 80 of the Life Act and are allocated between the funds in proportion to the activities to which they relate. They are apportioned between policy acquisition costs and policy maintenance costs in relation to their nature as either acquisition or maintenance activities. Activities are based on direct measures such as time, head counts and business volumes. Life investment contracts are held within statutory funds No.2 and No.4. Life insurance contracts are principally held within statutory fund No.1, except for a small, closed book of rider insurance covers held in statutory fund No.2. The allocation of expenses between the primary life investment or life insurance contracts is inherent in the allocation to the statutory funds, as described above. The apportionment basis is in line with the principles set in the Life Insurance Prudential Standard valuation standard (Prudential Standard LPS340 Valuation of Policy Liabilities). All expenses relate to non- participating business as ClearView Life only writes this category of business. (o) Policy liabilities Policy liabilities consist of life insurance policy liabilities and life investment policy liabilities. ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued Life insurance contracts (r) Share based payment arrangements The value of life insurance policy liabilities is calculated using the Margin on Services methodology. Under this methodology, planned profit margins and an estimate of future liabilities are calculated separately for each related product group, with future cash flows determined using best estimate assumptions and discounted to the reporting date. Profit margins are systemically released over the term of the policies in line with the pattern of services to be provided. The future planned profit margins are deferred and recognised over time by including the value of the future planned profit margins within the value of the policy liabilities. Further details of the actuarial assumptions used in these calculations are set out in Note 4. Life investment contracts Life investment policy liabilities are valued at fair value, which is based on the valuation of the assets held within the unitised investment linked policy investment pools. (p) Cash and cash equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of changes in value. (q) Employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of short-term employee benefits, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of long term employee benefits are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. Termination benefit A liability for a termination benefit is recognised at the earlier of when the entity can no longer withdraw the offer of the termination benefit and when the entity recognises any related restructuring costs. Share-based payment transactions of the Company Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in Note 28. The fair value determined at the grant date of the equity- settled share-based payments is expensed on a straight- line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity- settled employee benefits reserve. Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. (s) Taxation Income tax expense represents the sum of the tax currently payable (or receivable) and deferred tax. Current tax The tax currently payable (or receivable) is based on taxable profit for the year less tax instalments paid. Taxable profit differs from profit before tax as reported in the consolidated statement of profit or loss and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period less any tax instalments paid. Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax ClearView Annual Report 2017 81 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax liabilities and assets are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity, respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. (t) Property, plant and equipment Fixtures and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is recognised so as to write off the cost or valuation of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. (u) Intangible assets - Software and Client Books Intangible assets acquired separately Intangible assets with finite lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Internally-generated intangible assets - research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. Current and deferred tax for the year Current and deferred tax are recognised in profit or loss, An internally-generated intangible asset arising from development (or from the development phase of an internal 82 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued project) is recognised if, and only if, all of the following have been demonstrated: • • The technical feasibility of completing the intangible asset so that it will be available for use or sale; The intention to complete the intangible asset and use or sell it; • The ability to use or sell the intangible asset; • • • How the intangible asset will generate probable future economic benefits; The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and The ability to measure reliably the expenditure attributable to the intangible asset during its development. The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Amortisation is charged to the statement of profit or loss and other comprehensive income on a straight-line basis over periods generally ranging from 3 to 5 years. Management reviews the appropriateness of the amortisation period on an annual basis. Derecognition of intangible assets An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset are recognised in profit or loss when the asset is derecognised. (v) Impairment of tangible and intangible assets other than goodwill At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. When an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash- generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. (w) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. ClearView Annual Report 2017 83 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material). When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Financial assets Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (FVTPL), ‘held-to-maturity’ investments, ‘available¬for- sale’ (AFS) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Onerous contracts Effective interest method Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from the contract. Restructurings A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity. (x) Financial instruments Financial assets and financial liabilities are recognised when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL. Financial assets at FVTPL Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: • • • It has been acquired principally for the purpose of selling it in the near term; or On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit- taking; or It is a derivative that is not designated and effective as a hedging instrument. A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: • Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • The financial asset forms part of a group of financial 84 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • It forms part of a contract containing one or more embedded derivatives, and AASB 139 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL. For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. For financial assets that are carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the “net fair value gains and losses” line item in the statement of profit or loss and other comprehensive income. Fair value is determined based on the bid price determined at 7:00pm in accordance with the policy adapted by the custodian on the reporting date. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectable, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. Held-to-maturity investments Bills of exchange and debentures with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity are classified as held-to maturity investments. Held-to-maturity investments are measured at amortised cost using the effective interest method less any impairment. Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as “loans and receivables”. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period. For financial assets measured at amortised cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. In respect of AFS equity securities, impairment losses previously recognised in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognised in other comprehensive income and accumulated under the heading of investments revaluation reserve. In respect of AFS debt securities, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss. Derecognition of financial assets The Group derecognises a financial asset when the ClearView Annual Report 2017 85 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss. On derecognition of a financial asset other than in its entirety (e.g. when the Group retains an option to repurchase part of a transferred asset), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognised in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts. Financial liabilities and equity instruments Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. recognised as equal to the proceeds received, net of direct issue costs. Repurchase of the Company’s own equity instruments is recognised and deducted directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments. Financial liabilities Financial liabilities are classified as either financial liabilities “at FVTPL” or “other financial liabilities”. Financial liabilities at FVTPL Financial liabilities are classified at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. A financial liability is classified as held for trading if: • • • It has been incurred principally for the purpose of repurchasing it in the near term; or On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit taking; or It is a derivative that is not designated and effective as a hedging instrument. A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: • • • Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or The financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or It forms part of a contract containing one or more embedded derivatives, and AASB 139 “Financial Instruments: Recognition and Measurement” permits the entire combined contract (asset or liability) to be designated at FVTPL. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability 86 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued3. Significant accounting policies continued and is included in the “other gains and losses” line item in the statement of profit or loss. Fair value is determined in the manner described in Note 33. Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rates is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or where appropriate a shorter period, to the net carrying amount on initial recognition. Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. 4. Critical accounting judgments and key sources of estimation uncertainty In the application of the Group’s accounting policies, the Directors are required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The critical judgments that the Directors have made in the process of applying the Group’s accounting policies and in the application of Australian Accounting Standards that have a significant effect on the financial report and estimates include: • Life insurance policy liabilities, including the actuarial methods and assumptions and allocation of expenses between acquisition and maintenance costs; • Assets arising from reinsurance contracts; • Recoverability of intangible assets; • Impairment of goodwill; • Deferred tax assets; and • Contingent consideration for the acquisition of Matrix Planning Solutions Limited. Life insurance policy liabilities Life insurance policy liabilities are, in the majority of cases, determined using an individual policy-by-policy calculation. Where material liabilities are not determined by individual policy valuation, they are computed using statistical or mathematical methods, which are expected to give approximately the same results as if an individual liability were calculated for each contract. The calculations are made by suitably qualified personnel on the basis of recognised actuarial methods, with due regard to relevant actuarial principles. The methodology takes into account the risks and uncertainties of the particular classes of life insurance business written. The key factors that affect the estimation of these liabilities and related assets are: • • • • The cost of providing benefits and administering these insurance contracts; The costs incurred in acquiring the policies, including commissions, underwriting and policy issue costs; Mortality and morbidity experience on life insurance products; and Discontinuance experience, which affects ClearView Life’s ability to recover the cost of acquiring new business over the term of the contracts. In addition, factors such as regulation, competition, interest rates, taxes, securities market conditions and general economic conditions affect the level of these liabilities. Details of specific actuarial policies and methods are set out further below. Assets arising from reinsurance contracts Assets arising from reinsurance contracts are computed ClearView Annual Report 2017 87 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued4. Critical accounting judgments and key sources of estimation uncertainty continued using the same methods as used for insurance policy liabilities. In addition, the recoverability of these assets is assessed on a periodic basis to ensure that the balance is reflective of the amounts that will ultimately be received, taking into consideration factors such as reinsurer counterparty and credit risk. Impairment is recognised where there is objective evidence that the Group may not receive amounts due to it and these amounts can be reliably measured. Recoverability of acquired intangible assets The carrying amount of intangible assets acquired in a business combination at the financial position date was $10.4 million (2016: $16.9 million). Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset. Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately. At each reporting date ClearView is required to assess whether there is any indication that the intangibles may be impaired. Triggers for impairment are identified and approved for each cash generating unit (CGU). Further details have been provided in each relevant section below. Client Book – Intangible The carrying amount of the Client Book - Intangible as at the financial position date was $10.2 million (2016: $16.7 million). These intangible assets arose on the acquisition of ClearView Group Holdings Pty Limited (CVGH), Community and Corporate Pty Limited (CCFA) and Matrix Planning Solutions Limited (Matrix). The intangibles represent the value of the in-force insurance and investment contracts, and value of the existing financial advice and funds management revenues (the Client Books). Each Client Book has its own assessment of useful life depending on the nature of the clients in each segment and their relative characteristics, based on age, demographics and type of product to which it relates. The policy adopted to write-off the Client Books resembles the anticipated ageing profile of the revenue stream. ClearView identifies its CGUs at the segment reporting level (lowest level of cash generating units). The CGUs identified are as follows: • Life Insurance; • Wealth Management; and • Financial Advice. 88 ClearView Annual Report 2017 The Life Insurance Client Book had, until 30 June 2014, been written off on a straight line basis over 12 years. At each reporting date, an assessment is made of both the useful life and amortisation method. As a result of the annual assessment, the useful life of the Life Insurance Client Book has been changed from 12 years to 8 years due to a change in the lapse rate assumption at 30 June 2014 on the pre 2011 Life Insurance in-force portfolio and therefore in the estimated ageing profile of the book. The carrying value of the Life Insurance Client Book as at 30 June 2017 is $2.8 million. Triggers considered in testing for annual impairment for the Life Insurance Client Book are as follows: • Mortality and morbidity (claims); • Maintenance costs; • Persistency (lapse); and • Discount rates. The Wealth Management Client Book was written off at 15% per annum on a straight line basis. The triggers that were considered in testing for annual impairment for the Wealth Client Book were as follows: • Investment returns; • Maintenance costs; • Outflows; and • Discount rates. During the year the Wealth Management Client Book was fully amortised. The Financial Advice Client Book is written off on a straight line basis over 10 years. The carrying value is $7.4 million at 30 June 2017. Triggers that need to be considered in testing for annual impairment for the Financial Advice Client Book are as follows: • Investment returns; • Maintenance costs; • Outflows; and • Discount rates. ClearView prepares an Embedded Value for the Group at each reporting period. The Embedded Value is prepared at a reportable segment level (CGUs). The Embedded Value measure is used as a proxy for the value in use. The Embedded Value methodology is used to test the acquired intangibles for any impairment triggers. As at ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 4. Critical accounting judgments and key sources of estimation uncertainty continued 30 June 2017, based on the EV calculations, no impairment was required to the carrying value of the intangible assets. Further information about the Embedded Value (and the movement over the year) is provided in the “Operating and Financial Review” in the Directors Report and further details on intangible assets is detailed in Note 20. Recoverability of internally generated software intangibles The carrying amount of internally generated capitalised software at the financial position date was $13.8 million (2016: $11.5 million). At each reporting period the internally generated software is assessed for any impairment triggers. If any such indication exists, the recoverable amount of the asset shall be estimated. The impairment indicators for the software intangible are defined as: • • • • The ability of the software to provide the functionality required from the business to use the asset; The software is being utilised for the purposes that it was designed; The availability of alternative software that the business has available; and Product mix - The entity no longer sells the products that are administered on the policy administration system or utilises the provided functionality. Capitalised software costs include those associated with the implementation of a new compliant and functional wealth platform and the launch of WealthFoundations that is hosted on the new platform. The intention is to migrate the Master Trust and MIS products onto the new platform in the 2018 financial year, with the project already commenced. No impairment was required to the carrying values of internally generated software as at 30 June 2017. Impairment of goodwill The carrying amount of goodwill at the reporting date was $20.5 million (2016: $20.0 million). Determining whether goodwill is impaired requires an estimation of the value-in-use of the cash-generating units to which the goodwill has been allocated. The value-in-use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to determined the present value of those cash flows. Goodwill The Group acquired the business of CCFA on 9 April 2009. Goodwill arose in respect of the amount of consideration paid that related to the expected cost synergies, revenue growth, improved referral source penetration, future market development and the assembled work force and ingrained experience of personnel. These assets are not recognised separately from goodwill as the future economic benefits arising from them are not capable of being measured separately. CCFA was acquired in 2009 as the first step of the Group in developing a presence in the wealth management and financial advice industry. The goodwill that arose on the acquisition has at the reporting date been allocated to the Financial Advice CGU. The Group tests for impairment at each reporting date. The Group acquired Matrix Holdings Limited (Matrix Holdings) and its subsidiaries Matrix Planning Solutions Limited (MPS or Matrix) and Matrix Planning Investments Pty Ltd (MPI) on 10 October 2014. Goodwill arose in respect of the amount of consideration paid attributable to the expected revenue synergies and other benefits from combining the assets and activities of Matrix with those of the Group. The expanded number of supportive advisers has the potential to deliver revenue synergies given ClearView’s market proven products. This is also expected to result in the increased profitability of the Group. The goodwill that arose on acquisition has at reporting date been allocated across the Financial Advice, Life Insurance and Wealth Management CGU’s of the Group. ClearView prepares an Embedded Value for the Group at each reporting period. The Embedded value is prepared at a reportable segment level (CGU). The goodwill recognised in the Financial Advice CGU is tested for impairment triggers using the Embedded Value methodology. The goodwill recognised on acquisition of Matrix within the Life Insurance and Wealth Management CGU’s is tested for impairment triggers by comparing the carrying value of the goodwill to the in-force portfolios written to date and the forecast incremental Value of New Business expected to be generated in the Life Insurance and Wealth Management CGU’s based on the anticipated new business flows in accordance with the approved Business Plan. As at 30 June 2017, no impairment was required to the carrying value of the goodwill. ClearView Annual Report 2017 89 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued4. Critical accounting judgments and key sources of estimation uncertainty continued Further information about Goodwill is detailed in Note 19. Deferred tax asset – timing Differences The Board has considered that it is probable that sufficient taxable income will be available against which deductible temporary differences can be utilised. Deferred tax asset – Capital Losses ClearView Life has amounts of realised and unrealised capital losses within its superannuation business in its No. 2 and No.4 Statutory Funds. The Board has considered the likelihood of the recovery of these losses and their fair value, and has concluded that it is appropriate to reduce the deferred tax asset (DTA) held in respect of those capital losses below the nominal full recovery amount. This has been implemented via placing a cap on the recognised DTA. The DTA relating to capital losses are estimated to be utilised in the foreseeable future and is expressed as a percentage of the value of investments held. The same methodology has been adopted for unit pricing purposes and this financial report. In addition to the above, the Group has accumulated capital losses that arose within the Company that relate to the losses realised on the historic disposal of a subsidiary entity. At the current time, no DTA is recognised in respect of these losses. This is discussed further in Note 24. Actuarial methods and assumptions The effective date of the actuarial report on life insurance policy liabilities and life investment policy liabilities is 30 June 2017. The actuarial report was prepared by the ClearView Life Appointed Actuary, Ashutosh Bhalerao. The actuarial report indicates that the Appointed Actuary is satisfied as to the accuracy of the data upon which the policy liabilities have been determined. The methods used for the major product groups are as follows: Related Product Group Fund 1 Non-Advice Lump Sum (including the Old Book) Fund 1 LifeSolutions Lump Sum Ordinary Fund 1 LifeSolutions Lump Sum Super Fund 1 LifeSolutions Income Protection Ordinary Fund 1 LifeSolutions Income Protection Super Fund 2 Old Book Lump Sum Fund 2 Investments Fund 4 Investments These life insurance and life investment policy liability determinations are also consistent with the requirements of the relevant Prudential Standards and the Life Insurance Act 1995. Life insurance policy liabilities have been calculated in a way which allows for the systematic release of planned margins as services are provided to policyholders and premiums are received. The projection method uses the discounted value of future policy cash flows (premiums, expenses and claims) plus a reserve for expected future profits. The policy liabilities for life investment contracts are determined as the fair value of the policyholders’ accounts under the accumulation method with no future profit reserve. (a) Actuarial assumptions used in the valuation of life insurance policy liabilities 90 ClearView Annual Report 2017 Method Profit carrier Projection Projection Projection Projection Projection Projection Accumulation Accumulation Premiums Premiums Premiums Premiums Premiums Premiums n/a n/a Key assumptions used in the calculations of life insurance policy liabilities are as follows: Discount rates: Discount rates are based on a yield curve derived from Commonwealth Government bond market yields as at the valuation date, plus an illiquidity adjustment based on the difference between these yields and BBSW swap rates as at the valuation date. As an indication, the resulting average effective discount rate adopted was 3.0% (2016: 2.6%). Acquisition expenses: Per policy acquisition expense assumptions were based on the actual acquisition expenses incurred for the 12 months to 30 June 2017. Maintenance expense and inflation: The per policy maintenance expense assumptions were based on the longer term per policy unit costs implied by ClearView Life’s 2017 business plan (2016: Based on the 2016 business plan). Expense inflation of 2.5% p.a. (2016: 2.5% p.a.) was assumed. ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued4. Critical accounting judgments and key sources of estimation uncertainty continued Lapses: Rates adopted vary by product, duration, age, commision type and premium frequency, and have been based on an analysis of ClearView Life’s experience over recent years with allowance for expected trends. Mortality: Rates adopted vary by product, age, gender, and smoking status. The primary underlying mortality tables used were the AI-FSC 2004-2008 industry standard tables, which were adjusted for industry experience and ClearView’s own experience. Morbidity (TPD, Income Protection and Trauma): Rates adopted vary by age, gender, and smoking status. The primary rates adopted are based on the AI-FSC 2004-2008 and ADI-FSC-KPMG 2007 - 2011 industry standard tables, which were adjusted for industry experience and ClearView’s own experience. (b) Effects of changes in actuarial assumptions (over 12 months to 30 June 2017) Effect on profit margins Increase/ (decrease) Effect on policy liabilities Increase/ (decrease) $’000 $’000 (5,672) - (1,862) 1,419 (6,115) 3,912 - - - 3,912 Assumption category Discount rates and inflation Maintenance expenses Lapses Mortality and morbidity Total (c) Processes used to select assumptions in the three year Board adopted business plan excluding short term growth and development costs. Per policy maintenance expenses are assumed to increase in the future with inflation, at a rate that allows for basic price increases (CPI). Acquisition expenses Per policy acquisition expenses were derived from the analysis of acquisition expenses adopted for this financial report. Taxation It has been assumed that current tax legislation and rates continue unaltered. Mortality and morbidity Appropriate base tables of mortality and morbidity are chosen for the type of products written. An investigation into the actual experience of the insurance portfolio over recent years is performed annually and ClearView Life’s mortality and morbidity experience is compared against the rates in the base tables. Where the data is sufficient to be fully statistically credible, the base table is adjusted to reflect the portfolio’s experience. Where data is insufficient to be fully statistically credible, the base table is adjusted having regard to the extent of the credibility of the portfolio’s experience, the overall experience of the industry known and advice from ClearView’s reinsurers. Lapse An investigation into the actual lapse experience of ClearView Life over the most recent years is performed and statistical methods are used to determine appropriate lapse rates. An allowance is then made for any trends in the data as well as industry experience to arrive at a best estimate of future lapse rates. Discount rate (d) Sensitivity analysis Benefits under life insurance contracts are not contractually linked to the performance of the assets held. As a result, the life insurance policy liabilities are discounted for the time value of money using discount rates that are based on current observable, objective rates that relate to the nature, structure and term of the future obligations. The discount rate is based on Commonwealth Government bond rates adjusted for the value of the illiquidity of the policy liability. The effect of this approach is unchanged from that adopted last valuation. ClearView Life conducts sensitivity analyses to quantify the exposure to risk of changes in the key underlying variables such as discount rates, expenses, mortality, morbidity and lapses. The valuations included in the reported results and ClearView Life’s best estimate of future performance are calculated using certain assumptions about these variables. The movement in any key variable may impact the reported performance and net assets of ClearView Life and the consolidated entity and as such represents a risk. Maintenance expenses and inflation Maintenance expenses are set having regard to the cost base ClearView Annual Report 2017 91 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued4. Critical accounting judgments and key sources of estimation uncertainty continued Variable Impact of movement in underlying variable Interest Rate Risk Expense Risk Mortality Rates Morbidity Rates Lapses The life insurance policy liabilities are calculated using a discount rate that is derived from market interest rates. Changes in market interest rates will affect the present value of cash flows and profit margins in the policy liabilities, which in turn will affect the profit and shareholder equity. The change in interest rates would also impact the emerging profit via its impact on the investment returns on the assets held to back the liabilities. An increase in the level (or inflation) of expenses over the assumed levels will decrease emerging profit. However, a change in the base expense assumptions adopted for the policy liability is unlikely to impact the current policy liability determination as such a change is absorbed into the policy liability profit margin reserve in the first instance. For life insurance contracts providing death benefits an increased rate of mortality would lead to higher levels of claims, increasing associated claims cost and thereby reducing emerging profit. However, a change in the mortality assumptions adopted for the policy liability is unlikely to directly impact the current policy liability determination as such a change is absorbed into the policy liability profit margin reserve in the first instance. The cost of claims under TPD, Income Protection and trauma cover depends on the incidence of policyholders becoming disabled or suffering a “trauma” event such as a heart attack or stroke. Higher incidence or claims duration would increase claim costs, thereby reducing profit and shareholder equity. The impact on the policy liability of a change in morbidity assumptions is as per mortality above. Lapse risk represents the extent to which policyholders choose not to renew their policy, and allow it to lapse. An increase in the lapse rates will have a negative effect on emerging profit owing to the loss of future revenue, including that required to recover acquisition costs. The impact on the policy liability of a change in lapse assumptions is as per mortality above. The table below illustrates how outcomes during the financial year ended 30 June 2017 in respect of the key actuarial variables, would have impacted the reported life insurance policy liabilities, profit and equity for that financial year. Variable Interest rates Mortality and morbidity Lapses Maintenance expenses Impact on policy liabilities Impact on net profit and shareholder equity Gross of reinsurance Net of reinsurance Gross of reinsurance Net of reinsurance $’000 17,213 $’000 15,155 (19,605) (17,261) - - - - - - - - - - - - $’000 (12,049) 13,723 (4,479) 4,479 (2,436) 2,436 (1,382) 1,382 $’000 (10,608) 12,082 (1,536) 1,536 (2,169) 2,169 (1,382) 1,382 Change in variable + 100 bp - 100 bp 110.0% 90.0% 110.0% 90.0% 110.0% 90.0% * Note: The interest rate sensitivities show the change to policy liabilities and profit from a change in the discount rate by adding or subtracting 1% from the yield curve adopted. The other sensitivities show how different the policy liabilities and reported profit would have been if ClearView Life’s experience in the current year in relation to those variables had been higher or lower by 10% of that experienced. The Group’s activities expose it to a variety of risks, both financial and non-financial. Key risks include: • Asset risks, including investment market risk (interest rate risk and equity price risk), investment management risk, credit risk and liquidity risk; • Asset-liability mismatch risk; • Expense and discontinuance (lapses, withdrawals and loss of client) risks; and • Non-financial risks - regulatory environment, operational, resilience and strategic risks. • Insurance risk; 92 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued5. Risk management Risk management strategy and framework, roles and responsibilities Risk management is an integral part of the Group’s management process. The Group’s Board has adopted a formal Risk Management and Capital Strategy (RMCS) and Risk Management Framework (RMF) to assist it in identifying and managing the key risks to achieving the Group’s objectives. The RMCS and RMF are fundamental to the business decisions of the Group, including resource allocation decisions and prioritisation of activities. The Risk and Compliance Committee, on behalf of the Board, monitors the operation of the RMF and facilitates review of the key process and procedures underlying the RMF. Internal audit activities are focused on key risks and on the key risk controls identified as part of the risk assessment process. KPMG is retained to provide outsourced internal audit services. The RMCS and RMF considers the key stakeholders in the Group, beyond the shareholders, including: • The benefit, security and expectations of policyholders, members of the ClearView Retirement Plan and investment product and advice clients; • Risk impacts on and from our staff, our distribution partners and suppliers and counterparties; and • Requirements and objectives of our regulators. The RMCS specifies the Board’s risk appetite and tolerance standard which guides the Group in its decisions as to the acceptance, management and rejection of risks. A risk register Insurance risk is maintained that identifies the key risks of the Group by type, impact and likelihood, and indicates the key process and mechanisms to control, mitigate or transfer those risks within the allowed tolerances. The RMCS and RMF includes suitable monitoring mechanisms. As part of the RMCS and RMF, the Group has adopted an Internal Capital Adequacy Assessment Process (ICAAP) with respect to supporting the residual risk exposures retained by the Group and the ongoing capital needs of the Group. The key risks are discussed in more detail below: Asset risks The primary asset risks borne by the Group relate to the financial assets of the Company and its operating subsidiaries excluding those in the non-guaranteed investment linked funds in ClearView Life’s statutory fund No.4 (referred to below as ClearView assets). The primary financial risks related to the financial assets in the non-guaranteed investment linked funds in ClearView Life’s statutory fund No.4 are borne by policyholders as the investment performance on those assets is passed through, in full, to the policyholders (referred to below as Policyholder assets). Nonetheless, the Company has a secondary exposure to the Policyholder assets and off-balance sheet client funds, via the impact on the fees charged by the Group which vary with the level of Policyholder and client funds under management and under administration, as well as related reputational exposure (for further detail on Asset risks refer to Note 33 Financial Instruments). The risks under the life insurance contracts written by ClearView Life are exposed to various key variables. The table below provides an overview of the key insurance contract types and exposure variables. Type of contract Detail of contract workings Nature of compensation for claims Key variables that affect the timing and uncertainty Non-participating life insurance Benefits paid on death or ill Benefits defined by the contracts with fixed terms health that are fixed and not at insurance contract are (Term Life and Disability) the discretion of the issuer determined by the contract obligation of the issuer and Mortality Morbidity Discontinuance rates are not directly affected by the Expenses performance of the underlying assets or the performance of the contracts as a whole Policy Terms Premium Rates Insurance risks are controlled through the use of underwriting procedures, appropriate premium rating methods and approaches, appropriate reinsurance arrangements, effective claims management procedures and sound product terms and conditions due diligence. ClearView Annual Report 2017 93 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued5. Risk management continued (a) Risk management objectives and policies for mitigating insurance risk ClearView Life issues term life insurance contracts and disability insurance contracts. The performance of ClearView Life and its continuing ability to write business depends on its ability to manage insurance risk. The Group’s RMCS summarises its approach to insurance risk management. (b) Methods to limit manage or transfer insurance risk exposures Reinsurance ClearView Life purchases reinsurance to limit its exposure to accepted insurance risk. ClearView Life cedes to specialist reinsurance companies a proportion of its portfolio for certain types of insurance risk. This serves primarily to reduce the net liability on large individual risks and provide protection against large losses. The reinsurers used are regulated by the Australian Prudential Regulation Authority (APRA) and are members of large international groups with sound credit ratings. ClearView Life periodically reviews its reinsurance arrangements and retention levels. Underwriting procedures Underwriting decisions are made using the underwriting procedures reflected in ClearView Life’s underwriting systems and detailed in ClearView Life’s underwriting manual. Such procedures include limits as to delegated authorities and signing powers. The underwriting process is subject to ClearView Life’s internal control processes and is subject to review by the reinsurers from time to time. Claims management Strict claims management procedures help ensure the timely and correct payment of claims in accordance with policy conditions, as well as limiting exposure to inappropriate and fraudulent claims. (c) Concentration of insurance risk The insurance business of ClearView Life is principally written on individual lives (not group business). Individual business is not expected to provide significant exposure to risk concentration. Nonetheless, insurance risk is concentrated to the eastern seaboard of Australia and its capital cities. The residual risk exposure is reduced through the use of reinsurance and is subject to review by the reinsurer’s from time to time. (d) Pricing risk, and terms and conditions of insurance contracts The key risk controls in respect of pricing and policy terms and conditions include: • Review of product pricing by the Appointed Actuary of ClearView Life, including annual analysis of experience and product line profitability in the annual ClearView Life Financial Condition Report; • Formal Appointed Actuary Board reporting on new product pricing, reinsurance and terms and conditions; • Assessment by ClearView Life’s reinsurers of the pricing adopted, including the offer of corresponding reinsurance terms; • Formal internal policy document and Product Disclosure Statement due diligence review and sign-off processes; and • The ability to re-price products (change premium rates and fees) on most products in the event of adverse claims and/or other product experience. It is noted that similar processes and controls apply to the pricing and terms and conditions applicable to the investment products issued by ClearView Life. Asset-Liability mismatch risk Asset-liability mismatch risk arises to the extent to which the assets held by the Group to back its liabilities (especially its policy liabilities and investment contract liabilities) do not closely match the nature and term of those liabilities. In practice, the market risk and credit risk exposures of the Group primarily relate to the extent that the Group retains a net exposure with respect to these risks – that is the extent to which the liabilities and their values do not mirror the variation in asset values. In this context it is noted: • The investment linked liabilities of the ClearView Life directly link the underlying assets held to support those liabilities, with the primary market risks and credit risks passed on to the policyholder and unit trust investors (as discussed above); 94 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued5. Risk management continued • The assets held to support the capital guaranteed units in the ClearView Life No.2 and No.4 statutory funds are maintained, in accordance with the Board’s Investment Policy and Guidelines, in high quality, short dated fixed interest assets and cash. Asset-liability risk is substantially reduced via this means; and • Similarly, assets held to support the policy liabilities and risk capital of the ClearView Life No.1 statutory fund are maintained, in accordance with the Board’s investment Policy and Guidelines, in high quality, short dated fixed interest assets and cash that closely match those policy liabilities and capital reserves. Expense and discontinuance risks Expense risks and discontinuance risks involve: • The extent to which the expenses of the business are not maintained at a level commensurate with premium and fee flows of the business, including the level of business growth and new business and client acquisition; and • The extent to which the rate of loss of policyholders, investment clients and other customers exceed benchmark standards and pricing targets, result in the loss of future profit margins, current period expense support, and loss of opportunity to recover historic acquisition costs incurred. • The risks are principally managed via the Group’s: • Budgeting and expense management reporting and management processes; • Modelling of anticipated client loss rates and ongoing monitoring of discontinuance rates; • Adoption of appropriate business retention strategies; and • Maintaining strong distribution partner relationships. Non-Financial Risks – regulatory environments, operational, resilience and strategic risks The Group has exposure to a number of operational, compliance and strategic risks. The management of these risks forms a substantial part of the focus of the RMCS and RMF. Key elements of the RMF include: • Internal Group risk and compliance team. The adequacy of the team’s resources are periodically reviewed as the nature, size and complexity of ClearView changes; • A Breach and Incident Management process which ensures that incidents are identified, reported and assessed; • Detailed compliance registers, reporting timetables and due diligence processes; • A detailed overall risk register which identifies the key risks, mitigations and controls, inherent and residual risks, and risk owners; • A fraud and cyber Risk Management Framework which provides governance for the prevention, detection and recovery in the case of attempted and materialised internal and external fraud events; • A monthly Risk Management and Compliance Committee which focuses, among other items, on the RMCS and RMF; • Internal audit, whistleblowing policy and facilities, detailed financial reconciliations and unit pricing checking processes, detail IT development and implementation processes; • Comprehensive internal management information reporting and monitoring, emerging risk exposures reporting, staff training programs, staff recruitment standards (including fit and proper standards); • Annual Business Continuity and Disaster Recovery Testing; and • Initiatives to ensure that an appropriate risk culture within the business is maintained including, Board and Senior Management Team focus, an adopted culture statement, including risk management as a formal part of all key business decisions, and appropriate risk management supporting remuneration structures and monitoring of Risk Culture Indicators. Capital management and reserving In terms of regulatory requirements: • ClearView Life is subject to minimum regulatory capital requirements, as determined by the Appointed Actuary in accordance with APRA Life Insurance Prudential Standards, in respect of the principal financial risks exposures retained by ClearView Life; • ClearView Financial Management, ClearView Financial Advice and Matrix Planning Solutions are also required to maintain minimum regulatory capital as required by ASIC; and ClearView Annual Report 2017 95 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 5. Risk management continued • ClearView Life Nominees is required to maintain an Operational Risk Financial Requirement (ORFR) as determined in accordance with Superannuation Prudential Standard 114. SPS 114 requires that the trustee maintains adequate financial resources to address losses arising from the operational risks that may affect the ClearView Retirement Plan. In addition, the Group maintains capital reserves in accordance with its Board adopted ICAAP that retains capital reserves to support its retained risk exposures, ensures there is a low likelihood that the Group (and its regulated) subsidiaries will breach their regulatory requirements, and has sufficient capital to manage its near term business plans and provide a buffer (capital and time) to take action to deal with reasonably foreseeable adverse events that may impact the businesses. These additional reserves are partly held within the subsidiaries where the key risks reside, and partly in a central reserve within the parent entity. 96 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued6. Capital adequacy (ClearView Life Assurance Limited) ClearView Life Assurance Limited (ClearView Life) is subject to minimum capital regulatory capital requirements in accordance with Australian Prudential Regulation Authority (APRA) Life Insurance Prudential Standards. ClearView Life is required to maintain adequate capital against the risks associated with its business activities and measure its capital to the “Prudential Capital Requirement” (PCR). ClearView Life has in place an Internal Capital Adequacy Assessment Process (ICAAP), approved by the Directors, to ensure it maintains required levels of capital within each of its statutory and general funds. The capital adequacy position at balance date for ClearView Life, in accordance with the APRA requirements, is as follows: Capital position Statutory fund Statutory fund Statutory fund No. 1 No. 2 No. 4 Shareholder’s Fund Australian non- participating Australian non- participating Australian non- participating Net Assets (Common Equity Tier 1 Capital) Goodwill and intangibles Net tangible assets Capital base adjustments Deferred tax assets Investment in subsidiaries Policy liability Regulatory capital base Prescribed Capital Amount (PCA) Available Enterprise Capital (AEC) Capital Adequacy Multiple Prescribed capital amount comprises of: Insurance Risk Asset Risk Asset Concentration Risk Operational Risk Aggregation benefit LPS110 CLAL Minimum Prescribed Capital Amount 2017 $’000 3,832 - 3,832 - (2,950) 2017 $’000 330,456 (10,110) 320,346 (50) - - (272,002) 856 (12) 844 71.3 - (12) - - - - 48,320 (10,604) 37,716 4.6 (2,753) (1,669) (1,435) (5,676) 929 - 2017 $’000 2,467 - 2,467 (2) - (193) 2,272 (556) 1,716 4.1 - (344) - (212) - - ClearView Life Assurance Limited 2017 $’000 347,286 (13,761) 2017 $’000 10,531 (3,651) 6,880 333,525 (56) - - 6,824 (2,965) 3,859 2.3 - (139) - (2,826) - - (108) (2,950) (272,195) 58,272 (14,137) 44,135 4.1 (2,753) (2,164) (1,435) (8,714) 929 - (12) (10,604) (556) (2,965) (14,137) ClearView Annual Report 2017 97 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued6. Capital adequacy continued Statutory fund Statutory fund Statutory fund No. 1 No. 2 No. 4 Shareholder’s Fund Australian non- participating Australian non- participating Australian non- participating ClearView Life Assurance Limited 2016 $’000 2016 $’000 2016 $’000 2016 $’000 2016 $’000 Net Assets (Common Equity Tier 1 Capital) 6,319 298,875 3,973 12,871 322,038 Goodwill and intangibles Net tangible assets Capital base adjustments Deferred tax assets Investment in subsidiaries Policy liability Regulatory capital base Prescribed Capital Amount (PCA) Available Enterprise Capital (AEC) - 6,319 (6,847) 292,028 - (2,950) (167) - - 3,973 (2) - - (239,555) 55 3,369 (20) 3,349 52,306 (7,146) 45,160 4,026 (554) 3,472 (4,650) 8,221 (11,497) 310,541 (82) - - 8,139 (2,931) 5,208 (251) (2,950) (239,500) 67,840 (10,651) 57,189 Capital Adequacy Multiple 165.1 7.3 7.3 2.8 6.4 Prescribed capital amount comprises of: Insurance Risk Asset Risk Asset Concentration Risk Operational Risk Aggregation benefit LPS110 CLAL Minimum Prescribed Capital Amount - (20) - - - - (2,193) (1,098) - (4,504) 649 - - (376) - (178) - - - (173) (2,193) (1,667) - - (2,758) (7,440) - - 649 - (20) (7,146) (554) (2,931) (10,651) 98 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued7. Segment information AASB 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The information reported to the Group’s Board of Directors, being the chief operating decision maker, for the purpose of resource allocation and assessment of performance is focused on the products and services of each reporting segment. The principal activities and the Group’s reportable segments under AASB 8 are as follows: • Life Insurance; • Wealth Management; • Financial Advice; and • Listed Entity/Other. (a) Life Insurance (“protection” products) ClearView provides life insurance protection products through its wholly owned subsidiary ClearView Life. The products provided by ClearView Life include: • • A comprehensive range of life protection products distributed via both CFA and Matrix financial advisers and third party, external advisers (IFAs). The product suite, LifeSolutions, was launched in December 2011 and is a high quality advice based product suite, providing top quartile benefits and terms at market competitive prices. LifeSolutions includes term life, permanent disability, trauma and critical illness benefits, parent cover, child cover, accident covers, income protection and business expense covers. Policies can be issued directly or via the ClearView Retirement Plan as superannuation; A range of Non-Advice life protection products sold through direct marketing, telemarketing, call centre referrals, or online. Products include term life, accidental death, injury covers, trauma and critical illness and funeral insurance. (b) Wealth Management (“investment” products) ClearView provides wealth management products via four primary avenues: • Master Trust - Life investment contracts issued by ClearView Life. Products include ordinary savings, superannuation and allocated pension products, with the latter two provided via the ClearView Retirement Plan; • • • WealthSolutions - A superannuation and retirement income wrap (issued via the ClearView Retirement Plan) and an Investor Directed Portfolio Service (IDPS) Wrap (provided by CFML). This is offered via the WealthSolutions platform which was launched in December 2011. WealthSolutions includes a menu of approximately 250 investment funds, ASX listed shares, term deposits, seven ClearView managed funds and recently launched Separately Managed Account (SMA) offering. It also provides a number of model portfolios managed by ClearView for superannuation and non superannuation investors; WealthFoundations - Life investment contracts issued by ClearView Life. Products include superannuation and allocated pension products, issued via the ClearView Retirement Plan. WealthFoundations includes a menu of 14 investment options with transparent investment in underlying funds; and Managed Investment Schemes (MIS) - Products are issued via ClearView Financial Management Limited (CFML) as the ASIC licensed Responsible Entity and include MIS products available on ClearView’s WealthSolutions platform and external platforms. (c) Financial Advice ClearView provides financial advice services through its wholly owned subsidiaries ClearView Financial Advice (CFA) and Matrix Planning Solutions (Matrix). CFA and Matrix provide dealer group services to it’s employed financial advisers as well as a number of self employed financial advisers. (d) Listed Entity/Other This represents the investment earnings on the cash and investments held in the listed and central services entities and in the shareholders fund of ClearView Life, less the costs associated with maintaining a listed entity and interest expense on corporate debt. The Group manages capital at the listed entity level in accordance with its ICAAP policy. Asset segment information has not been disclosed because the allocation of assets is not used for evaluating segment performance and deciding the allocation of resources to segments. Asset segment information is critical to the performance of each company and their respective regulatory obligations and is managed at a company level. ClearView Annual Report 2017 99 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued7. Segment information continued Information regarding these segments is provided on the following page. Segment profit or loss represents the profit or loss earned by each segment including the allocation of directly attributable costs of each segment and an allocation of central services costs according to an expense allocation model which allocates costs across each segment. The allocation model excludes the allocation of investment revenue as these are directly recorded against the relevant segments. This is the measure reported to the Board for the purposes of resource allocation and assessment of segment performance. The accounting policies of the reportable segments are the same as the Company’s accounting policies described in Note 3. Segment revenue Life Insurance Wealth Management Financial Advice Listed entity/Other Total Revenue Inter-Segment Revenue Consolidated Revenue 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 136,913 117,665 107,095 314 110,963 107,590 97,380 1,258 - (5,688) (22,796) - - (3,836) (17,527) - 136,913 111,977 84,299 314 110,963 103,754 79,853 1,258 Consolidated segment revenue 361,987 317,191 (28,484) (21,363) 333,503 295,828 2017 Total operation earnings after tax Interest expense on corporate debt (after tax) Underlying net profit/(loss) after tax Amortisation of acquired intangibles1 AIFRS policy liability discount rate effect (net of tax)2 Strategic review costs (net of tax)3 Direct closure provision (net of tax)5 Reported profit/(loss) 2016 Total operation earnings after tax Interest expense on corporate debt (after tax) Underlying net profit/(loss) after tax Amortisation of acquired intangibles1 AIFRS policy liability discount rate effect (net of tax)2 Your Insure Impairments4 Strategic review costs (net of tax)3 Reported profit/(loss) Life Insurance Wealth Management Financial Advice Listed Entity/ Other 24,867 - 24,867 (2,833) (5,918) - - 3,942 - 3,942 (4,378) - - - 2,231 - 2,231 (980) - - - 16,116 (436) 1,251 24,512 - 24,512 (2,833) 7,749 - - 2,714 - 2,714 (5,254) - - - 1,479 - 1,479 (1,048) - - - 29,428 (2,540) 431 (503) (175) (678) - - (683) (2,420) (3,780) (442) (1,028) (1,470) - - (1,898) (336) (3,704) Total 30,537 (175) 30,362 (8,191) (5,918) (683) (2,420) 13,150 28,263 (1,028) 27,235 (9,135) 7,749 (1,898) (336) 23,615 1 2 3 4 5 The amortisation of the intangibles is associated with the acquisition of wealth and life insurance businesses from Bupa, ComCorp financial advice business and Matrix. These are separately reported to remove the non-cash effect of the write-off of these acquired intangibles. However, amortisation associated with capitalised software is reported as part of Operating Earnings (after tax). The policy liability discount rates effect is the result of the changes in long term discount rates used to determine the insurance policy liability. The life insurance policy liability (based on AIFRS) is discounted using market discount rates that typically vary at each reporting date and create volatility in the policy liabilities and consequently earnings. ClearView separately reports this volatility which represents a timing difference in the release of profit and has no impact on underlying earnings. This movement in policy liability creates a cash flow tax effect. Certain costs were recognised in relation to the evaluation of strategic options and Sony Life becoming a new strategic shareholder. The costs are considered unusual to the ordinary activities of the Group and are therefore not reflected as part of Operating Earnings (after tax). ClearView made an investment in Your Insure, a start-up operation in Melbourne, in August 2014 to target selling direct life insurance to the lower socio demographic customers. ClearView agreed to provide funding to Your Insure which was structured as a Convertible Note. The investment in Your Insure has been written off, with a net of tax cost of $1.9 million being incurred in FY16. The costs associated with the aforementioned are considered unusual to the ordinary activities of the Group and are therefore not reflected as part of Operating Earnings (after tax). Certain costs were recognised in the period in relation to the Direct closure. The costs are considered unusual to the ordinary activities of the Group and therefore not reflected as part of Operating Earnings (after tax). 100 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued8. Fee and other revenue Financial advice fees Funds management fees Other income Total fee and other revenue 9. Investment income Interest income Dividend income Distribution income Total investment income 10. Operating expenses Consolidated 2017 $’000 76,918 38,470 1,074 2016 $’000 79,043 31,575 257 116,462 110,875 Company 2016 $’000 2017 $’000 - - - - - - 5 5 Consolidated Company 2017 $’000 23,267 17,529 41,701 82,497 2016 $’000 36,660 16,526 23,624 76,810 2017 $’000 154 2016 $’000 733 21,000 17,000 - - 21,154 17,733 Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 Administration expenses Administration and other operational costs Custody and investment management expenses Total administration expenses Employee costs and directors' fees Employee expenses Share based payments Employee termination payments Directors’ fees 32,402 8,130 40,532 49,120 1,012 798 845 26,638 7,439 34,077 47,338 1,083 1,322 966 Total employee costs and directors’ fees 51,775 50,709 Other expenses Interest expense and other costs of finance Costs associated with Sony Life becoming a strategic shareholder 827 978 1,472 480 346 - 346 12 - - 629 641 257 978 Direct closure costs Your Insure impairment Total other expenses Total operating expenses 3,458 - 5,263 97,570 - 3,458 2,702 4,654 89,440 - 4,693 5,680 449 - 449 19 - - 726 745 1,472 480 - 2,702 4,654 5,848 ClearView Annual Report 2017 101 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued10. Operating expenses continued Depreciation and amortisation expenses Depreciation expenses Software amortisation Amortisation of acquired intangibles Consolidated 2017 $’000 639 4,808 8,190 2016 $’000 700 3,967 9,135 Total amortisation and depreciation expenses 13,637 13,802 Company 2016 $’000 2017 $’000 - - - - - - - - Remuneration of auditors Auditor of the parent entity Audit and review of financial reports Audit of APRA and ASIC regulatory returns Audit of Managed Investment Schemes Total remuneration for audit services Preparation and lodgement of tax returns Other non-audit services - taxation advice Other non-audit services - compliance Other non-audit services - consulting Consolidated 2017 $ 2016 $ Company 2016 $ 2017 $ 318,000 303,000 104,200 97,500 99,400 99,400 127,600 127,600 - - 545,000 530,000 104,200 106,050 91,000 106,050 46,400 34,000 26,800 358,386 - - 310,976 191,945 135,976 - - 97,500 91,000 34,000 - - Total remuneration for non-audit services 821,812 316,945 268,826 125,000 Total remuneration 11. Income tax 1,366,812 846,945 373,026 222,500 Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 a) Income tax recognised in profit or loss Income Tax expense/(benefit) comprises: Current tax expense Deferred tax expense 4,827 322 Over provided in prior years – current tax expense (2,860) (3,640) (1,179) Under provided in prior years – deferred tax expense Income tax expense/(benefit) Deferred income tax expense/(benefit) included in income tax expense comprises: Decrease/(increase) in deferred tax asset Increase/(decrease) in deferred tax liability 792 3,081 292 823 1,115 (82) 9,271 427 (275) 152 102 ClearView Annual Report 2017 12,759 (1,709) (1,833) 234 52 300 (12) 8 802 (2,034) (1,537) 263 591 854 308 - 308 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued11. Income Tax continued b) Tax losses Unused tax losses for which no deferred tax asset has been recognised Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 54,293 83,096 32,635 32,635 Potential tax benefit 11,956 14,853 9,790 9,790 The prima facie income tax expense/(benefit) on pre-tax accounting profit from operations reconciles to the income tax expense in the financial statements as follows: Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 c) Reconciliation of income tax expense to prima facie tax payable Profit before income tax expense 16,231 32,886 15,474 11,890 Policyholder tax (expense) credit recognised as part of the change in policyholder liabilities in determining profit before tax Profit before income tax excluding tax charged to policyholders Prima facie tax calculated at 30% Tax effect of amounts which are non deductible/assessable in calculating taxable income: Franking credits on dividends received Non assessable income Non deductible expenses Non-deductible amortisation expenses Under/(over) provision in prior years Other Income tax expense/(benefit) attributable to shareholders Income tax expense/(benefit) attributable to policyholders Income tax expense/(benefit) 5,092 4,105 - - 21,323 6,397 36,992 11,098 15,474 4,642 11,890 3,567 - (601) 406 2,449 (463) (15) 8,173 (5,092) 3,081 - (6,300) (5,101) (546) 472 2,740 (388) - 13,376 (4,105) 9,271 - - - (376) - - - - (3) - (2,034) (1,537) - - (2,034) (1,537) The ability of the Company to continue to pay franked dividends is dependent upon the receipt of franked dividends from its investment assets and the group itself paying tax. Franking account The balance of the franking account after allowing for tax payable in respect of the current year’s profit, the receipt of franked dividends recognised as receivables and the payment of any dividends recognised as a liability at the reporting date. Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 27,610 24,286 27,610 24,286 ClearView Annual Report 2017 103 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued11. Income Tax continued Relevance of tax consolidation to the Group ClearView Wealth Limited and its wholly-owned Australian resident entities have formed a tax consolidated group with effect from 1 February 2007 and are therefore taxed as a single entity from that date. The members in the ClearView tax consolidated group are identified in Note 31. Under the Tax Act, ClearView Wealth Limited being the head company of the tax consolidated group is treated as a life insurance company for income tax purposes as one of the subsidiary members of the tax consolidated group is a life insurance company. Entities within the tax consolidated group have entered into a tax sharing and funding agreement with the head entity. This agreement has been amended to reflect the changes in the structure of the tax consolidated group and a life insurer becoming part of the group. These amendments were executed on 20 August 2010. Under the terms of the tax funding arrangement, ClearView Wealth Limited and each of the entities in the tax consolidated group has agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. The tax funding agreement also provides for the head entity to make payments for tax losses of a group member that is determined in accordance with the provisions of the agreement. Settlement for these amounts is based on the extent to which the losses are utilised. The tax sharing arrangement between members of the tax consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations or if an entity should leave the tax-consolidated group. The effect of the tax sharing agreement is that each member’s liability for tax payable by the tax consolidated group is limited to the amount payable to the head entity under the tax funding arrangement. 12. Movements in reserves Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 Retained losses Balance at the beginning of the financial year (12,344) (23,659) (57,887) (54,314) Net profit/(loss) attributable to members of the parent entity 13,150 23,616 (3,492) (3,573) Dividend paid during the year Balance at the end of the financial year Executive share plan reserve1 Balance at the beginning of the financial year Recognition of share based payments ESP loans settled through dividend/sale of renounceable rights Proceeds from sale of ESP shares vested/forfeited (net of tax) Balance at end of the financial year (16,454) (12,301) - - (15,648) (12,344) (61,379) (57,887) 8,342 1,012 1,011 (297) 10,068 6,607 1,201 652 (118) 8,342 8,342 1,012 1,011 (297) 10,068 6,607 1,201 652 (118) 8,342 1 The above executive share plan reserve relates to share options granted by the Company to employee and contractor participants under the ClearView Executive Share Plan (Plan). Further information about the Plan is set out in Note 27. 104 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 12. Movements in reserves continued Profit Reserve Balance at the beginning of the financial year Net profit attributable to the parent entity Dividend paid during the year Balance at end of the financial year General Reserve1 Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 - - - - - - - - 21,089 21,000 16,391 17,000 (16,454) (12,301) 25,635 21,090 Balance at the beginning of the financial year (2,085) (2,085) (2,085) (2,085) Proceeds from sale of ESP shares vested/forfeited (net of tax) Balance at end of the financial year 1,598 (487) - (2,085) 1,598 (487) - (2,085) 1 The general reserve comprises: • • The general reserve is not an item of other comprehensive income and the items in the general reserve will not be reclassified subsequently to profit or loss. A fair value adjustment (-$2.1 million) for contingent consideration in relation to the acquisition of Matrix Planning Solutions Limited; and The profit on sale of forfeited ESP shares ($1.6 million) where the shares were sold via an off market transfer with the proceeds being received by the Company. 13. Sources of profit (ClearView Life Assurance Limited) Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 Components of profit related to movements in life insurance liabilities Planned profit margins released Profit arising from the difference between actual investment income and expected interest on policy liabilities Profit arising from the difference between actual and expected experience Impact of change in economic assumptions Life insurance Components of profit related to movements in life investment liabilities Expected profit margin Life investment Profit for the statutory funds Profit for the shareholders fund 21,683 4,187 17,007 4,708 (4,182) 165 (2,739) 18,949 10,381 32,261 2,812 2,812 21,735 13 2,931 2,931 35,192 73 Profit for ClearView Life Assurance Limited 21,748 35,265 - - - - - - - - - - - - - - - - - - - - ClearView Annual Report 2017 105 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 14. Earnings per share Earnings per share (cents) Basic earnings (cents) Diluted earnings (cents) Basic earnings per share Consolidated 2017 2016 2.20 2.11 4.39 4.27 The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: Profit for the year attributable to owners of the Company ($'000) Earnings used in the calculation of basic earnings per share ($'000) 13,150 13,150 23,615 23,615 Weighted average number of ordinary shares for the purpose of basic earnings per share ('000's) 597,808 537,588 Diluted earnings per share The earnings used in the calculation of diluted earnings per share are as follows: Profit for the year attributable to owners of the Company ($'000) Earnings used in the calculation of total diluted earnings per share 13,150 13,150 23,615 23,615 The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows: Weighted average number of ordinary shares used in the calculation of basic earnings per share (000's) Shares deemed to be dilutive in respect of the employee share plan (000's) Weighted average number of ordinary shares used in the calculation of diluted earnings per share (all measures) (000's) 597,808 537,588 25,550 15,691 623,358 553,279 15. Cash and cash equivalents Cash at bank Total cash and cash equivalents Consolidated Company 2017 $’000 2016 $’000 222,197 217,673 222,197 217,673 2017 $’000 5,880 5,880 2016 $’000 20,889 20,889 106 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued16. Investments Equity securities Investment in Group Companies Held directly Held indirectly via unit trust Debt securities/fixed interest securities Held directly Held indirectly via unit trust Property/Infrastructure Held directly Held indirectly via unit trust Total investments 17. Receivables Trade receivables Outstanding life insurance premium receivable Provision for outstanding life insurance premiums Accrued dividends Investment income receivable Outstanding settlements Prepayments Receivables from controlled entities Related party receivables Loans receivable Other debtors Total receivables Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 - - 377,159 354,158 262,428 256,093 433,603 337,706 - - - - 696,031 593,799 377,159 354,158 448,086 357,944 424,963 337,156 806,030 762,119 - - 311,988 259,308 311,988 259,308 - - - - - - - - - - - - 1,814,049 1,615,226 377,159 354,158 Consolidated 2017 $’000 392 3,909 (800) 2,036 10,317 3,622 3,298 - 4,530 8,612 2,031 2016 $’000 773 3,254 (667) 2,232 888 509 3,824 - 567 3,722 995 Company 2016 $’000 2017 $’000 - - - - - - - - - - - - 30 6,472 3,774 3,409 4 80 11,775 - - - 37,947 16,097 13,689 11,855 $5.6 million (2016: $2.1 million) of Total consolidated receivables are expected to be recovered more than 12 months from the reporting date and $3.4 million (2016: $4.9 million) of Total receivables for the Company are expected to be recovered more than 12 months from the reporting date. ClearView Annual Report 2017 107 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 18. Fixed interest deposits Fixed interest term deposits Consolidated Company 2017 $’000 2016 $’000 78,327 79,584 2017 $’000 - 2016 $’000 - Fixed interest term deposits, held at year end, yield an average fixed interest rate of 2.37% (2016: 2.58%) 19. Goodwill Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 Gross carrying amount Balance at the beginning of the financial year 19,952 19,952 Additional amount recognised through acquisition of business1 500 - Balance at the end of the financial year 20,452 19,952 Net book value Balance at the beginning of the financial year Balance at the end of the financial year 19,952 20,452 19,952 19,952 - - - - - - - - - - 1 In August 2016 the Group acquired the business of an adviser under pre-existing contracted arrangements. $0.5 million of goodwill was recognised on this acquisition. As required under accounting standards the Group completes an impairment assessment at each reporting date. As at 30 June 2017, no impairment was required to the carrying value of goodwill. Further details have been provided in Note 4. 108 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017ContinuedCapitalised software $’000 CWT software $’000 Client Book $’000 Matrix Website $’000 Matrix Brand $’000 Total $’000 Consolidated Balance at the beginning of the year 12,115 1,500 46,585 20. Intangible assets 2017 Gross carrying amount Balance at the beginning of the financial year Acquired directly during the year Balance at the end of the financial year Accumulated amortisation and impairment losses Amortisation expense in the current year Balance at the end of the financial year Net book value Balance at the beginning of the financial year Balance at the end of the financial year 2016 Gross carrying amount Balance at the beginning of the financial year Acquired directly during the year Balance at the end of the financial year Accumulated amortisation and impairment losses 23,611 1,500 63,317 7,072 30,683 - 1,500 1,700 65,017 4,808 16,923 - 1,500 8,190 54,775 11,496 13,760 - - 16,732 10,242 18,102 5,509 23,611 1,500 63,317 - - 1,500 63,317 $’000 $’000 $’000 $’000 $’000 $’000 Balance at the beginning of the year 8,147 1,500 37,461 Amortisation expense in the current year Balance at the end of the financial year Net book value Balance at the beginning of the financial year Balance at the end of the financial year 3,968 12,115 - 9,124 1,500 46,585 9,955 11,496 - - 25,856 16,732 The intangible assets are amortised over their expected useful lives. As required under accounting standards at each reporting date the Company assesses whether there is an indication of impairment. Further details have been provided in Note 4. ClearView Annual Report 2017 109 20 - 20 20 - 20 - - 200 - 200 - - - 88,648 8,772 97,420 60,220 12,998 73,218 200 200 28,428 24,202 20 - 20 10 10 20 10 - 200 - 200 83,139 5,509 88,648 - - - 47,118 13,102 60,220 200 200 36,021 28,428 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued21. Property, plant and equipment 2017 Gross carrying amount Balance at the beginning of the financial year Additions Written off Balance at the end of the financial year Accumulated depreciation/ amortisation and impairment Balance at the beginning of the financial year Depreciation expense Balance at the end of the financial year Net book value Balance at the end of the financial year 2016 Gross carrying amount Balance at the beginning of the financial year Additions Written off Balance at the end of the financial year Accumulated depreciation/ amortisation and impairment Balance at the beginning of the financial year Depreciation expense Balance at the end of the financial year Net book value Balance at the end of the financial year Office furniture Office equipment Computer hardware Leasehold improvements $’000 $’000 $’000 $’000 Consolidated Total $’000 432 17 - 449 420 15 435 14 46 35 - 81 34 17 51 30 1,415 3,654 5,547 107 12 1,534 70 - 3,724 229 12 5,788 1,076 2,194 3,724 226 1,302 381 2,575 639 4,363 232 1,149 1,425 $’000 $’000 $’000 $’000 $’000 507 - (75) 432 365 55 420 12 42 4 - 46 28 6 34 12 1,289 2,342 4,180 130 (4) 1,415 1,523 (211) 3,654 1,657 (290) 5,547 862 1,769 3,024 214 1,076 425 2,194 700 3,724 339 1,460 1,823 No property, plant and equipment is held by the Company. 110 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued22. Payables Trade payables Reinsurance premium payable Employee entitlements Life insurance premiums in advance Life investment premium deposits Lease incentive in advance Outstanding investment settlements Other creditors Total payables Consolidated Company 2017 $’000 5,180 12,127 6,962 566 2,298 1,194 11,239 343 2016 $’000 7,884 8,487 6,282 481 2,138 1,336 8,233 778 39,909 35,619 2017 $’000 292 - 10 - - - - 50 352 2016 $’000 484 - 5 - - - - 291 780 $0.9 million (2016: $1.4 million) of Total consolidated payables are expected to be settled more than 12 months from the reporting date and nil (2016: nil) of total payables of the Company are expected to be settled more than 12 months from the reporting date. ClearView Annual Report 2017 111 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued23. Provisions Current and non current Make good provision Employee leave provisions Provision for restructuring Other provisions Total Make good provision1 Balance at the beginning of the financial year Additional provisions raised Utilised during the period Non-utilised provisions transferred Balance at the end of the financial year Employee leave provision2 Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 419 3,849 3,031 1,161 8,460 270 149 - - 419 270 3,540 20 1,385 5,215 432 148 (89) (221) 270 - - - 18 18 - - - - - - - - - - - - - - 26 24 (10) (22) 18 - - - 26 26 - - - - - - - - - - - - - - 26 - - - 26 Balance at the beginning of the financial year 3,540 3,392 Provision acquired in a business combination Additional provisions raised Utilised during the period Balance at the end of the financial year Provision for Restructuring3 Balance at the beginning of the financial year Additional provisions raised Utilised during the period Balance at the end of the financial year Other provisions4 Balance at the beginning of the financial year Additional provisions raised Utilised during the period Unutilised provisions transferred during the period Balance at the end of the financial year - 890 (581) 3,849 20 3,458 (447) 3,031 1,385 24 (344) 96 1,161 - 836 (688) 3,540 122 - (102) 20 1,429 (237) - 193 1,385 1 2 3 4 The provision for make good represents the accrued liability for expected costs in relation to the restoration of leased premises on the termination of the lease. The provisions are expected to be settled on vacating the leased premises on expiration of the relevant lease. The provision for employee leave represents annual leave and long service leave entitlements accrued by employees. The provisions are expected to be utilised in accordance with the pattern of consumption of employees utilising their leave entitlements. The provision for restructuring relates to the expected costs in relation to the closure of Direct business. Other provisions relate to provision for future project work that has been commissioned and for which the work is yet to commence. This relates predominantly to the migration of the old Wealth Management portfolio to the new weath platform. 112 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued24. Deferred tax balances Deferred tax assets Deferred tax assets Deferred tax liabilities Deferred tax assets Arising on income expenses recognised in profit or loss Accruals not currently deductible Depreciable and amortisable assets Provisions not currently deductible Unrealised losses carried forward Capital business expense Rental lease incentives Other Deferred tax asset Deferred tax liabilities Arising on income expenses recognised in profit or loss Unrealised gains on investments Prepaid expenses Other Deferred tax liability Consolidated 2017 $’000 2016 $’000 10,509 1,819 10,801 996 440 15 4,329 5,265 267 193 - 495 148 3,177 6,263 513 205 - 10,509 10,801 512 1,307 - 1,819 526 470 - 996 Company 2016 $’000 573 - 14 - - - 513 - 46 573 - - - - 2017 $’000 310 591 28 - - - 267 - 15 310 - - 591 591 ClearView Annual Report 2017 113 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued24. Deferred tax balances continued 2017 Gross deferred tax liabilities Gross deferred tax assets Total 2016 Gross deferred tax liabilities Gross deferred tax assets Total 2017 Gross deferred tax liabilities Gross deferred tax assets Total 2016 Gross deferred tax liabilities Gross deferred tax assets Total Opening balance $’000 (996) 10,801 9,805 (1,271) 11,029 9,758 Transfers from subsidiaries $’000 Sharehold- er Equity $’000 - - - - - - - - - - 199 199 $’000 $’000 $’000 - 573 573 - 682 682 - - - - - - - - - - 199 199 Consolidated (Charge)/ Credit to income $’000 (823) (292) (1,115) 275 (427) (152) $’000 (591) (263) (854) - (308) (308) Closing balance $’000 (1,819) 10,509 8,690 (996) 10,801 9,805 Company $’000 (591) 310 (281) - 573 573 Deferred income tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. Unused tax losses for which no deferred tax assets have been recognised are attributable to tax losses of a capital nature of $54.3 million (tax effected $11.9 million) consolidated and $32.6 million (tax effected $9.8 million) for the Company. Refer to Note 11 for further details. 114 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued25. Policy liabilities (a) Reconciliation of movements in policy liabilities Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 Life investment policy liabilities Opening gross life investment policy liabilities Net increase in life investment policy liabilities reflected in the income statement 1,152,554 1,160,627 100,419 54,836 Decrease in life investment policy liabilities due to management fee reflected in the income statement (22,503) (23,139) Life investment policy contributions recognised in policy liabilities 175,231 147,381 Life investment policy withdrawals recognised in policy liabilities (228,411) (187,151) Closing gross life investment policy liabilities 1,177,290 1,152,554 Life insurance policy liabilities Opening gross life insurance policy liabilities Movement in outstanding claims Decrease in life insurance policy liabilities reflected in the income statement Closing gross life insurance policy liabilities Total gross policy liabilities Reinsurers' share of life insurance policy liabilities Opening balance Movement in outstanding reinsurance (Increase)/decrease in reinsurance assets reflected in the income statement Closing balance Net policy liabilities at balance date (203,830) (156,641) 18,077 8,185 (21,879) (55,374) (207,632) (203,830) 969,658 948,724 703 2,233 (15,871) (12,326) (170) 10,796 (15,338) 703 954,320 949,427 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Included in life investment policy liabilities are contracts for which there is a guarantee that the unit price will not fall. The amount of the gross policy liabilities for such contracts is $65.5 million (2016: $69.2 million). (b) Components of net life insurance policy liabilities Future policy benefits Future expenses and commissions Less future revenues Best estimate liability Present value of future planned profit margins Net life insurance policy liabilities Consolidated 2017 $’000 292,852 353,242 2016 $’000 242,510 265,333 (1,201,508) (984,868) (555,414) (477,025) 332,444 273,897 (222,970) (203,128) Company 2016 $’000 2017 $’000 - - - - - - - - - - - - ClearView Annual Report 2017 115 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 25. Policy liabilities continued (c) Disclosures on asset restrictions, managed assets and trustee activities Restrictions on assets Investments held in the life statutory funds (Funds) can only be used within the restrictions imposed under the Life Insurance Act 1995. The main restrictions are that the assets in a Fund can only be used to meet the liabilities and expenses of that Fund, to acquire investments to further the business of the Fund or as a distribution when solvency and capital adequacy requirements are met for that Fund. The shareholder can only receive a distribution from a Fund if the capital adequacy requirements continue to be met after the distribution. 26. Issued capital Issued and fully paid ordinary shares Balance at the beginning of the financial year 597,429,600 417,850 524,610,834 355,970 2017 2017 2016 No. of Shares $’000 No. of Shares Company 2016 $’000 Dividend Reinvestment Plan Dividend Reinvestment Plan Costs Dividend costs Share buy back (inclusive of costs) Entitlement offer Entitlement offer costs related to prior year Entitlement offer costs (net of tax) - - - - - - - - - (3) - - (12) - 12,948,536 12,301 - - (83,572) (35) - (75) 58,984,051 50,136 - - - (579) 132 Shares issued during the year (ESP vested/forfeited) 5,836,450 3,882 969,751 Balance at the end of the financial year 603,266,050 421,717 597,429,600 417,850 Executive share plan Balance at the beginning of the year Shares granted under employee share plan (note 27) Shares forfeited during the year Shares reallocated during the year Shares exercised during the year Balance at the end of the financial year 60,743,527 1,300,000 (3,693,143) - (2,143,307) 56,207,077 - - - - - - 58,371,348 6,160,179 (2,438,648) (379,601) (969,751) 60,743,527 - - - - - - In accordance with AASB 2, Share-Based Payments the shares issued under the Executive Share Plan are treated as options and are accounted for as set out in Note 27. The Company does not have a limited amount of authorised capital and issued shares do not have a par value. Fully paid ordinary shares carry one vote per share and carry the rights to dividends. 116 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 27. Share-based payments ClearView operates the ClearView Executive Share Plan (ESP or Plan). In accordance with the provisions of the Plan, as approved by shareholders at the 2015 Annual General Meeting, the ownership-based compensation scheme allows participation in the Plan of: • • Employee Participants - These participants are key managers, members of the Senior Management Team (SMT) and the Managing Director; and Contractor Participants - These participants are financial advisers. Eligible Employees under the Plan Rules therefore include both Employee Participants and Contractor Participants of the Company and its related body corporates. Non-executive Directors are ineligible to participate in the Plan in accordance with the Plan Rules. Offer and consideration Under the ESP, the Board may invite Eligible Employees to participate in an offer (Offer) of fully paid ordinary shares in ClearView, subject to the terms of conditions of the ESP. Each Share is issued at a price to be determined by the Board prior to making an Offer and this price is set out in the invitation (Invitation) to Eligible Employees. This price may be the market price of a Share (as defined in the ESP Rules) on the date of the Invitation. Taking into account the liquidity, volatility, and the average trading activities of the ClearView Shares, the Board determined in February 2013 that it is appropriate and reasonable for ClearView to adopt the Volume Weighted Average Price (VWAP) over a 3 month period to determine the market value of the ClearView Shares for the purposes of ESP issues. This has been implemented for all ESP Share issues since that date. Restrictions on offer Shares may not be offered under the ESP to an Eligible Employee if that Eligible Employee would hold, after the issue of the Shares, an interest in more than 5% of the issued Shares of ClearView or be able to control the voting rights of more than 5% of the votes that might be cast at a general meeting of ClearView. As at the date of this Report, the Board has not set a limit on the number of Shares that may be issued under the Plan. The Board or Board Authorised Delegates approve the issue of new ESP shares and monitors the overall quantum of ESP shares on issue, relative to the interests of existing shareholders and the overall objectives of the business. Financial Assistance The Company may provide financial assistance to an Eligible Employee for the purposes of subscribing for Shares under the ESP. The financial assistance will be a limited recourse loan equal to the purchase value of the Shares and is repayable in accordance with the terms of the accompanying Invitation, or as follows: • • For Share issues prior to 14 February 2013 - within 60 days (or a longer period determined by the Board in its discretion) after the 5th anniversary of the grant of the financial assistance (unless it is required to be repaid at an earlier date owing to the operation of the Rules); or immediately in the event of certain “disqualifying circumstances” including failure to meet performance or vesting conditions, cessation of the Employee Participant’s employment in circumstances defined in the ESP Rules or termination of the Contractor Participant’s contract with a Group Company for the provision of services. For Employee Participants, the financial assistance is secured over the shares and rights attached to the shares. The Board has delegated authority to Mr Swanson, Mr Chiert and Mr Thomson to approve granting an extension to the loan term of all ESP participants who remain employees at the expiration of their loan term for a period until a Change in Control of the Company (as defined in the ESP Rules). As noted in the Renumeration Report it is intended that ESP loans become interest bearing for SMT members from 30 November 2017 Holding lock The shares granted under the ESP to participants are subject to a holding lock restricting the holder from dealing with the shares, unless otherwise provided under the Invitation. Where all performance conditions and/or vesting conditions (if any) attaching to the Shares issued prior to 14 February 2013 have been satisfied (or waived) a holding lock will cease to have effect if: • The Board accepts a disposal request (as defined in the ESP Rules) (Disposal Request); or • 5 years have passed from the Acquisition Date; or If the Participant: • • is an Employee Participant, their employment with the Group ceases, or is a Contractor Participant, their contractor agreement is terminated; or • The ESP is terminated, or ClearView Annual Report 2017 117 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued27. Share-based payments continued • The holding lock period otherwise ceases; provided that the Financial Assistance and any interest that has been accrued have been repaid. For share issues from 14 February 2013 the Holding Lock ceases on vesting or forfeiture of Shares. The holding lock is imposed through the share registry and in accordance with the ASX Listing Rules. Participants will not be able to sell their shares on ASX or have an off-market transfer registered (and are also otherwise prohibited from dealing in the shares) while the holding lock is in place. If the participant is a Contractor Participant, following the removal of the holding lock over the Shares of the participant, the participant may not sell, or otherwise deal with, any such Shares without the prior written consent of the Company, which consent the Company may give or withhold in its absolute discretion and which consent may be given subject to conditions. Eligible Employees are entitled under the ESP Rules to make a Disposal Request provided the performance and vesting conditions have been met (or waived). The holding lock applicable to their ESP shares will cease to have effect upon the Board (in its absolute discretion) accepting the Disposal Request. ClearView may dispose of these ESP shares on behalf of the participant in one or more of the following ways (at the discretion of the Board): • • Reallocate the Shares to give effect to acquisitions by other Eligible Employees under the ESP; Sell to the Company in accordance with buy-back provisions of the Corporations Act; or • Offer or sell to buyers on the ASX. The amount payable by these Eligible Employees to ClearView following such a disposal is the amount outstanding in relation to the financial assistance, including accrued interest. The Eligible Employees may retain any surplus proceeds. Change of control Under the ESP Rules, all performance and vesting conditions in relation to Shares held by an Eligible Employee who is an Employee Participant are deemed to have been satisfied upon a Change of Control unless stated otherwise in the participants invitation offer. A Change of Control is defined under the ESP Rules as being: (a) Until 14 February 2013: • A person who did not Control the Company at the date of issue of the Plan Shares gains Control of the Company 118 ClearView Annual Report 2017 (but only if the person is not itself Controlled by another person who Controlled the Company at the date of issue); or Other circumstances occur which the Board determines in its absolute discretion are analogous to a Control transaction and justify removal of Performance Conditions and/or Vesting Conditions; “Control” is defined as where a person and its related bodies corporate holds more than 50% of the Shares in ClearView. • • (b) After 14 February 2013: • 12 months after a Change of Control; or • • Circumstances occur which the Board determines in its absolute discretion are analogous to a Control transaction and justify removal of Performance Conditions and/or Vesting Conditions. “Control” is defined as Crescent Capital Partners and its Associated Entities no longer holding 20% of the voting rights of the Company. (c) After 1 July 2015: • • For ESP Shares issued to employee participants after 1 July 2015, unless stated otherwise in the participants Invitation Offer, all performance and vesting conditions in relation to these shares, are not deemed to have been met upon a Change of Control “Control” is defined as Crescent Capital Partners and its Associated Entities no longer holding 20% of the voting rights of the Company. The above provisions concerning change of control apply only to Employee Participants and not Contractor Participants under the ESP.. Administration of the ESP The ESP is administered by the Board. The Board may make rules and regulations for its operation that are consistent with the rules of the ESP. The Company pays all costs and expenses of operating the ESP. Employees are liable for any brokerage and tax payable associated with their participation in the ESP. Termination of the ESP The Board may resolve at any time to terminate, suspend or reinstate the operation of the ESP for the issue of shares in future. ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued27. Share-based payments continued Share-based payment arrangements The following share-based payment arrangements were in existence during the current and comparative reporting periods: Issue Date Type of Arrangement8 Number Grant date Expiry date 30/06/2008 KMP 500,000 30/06/2008 Change in Control 29/09/2009 KMP and SM 3,500,000 29/09/2009 29/09/2014 Series Series 66 Series 72 Series 103,10 Series 114,10 Series 125,10 Series 155 Series 165 Series 175 Series 18 Series 19 Series 20 Series 21 Series 22 Series 23 Series 245 Series 25 Series 267 25/06/2010 MD 25/06/2010 MD 25/06/2010 MD 18/08/2011 SM 6/10/2011 SM 1/03/2012 SM 1/03/2012 CP 3/04/2012 CP 3/04/2012 CP 25/05/2012 CP 29/06/2012 CP 6/08/2012 CP 22/08/2012 SM 21/12/2012 CP 16/04/2013 SM 2,000,000 25/06/2010 26/03/2015 4,000,000 25/06/2010 26/03/2015 4,000,000 25/06/2010 26/03/2015 3,000,000 1/07/2011 1/07/2016 3,950,000 1/09/2011 1/09/2016 2,150,000 1/03/2012 1/03/2017 2,500,000 10/02/2012 10/02/2017 600,000 15/03/2012 15/03/2017 700,000 3/04/2012 3/04/2017 2,325,000 7/05/2012 7/05/2017 1,000,000 29/06/2012 29/06/2017 4,600,000 6/08/2012 6/08/2017 450,000 22/08/2012 22/08/2017 1,300,000 21/12/2012 21/12/2017 2,650,000 12/04/2013 Series 27 16/04/2013 SM 150,000 12/04/2013 Series 28 Series 29 Series 30 Series 31 16/04/2013 CP 31/05/2013 CP 27/06/2013 CP 14/10/2013 SM 566,667 12/04/2013 12/04/2018 1,700,000 31/05/2013 31/05/2018 750,666 27/06/2013 27/06/2018 1,175,000 14/10/2013 Series 32 14/10/2013 SM 1,175,000 14/10/2013 Series 33 29/11/2013 SM 75,000 29/11/2013 50% Change in Control; 50% 1 year after 1 year post Change in Control Change in Control 1 year post Change in Control Change in Control Fair value at grant date (pre modifica- tion1) $ Fair value at grant date (post modifica- tion1) $ Issue price at grant date $ 0.59 0.49 0.50 0.58 0.65 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.54 0.55 0.58 0.57 0.57 0.69 0.68 0.64 0.61 0.61 0.61 0.10 0.07 0.11 0.08 0.06 0.10 0.10 0.09 0.12 0.12 0.13 0.13 0.13 0.17 0.16 0.16 n/a n/a n/a n/a n/a n/a n/a n/a 0.10 0.10 0.11 0.08 0.06 0.13 0.13 0.11 0.15 0.16 0.17 0.17 0.16 0.21 0.19 0.20 0.29 0.27 0.22 0.22 0.21 0.17 0.19 0.17 ClearView Annual Report 2017 119 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued27. Share-based payments continued Issue Date Type of Arrangement8 Number Grant date Expiry date Fair value at grant date (pre modifica- tion1) $ Fair value at grant date (post modifica- tion1) $ Issue price at grant date $ Series Series 34 29/11/2013 SM 75,000 29/11/2013 1 year post Change in Control Change in Control 1 year post Change in Control Series 35 31/01/2014 SM 75,000 31/01/2014 Series 36 31/01/2014 SM 75,000 31/01/2014 Series 37 Series 38 Series 39 Series 40 Series 41 Series 42 Series 43 Series 44 Series 44 Series 45 Series 46 Series 47 Series 47 Series 48 Series 49 31/01/2014 CP 30/05/2014 SM 30/05/2014 SM 30/05/2014 SM 30/05/2014 CP 9/07/2014 CP 2,453,333 31/01/2014 31/01/2019 737,000 30/05/2014 30/05/2018 737,000 30/05/2014 30/05/2019 737,000 30/05/2014 30/05/2020 1,950,000 30/05/2014 30/05/2019 4,560,760 9/07/2014 8-Jul-19 26/11/2014 SM including KMP 181,518 26/11/2014 25-Nov-18 26/11/2014 CP 2,413,368 26/11/2014 25-Nov-19 26/11/2014 SM including KMP 181,518 26/11/2014 25-Nov-19 26/11/2014 SM including KMP 181,518 26/11/2014 25-Nov-20 30/03/2015 SM including KMP 141,667 30/03/2015 30/03/2019 30/03/2015 SM including KMP 141,667 30/03/2015 30/03/2020 30/03/2015 CP 1,550,000 30/03/2015 30/03/2020 30/03/2015 SM including KMP 141,666 30/03/2015 30/03/2021 30/07/2015 CP 3,009,452 30/07/2015 30/07/2020 Series 50a 30/07/2015 SM including KMP 25,773 30/07/2015 30/07/2019 Series 50b 30/07/2015 SM including KMP 25,773 30/07/2015 30/07/2020 Series 50c 30/07/2015 SM including KMP 25,774 30/07/2015 30/07/2021 Series 51a 23/12/2015 SM including KMP 602,032 23/12/2015 23/12/2020 Series 51b 23/12/2015 SM including KMP 602,031 23/12/2015 23/12/2021 Series 52 Series 53 Series 54 Series 55 27/04/2016 SM including KMP 295,603 27/04/2016 27/04/2021 27/04/2016 CP 1,494,140 27/04/2016 27/04/2021 20/06/2016 SM including KMP 79,694 20/06/2016 20/06/2021 14/06/2017 CP 1,300,000 14/06/2017 14/06/2022 0.61 0.65 0.65 0.65 0.75 0.75 0.75 0.75 0.79 1.01 1.01 1.01 1.01 1.00 1.00 1.00 1.00 0.97 0.97 0.97 0.97 0.96 0.96 0.93 0.93 0.94 1.38 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a na na 0.19 0.17 0.20 0.17 0.17 0.19 0.22 0.19 0.17 0.19 0.22 0.22 0.24 0.22 0.25 0.25 0.28 0.19 0.17 0.19 0.22 0.19 0.22 0.20 0.20 0.20 0.30 1 2 3 4 5 6 7 On the 14th February 2013, the Board approved a change to the rules of the ESP which changed the interest rate charged on the financial assistance granted to the ESP Participants from the RBA official cash rate plus 25 basis points to zero percent. This resulted in changes to the inputs of the option pricing model which had an impact on the fair value of the option at the date of the change. A Change of Control provision was triggered on 23 October 2009 by GPG increasing its shareholding above 50%. As a result, the vesting conditions for employees that were issued shares prior to the date of change of control were accelerated. Shares vested 1 year from date of commencement of employment on 26 March 2011. Shares vested 2 years from date of commencement of employment on 26 March 2012. Change of control provision was triggered on 26 September 2012 by CCP Bidco obtaining a shareholding above 50%. The Board approved granting an extension of the loan term until such time as there is a change of control in the Company. Special condition relating to shares issued to KMP in Series 26: the shares may be sold on change of control with 50% of the funds held for in escrow for a period of 12 months. 8 KMP = Key Management Personnel, SM = Senior Management, MD = Managing Director, CP = Contractor Participant. 120 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued27. Share-based payments continued Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Series 6 Series 7 Series 10 Series 11 Series 12 0.59 0.58 25.26 3.00 0.49 0.55 30.24 1.75 0.50 0.54 28.78 2.75 0.58 0.63 28.78 2.75 0.65 0.71 28.78 2.75 Series 15 Series 16 Series 17 Series 18 Series 19 0.50 0.50 31.49 3.00 0.50 0.51 35.35 3.00 0.50 0.50 36.70 3.00 0.50 0.50 37.06 4.95 0.50 0.50 36.47 4.95 Series 20 Series 21 Series 22 Series 23 Series 24 0.50 0.50 36.61 5.00 0.50 0.49 36.94 4.95 0.50 0.49 37.33 5.00 0.54 0.53 37.85 5.00 0.55 0.54 37.99 3.00 Series 25 Series 26 Series 27 Series 28 Series 29 0.58 0.58 35.21 5.00 0.57 0.57 35.92 5.99 0.57 0.57 35.92 4.99 0.69 0.69 35.92 4.99 0.68 0.68 36.81 5.00 Series 30 Series 31 Series 32 Series 33 Series 34 0.64 0.64 36.90 5.00 0.61 0.61 22.20 5.00 0.61 0.61 22.20 6.00 0.61 0.61 22.11 5.00 0.61 0.61 22.11 6.00 Series 35 Series 36 Series 37 Series 38 Series 39 0.65 0.65 22.01 5.00 0.65 0.65 22.01 6.00 0.65 0.65 22.01 5.00 0.75 0.75 21.12 4.00 0.75 0.75 21.12 5.00 Series 40 Series 41 Series 42 Series 43 Series 44 0.75 0.75 21.12 6.00 0.75 0.75 21.12 5.00 0.79 0.79 16.78 5.00 1.01 1.01 19.79 4.00 1.01 1.01 21.56 5.00 Series 45 Series 46 Series 47 Series 48 Series 49 1.01 1.01 24.18 6.00 1.00 1.00 20.84 4.00 1.00 1.00 20.84 5.00 1.00 1.00 20.84 6.00 0.97 0.97 20.15 5.00 ClearView Annual Report 2017 121 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued27. Share-based payments continued Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Series 50a Series 50b Series 50c Series 51a Series 51b 0.97 0.97 20.15 4.00 0.97 0.97 20.15 5.00 0.97 0.97 20.15 6.00 0.96 0.96 20.03 5.00 0.96 0.96 20.03 6.00 Series 52 Series 53 Series 54 Series 55 0.93 0.93 20.31 5.00 0.93 0.93 20.31 5.00 0.94 0.94 20.55 5.00 1.38 1.38 20.11 5.00 The shares were priced using a binomial option pricing model with volatility based on the historical volatility of the share price. Balance at the beginning of the financial year Issued during the financial year Forfeited during the year Share bought back during the year Exercised during the year Reallocated during the year 2017 Weighted average exercise price 0.64 1.38 1.32 Number of shares 58,371,348 6,160,179 - - (2,438,648) 0.82 - (969,751) (379,601) Number of shares 60,743,527 1,300,000 (3,693,143) - (2,143,307) - 2016 Weighted average exercise price 0.61 0.96 - 0.73 0.50 - 0.64 Balance at the end of the financial year 56,207,077 0.61 60,743,527 The above reconciles the outstanding shares granted under the executive share plan at the beginning and end of the financial year. Shares that were granted in the current year In accordance with the provisions of the ESP, during the financial year 1,300,000 shares were granted to financial advisers with the grant dates set out above. 2,143,307 vested ESP shares were exercised during the financial year, of which 1,361,987 were transferred to the participants personal holdings and 781,320 of which were sold via an off market transfer to repay outstanding ESP loans attached to the vested ESP shares with the balance being paid to the participant. 3,693,143 ESP shares did not vest during the financial year and have been forfeited. These unvested shares were sold via an off market transfer with the full proceeds of the sale being received by the Company. The following table outlines the vesting conditions and performance conditions of share based payment arrangements in existence during the period. Employee participants Series Vesting Conditions Performance Conditions Series 6 – 30 June 2008 Issue Series 7 – 29 September 2009 Issue Series 10 – 25 June 2010 Issue Series 11 – 25 June 2010 Issue Series 12 – 25 June 2010 Issue Series 15 – 18 August 2011 Issue Series 16 - 6 October 2011 Issue Nil1 Nil1 Nil2 Nil2 Nil2,4 Nil4 Nil4 122 ClearView Annual Report 2017 Nil Nil Nil Nil Nil Nil Nil ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued27. Share-based payments continued Series Vesting Conditions Performance Conditions Series 17 - 1 March 2012 Series 24 - 22 August 2012 Issue Nil4 Nil4 Series 26 - 16 April 2013 Issue Upon a change in control of the company3 Series 27 - 16 April 2013 Issue First year anniversary upon the change in control Series 31 - 14 October 2013 Issue Upon a change in control of the company Series 32 - 14 October 2013 Issue First year anniversary upon the change in control Series 35 - 31 January 2014 Issue Upon a change in control of the company Series 36 - 31 January 2014 Issue First year anniversary upon the change in control Series 38 - 30 May 2014 Issue Series 39 - 30 May 2014 Issue Series 40 - 30 May 2014 Issue Series 43 - 26 November 2014 Issue Series 44 - 26 November 2014 Issue Series 45 - 26 November 2014 Issue Series 46 - 30 March 2015 Issue Series 47 - 30 March 2015 Issue Series 48 - 30 March 2015 Issue Series 50a - 30 July 2015 Issue Series 50b - 30 July 2015 Issue Series 50c - 30 July 2015 Issue Series 51a & 51b - 23 December 2015 Issue Series 52 - 27 April 2016 Issue Series 54 - 20 June 2016 Issue Remain an employee of the company for 4 years from Grant date of shares Remain an employee of the company for 5 years from Grant date of shares Remain an employee of the company for 6 years from Grant date of shares Remain an employee of the company for 4 years from Grant date of shares Remain an employee of the company for 5 years from Grant date of shares Remain an employee of the company for 6 years from Grant date of shares Remain an employee of the company for 4 years from Grant date of shares Remain an employee of the company for 5 years from Grant date of shares Remain an employee of the company for 6 years from Grant date of shares Remain an employee of the company for 4 years from Grant date of shares Remain an employee of the company for 5 years from Grant date of shares Remain an employee of the company for 6 years from Grant date of shares Upon a change in control of the company Remain an employee of the company for 4 years from Grant date of shares Remain an employee of the company for 4 years from Grant date of shares Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 1 2 3 4 Change of control provision was triggered on 23 October 2009 by GPG increasing its shareholding above 50%. In accordance with Mr Swanson’s employment contract, Mr Swanson is entitled to a long term incentive comprising 10 million Shares in accordance with the ESP, and vesting progres- sively over three years from the commencement date of his contract as follows: Series 10: 2 million shares at an issue price of 50 cents vesting on 26 March 2011 (vested); Series 11: 4 million shares at an issue price of 58 cents vesting on 26 March 2012 (vested); and Series 12: 4 million shares at an issue price of 65 cents vesting on 26 September 2012 (vested) on change of control of ClearView. The Shares issued to Mr Swanson have vested progressively each year as outlined above. Special condition relating to shares issued to KMP in Series 26: 100% of the shares may be sold on change of control, but 50% are held in escrow after employment for 1 year thereafter. Change of control provision was triggered on 26 September 2012 by CCP Bidco obtaining a shareholding above 50%. ClearView Annual Report 2017 123 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued27. Share-based payments continued Contractor participants Series Vesting conditions 1 Performance conditions Series 18 – 1 March 2012 Issue 4 years and 346 days from the date of issue and achievement of specific Nil target Series 19 – 3 April 2012 Issue Series 21 – 25 May 2012 Issue 4 years and 346 days from the date of issue and achievement of specific target 4 years and 347 days from the date of issue and achievement of specific target Series 22 – 29 June 2012 Issue 5 years from the date of issue and achievement of specific target Series 23 – 6 August 2012 Issue 5 years from the date of issue and achievement of specific target Series 25 – 21 December 2012 Issue Series 28 – 16 April 2013 Issue 5 years from the date of issue and achievement of specific target 4 years and 361 days from the date of issue and achievement of specific target Series 29 – 31 May 2013 Issue 5 years from the date of issue and achievement of specific target Series 30 – 27 June 2013 Issue 5 years from the date of issue and achievement of specific target Series 37 – 31 January 2014 Issue Series 41 – 30 May 2014 Issue Series 42 – 9 July 2014 Issue 5 years from the date of issue and achievement of specific target 5 years from the date of issue and achievement of specific target/balanced scorecard 5 years from the date of issue and achievement of specific target/balanced scorecard Series 44 – 26 November 2014 Issue 5 years from the date of issue and achievement of specific target/balanced scorecard Series 47 – 30 March 2015 Issue 5 years from the date of issue and achievement of specific target/balanced scorecard Series 49 – 30 July 2015 Issue 5 years from the date of issue and achievement of specific target/balanced scorecard Series 53 – 27 April 2016 Issue 5 years from the date of issue and achievement of balanced scorecard Series 55 – 14 June 2017 Issue 5 years from the date of issue and achievement of balanced scorecard 1 Subject to qualifying circumstances as outlined in the ESP Plan Rules. Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Unless otherwise stated in the Invitation Letter to an individual employee participant, the vesting conditions in the ESP rules stipulate that shares issued in terms of the Plan to employees participants will either automatically vest with a change of control of the Company (for shares issued prior to 14 February 2013) and for all other shares 12 months after a change in control. The change of control provisions do not apply to shares issued in terms of the plan to contractor participants. On 26 September 2012 CCP Bidco Pty Limited and its Associates (CCP Bidco), CCP Bidco’s off-market takeover bid for all the ordinary shares in ClearView became unconditional which resulted in accelerating the vesting of the shares in the ESP at that time, including all Series 10 to 24 which had been issued to employee participants prior to the change of control. Series 7 was issued prior to 23 October 2009, where the change of control provision was triggered upon GPG obtaining control of ClearView. The Board had previously announced that it had considered several alternatives in relation to its major shareholder, Crescent Capital Partners and its Associates (Crescent) selling down its 52.9% shareholding. This process resulted in Sony Life Insurance Co., Ltd (Sony Life) becoming a new strategic shareholder in October 2016 following their agreement with Crescent to acquire a 14.9% stake in ClearView. 124 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued27. Share-based payments continued Shares that were fortfeited during the year The following table shows the shares that were fortfeited due to the vesting conditions not being met. Date 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 Total Number of share cancelled Cancelled from 75,000 161,238 39,604 125,000 189,873 400,000 1,000,000 302,160 40,470 116,145 109,180 111,375 378,203 149,867 424,164 32,910 18,350 19,604 3,693,143 Series 46, 47 and 48 Series 52 Series 43 Series 46, 47 and 48 Series 42 Series 46 Series 41 Series 19 Series 23 Series 25 Series 25 Series 30 Series 30 Series 37 Series 37 Series 37 Series 23 Series 43 Shares that were exercised during the year The following table shows the shares that were exercised due to the vesting conditions being met. Date 5/04/2017 16/06/2017 16/06/2017 16/06/2017 16/06/2017 23/06/2017 Total Number of share exercised Exercised from 700,000 89,307 450,000 150,000 500,000 254,000 2,143,307 Series 20 Series 43 Series 21 Series 17 Series 21 Series 16, 38, 39 and 40 28. Shares granted under the executive share plan In accordance with the provisions of the ESP, as at 30 June 2017, key management, members of the senior management team, the managing director and contractor participants have acquired 56,207,077 (2016: 60,743,527) ordinary shares. Shares granted under the ESP carry rights to dividends and voting rights. Financial assistance amounting to $36,780,762 (2016: $39,618,401) was made available to executives, senior employees and contractor participants to fund the acquisition of shares under the ESP. For details of the ESP refer to Note 27. ClearView Annual Report 2017 125 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued29. Dividends Dividend payments on Ordinary shares 2016 final dividend (2016: 2015 final dividend) (cps) Total dividends on ordinary shares paid to owners of the Company Dividends not recognised in the consolidated statement of financial position Dividends declared since balance date Consolidated and Company 2017 $’000 Per share 2016 $’000 Per share 2.50 2.50 16,454 16,454 2.10 2.10 12,301 12,301 2017 final dividend (2016: 2016 final dividend) (cps) 2.75 18,136 2.50 16,454 Dividend franking account Amount of franking credit available for use in subsequent financial years - 27,610 - 24,286 1 2 The impact on the dividend franking account for the final dividend declared is expected to reduce the franking account by $7.8 million (2016: $7.1 million). There are no other income tax consequences for dividends not recognised in the statement of financial position. The total 2017 final dividend declared but not recognised in the statement of financial position is estimated based on the total number of ordinary shares on issue as at the date of this report. The actual amount recognised in the consolidated financial statements for the year ending 30 June 2018 will be based on the actual number of ordinary shares on issue on the record date. The Directors declared that there will be a final fully franked dividend paid for the year ended 30 June 2017 of $18.14 million (2016: $16.45 million). 30. Reconciliation of net profit for the year to net cash flows from operating activities Net profit/(loss) for the year Fair value gains on financial assets at fair value through profit and loss Loss on disposal of property, plant and equipment Amortisation and depreciation Employee share plan expense Other non cash items Interest and dividend received from controlled entity Reinvested trust distribution income/interest income Movement in provisions Movements in liabilities to non-controlling interest in controlled unit trust (Increase)/decrease in receivables Decrease/(increase)/ in deferred tax asset Increase/(decrease) in payables Increase/(decrease) in policy liabilities Increase/(decrease) in current tax liability Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 13,150 23,615 17,508 13,427 (62,432) - 4,670 287 13,637 13,802 - - - - - - 1,012 (306) - 1,083 (16) 1,012 1,083 - - - (21,000) (17,000) (32,041) (26,625) 3,035 44,593 2,381 14,768 (17,563) 1,115 4,761 4,893 1,164 721 (47) 115 (53,446) (5,189) - - - 2,306 263 (579) - 1,164 674 (421) 2,381 - (1,971) 109 423 - (5,189) (7,158) Net cash (utilised)/generated by operating activities (24,982) (23,881) 126 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued31. Subsidiaries Name of Entity Parent entity Principal Activity Parent Entity Country of incorporation 2017 % 2016 % Ownership interest ClearView Wealth Limited (CWL) Holding Company - Australia Subsidiaries ClearView Group Holdings Pty Limited (CGHPL) Holding Company CWL ClearView Life Assurance Limited (CLAL) Life Company CGHPL ClearView Financial Management Limited (CFML) Responsible Entity CGHPL ClearView Life Nominees Pty Limited (CLNPL) Trustee ClearView Administration Services Pty Limited (CASPL) Administration Service Entity ClearView Financial Advice Pty Limited (CFAPL) Advice Company Matrix Planning Solutions Limited (MPS) Affiliate Financial Planning Pty Limited Advice Company Non operating Controlled unit trusts CVW Pimco International Bonds Fund CVW Schroder Equity Opportunities Fund CVW Fixed Interest Fund CVW SSGA International Shares Fund CVW Listed Property Fund CVW Cash Fund CVW CFS Infrastructure Fund CVW RARE Emerging Markets Fund CVW Platinum International Shares Fund CVW Hyperion Australian Shares Fund CVW Vanguard Listed International Infrastructure Fund CVW Vanguard Emerging Markets Fund CVW Plato Australian Shares Fund CVW MFS International Shares Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund Wholesale Fund CLAL CWL CWL CWL CFA CLAL CLAL CLAL CLAL CLAL CLAL CLAL CLAL CLAL CLAL CLAL CLAL CLAL CLAL Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 96 47 58 93 51 72 56 56 30 92 99 98 77 21 100 100 100 100 100 100 100 100 96 54 62 93 69 75 59 65 99 90 98 98 81 33 CASPL was incorporated to centralise the administrative responsibilities of the group which include salary disbursements and settling all non-directly attributable overhead expenditure. CASPL recoups all expenditure by virtue of a management fee from the various group companies and operates on a cost recovery basis (in accordance with an inter group agreement). Controlled unit trusts are not members of the tax consolidated group. Members of the ClearView tax consolidated group include the parent entity and its subsidiaries. CWL is regulated as a Non-Operating and Holding Company by the Australia Prudential Regulation Authority (APRA) under the Life Insurance Act 1995, and via its subsidiaries, holds an APRA life insurance licence (CLAL), and APRA registrable superannuation entity (RSE) licence (CLN), an ASIC funds manager responsible entity (RE) licence (CFML) and operates two ASIC financial adviser licences (CFA and MPS). ClearView Annual Report 2017 127 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued32. Related party transactions (a) Equity interests in related parties Equity interests in subsidiaries Details of the percentage of ordinary shares held in subsidiaries are disclosed in Note 31 to the financial statements. (b) Transactions with KMP Key management personnel compensation Details of Key Management Personnel compensation are disclosed in the Directors’ Report on pages 48 to 64 of the Annual Report. The aggregate compensation made to Key Management Personnel (KMP) of the Company and the Group is set out below: Short-term employee benefits Post-employment benefits Share based payments Total Limited recourse loans Consolidated 2017 $ 2016 $ 4,843,740 5,128,138 389,144 176,233 533,940 157,063 5,409,117 5,819,141 Limited recourse loans were granted to KMP ESP participants in May 2017. This limited recourse loan facility is secured by the ESP shares held and will become interest bearing from 30 November 2017 at 3 year BBSY rate plus a margin of 1%. This limited recourse facility is reflected as loans on balance sheet of the listed entity. (c) Transactions between the Group and its related parties Other related parties include: • Entities with significant influence over the Group; • Associates; and • Subsidiaries. Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties during the financial year ended 30 June 2017 are disclosed below: • Directors fees were paid to Cresent Capital Partners Pty Limited the manager of the parent entity’s majority shareholder CCP Bidco Pty Limited; and • Directors fees were paid to Sony Life Insurance Co., Ltd. The ultimate parent entity in the Group is ClearView Wealth Limited which is incorporated in Australia. 128 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued32. Related party transactions continued Outstanding balances between the Group and its related parties h t l a e W w e V r a e l C i d e t i m i L $ e f i L w e V r a e l C i d e t i m i L e c n a r u s s A $ l a i c n a n i F w e V r a e l C i d e t i m i L t n e m e g a n a M $ l a i c n a n i F w e V r a e l C i d e t i m i L y t P e c i v d A $ n o i t a r t s i n m d A i i w e V r a e l C d e t i m i L y t P s e c i v r e S $ i g n n n a l P x i r t a M d e t i m i L s n o i t u l o S $ d e t i m i L y t P s e e n m o N i $ e f i L w e V r a e l C i s e m e h c S t n e m t s e v n I d e g a n a M L M F C t n e m e r i t e R w e V r a e l C i n a l P $ l a t o T $ - (3,667,738) (523,676) (992,035) 211,021 (1,486,965) (13,276) (3,773,887) - (10,246,556) 3,667,738 - 167,090 634,285 (7,358) 4,424,191 - - - 8,885,946 523,676 (167,090) - 66,280 - 314,793 (158,366) - 756,350 1,335,643 992,035 (634,285) (66,280) - 7 1,027,033 (211,021) 7,358 - (7) - 497,443 1,486,965 (4,424,191) (314,793) (1,027,033) (497,443) 13,276 - 158,366 3,773,887 - - - - (756,350) - - - - - - - - - - - - - - - - - - - - - - - - 1,318,510 293,773 - (4,776,495) - - - 171,642 3,773,887 (756,350) 10,246,556 (8,885,946) (1,335,643) (1,318,510) (293,773) 4,776,495 (171,642) (3,773,887) 756,350 - 2017 ClearView Wealth Limited ClearView Life Assurance Limited ClearView Financial Management Limited ClearView Financial Advice Pty Limited Matrix Planning Solutions Limited ClearView Admin Services Pty Limited ClearView Life Nominees Pty Limited ClearView Retirement Plan CFML Managed Investment Schemes ClearView Annual Report 2017 129 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 32. Related party transactions continued h t l a e W w e V r a e l C i d e t i m i L $ e f i L w e V r a e l C i d e t i m i L e c n a r u s s A $ l a i c n a n i F w e V r a e l C i d e t i m i L t n e m e g a n a M $ l a i c n a n i F w e V r a e l C i d e t i m i L y t P e c i v d A $ n o i t a r t s i n m d A i i w e V r a e l C d e t i m i L y t P s e c i v r e S $ i g n n n a l P x i r t a M d e t i m i L s n o i t u l o S $ d e t i m i L y t P s e e n m o N i $ e f i L w e V r a e l C i s e m e h c S t n e m t s e v n I d e g a n a M L M F C t n e m e r i t e R w e V r a e l C i n a l P $ l a t o T $ - (6,616,997) (12,747) 128,517 (271,757) (4,847,916) (153,512) 6,616,997 - 127,116 607,712 (8,657) 4,474,005 - 12,747 (127,116) - (47,953) - 223,538 (571,495) (128,517) (607,712) 47,953 - (25,734) 926,358 84,777 271,757 8,657.00 - 25,734.00 - 313,518 - 4,847,916 (4,474,005) (223,538) (926,358) (313,518) - (21,257) 153,512 - 571,495 (84,777) - 21,257 - 11,774,412 (11,817,173) 510,279 (297,125) (619,666) 1,110,760 (661,487) - - - - - - - - - (11,774,412) - 11,817,173 - - - (510,279) 297,125 619,666 - (1,110,760) - - 661,487 - 2016 ClearView Wealth Limited ClearView Life Assurance Limited ClearView Financial Management Limited ClearView Financial Advice Pty Limited Matrix Planning Solutions Limited ClearView Admin Services Pty Limited ClearView Life Nominees Pty Limited (d) Transactions other than financial instrument transactions No Director has entered into a material contract with the Company or the ClearView Group since the end of the previous financial year and there were no material contracts involving Directors’ interests existing at year end. Other transactions with directors, executives and their related parties are conducted on arm’s length terms and conditions, and are deemed trivial or domestic in nature. These transactions are in the nature of personal investment, life insurance policies and superannuation. 33. Financial instruments (a) Management of Financial Instruments The financial assets of the Group (other than shareholder cash holdings) are managed by specialist investment managers who are required to invest the assets allocated in accordance with directions from the Board. BNP Paribas acts as master custodian on behalf of the Group and, as such, provides services including physical custody and safekeeping of assets, settlement of trades, collection of dividends and accounting for investment transactions. Daily operating bank accounts and shareholder cash are managed within the Group by the internal management and the finance department. 130 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 33. Financial instruments continued (b) Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which revenues and expenses are recognised, in respect of each class of financial asset and financial liability are disclosed in Note 3(x). (c) Capital risk management The Group maintains capital to protect customers, creditors and shareholders against unexpected losses to a level that is consistent with the Group’s risk appetite. The Group’s capital structure consists of ordinary equity comprising issued capital, retained earnings and reserves (as detailed in Notes 12 and 26). The Group has access to a $60 million Debt Funding Facility as at the date of this report. This was put in place in July 2017 Fair Value Hierarchy for 3 years to replace the facility that was in place at 30 June 2017 (and due to expire in December 2017). The $60 million 3 year debt facility provides the Group with further capital support and to meet liquidity needs from time to time. As at 30 June 2017, the Company has not drawn down any amount under the Debt Funding Facility. ClearView is now fully capitalised with Common Equity Tier 1 capital to fund its current business plans and anticipated medium term growth, with some additional capital flexibility over the medium term. (d) Fair value of financial instruments The fair values of financial assets and financial liabilities are determined in accordance with the fair value hierarchy. The table below summarises financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: • • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included within level 2 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Financial assets 2017 Equity Securities Fixed Interest Securities Unit Trusts Total 2016 Equity Securities Fixed Interest Securities Unit Trusts Total Financial Liabilities 2017 Life investment policy liability Total 2016 Life investment policy liability Total Level 1 Level 2 Level 3 $’000 $’000 $’000 Total $’000 262,428 - - 448,086 1,103,535 - 1,365,963 448,086 256,093 - - 424,963 934,170 - 1,190,263 424,963 - - - - 1,177,290 1,177,290 1,152,554 1,152,554 - - - - - - - - - - - - 262,428 448,086 1,103,535 1,814,049 256,093 424,963 934,170 1,615,226 1,177,290 1,177,290 1,152,554 1,152,554 ClearView Annual Report 2017 131 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued33. Financial instruments continued (e) Categories of financial instruments The Group has investments in the following categories of financial assets and liabilities: Financial assets Investment in group companies Cash and cash equivalents Fixed interest deposits (held to maturity deposits) Life insurance investment assets (FVTPL) Loans and receivables Current tax assests Total Financial liabilities Policyholder liabilities Payables Current tax liabilities Provisions Total Consolidated Company 2017 $’000 2016 $’000 2017 $’000 2016 $’000 - - 377,159 354,158 222,197 217,673 5,880 20,889 78,327 79,584 1,814,049 1,615,226 - - - - 37,947 16,097 13,689 11,855 - 641 - 641 2,152,520 1,929,221 396,728 387,543 954,320 949,427 39,909 35,619 523 8,460 - 5,215 1,003,212 990,261 - 352 523 18 893 - 780 - 26 806 (f) Financial risk management objectives (g) Market risk The primary asset risks borne by the Company relate to the financial assets of the Company and its operating subsidiaries excluding those in the non-guaranteed investment linked funds in ClearView Life’s statutory fund No.4 (referred to below as ClearView assets). The primary financial risks related to the financial assets in the non-guaranteed investment linked funds in ClearView Life’s statutory fund No.4 are borne by policyholders as the investment performance on those assets is passed through, in full, to the policyholders (referred to below as Policyholder assets). Nonetheless, the Company has a secondary exposure to the Policyholder assets and off-balance sheet client funds, via the impact on the fees charged by the Company which vary with the level of Policyholder and client funds under management and under administration, as well as related reputational exposure. Market risk is the risk that financial assets will be affected by changes in interest rates, foreign exchange rates and equity prices. Interest rate risk Interest rate risk arises on ClearView’s assets which are invested in fixed interest funds and cash. Interest rate risk is managed by the Group through: • • • Maintaining the level of interest rate exposure within the tolerances set by the Board in the RMCS; Investing ClearView’s assets in accordance with the Board approved Investment Policy and Guidelines; and By holding capital reserves in accordance with the Company’s ICAAP with respect to the residual interest rate risk exposure retained, in addition to the regulatory capital reserves held within ClearView Life in respect of interest rate risk. 132 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued33. Financial instruments continued Equity price risk Equity price risk is the risk that the fair value of investments in equities decreases or increases as a result of changes in market prices, whether those changes are caused by factors specific to the individual share price or factors affecting all equity instruments in the market. As at 30 June 2017, ClearView’s shareholder related assets were not invested in equities and therefore not exposed to equity price risk. In contrast to this, the Policyholder assets and other client funds under management and under administration, involve significant investment in equities. As noted above, the Policyholder asset risks are borne by the policyholders. The Group is exposed to secondary risks on its management and advice fees that are driven by the total funds under management and administration, as well as reputational risks from poor investment returns. The investment of the Policyholder assets and client monies controlled by ClearView is undertaken in accordance with the Investment Policy and Guidelines approved by the Board, which inter alia stipulates the investment allocation mix, the portfolio’s risk characteristics, management response plans and the use of derivatives. To the extent required, capital reserve are held in accordance with the ICAAP with respect to the Group’s residual fee risk exposure. (h) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk exposures arising from investment activities are assessed by the Group’s internal investment management committee (the ClearView Investment Committee (CIC) appointed by the Board) prior to investing ClearView assets into any significant financial asset. The ongoing credit standing of material investments are monitored by the CIC. The CIC is charged with maintaining the credit quality of ClearView assets within the Board’s investment guidelines. The large majority of debt assets invested in by the Group on behalf of policyholders and clients (including Policyholder assets) are managed under mandates with appointed funds managers. Those mandates include credit rating, diversification and maximum counterparty exposure rules and standards that are to be met. The funds managers adherence to those requirements are subject to ongoing monitoring by the funds managers, and are separately monitored by the Group’s custodian. Formal compliance reporting is monitored monthly by the CIC. Credit risk arising from other third party transactions, such as reinsurance recovery exposures and exposure to outsource service providers, are assessed prior to entering into financial transactions with those parties, are approved by the Board where material, and are monitored by appropriate mechanisms on an ongoing basis (for example, a quarterly monitoring and compliance reporting process in respect of the ClearView’s outsourced custodian). The Group does not expect any of its material counterparties to fail to meet their obligations and does not require collateral or other security to support these credit risk exposures. Specific capital reserves are held against credit risk under the regulatory capital requirements of ClearView Life and credit risk is considered within the Company’s ICAAP. The Group does have significant credit risk exposure to counterparties but these counterparties have a high credit rating. The table below shows the maximum exposure to credit risk at the reporting date. It is the opinion of the Board that the carrying amounts of these financial assets represent the maximum credit risk exposure at the balance sheet date. ClearView Annual Report 2017 133 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued33. Financial instruments continued The following table reflects the shareholder financial assets with credit risk exposure monitored by the CIC: Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 156,319 169,921 156,319 169,921 5,880 5,880 20,889 20,889 The Group’s cash flow requirements are reviewed and forecast daily for a one week forward period. This assessment takes into account the timing of expected cash flows, the likelihood of significant benefit outflows over the short term and known significant one-off payments. Under the terms of the Group’s products (issued via ClearView Life and ClearView Financial Management) the payment of unit fund redemptions to policyholders and unit trust investors may be delayed, if necessary, until funds are available. To date no such delays have been imposed. The risks in respect of external (third party) funds are controlled via the Group’s Approved Product List, which restricts the external funds available for use by the Group’s advisers and planners to investment platform providers that are assessed to be reputable and financially sound. Cash and cash equivalents and debt securities/fixed interest securities Rating AAA to AA- In addition to the credit risk exposures above, the Group had a $15.3 million (2016: $0.7 million payable) exposure to Swiss Re Life & Health Australia Ltd in relation to reinsurer’s share of policy liabilities. Credit risk associated with receivables is con- sidered minimal. The main receivables balance is in relation to receivables from outstanding premiums receivable, accrued dividends, loans receivable, prepayments and outstanding settlements. The concentration of other receivables is spread across the various debtors with no single significant debtor. (i) Liquidity risk Liquidity risk is primarily the risk that the Group will encounter difficulty in meeting its obligations due to an inability to realise some or all of its assets in order to fund its cash flow needs, including the payment of amounts to its policyholders, members and clients. A secondary risk relates to the risk of the illiquidity of the external (including off balance sheet) funds its clients invest in, which may result in restricted fee flows to the Group and/or reputational damage via association. The primary risk is controlled through focusing the Group’s assets, as well as policyholder and member assets and the investment of client funds controlled by ClearView Life, into assets which are highly marketable and readily convertible into cash. In addition, the Group maintains suitable cash holdings at call and an appropriate overdraft facility. 134 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued33. Financial instruments continued The following tables summarise the realisation profile of financial assets at the reporting date. There were no financial assets past due or impaired at the reporting date other than those provided for. Consolidated Less than 3 months 3 to 6 months 6 months to a year 1 year and over 2017 Receivables Outstanding life insurance premiums net of provision Accrued dividends Investment income and distribution income Loans Prepayments Related party receivables Total 2016 Receivables Current tax assets Outstanding life insurance premiums net of provision Accrued dividends Investment income and distribution income Loans Total $’000 5,152 3,078 2,036 10,317 1,234 1,910 756 $’000 692 25 - - 80 834 - 24,483 1,631 3,088 - 2,558 2,232 888 601 9,367 19 641 25 - - 336 1,021 $’000 432 $’000 38 6 - - - - - 1,450 5,579 554 3,774 6,216 - - 5,617 6 - 3 - - - - - - - Over 5 years $’000 - - - - - - - - - - - - - 640 649 1,781 1,781 364 364 2017 Trade receivables Amounts from controlled/associated entities Loan receivables Related party receivables Total 2016 Trade receivables Current tax assets Amounts from controlled/associated entities Total Less than 3 months 3 to 6 months 6 months to a year 1 year and over Over 5 years $’000 19 6,472 - - 6,491 14 - 6,928 6,942 $’000 15 - - - 15 17 641 - 658 $’000 $’000 $’000 - - - 3,774 3,774 25 - - 25 - - 3,409 - 3,409 24 - 4,847 4,871 - - - - - - - - - Total $’000 6,314 3,109 2,036 10,317 8,343 3,298 4,530 37,947 3,113 641 2,586 2,232 888 3,722 13,182 Company Total $’000 34 6,472 3,409 3,774 13,689 80 641 11,775 12,496 ClearView Annual Report 2017 135 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued33. Financial instruments continued The following tables summarise the maturity profile of the Group and the Company’s financial liabilities all of which are non-interest bearing. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay. The tables include both interest and principal cash flows. Consolidated 2017 Payables Current tax liabilities Provisions Reinsurance payable1 Total 2016 Payables Provisions Reinsurance payable1 Total 2017 Payables Current tax liabilities Provisions Total 2016 Payables Provisions Total Less than 3 months 3 to 6 months 6 months to a year 1 year and over $’000 153 523 1,204 - $’000 321 - 784 - Over 5 years $’000 84 - $’000 830 - 2,895 2,070 - - Total $’000 27,782 523 8,460 12,127 48,892 1,518 1,091 5,025 2,154 62 703 - 765 35 1,791 - 1,338 585 - 84 27,061 1,793 - 5,215 8,487 1,826 1,923 1,877 40,763 $’000 26,394 - 1,507 12,127 39,104 25,542 343 8,487 34,372 Less than 3 months 3 to 6 months 6 months to a year 1 year and over Over 5 years $’000 352 - - 352 776 - 776 $’000 $’000 $’000 $’000 - 523 18 541 4 26 30 - - - - - - - - - - - - - - - - - - - - - Company Total $’000 352 523 18 893 780 26 806 1 Reinsurance payable represents reinsurance premium payable on reinsurance due in respect of life insurance premium. 136 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued33. Financial instruments continued The following table gives information about how the fair values of the financial assets and financial liabilities are determined (in particular, the valuation techniques and inputs used, significant unobservable inputs and the relationship of unobservable inputs to fair value). Fair value as at 2017 $’000 2016 $’000 Fair value hierarchy Valuation techniques and key inputs Equity Securities 262,428 256,093 Level 1 Fixed Interest Securities 448,086 424,963 Level 2 Unit Trusts Total 1,103,535 934,170 Level 1 1,814,049 1,615,226 (j) Financing Facilities Quoted bid prices in an active market The fair value of Fixed Interest Securities are based on a discounted cash flow model using a yield curve appropriate to the remaining maturity of the investment. Quoted bid prices in an active market Significant unobservable inputs Relationship of unobserv- able inputs to fair value n/a n/a n/a n/a n/a n/a The Group has access to the following facilities: Bank Guarantees – amount used Overdraft and credit – amount used – amount unused Bank Revolving Facility – amount used – amount unused Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 1,598 1,272 - - 2,000 2,000 - - 50,000 50,000 - - - - - - - - - - As at the reporting date the Company had a $50 million facility agreement with the Commonwealth Bank of Australia. This facility was unused and available for immediate use. Interest on the loan accrued at BBSY plus a margin of 0.7% per annum, and was payable monthly. Furthermore, a line fee of 0.4% per annum was payable on the facility on a quarterly basis. The facility was secured by a number of cross guarantees, refer to Note 38 for details. On 25 July 2017 the Facility with the Commonwealth Bank of Australia was terminated and the Company entered into a facility with National Australia Bank, refer to Note 40 for further details. ClearView Life Assurance Limited has a $2 million overdraft facility with National Australia Bank at a benchmark interest rate of 8.12% p.a calculated daily. Any overdrawn balance in excess of the overdraft will incur an additional margin of 1.5% p.a above the benchmark interest rate. The bank overdraft is short-term in nature and was unutilised at 30 June 2017. There is an additional $0.25 million credit card facility with National Australia Bank in the name of ClearView Administration Services Pty Limited. ClearView Annual Report 2017 137 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued33. Financial instruments continued Interest rate risk management The Group’s activities expose it to the financial risk of changes in interest rates. Floating rate instruments expose the Group to cash flow risk and credit spread risks, whereas fixed interest rate instruments expose the Group to fair value interest rate risk. The Board monitors the Group’s exposures to interest rate risk. The tables below detail the shareholder’s exposure to interest rate risk at the balance sheet date by the earlier of contractual maturities or re-pricing. 2017 Financial assets Variable interest rate instruments: Cash and cash equivalents Fixed interest securities Total 2016 Financial assets Variable interest rate instruments: Cash and cash equivalents Fixed interest securities Total Consolidated Company Weighted average interest rate Less than 6 months Weighted average interest rate Less than 6 months % $’000 % $’000 0.62 2.37 77,992 78,327 156,319 0.62 - 5,880 - 5,880 1.54 2.58 90,337 79,584 169,921 1.54 20,889 - - 20,889 Interest rate sensitivity analysis for floating rate financial instruments The sensitivity analysis below have been determined based on the Group’s exposure to interest rates at the reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period, in the case of instruments that have floating interest rates. A 0.5% (2016: 0.5%) increase or decrease is used when reporting interest risk internally to key management personal and represents management’s assessment of the reasonably possible change in interest rates. 138 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued33. Financial instruments continued The following table illustrates the effect for the Group from possible changes in market risk that are reasonably possible based on the risk the Group was exposed to at reporting date: Effect on operating profit Effect on securities Effect on operating profit Effect on securities Consolidated Consolidated Company Company 2017 $’000 ±496 2016 $’000 ±520 2017 $’000 ±496 2016 $’000 ±520 2017 $’000 ±21 2016 $’000 ±73 2017 $’000 ±21 2016 $’000 ±73 ±0.5% (2016: ±0.5%) The method used to prepare the sensitivity analysis has not changed in the year. Based on the market exposure management believe that the interest rate variation above is considered appropriate in the current environment. Fair value sensitivity analysis for fixed rate financial instruments The Group does account for fixed rate financial assets and liabilities at fair value through profit and loss. Therefore a change in long term interest rates at reporting date would affect profit and loss. (k) Foreign currency risk management Foreign currency risk is the risk that the market value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group undertakes certain investments denominated in foreign currencies, hence is exposed to the effects of exchange rate fluctuations. However, the foreign currency risk is borne by the policyholder and the shareholder has no direct exposure to foreign currency. Forward foreign exchange contracts The Group currently does not make use of forward foreign exchange contracts. ClearView Annual Report 2017 139 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued 34. Disaggregated information by fund Abbreviated income statement 2017 Life insurance premium revenue Outwards reinsurance expense Fee revenue Investment revenue Net fair gains/(losses) on financial assets at fair value Net revenue and income Claims expense Reinsurance recoveries Change in life insurance policy liabilities Change in reinsurers' share of life insurance liabilities Change in life investment policy liabilities Other expenses Profit for the year before income tax Income tax expense Net profit attributable to members of ClearView Life Assurance Limited ClearView Life Assurance Limited Shareholders Fund Statutory Fund No.1 Statutory Fund No.2 Statutory Fund No.4 Total $’000 $’000 $’000 $’000 $’000 Australian Non-Participating - - - 19 - 19 - - - - - - 19 (6) 13 177,365 (43,080) - 2,274 - 136,559 (72,706) 47,417 21,896 170 - 309 (50) 808 876 20 1,963 500 (235) (17) - - - 21,695 61,339 33,266 116,300 - - - - 177,674 (43,130) 22,503 64,508 33,286 254,841 (72,206) 47,182 21,879 170 (6,070) (94,349) (100,419) (106,842) (478) (19,153) (126,473) 26,494 (7,913) (4,337) 5,331 2,798 (638) 24,974 (3,226) 18,581 994 2,160 21,748 140 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued34. Disaggregated information by fund continued Abbreviated statement of financial position 2017 Investments in subsidiaries and controlled unit trusts ClearView Life Assurance Limited Shareholders Fund Statutory Fund No.1 Statutory Fund No.2 Statutory Fund No.4 Total $’000 2,950 $’000 $’000 $’000 $’000 - 47,307 1,128,970 1,179,227 Australian Non-Participating Policy liabilities ceded under reinsurance - 15,108 Other assets Total assets Gross policy liabilities – Life insurance contracts Gross policy liabilities – Investment insurance contracts Other liabilities Total liabilities Net assets Shareholder’s retained profits Opening retained profits Operating profit Capital transfer between funds Dividend paid Shareholders' retained profits Shareholders' capital Total equity 128,839 143,947 (207,681) 230 739 - 15,338 18,003 149,577 48,276 1,146,973 1,344,142 49 - (207,632) - 47,030 1,130,260 1,177,290 21,172 (1,270) 6,182 27,198 (186,509) 45,809 1,136,442 330,456 2,467 10,531 1,996 4,946 - - 1,114 1,114 3,832 (30,306) 167,675 13 - (18,000) (48,293) 52,125 18,581 7,000 - 193,256 137,200 3,832 330,456 3,773 994 (2,500) - 2,267 200 2,467 996,856 347,286 152,413 21,748 - 11,271 2,160 (4,500) - (18,000) 8,931 1,600 156,161 191,125 10,531 347,286 ClearView Annual Report 2017 141 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued34. Disaggregated information by fund continued Abbreviated income statement 2016 Life insurance premium revenue Outwards reinsurance expense Fee revenue Investment revenue Net fair gains/(losses) on financial assets at fair value Net revenue and income Claims expense Reinsurance recoveries Change in life insurance policy liabilities Change in reinsurers' share of life insurance liabilities Change in life investment policy liabilities Other expenses Profit for the year before income tax Income tax expense Net profit attributable to members of ClearView Life Assurance Limited ClearView Life Assurance Limited Shareholders Fund Statutory Fund No.1 Statutory Fund No.2 Statutory Fund No.4 Total $’000 $’000 $’000 $’000 $’000 Australian Non-Participating - - - 104 - 104 - - - - - - 104 (31) 137,959 (30,095) - 330 (51) 870 2,821 1,103 - - 22,268 69,409 138,289 (30,146) 23,138 73,437 - 64 (18,161) (18,097) 110,685 (44,034) 25,461 55,375 (10,796) 2,316 (450) 235 (1) - 73,516 - - - - - (4,373) (52,010) 186,621 (44,484) 25,696 55,374 (10,796) (56,383) (90,732) 45,959 (13,733) (434) (19,919) (111,085) (2,707) 3,642 1,587 444 44,943 (9,678) 73 32,226 935 2,031 35,265 142 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued34. Disaggregated information by fund continued Abbreviated statement of financial position 2016 Investments in subsidiaries and controlled unit trusts ClearView Life Assurance Limited Shareholders Fund Statutory Fund No.1 Statutory Fund No.2 Statutory Fund No.4 Total $’000 2,950 $’000 $’000 $’000 $’000 - 49,267 1,104,494 1,156,711 Australian Non-Participating Policy liabilities ceded under reinsurance - (1,184) Other assets Total assets Gross policy liabilities – Life insurance contracts Gross policy liabilities – Investment insurance contracts Other liabilities Total liabilities Net assets Shareholder’s retained profits Opening retained profits Operating profit Dividend paid Shareholders' retained profits Shareholders' capital Total equity 114,659 113,475 (204,378) 481 2,997 - (703) 20,318 141,373 52,745 1,124,812 1,297,382 548 - (203,830) - 49,175 1,103,379 1,152,554 18,978 (951) 8,562 26,620 3,400 6,350 - - 31 31 (185,400) 48,772 1,111,941 6,319 298,875 3,973 12,871 975,344 322,038 (13,379) 135,449 73 32,226 (17,000) (30,306) 36,625 - 167,675 131,200 6,319 298,875 2,839 934 - 3,773 200 3,973 9,239 2,031 134,148 35,265 - (17,000) 11,271 1,600 152,413 169,625 12,871 322,038 ClearView Annual Report 2017 143 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued35. Investment in controlled unit trusts Name Controlled unit trusts CVW Pimco International Bonds Fund CVW Schroder Equity Opportunities Fund CVW Fixed Interest Fund CVW SSGA International Shares Fund CVW Listed Property Fund CVW Cash Fund CVW CFS Infrastructure Fund CVW RARE Emerging Markets Fund CVW Platinum International Shares Fund CVW Hyperion Australian Shares Fund CVW Vanguard Listed International Infrastructure Fund CVW Vanguard Emerging Markets Fund CVW Plato Australian Shares Fund CVW MFS International Shares Fund Total 36. Leases Not longer than 1 year Longer than 1 year and not longer than 5 years Longer than 5 years Total Lease committments relate to: Consolidated 2017 Consolidated 2016 Type $’000 % $’000 % Debt Equities Debt Equities Property Debt Property Equities Equities Equities Property Equities Equities Equities 21,890 111,715 339,119 101,746 25,882 226,100 145,571 102,814 19,434 11,937 10,585 7,897 41,722 9,865 95.65 46.76 57.71 92.89 51.26 72.16 55.59 56.25 30.32 92.49 98.57 98.06 77.43 20.71 25,422 115,966 332,846 84,315 47,854 232,183 111,422 106,321 13,419 9,012 6,784 6,562 46,936 14,719 1,176,277 1,153,761 95.89 53.77 61.77 93.44 68.80 75.43 59.34 64.60 98.98 89.97 97.68 97.83 80.66 33.04 Consolidated 2017 $’000 2,007 3,356 - 2016 $’000 2,591 6,144 - 5,363 8,735 Company 2016 $’000 2017 $’000 - - - - - - - - • • • ClearView Group’s offices in various locations. Under these arrangements ClearView generally pays rent on a periodic basis at rates agreed at the inception of the lease; Tools of trade cars utilised by employees in the performance of their work responsibilities. The Group does not have an option to purchase the leased assets at expiry of the leases; and Printers and copiers utilised in the business. The Group does not have an option to purchase the leased assets at expiry of the leases. 144 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued36. Leases continued In respect of non-cancellable operating leases the following liabilities have been recognised: Make good provision (note 23) Current Non-current Total Consolidated 2017 $’000 2016 $’000 2017 $’000 Company 2016 $’000 109 310 419 37 233 270 - - - - - - 37. Contingent liabilities and contingent assets There are outstanding claims and potential claims against the ClearView Group in the ordinary course of business. The ClearView group does not consider the outcome of any such claims known to exist at the date of this report, either individually or in aggregate is likely to have a material effect on its operations or financial position. The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. less than the cost to the Group. Due to the uncertainty of these circumstances arising no value can be reliably placed on the contingent liability. The Company in the ordinary course of business has guaranteed the obligations of one of its subsidiaries in respect of its obligations for leasehold premises. The Company has guaranteed the obligations of one of its subsidiaries in respect of employee entitlements of employees who were previously employed by MBF Holding Pty Limited (Bupa Australia). Certain subsidiaries act as trustee for various trusts. In this capacity, the subsidiaries are liable for the debts of the trusts and are entitled to be indemnified out of the trust’s assets for all liabilities incurred on behalf of the trusts. In the ordinary course of business, certain ClearView subsidiaries enter into various types of investment contracts that can give rise to contingent liabilities. It is not expected that any significant liability will arise from these transactions as any losses or gains are offset by corresponding gains or losses on the underlying exposure. The Group has contractual agreements with a limited number of advisers to purchase the adviser’s business should the adviser want to sell their business and on the satisfaction of certain criteria. The terms and conditions provide that on the satisfaction of specific requirements, the adviser’s book of business will be purchased for a price based on the adviser’s recurring income stream from the Group. It is anticipated that one or more advisers may initiate the purchase of their book of business in the coming financial year at a price that is not yet determined and that includes deferred uncertain components. It is possible that the market value or resale value of such a business purchased may be The Board had previously announced that it had considered several alternatives in relation to its major shareholder, Crescent Capital Partners and its Associates (Crescent) selling down its 52.9% shareholding. This process resulted in Sony Life Insurance Co., Ltd (Sony Life) becoming a new strategic shareholder in October 2016 following their agreement with Crescent to acquire a 14.9% stake in ClearView. The Board has appointed Morgan Stanley Australia Securities Limited (Morgan Stanley) to assist in evaluating any strategic options and potential future proposals in relation to a change in control. Under the terms of the engagement with Morgan Stanley, there are a range of circumstances and related outcomes that may result in a success fee being payable to Morgan Stanley by the Company. Due to the uncertainty of these circumstances arising no value can be reliably placed on the existing liability at the date of this report. Other than the above, the Directors are not aware of any other contingent liabilities in the Group at the year end. ClearView Annual Report 2017 145 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued38. Capital commitments The Group has committed to the following capital commitments subsequent to the year end. Technology projects Total Consolidated Company 2017 $’000 385 385 2016 $’000 1,360 1,360 2017 $’000 - - 2016 $’000 - - 39. Guarantees The facility entered into with the Commonwealth Bank of Australia is guaranteed jointly and severally by: • ClearView Wealth Limited • ClearView Group Holdings Pty Limited ACN 106 248 248 ACN 107 325 388 • ClearView Administration Services Pty Limited ACN 135 601 875 • ClearView Financial Management Limited* • Matrix Planning Solutions Limited* • ClearView Financial Advice Pty Ltd* ACN 067 544 549 ACN 087 470 200 ACN 133 593 012 *These entities provide a limited guarantee. The recovery granted from the guarantee is limited to the extent that it does not result in the entities breaching their Australian Financial Services Licence conditions. The guarantees are supported by collateral (in the form of the shares) of the entities. 40. Subsequent events Dividends On 24 August 2017, the Group proposed a final dividend of $18.14 million representing 2.75 cents per share fully franked. The record date for determining entitlement to the dividend is 13 September 2017 and the dividend will be paid on 29 September 2017. Since the dividend has not been declared at year end it has not been recognised as payable in these accounts. Debt facility agreement On 25 July 2017 the Company entered into a $60 million facility agreement with National Australia Bank. As at the date of this Annual Report the facility is unused and available for immediate use. Interest on the loan accrues at BBSY plus a margin of 0.67% per annum, and is payable quarterly. Furthermore, a line fee of 0.65% per annum is payable on the facility on a quarterly basis. The facility is secured by the following cross guarantees • ClearView Group Holdings Pty Limited ACN 107 325 388 • ClearView Administration Services Pty Limited ACN 135 601 875 • ClearView Financial Management Limited ACN 067 544 549 • Matrix Planning Solutions Limited • ClearView Financial Advice Pty Ltd ACN 087 470 200 ACN 133 593 012 The Directors are not aware of any other matter or circumstance not otherwise dealt with in this report or the financial statements that has significantly, or may significantly; affect the operations of the Group, the results of those operations or the state of the affairs of the Group in future financial years. 146 ClearView Annual Report 2017 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017Continued The Directors declare that: (a) In the Directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; (b) In the Directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including the compliance with accounting standards and giving a true and fair view of the financial position and the performance of the Company and the consolidated entity; (c) In the Directors’ opinion, the financial statements and notes thereto are in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board as disclosed in Note 3; and (d) The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of the Directors made pursuant to section 295(5) of the Corporations Act 2001. On behalf of the Directors Mr Bruce Edwards Chairman 24 August 2017 ClearView Annual Report 2017 147 ClearView Wealth LimitedNotes to the Financial StatementsFor the year ended 30 June 2017ContinuedDeloitte Touche Tohmatsu A.B.N. 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au Independent Auditor’s Report to the members of ClearView Wealth Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of ClearView Wealth Limited (the “Company”) and its subsidiaries (the “Group”) which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the company and Group’s financial position as at 30 June 2017 and of their financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. further described We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited. 148 ClearView Annual Report 2017 ClearView Wealth LimitedIndependent Auditor’s Report Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter How the scope of our audit responded to the Key Audit Matter Actuarial Valuations As at 30 June 2017 the Group’s life insurance policy liabilities are $(207.6) million calculated on the basis of recognised actuarial methods and assumptions, as disclosed in note 4. Significant management judgement is involved, including assumptions that have been identified as having high estimation uncertainty and include:  Appropriateness of assumptions used in valuations, especially in respect of ClearView experience vs market experience;  Accuracy of the expense allocation basis and its impact on the policy liability;  Basis of determination of the Best Estimate Liabilities and Liabilities Profit the policy components liabilities; Margin of  Allowances for discretions; and  Quality of data used for the valuation. Valuation of Intangibles As at 30 June 2017 the Groups carrying amount of intangible assets and goodwill was $44.7 million as disclosed in note 4. The intangible assets are allocated to three cash- generating units (CGUs) which are tested separately for impairment. The Entity performs an Embedded Value (EV) calculation to support its impairment analysis. As a result of the In conjunction with our actuarial specialists our procedures included, but were not limited to: • Assessing the valuation methodology, valuation process and the valuation model to ensure compliance with APRA’s Life Prudential Standard 340, “Valuation of Policy Liabilities”; • Validating the assumptions used by management (including interest rates, lapse rates, mortality, morbidity and expense ratios); • Comparing model outputs to results of experience studies for reasonableness; • Evaluating the appropriate technical review, peer review; • Assessing a sample of valuation calculations for reasonableness; • Assessing management’s expense allocation basis, including the allocation to statutory funds and determination of policy liability; • Challenging the appropriateness of management’s selection of profit carriers and product groupings in respect of the policy liabilities; and • Assessing the appropriateness of the disclosures in note 25 to the financial statements. In conjunction with our valuation specialists our procedures included, but were not limited to: • Assessing the methodology used by management; • Evaluating their documented basis for key assumptions used in the EV calculation; ClearView Annual Report 2017 149 ClearView Wealth LimitedIndependent Auditor’s Report acquisition of Matrix, management are also leveraging the use of the EV to support the carrying value of goodwill and intangibles. The evaluation of the recoverable amount of the intangible assets requires significant judgement in determining the key assumptions supporting the expected future cash flows of the business. The key assumptions include:  Life insurance intangible: morbidity/ mortality rates, lapse rates, rates, discount maintenance costs; and and  Wealth management intangible: financial planning investment returns, lapse rates and maintenance costs. • Reviewing management’s assessment of indicators of impairment by: • • • • • • • to plans, Challenging the identification of the CGU’s; Comparing assumptions used in historical the model future business performance, strategy the and assumptions used in the policy liability calculation; Challenging the key assumptions utilised in the model including the revenue and expense growth rates and the discount rate by comparing them to corroborating support historical including results, economic and other forecasts; Performing a sensitivity analysis on to the key assumptions the assessment of support impairment indicators and its impact on the headroom in the EV; Testing on a sample basis the mathematical accuracy of the discounted cash flow model, agreeing budgeted cash flows to the latest Board approved budget and assessing the performance against budget/forecasts in prior periods; Assessing the assumptions for the Value of New Business (‘VNB’) factors supporting the goodwill impairment analysis; and Assessing the appropriateness of the disclosures in notes 19 and 20 to the financial statements. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2017, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 150 ClearView Annual Report 2017 ClearView Wealth LimitedIndependent Auditor’s Report Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.  Conclude on the appropriateness of the director’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. ClearView Annual Report 2017 151 ClearView Wealth LimitedIndependent Auditor’s Report  Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in page 48 to 64 of the Directors’ Report for the year ended 30 June 2017. In our opinion, the Remuneration Report of ClearView Wealth Limited, for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU Max Murray Partner Chartered Accountants Sydney, 24 August 2017 152 ClearView Annual Report 2017 ClearView Wealth LimitedIndependent Auditor’s Report Shareholders’ Information As at 04 August 2017 Substantial shareholders As at the date of this Annual Report, the following entities have notified ClearView that they hold a substantial holding in shares. Rank Name 1 2 3 CCP Bidco Pty Ltd and Associates1 Perpetual Corporate Trust Limited Sony Life Insurance Co., Ltd2 No. of shares as per notice % of issued capital 252,897,269 63,828,308 98,067,795 38.4% 9.7% 14.9% 1 2 Crescent Capital Partners Management Pty Limited represent the interests of CCP Bidco Pty Limited (CCP Bidco) and Perpetual Corporate Trust Limited (Perpetual) as manager. Perpetual’s 9.7% is therefore included in the 38.4% holding of CCP Bidco in the table above. Sony Life Insurance Co., Ltd’s (Sony Life) 14.9% shareholding is held through its custodian, HSBC Custody Nominees (Australia) Limited. Twenty largest shareholders (as at 04 August 2017) Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC Custody Nominees (Australia) Limited Perpetual Corporate Trust Limited Citicorp Nominees Pty Limited CCP Trusco 4 Pty Limited CCP Bidco Pty Ltd CCP Bidco Pty Limited CCP Trusco 5 Pty Limited CCP Trusco 1 Pty Limited BNP Paribas Noms Pty Ltd Portfolio Services Pty Ltd Pacific Custodians Pty Limited Perpetual Corporate Trust Ltd J P Morgan Nominees Australia Limited RBC Investor Services Australia Nominees Pty Ltd CCP Trusco 3 Pty Limited Mr Simon Swanson UBS Nominees Pty Ltd CCP Trusco 4 Pty Limited CCP Trusco 2 Pty Limited Salamanca Group Trust (Switzerland) SA No. of shares as per notice % of issued capital 130,265,304 19.75 48,631,777 32,337,594 31,657,567 30,300,523 24,541,899 22,440,451 20,671,919 20,100,002 17,945,796 15,432,642 15,196,532 13,915,895 11,954,858 11,812,524 10,000,000 10,000,000 9,892,405 9,843,771 8,235,295 7.37 4.90 4.80 4.59 3.72 3.40 3.13 3.05 2.72 2.34 2.30 2.11 1.81 1.79 1.52 1.52 1.50 1.49 1.25 ClearView Wealth Limited ClearView Wealth Limited ClearView Annual Report 2017 153 Shareholders’ Information As at 04 August 2017 Ordinary share capital There are 659,473,127 fully paid ordinary shares held by 1,910 shareholders. All the shares carry one vote per share. Distribution of shareholders The distribution of Shareholders as at 31 July 2017 is as follows: Range 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Total Unmarketable parcels Minimum $500.00 parcel at $1.4350 per unit Shares under voluntary escrow There are no shares subject to voluntary escrow as at 30 June 2017. Total holders 353 493 299 548 217 Units 143,598 1,414,522 2,261,631 16,755,299 638,898,077 1,910 659,473,127 % of issued capital 0.02 0.21 0.34 2.54 96.88 100.00 Minimum parcel size 349 Holders 168 Units 7,745 154 ClearView Annual Report 2017 ClearView Wealth Limited Auditors Deloitte Touche Tohmatsu Stock Listing ClearView Wealth Limited is listed on the Australian Securities Exchange (ASX) under the ASX code “CVW”. Annual Corporate Governance Statement The ClearView Annual Corporate Governance Statement may be viewed at www.clearview.com.au/about- clearview/corporate-governance Directory Current Directors Bruce Edwards (Chairman) Andrew Sneddon David Brown Gary Burg Michael Alscher Michael Lukin (Alternate to Mr Alscher) Nathanial Thomson Satoshi Wakuya Susan Young Simon Swanson Managing Director Simon Swanson Company Secretary Athol Chiert Appointed Actuary Ashutosh Bhalerao Chief Actuary and Risk Officer Greg Martin Registered Office and Contact Details Level 15, 20 Bond Street Sydney NSW 2000 GPO Box 4232 Sydney NSW 2001 Telephone: +61 2 8095 1300 Facsimile: +61 2 9233 1960 Email: ir@clearview.com.au Website: www.clearview.com.au Share Registry For all enquiries relating to shareholdings, dividends and related matters, please contact the share registry: Computershare Investor Services Pty Limited Level 4, 60 Carrington Street Sydney NSW 2000 GPO Box 2975 Melbourne VIC 3001 Telephone: 1300 850 505 +61 3 9415 4000 Facsimile: +61 3 9473 2500 www.computershare.com.au ClearView Wealth Limited ClearView Annual Report 2017 155 ClearView Wealth Limited ABN 83 106 248 248 www.clearview.com.au ASX code CVW CVM_0630 08/17

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