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2023 ReportClearView results FY18 v FY17 5% Advised sales $42.4m including $33.8m from IFA chanel APLS 419 22% $26.1m UNPAT 5% $32.4m Underlying NPAT $701m Embedded value 7% 6% $5.2m UNPAT 31% $2.79b FUM 12% $207m Net inflows $1.8m UNPAT 20% $270m Premiums under advice $9.6b FUMA 233 Financial advisers Life InsuranceWealth ManagementGroupFinancial Advice Contents Section Page Financial highlights FY18 results summary Chairman’s address 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 4 5 6 8 11 19 57 75 76 151 152 157 159 Financial calendar FY18 dividend payment 28 September 2018 Annual General Meeting 8 November 2018 Half year end 31 December 2018 Half year result announcement February 2019 Year end 30 June 2019 Annual Report August 2019 Dates are subject to change. CLEARVIEW WEALTH LIMITED | 3 2018 Financial highlights After tax profit by segment, $m Life Insurance Wealth Management Financial Advice Listed entity and other Underlying NPAT2 Other adjustments3 NPATA4 Amortisation5 Reported NPAT6 Embedded value7 Value of new business8 Net asset value9 Reported diluted EPS (cps)10 Underlying diluted EPS (cps)10 DPS (cps)11 FY18 26.1 5.2 1.8 (0.7) 32.4 (1.8) 30.6 (4.0) 26.6 701.1 12.0 444.3 4.14 5.03 3.00 FY17 % change1 24.9 3.9 2.2 (0.7) 30.4 (9.0) 21.4 (8.2) 13.2 661.9 16.7 415.6 2.11 4.88 2.75 5% 31% (20%) NM 7% Large 43% Large 102% 6% (28%) 7% 95% 3% 9% Underlying NPAT1 ($m) Fully diluted Underlying EPS and DPS7 (cps) $m 35 30 25 20 15 10 5 0 32.4 17.1 30.4 15.2 27.2 13.8 19.7 20.5 10.6 10.6 9.1 9.9 13.4 15.2 15.3 FY14 FY15 FY16 FY17 FY18 1H 2H 6 5 4 3 2 1 0 Impact of FY16 $50m capital raising Impact of FY14 $45m capital raising 4.92 4.88 5.03 4.41 3.85 2.0 2.1 (0.5) 2.5 2.75 3.0 FY14 FY15 FY16 FY17 FY18 EPS DPS 1. % movement, FY17 to FY18 unless otherwise stated. 2. 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. Other adjustments include costs considered unusual to normal activities (includes $0.8m strategic review costs) and changes in long term discount rates used to determine the insurance policy liabilities ($5.0m ‘swing’ between periods). 3. 4. NPATA is reported net profit after tax adjusted to exclude the non-cash amortisation of acquired intangibles (not including capitalised software). 5. Amortisation is amortisation of acquired intangibles (not including depreciation and amortisation of software). 6. Reported NPAT of $26.6m, up 102%, impacted by changes in long term discount rates used to determine the insurance policy liabilities ($5.0m ‘swing’ between periods); represents a non-cash timing difference in the release of profit over time and has no impact on underlying earnings. Embedded Value at 4% discount rate margin, including a value for future franking credits, accrued franking credits and Employee Share Plan (ESP) loans. Value of New Business (VNB) at 4% discount rate margin. Adversely impacted in 2H by the hybrid commission model under the LIF reforms (noting VNB will improve as the commission cap reduces from 80% to 60% over the next few years). Net Asset Value as at 30 June 2018 excluding ESP Loans; % movement FY17 to FY18. 9. 10. Adversely impacted by the dilutive effect of shares issued under the DRP, ESP shares vested/forfeited during the period partially offset by a decrease in the 7. 8. number of ESP shares ‘in the money’ given the decrease in ClearView’s share price period on period. 11. DPS is dividend per share. 4 | CLEARVIEW ANNUAL REPORT 2018 FY18 Results summary Growth in distribution footprint broadening out via the IFA market Active Life APLs with ClearView products Active Wealth APLs with ClearView products Aligned financial advisers 450 400 350 300 250 200 150 100 50 0 419 343 256 191 119 FY14 FY15 FY16 FY17 FY18 45 36 27 18 9 0 44 30 9 5 1 1 235 243 233 89 91 99 221 82 245 210 175 140 $m 117 105 70 35 0 127 138 143 125 98 19 FY14 12 FY15 8 FY16 9 FY17 9 FY18 FY14 FY15 FY16 FY17 FY18 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 $m 50 40 30 20 10 0 40.3 42.4 34.6 27.5 23.6 FY14 FY15 FY16 FY17 FY18 $m 350 300 250 200 150 100 50 0 335 353 333 275 153 FY14 FY15 FY16 FY17 FY18 $m 45 40 35 30 25 20 15 10 5 0 42.4 42.3 5% 80% 68% 39.2 12% 55% 34.5 20% 42% 27.4 14% 38% 48% 38% 33% 27% 20% FY14 FY15 FY16 FY17 FY18 Aligned IFA Direct 2.2 2.2 Growth in the in-force base underpinning growth profile Life in-force premium4 Wealth Management FUM3 Embedded Value ($M)5 240 200 160 $m 120 80 87.5 45.2 40 5.6 36.7 115.7 71.0 9.6 35.1 224.8 184.2 189.5 146.1 150.7 105.7 10.9 34.1 10.7 32.7 9.6 30.9 0 FY14 FY15 FY16 FY17 FY18 Old Book Direct LifeSolutions 3.0 2.5 2.0 $b 1.5 1.0 0.5 0.0 2.50 0.06 0.12 0.30 2.13 1.90 0.11 0.61 0.20 0.80 1.08 2.79 0.19 0.41 1.29 1.18 1.07 1.00 0.90 1.66 0.41 1.25 FY14 FY15 FY16 FY17 FY18 Old Book WealthSolutions WealthFoundations External Platforms 700 600 500 400 300 200 100 0 624 92 40 662 104 37 492 522 701 112 32 557 494 69 36 389 445 57 29 359 FY14 FY15 FY16 FY17 FY18 Embedded Value ESP Loans Franking Credits 2.2 2.2 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. 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 Employee Share Plan (ESP) loans. CLEARVIEW WEALTH LIMITED | 5 Chairman’s address To our customers and shareholders: Some benefits can already be seen. For example, from the launch of the revamped AQUA life insurance platform in January to the end of May, 805 health and lifestyle questionnaires had been completed over the phone, making it faster and more convenient for customers to apply for, and secure, cover. This tele-interview service and other AQUA features, including enhanced eQuote and eApplication functionality, are reducing the administration burden on financial advisers. In April we merged all our wealth business on to a single platform so we are now in the enviable position of having one platform for all our wealth business, one platform for all our life insurance business and one platform for all our advice business. This simplifies future product development. Financial results In FY18, ClearView’s management team and employees continued to execute the company’s strategic plan, leading to a solid full year result notwithstanding some claims and lapse volatility. Underlying Net Profit After Tax (NPAT), the Board’s key measure of Group profitability and also used for dividend payment decisions, increased 7% to $32.4 million (FY17: $30.4 million). The 2H Underlying NPAT increased 12% to $17.2 million, reflecting the strong fundamentals in the underlying operating businesses and further emergence of sustainable growth, offset by the adverse claims and lapse experience. The Embedded Value (EV) has increased by 6% to $701 million or $1.05 per share (including ESP loans and franking credits). The EV was negatively impacted in FY18 by the claims and lapse experience. The FY18 result reflects material growth in funds under management (FUM) and inforce premium, underpinning ClearView’s future prospects. In the last financial year, ClearView’s management team and staff continued to execute the company’s strategic plan, despite the uncertainty around the group’s ownership. Both ClearView and Sony Life enjoyed some early benefits from our Cooperation Agreement which was in place for most of 2017/18, however, we concurrently pursued other strategies to position ClearView for the next phase of growth. The financial services industry is experiencing revolutionary change and this creates both opportunities and challenges. ClearView is able to respond quickly because it does not have a substantial legacy portfolio and because it has built strong relationships with financial advisers. Looking ahead we see opportunities to build on current products and existing relationships. We continue investing heavily in technology to facilitate these opportunities. Two areas of focus include: • • Strengthening our ties with independent financial advisers by offering them access to our excellent licensee support services. This will provide the scale to enable us to further enhance our dealer services for the benefit of existing and new users; and Leveraging the convergence of life insurance and wealth management through the release of significant product enhancements. You will hear more on these initiatives over the next twelve months. Technology investment ClearView sharpened its focus on driving efficiencies across the business in 2018 by simplifying and streamlining processes, consolidating technology platforms and increasing automation. This strategy supports our mission to partner with financial advisers to help more Australians grow and protect their wealth. It positions ClearView for future growth with the ability to scale up and meet the increasing demands and expectations of advisers and their clients. 6 | CLEARVIEW ANNUAL REPORT 2018 Bruce Edwards Chairman CHAIRMAN’S REPORT (CONTINUED) Dividends and capital The Board has declared a fully franked final dividend of 3 cents per share for FY18 up 9% on FY17. This reflects a full year 2018 dividend payout ratio of just over 60% of underlying NPAT and is in line with the company’s dividend policy. Shares under the Dividend Reinvestment Plan (DRP) will be issued at a fixed price of $1.05, consistent with ClearView’s DRP rules, and represents a 9% discount of the 90 day volume weighted average price of $1.14.1 Substantial shareholders have committed to participate in the DRP at a fixed price of $1.05 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%). As at 30 June 2018, the Group held $14.7 million of capital reserves above our internal benchmarks. ClearView is fully-capitalised with Common Equity Tier 1 capital to fund its current business plans and anticipated medium-term growth. Industry and regulatory changes The past year has been characterised by an extraordinary level of merger, demerger and acquisition activity, intense media scrutiny and ongoing digital disruption, against the backdrop of the current Royal Commission. On 1 January 2018, the Life Insurance Framework (LIF) legislation came into effect, with changes to life insurance commission payments and advisers’ remuneration being progressively implemented over the next two years. A key objective of LIF is to ensure better consumer outcomes. As such, ClearView is working hard to enhance its products and services, and maintain effective systems and processes, to deliver an excellent customer experience. The industry is also currently preparing for the introduction of higher professional education and training standards as well as significant superannuation changes. I am proud of the way the management team has remained focused on core business activities despite all of the distractions. Sony Life During the year, ClearView terminated its Cooperation Agreement with Sony Life. This decision was made by the Board acting in the best interests of the company, after Sony Life failed to make a takeover offer for ClearView by the April 1 As at 17 August 2018 25 option deadline, under the terms of its arrangement with Crescent Capital. Despite the end of our Cooperation Agreement, Sony Life remains a committed shareholder in ClearView, noting that under the terms of the Option Agreement entered into with Crescent Capital they are not permitted to dispose of their shareholding. Their participation in the DRP is testament to their commitment to their shareholding in ClearView. Acknowledgements On behalf of the Board, I would like to acknowledge Simon and his team for their hard work and contribution to ClearView’s strong FY18 result. I would also like to thank our customers, financial advice partners and shareholders for their ongoing support. Personally, I would like to recognise my fellow Directors for their counsel and support throughout the year. Bruce Edwards Chairman CLEARVIEW WEALTH LIMITED | 7 To our shareholders, customers and advisers: ClearView passed a number of important milestones this year. We continued to serve customers in partnership with financial advisers, grew funds under management by $295 million and paid around $94 million in claim entitlements. Our flagship LifeSolutions product is on 419 Approved Product Lists (APLs) and our wealth management solutions are on 44 APLs. This year, a key focus for the business was streamlining systems and processes, and ensuring the right product mix. As a company, we are committed to only manufacturing and distributing products that represent a fair deal for customers and shareholders. With fairness as our guide, we don’t offer products with a low pay-out ratio such as funeral insurance or consumer credit insurance. On the systems and technology front, significant enhancements to our life insurance platform, AQUA, were rolled out in January including an intuitive new-look front- end and integrated quote and application tools to fast-track the LifeSolutions application process and implement Tele- Underwriting and Tele-Interviewing. The AQUA upgrade, which formed part of a broader ongoing technology program, has resulted in more than 40 tele- interviews conducted per week and a 30 per cent reduction in paper applications. In April, we completed our multi-year Wealth Migration program on schedule. This transition united all of ClearView’s wealth customers on a single, scalable platform, providing richer online functionality, greater investment choice and the option to self-service. The success of AQUA and the Wealth Migration program position ClearView strongly for future growth with further developments in the pipeline. To ensure all our projects align with the company’s broader strategic goals and priorities, this year ClearView established a formal prioritisation committee to determine the most effective use of resources. This committee, which I chair, is responsible for ensuring our resources are directed to projects that will drive our long-term profitability. 8 | CLEARVIEW ANNUAL REPORT 2018 Big four inquiries The financial services industry is at a 20-year inflection point. As the subject of ongoing reform for many decades the industry has almost become numb to regulatory change but the current level of scrutiny is not normal. It is extremely unusual. This unparalleled regulatory activity will most certainty lead to once in a generation change and it’s being driven by four landmark inquiries and reports: • • • • Banking and Financial Services Royal Commission Parliamentary Joint Committee (PJC) Report on the life insurance industry Superannuation Productivity Commission APRA Prudential Inquiry into the Commonwealth Bank of Australia The financial services industry is currently adjusting to increasing disintermediation as the financial link between product manufacturers and financial advisers is eroded with commissions on investment and superannuation products banned, life insurance commissions ratcheting down and pressure for grandfathered rebates and other sales incentives to go. Yet product manufacturers still need to support financial advisers to run more efficient businesses and see more clients, as a vibrant advice industry is in the nation’s best interests. Our focus remains on partnering with financial advisers to help more Australians grow and protect their wealth and achieve their goals. We are committed to helping advisers adapt to change, achieve efficiency gains in their practices and identify trends and opportunities. Changing economic conditions An emerging trend throughout Australia is poor job security and the casualisation of the workforce. Part-time workers now account for 1 in 3 workers, up 2 per cent since 2012, while the under-employment rate has risen to 9.1% over the same period, according to the Australia Institute. Simon Swanson Managing DirectorManaging Director’s report The report, which tracked and benchmarked the journey of around 500 income protection, trauma and total and permanent disablement (TPD) claims customers, found ClearView delivers a superior customer experience, particularly in application and assessment speed, accurate and timely payment, and clear communications. In terms of claims staff, the report commended ClearView for being a “standout” company with a “high-performing culture”. Customers described the team as responsive, knowledgeable and easy to deal with. MANAGING DIRECTOR’S REPORT (CONTINUED) This development has the potential to derail the retirement dreams of many Australians. Furthermore, young people joining the workforce today are likely to change careers multiple times, yet the current superannuation system was designed at a time when workers often had full-time employment in a single industry, if not for a single employer, for their whole lives. The changing nature of work highlights the enormous need for Australians to plan ahead and seek professional advice to protect and grow their wealth for the future. This will also require companies like ClearView to adapt both their product and services to this changing environment. Corporate culture In light of current regulatory activity, I would like to touch briefly on corporate culture. The ‘Big four’ inquiries have been a public relations disaster for the banking and financial services sector, showing the need for sensible reform to better protect consumers. All claims 100 90 80 70 93.1 75.5 Oct 2017 Apr 2018 It has also highlighted the importance of culture. Apr 2017 A strong, positive culture that champions the client and strives for continuous improvement is a great asset that drives performance. But poor culture destroys brands, relationships and businesses. ClearView Industry Top company Licensee of the Year Award Matrix Planning Solutions was named the 2018 Licensee of the Year by data insights company, CoreData Research, with As a relatively young company, ClearView has had a unique ClearView Financial Advice also performing strongly. opportunity to build and nurture a dynamic, innovative culture - backed by a recruitment policy that is set on attracting skilful, highly-motivated people with a growth mindset. Similarly, in our advice business, the focus is on building a network of passionate like-minded professionals who are committed to providing quality advice in the best interest of clients. In the past eight years, ClearView has grown rapidly to This is the second year in a row that Matrix has received this Award, which recognises excellence in licensee services based on responses from around 1,500 advisers across the industry. CoreData cited the Dealer Group’s unified and stable culture as a key point of difference that allowed advisers to flourish in the midst of regulatory change and disruption. employ 333 staff. The Dealer Group partners with 233 No. 1 in overall adviser satisfaction aligned financial advisers. ClearView received the highest overall adviser satisfaction According to our latest employee engagement survey, rating in the 2018 Investment Trends Planner Risk Report for conducted in June, our employees strongly support the clear the second consecutive year. set of values in place at ClearView. Our people are energised by our customer focus, capacity for change and market ClearView was also ranked first in six out of 12 categories including underwriting, brand/reputation, BDM support and disruptor strategy. product. Our internal research is validated and supported by external research. No. 1 in claims customer satisfaction ClearView achieved the highest overall client satisfaction rating for claims management in Beddoes Institute’s May 2018 Claims Journey Study Report; a considerable improvement on our already strong performance in 2017. Strategic opportunities At ClearView, we are not afraid to try new things. Acquiring established licensee Matrix in 2014 was a calculated risk which has been highly successful and rewarding. Despite thorough due diligence, there is always a chance with any merger that there’ll be a cultural mismatch and quality practices will leave. CLEARVIEW WEALTH LIMITED | 9 MANAGING DIRECTOR’S REPORT (CONTINUED) It is extremely pleasing that almost four years after the platform rebates to remove any incentive to keep clients Matrix deal not a single original practice has left to join in legacy products; and another licensee. In 2018/19, ClearView will continue exploring and capitalising on growth opportunities, including: 1. Self-licensing trend and demand for licensee support ClearView will launch a Dealer-to-Dealer (D2D) offering in the first half of 2018/19 to provide a range of services such as audits and compliance, investment research, technology and ongoing training and professional development, to the growing number of advice firms that hold their own AFSL. The D2D unit will also provide specialist assistance to aligned advisers who want to gain their own AFSL. • Australian Financial Services Licensing (AFSL) reforms. ClearView has consistently engaged key policy makers for sensible customer-centric reforms. We are pleased that our advocacy efforts have contributed to positive changes including to group life insurance introduced in the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018. Outlook Unfortunately, Sony Life – which acquired a 14.9 per cent stake in ClearView from Crescent Capital Partners in 2016 - was unable to make a takeover bid for ClearView by the April 25 option deadline, however, Sony Life remains a committed 2. Rise of non-institutional platforms and managed strategic shareholder. accounts Independently-owned platform providers continue to grab the lion’s share of platform inflows and take market share from the institutional incumbents, with Strategic Insights listing Hub24, Netwealth and ClearView as the three fastest Looking forward, we know that a key measure of our success will be the customer and shareholder value we create over the long term. This value will be a result of our ability to execute our strategy and meet our medium-to-long term goals. growing superannuation and investment administration I am extremely proud of what ClearView has achieved in the past year and I’m excited about the future. Our strong performance in FY18 is a reflection of the quality of our people, strategy, priorities and processes. Simon Swanson Managing Director providers^. Our WealthFoundations and WealthSolutions platforms, which feature a range of internally-managed model portfolios/managed accounts, are currently supported by a small but growing number of boutique AFSLs in addition to our aligned dealer group. Furthermore, ClearView managed accounts are now on a small number of external platforms including Hub24. 3. LifeSolutions upgrade The intended upgrade of our flagship LifeSolutions product series in the first half of FY19 will include a raft of enhancements. These include a market first Relapse Benefit feature along with redefining several income protection definitions to remove the barriers of customers returning to work. It also includes a full review of medical definitions and continues ClearView’s tradition of adding significant value to customers and making it easier to do business with ClearView. 4. Promoting sensible financial services reform ClearView continues to advocate for sensible public policy, particularly in relation to: • Unrestricted life insurance APLs; • Extending the opt-in requirements for group life insurance inside superannuation to all fund members; • The introduction of a cut-off date for grandfathered 10 | CLEARVIEW ANNUAL REPORT 2018 Directors’ 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 2018 (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 (Resigned as Director on 1 March 2018) • David Brown • Gary Burg • Michael Alscher (Resigned as Director and appointed as Alternate to Mr Thomson on 1 March 2018) • Michael Lukin (Alternate to Mr Alscher until revocation on 1 March 2018) • Nathanial Thomson • • • Satoshi Wakuya Simon Swanson (Managing Director) Susan Young 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. 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 recently stepped down from being a Director of the PNG Institute of Directors. He is 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. CLEARVIEW WEALTH LIMITED | 11 Gary Burg B.ACC (Wits), MBA (Wits) Michael Alscher BCom Independent non-executive Director Alternate 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 (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 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, Australian Clinical Laboratories Pty Limited, National Media Services Group Pty Limited and National Dental Care Pty Limited. He is also a former Chairman and Director of Cover-More Group Limited and LifeHealthCare Group Limited and a former Director of 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 until 1 March 2018. Michael has since then been appointed as Alternate Director to Nathanial Thomson effective 1 March 2018. Nathanial Thomson BCom (Hons), LLB (Hons) Satoshi Wakuya Bachelor of Liberal Arts Non-executive Director 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, Australian Clinical Labs 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 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. 12 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) 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. 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 a Governor of WWF Australia. She has served as a non-executive Director on ClearView’s superannuation trustee board over the last 7 years, including holding the position as its Chairperson for two years. Susan was appointed to the Board on 14 December 2016 and is a member of each of the Board Committees. She was appointed Chairperson of the Nomination and Remuneration Committee and Board Risk and Compliance Committee on 1 July 2017, and Chairperson of the Board Audit Committee on 25 August 2017. CLEARVIEW WEALTH LIMITED | 13 DIRECTORS’ REPORT (CONTINUED) Former Directors Andrew Sneddon BEC, CA Michael Lukin BSc (AppMaths) (Hons), CFA, AIAA Former independent non-executive Director Former alternate 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 was the former Chairman of TGR BioSciences Pty Limited, Elastagen Pty Limited, Traditional Therapy Clinics Limited, Fusion Payments Limited and ServiceRocket Inc. Andrew was also the former non-executive Director of Innate Immunotherapeutics Limited. Andrew was a member and Chairperson of the Board Audit Committee, Board Risk and Compliance Committee and the Nomination and Remuneration Committee during his tenure and resigned from the Board on 1 March 2018. Michael is the Managing Partner 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 served as Alternate Director to Jennifer Newmarch and Mr Alscher during his tenure and his appointment as Alternate Director to Mr Alscher was revoked on 1 March 2018. 14 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) 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 and was part of the team that founded ClearView in its current form. 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. Athol is a supporter and contributor to a number of not for profit organisations. Elizabeth Briggs, BMedia LLB was appointed Company Secretary on 4 April 2018. She is also the General Counsel of ClearView. Elizabeth has over 10 years’ experience working in financial services working across the life insurance, superannuation, wealth management and financial advice sectors. Elizabeth joined ClearView in 2012 and prior to this worked in funds management and in private practice. Her experience extends to advising multinational organisations across Europe and the United States. Elizabeth is a member of the Law Society of NSW and ASFA, a mentor of junior lawyers through the NSW Law Society and supporter and contributor to a number of not for profit organisations. Appointed Actuary of ClearView Life Assurance Limited Ashutosh Bhalerao B.Ec, FIAA is the Appointed Actuary of ClearView Life Assurance Limited (ClearView Life). Ashutosh joined ClearView as Deputy Appointed Actuary in January 2014 and was appointed to his current role on 5 June 2014. Ashutosh has over 20 years experience in the financial services industry, specialising in life insurance. In the five years prior to joining ClearView, Ashutosh was the Appointed Actuary for Swiss Re Life & Health Australia Limited. Ashutosh has also held other senior actuarial roles with TAL Limited, Challenger Limited and AMP Limited. He 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. CLEARVIEW WEALTH LIMITED | 15 DIRECTORS’ REPORT (CONTINUED) Directorships 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 Andrew Sneddon (Resigned 1 March 2018) Traditional Therapy Clinics Limited Innate Immunotherapeutics Limited Gary Burg UCW Limited Period of Directorship 24 February 2015 – 4 August 2016 19 September 2013 – 4 May 2018 24 March 2016 - current 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 Nathanial Thomson Cardno Limited Cardno Limited 6 November 2015 – current 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 2018, and the number of meetings attended by each Director are 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 8 4 8 8 4 8 8 8 8 8 3 6 8 4 8 7 8 8 5 4 5 5 - - - 5 - 5 3 3 5 - - - 5 - 4 3 4 4 - - - 4 - 4 2 2 4 - - - 4 - 4 3 - 4 - - 4 - 4 2 - 4 - - 4 - Bruce Edwards Andrew Sneddon1 David Brown Gary Burg Michael Alscher2, 3 Nathanial Thomson Satoshi Wakuya Susan Young Simon Swanson 1 Mr Sneddon resigned as a non-executive director effective 1 March 2018. 2 Mr Alscher resigned as non-executive director effective 1 March 2018 and his attendance as non-executive director has been included in the table above. Mr Alscher was appointed as Alternate Director for Mr Thomson effective 1 March 2018 and he did not attend any meetings on behalf of Mr Thomson in the financial year. Mr Lukin’s appointment as Alternate Director for Mr Alscher was revoked effective 1 March 2018 and he did not attend any meetings on behalf of Mr Alscher in the financial year. 3 16 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Directors’ 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 Bruce Edwards David Brown Gary Burg Michael Alscher1 Nathanial Thomson1 Satoshi Wakuya2 Susan Young Simon Swanson Fully Paid Ordinary Shares Executive Share Plan Shares 599,900 - 10,918,090 - - - 80,783 4,639,019 - - - - - - - 10,000,000 1 Mr Alscher and Mr Thomson represent the interests of CCP Bidco Pty Limited and its Associates that non-beneficially hold 257,900,632 shares. 2 Mr Wakuya represents the interest of Sony Life Insurance Co., Ltd that hold 99,326,068 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 2018. Series Participant Grant date Opening balance (1 July 2017) Forfeited Exercised Closing balance (30 June 2018) No. of shares issued No. of shares forfeited/ exercised No. of shares total 56,207,077 - - (2,521,437) (2,521,437) (4,682,045) (4,682,045) - (7,203,482) 49,003,595 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 49,003,595 ESP shares on issue of which 23,522,207 have been issued to select financial advisers. No new shares were granted to financial advisers in the year ended 30 June 2018. During the financial year, 4,682,045 vested ESP shares were exercised with the outstanding ESP loan balance proceeds being received by the Company. During the financial year, the forfeited 2,521,437 ESP shares were sold via an off-market transfer with the full proceeds of the sale being received by the Company. CLEARVIEW WEALTH LIMITED | 17 DIRECTORS’ REPORT (CONTINUED) 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 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 75. 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. The 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. 18 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) 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 $16.2bn1 life (risk) insurance market, namely the $9.8bn1 individual risk market (excluding group life). ClearView has to date, chosen intentionally not to participate in the group life insurance market. 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, allowing us to focus on the advised life insurance market. 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. 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 233 financial advisers. In turn, they provide quality financial advice to retail clients. For the second year in a row, Matrix was named the 2018 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. 1 2 Plan for Life data as at 31 March 2018. ABS 5655.0 data as at March 2017 (unconsolidated). Retail segment based on management estimates. CLEARVIEW WEALTH LIMITED | 19 DIRECTORS’ REPORT (CONTINUED) Business strategy ClearView generates its revenue by manufacturing and distributing life insurance, superannuation and investment products, and providing licensing and support services to financial advisory practices. ClearView’s growth strategy is focused on building a quality life insurance, wealth management and financial advice business, to help customers manage, grow and protect their financial well being. Goals 5% of the long-term life insurance profit pool Building a material wealth management business Building a high quality financial advice business providing strategic advice to clients We will achieve our goals by providing advisers and the clients they serve with: • • • Fair products - for customers and shareholders; Personalised, efficient and effective service; and Strong and empathetic relationships. Our Strategy is focused on: Strategy Win market share within profitable niches by delivering innovative products and exceptional service. Expanding distribution presence Increase profitability Improve efficiency and reach Expand our distribution footprint in the IFA market Target profitable market segments with innovative products Enhance margins over time • • • • 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 • • 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 holistic advice and improved adviser business efficiency with the potential to provide back-end services in the dealer group market (D2D offering) • • • 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 1 Approved Product Lists. 20 | CLEARVIEW ANNUAL REPORT 2018 123DIRECTORS’ REPORT (CONTINUED) Group overview 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). Life insurance and superannuation regulatory changes Four major inquiries are driving unprecedented regulatory activity: • • • • Banking and Financial Services Royal Commission Parliamentary Joint Committee (PJC) Report on the life insurance industry Superannuation Productivity Commission APRA Prudential Inquiry into the Commonwealth Bank of Australia ClearView is supportive of any reform agenda designed to boost competition, drive efficiency and deliver improved consumer outcomes. We believe open Approved Product Lists (APLs) should be mandated as an important step to ensure conflicts of interest are properly managed. ClearView also fully supports changes to group life insurance inside superannuation contained in the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018. We believe that the reforms will help ensure young workers and those with low account balances don’t pay for cover they don’t want or need. However, we believe the reforms should be extended to require all members to consciously opt-in for group insurance. This would result in a substantial improvement in members understanding what they are and aren’t covered for, and lead to more Australians seeking professional advice, either via their super fund or a third party. CLEARVIEW WEALTH LIMITED | 21 Life InsuranceWealth ManagementFinancial AdviceClearView 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)ClearView Wealth Limited (NOHC)DIRECTORS’ REPORT (CONTINUED) ClearView also maintains that there are additional areas that need to be addressed to ensure good public policy outcomes, including: Competitive strengths Integrated business model As a relatively young diversified financial services company, with an integrated business structure that encompasses Life Insurance, Wealth Management and Financial Advice, ClearView is differentiated from other newcomers, the majority of whom focus on a single area. Strong IFA relationships ClearView has a sharp focus on the Independent Financial Adviser (IFA) market. It has developed strong IFA relationships by consistently delivering smart, customer- centric products and excellent service. Non-institutional ownership As dissatisfaction with, and distrust of, large financial institutions grows, consumers and financial advisers alike are increasingly seeking to form relationships with customer- centric non-bank organisations. ClearView is ideally-positioned to attract advisers and customers looking for objective service and advice. Nimble size and no material legacy issues ClearView stands to gain from market disruption, particularly around life insurance reforms with a stepped change in distribution profile expected to occur if institutionally- aligned licensees are forced to adopt open APLs and with the introduction of a ban on shelf-space fees. Furthermore, an extended period of consolidation in the Australian life insurance and wealth management industry, has created the need for a fresh, innovative entrant focused on servicing IFAs. Legacy issues such as multiple administration platforms; out-dated, expensive products; and older, higher margin in-force portfolios in run-off often stifle the ability of larger institutional competitors to innovate and adapt to change. This creates opportunities for ClearView given our relatively small size and differentiated business model with limited legacy issues. 1. Unrestricted life insurance APLs Good progress was made this year in relation to our advocacy efforts for open life insurance APLs. Open APLs must be mandated to give financial advisers the ability to recommend the most appropriate client solution, based on all life insurance products issued by APRA- regulated insurance companies. They are a first and important step for vertically-integrated financial services companies to manage conflicts of interest, better protect consumers and champion professional advice. 2. Sunset clause on grandfathered rebates ClearView has pushed for an end to grandfathered platform rebates, which still form a significant proportion of licensee remuneration and act as an incentive to keep clients in outdated platforms. While we supported the grandfathering relief contained in the Future of Financial Advice (FoFA) Act, we believe a deadline should have been applied. We believe this should be implemented by 2020 with a three-year sunset clause. 3. Higher education requirements ClearView broadly supports the Financial Adviser Standards and Ethics Authority’s (FASEA) higher education requirements. Greater guidance is still required in a number of areas including bridging courses, government traineeships and the professional year. 4. Life Code of Conduct More work must be done 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. 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 of the 30 June 2018 Annual Report. 22 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Awards ClearView was recognised by a number of leading research and ratings agencies in 2017/2018 including Canstar, Investment Trends, CoreData, Money Magazine, Dexx&r and Money Management. st1 st1 st1 Overall Adviser Satisfaction1 Australia’s leading Licensee2 Claims customer satisfaction3 AQUA Upgraded LifeSolutions eQuote and eApplication4 Highly rated WealthFoundations and WealthSolutions5 1 2 3 Investment Trends 2017 and 2018 Planner Risk Report. CoreData 2017 and 2018 Licensee Report. Rated Number 1 in claims customer satisfaction in the Beddoes Institute’s Industry Claims Journey Study which tracked the experience of 500 customers across the industry who have had an income protection, trauma or TPD claim. 4 AQUA launched in January 2018. 5 Chant West 2018 rating of 4 Apples for ClearView WealthFoundations Super and Pension, and ClearView WealthSolutions Super and Pension. A 4 Apples rating reflects a “high quality fund”. CLEARVIEW WEALTH LIMITED | 23 DIRECTORS’ REPORT (CONTINUED) FY18 Results overview Overview of result The ClearView Group achieved the following results for the year ended 30 June 2018: After tax profit by segment, $M Life Insurance Wealth Management Financial Advice Listed entity and other Underlying NPAT2 Other adjustments3 Reported NPAT4 Embedded Value5 Value of new business6 Net asset value7 Underlying diluted EPS (cps)8 DPS (cps)9 FY18 $M 26.1 5.2 1.8 (0.7) 32.4 (5.8) 26.6 FY17 $M 24.9 3.9 2.2 (0.7) 30.4 (17.2) 13.2 701.1 661.9 12.0 16.7 444.3 415.6 5.03 3.00 4.88 2.75 % change1 5% 31% (20%) 0% 7% 66% 102% 6% (28%) 7% 3% 9% Underlying NPAT, Reported NPAT, earnings per share (EPS) and dividends per share (DPS) Chart 1: Segment performance FY14-FY18 Life Insurance underlying NPAT ($m) Wealth Management underlying NPAT ($m) Financial Advice underlying NPAT ($m) Impacted by claims volatility and lapse experience - fit within assumptions in longer term 24.5 24.9 26.1 15.3 12.4 12.2 13.6 $m 10.8 8.0 6.1 4.7 7.3 12.1 12.7 12.5 FY14 FY15 FY16 FY17 FY18 Significant investment in contemporary platform and products n FY15 with growth now emerging 5.9 2.9 3.0 5.2 2.6 2.6 3.9 2.3 1.6 2.7 1.4 1.3 1.8 0.7 1.1 FY14 FY15 FY16 FY17 FY18 8 6 4 2 0 $m 30 25 20 15 10 5 0 Change in expense allocation basis, broadly neutral result period to period, adjusting for abnormal items 4.4 2.5 1.8 1.9 3.5 1.7 1.8 2.2 1.0 1.2 1.8 0.8 1.0 1.5 0.8 0.7 FY14 FY15 FY16 FY17 FY18 $m 5 4 3 2 1 0 1H 2H 1H 2H 1H 2H 1. % movement, FY17 to FY18 unless otherwise stated. 2. 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. Other adjustments include non-cash amortisation, costs considered unusual to normal activities (includes $0.8m strategic review costs) and changes in long term discount rates used to determine the insurance policy liabilities ($5.0m ‘swing’ between periods). Reported NPAT of $26.6m, up 102%, impacted by changes in long term discount rates used to determine the insurance policy liabilities ($5.0m ‘swing’ between periods); represents a non-cash timing difference in the release of profit over time and has no impact on underlying earnings. Embedded Value at 4% discount rate margin, including a value for future franking credits, accrued franking credits and Employee Share Plan (ESP) loans. Value of New Business (VNB) at 4% discount rate margin. Adversely impacted in 2H by the hybrid commission model under the LIF reforms (noting VNB will improve as the commission cap reduces from 80% to 60% over the next few years). Net Asset Value as at 30 June 2018 excluding ESP Loans. Adversely impacted by the dilutive effect of shares issued under the DRP, ESP shares vested/forfeited during the period partially offset by a decrease in the number of ESP shares ‘in the money’ given the decrease in ClearView’s share price period on period. 3. 4. 5. 6. 7. 8. 9. DPS is dividend per share. 24 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Chart 2: Underlying NPAT, EPS and DPS performance FY14-FY18 Underlying NPAT ($m) Fully diluted underlying EPS and DPS (cps) $m 35 30 25 20 15 10 5 0 32.4 17.1 30.4 15.2 27.2 13.8 19.7 20.5 10.6 10.6 9.1 9.9 13.4 15.2 15.3 FY14 FY15 FY16 FY17 FY18 1H 2H 6 5 4 3 2 1 0 Impact of FY16 $50m capital raising Impact of FY14 $45m capital raising 4.92 4.88 5.03 4.41 3.85 2.0 2.1 (0.5) 2.5 2.75 3.0 FY14 FY15 FY16 FY17 FY18 EPS DPS Underlying NPAT, the Board’s key measure of Group profitability and basis for dividend payment decisions increased 7% to $32.4 million (FY17: $30.4 million), 2H FY18 Underlying NPAT up 12% to $17.1 million (HY17:$15.2 million): • Life Insurance Underlying NPAT up 5% to $26.1 million (FY17: $24.9 million): • • • • In FY18, there was an adverse claims experience of $5.5 million (FY17: $1.9 million). Adopting a longer term view, overall net adverse claims performance is mainly attributed to the income protection (IP) portfolio, with the lump sum portfolio having a net neutral experience over the same five-year period. Claims assumptions have been updated for the IP portfolio at June 2018, with the expectation that overall claims performance will fit within best estimate claims assumptions (as at 30 June 2018) over the longer term. Due to the small size and nature of the portfolio, volatility has a material short-term impact on profitability. In FY18, there was an adverse lapse experience of $2.1 million (FY17: $2.0 million). LifeSolutions has been broadly neutral over a five-year period, with the more recent adverse experience driven by the LifeSolutions lump sum portfolio. The repositioning and repricing of the LifeSolutions lump sum product in 1H FY19, coupled with the impact of the life insurance (LIF) reforms, is expected to improve lapse performance so it is in line with best estimate lapse assumptions (as at 30 June 2018) over the longer term. Life Insurance remains the key profit driver. Our expanding distribution footprint and strong new business volumes led to a material increase in the in-force portfolio which underpins the growth profile. The in-force book has grown 19% in FY18 and LifeSolutions sales are up 5%. The IFA distribution footprint continues to expand, diversifying sales and creating embedded growth. • Wealth Management Underlying NPAT up 31% to $5.2 million (FY17: $3.9 million) • • • Wealth Management is a strong, net flow positive business with material growth in earnings. The business will continue to benefit from the shift away from larger institutions and banks, along with increasing demand for competitive investment administration platforms and products, albeit with some competitive pricing pressures in response to industry scrutiny. Growth in earnings follows material investment in the contemporary wealth platform and products in FY15. FUM increased 12% in FY18 with net flows of $333 million into new contemporary products (material relative to FUM). Material net flows will lead to comparable market share growth in FUM which is a key profit driver. • Financial Advice Underlying NPAT down 20% to $1.8 million (FY17: $2.2 million) • • Committed to building a high quality aligned advice business and assisting advisers run more efficient and profitable practices. Underlying NPAT is down 20%, but the prior year result includes the recovery of certain compliance costs incurred. Adjusting for this item recognised in FY17, Underlying NPAT has remained broadly neutral year-on-year. CLEARVIEW WEALTH LIMITED | 25 DIRECTORS’ REPORT (CONTINUED) ClearView has strong growth embedded in its expanding distribution footprint and product range – this underpins the growth profile: • • Maturation of existing Life Insurance approved product lists (APLs) and gaining access to new APLs. If the transition to open APLs occurs through regulatory change, the addressable market will expand materially for the LifeSolutions product; and Continued significant investment in building a wealth platform and products (since FY15), with the ability to leverage off the Life Insurance distribution network over time. Reported NPAT increased to $26.6 million (FY17: $13.2 million) and reported diluted EPS increased by 95% to 4.14 cps (FY17: 2.11 cps). Underlying NPAT increased to $32.4 million (FY17: $30.4 million) and fully diluted Underlying EPS increased by 3% to 5.03 cps (FY17: 4.88 cps). EPS calculations have been impacted by: • Growth in Underlying NPAT of 7%; • • Positive swing of $5.0 million (after-tax) from the impact of changes to the long-term discount rates on policy liabilities between periods; Reduction in amortisation of the intangibles associated with the acquisition of businesses from Bupa in 2010 given certain client books acquired have now been written off; • Reduction in the number of ESP shares given the decrease in ClearView’s share price since June 2017; and • Dilutive effect of shares issued under the DRP and ESP shares vested/forfeited during the period. The Board declared a fully franked FY18 dividend of $20.0 million (2017: $18.1 million). This equates to 3.00 cents per share (2017: 2.75 cents per share), representing just over 60% of 2018 UNPAT in line with the company’s dividend policy (+9% increase). Other adjustments and amortisation The following additional items impacted the statutory NPAT and comprised the reconciled items outlined in the following table. • • • Amortisation of intangibles ($4.0 million) is associated with the acquisition of wealth management and life insurance businesses from Bupa, ComCorp and Matrix Planning Solutions. These are reported separately 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 Underlying NPAT. 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 FY18 caused an adverse after-tax impact of -$0.9 million (FY17: -$5.9 million). Costs that are considered unusual to ClearView’s ordinary activities and therefore not reflected as part of Underlying NPAT predominantly include expenses incurred as ongoing costs associated with the Cooperation Agreement between ClearView and Sony Life. These costs are expected to cease from the end of July 2018, being the date of termination of the Cooperation Agreement. 26 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Operating expenses The chart below shows a 4% increase in the operating cost base from $77.1 million in FY17 to $80.2 million in FY18. Chart 3: Operating expense analysis FY17 vs FY18 cost base 2.4 0.9 0.5 1.7 1.4 80.2 (3.8) 77.1 75.5 100 80 60 40 20 $m 0 FY17 Cost Base Fu nctional costs Direct Life Distribution Financial A dvice Support Costs Projects & Softw are A m ortisation Shared Services/Listed FY18 Cost Base Key components of the movements include: • • • • • • Functional costs – costs increased in functional areas that support business growth including administration, the call centre, claims and underwriting. This reflects underlying volume growth in both new business and the in-force base. Direct Life Insurance exit – the closure of the direct business has reduced costs by $3.8 million vs the prior comparable period. This is driven by a reduction in the fixed cost base, coupled with the volume-based cost structure (call centre agents and related costs). Distribution costs – increased business development costs reflect a larger Life Insurance distribution presence to support the broader independent financial adviser (IFA) footprint. Investment in Wealth Management distribution to support business growth remains broadly consistent between periods. Financial Advice support costs – driven by the increase in operational and compliance head count, system costs and investment in strategic advice and dealer licensee services model, partially offset by lower conference costs. Dealer group overheads include staff, marketing, rent, professional indemnity insurance and shared services allocation. Project costs and software amortisation – software amortisation costs have increased as projects are delivered. For example, a project to migrate the Master Trust product onto a contemporary wealth platform was completed in 2H FY17. Cost benefits and efficiencies from the migration are expected to flow into FY19. 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 increased given higher investor relations costs incurred coupled with the allocation of insurance costs in FY18 to the listed segment. CLEARVIEW WEALTH LIMITED | 27 DIRECTORS’ REPORT (CONTINUED) The table below reconciles the operating expenses analysed in Chart 3 (page 27) with reported operating expenses in the annual financial statements. Reconciliation of operating expenses to reported operating expenses per financial statements Operating expenses per chart Custody and investment management expenses Depreciation and software amortisation Reinsurance technology costs Stamp duty Medical costs Interest expense Strategic review costs Direct closure provision Recoverable adviser related costs Other expenses on consolidation of unit trusts Operating expenses per financial statements Expense Overruns FY18 $M FY17 $M 80.2 9.5 (6.4) 77.1 8.1 (5.3) 0.5 8.8 2.1 0.4 1.1 - 3.6 1.9 1.2 6.7 1.7 0.3 1.0 3.4 1.8 1.6 101.7 97.6 ClearView has consistently invested in operations ahead of revenue to support growth. This includes prioritising incremental costs above those required for ClearView’s scale (expense overruns) to build capability for the future. In this context, initial start-up costs and business investment costs are being incurred prior to achieving scale. As ClearView continues to grow, the remaining expense overruns are likely to be absorbed. Expense overruns initially lower reported profits but this reverses as scale is achieved, the in-force portfolio increases and underlying profit is realised. In FY18, the non-deferred expense overruns across the Life Insurance and Wealth Management ‘manufacturing’ businesses had a negative impact on UNPAT of $2.5 million (FY17: $3.1 million). The movements between segments are shown in the corresponding graph. Chart 5: Non-deferred expense overruns FY15-FY18 10 8 6 9.1 5.2 4.5 $m 4 4.6 4.0 3.0 2.7 3.1 2.5 2 0 -2 1.2 0.4 (0.5) Life Insurance Wealth Management Total FY15 FY16 FY17 FY18 28 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) The increase in the Life Insurance in-force premium over time has progressively reduced expense overruns with the actual Life Insurance non-deferred overruns reflecting an experience profit of $0.5 million for the year. Investment in WealthFoundations and the contemporary wealth platform is however causing overruns in the Wealth Management segment. WealthSolutions continues to build scale (FUM +12%) with WealthFoundations now contributing to growth and development costs (FUM +37%). Expense overruns marginally increased in FY18 as a result of costs incurred on the Wealth migration project completed in 2H FY18. This situation should improve now that costs associated with the migration project have been incurred and the costs of the contemporary platform now being shared. A driver is also 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, this will impact expense overruns until WealthFoundations can support its cost base. The elimination of expense overruns along with achieving the business’ growth ambitions remains a key focus of management and the Board. CLEARVIEW WEALTH LIMITED | 29 DIRECTORS’ REPORT (CONTINUED) Operating segment review Life Insurance Approach ClearView set out to create a customer-focused business with a reputation for excellent customer service, innovative products and professional advisers. ClearView has built a firm foundation for ongoing growth in the advised life insurance market: • • LifeSolutions, launched in 2011, is ClearView’s core life insurance product with features that compare favourably with competitors; Continuous product upgrades has ensured LifeSolutions is consistently ranked in the first and second industry quartiles for features and price; • A sharp focus on relationships combined with a service-oriented approach has resulted in strong adviser support; • • Recognised as a customer-focused challenger, largely due to a leadership position on open APLs and a deliberate decision not to pay material shelf space fees or volume bonuses for inclusion on APLs; and Making system enhancements that are designed to speed up the application process, drive operational efficiencies and boost productivity. Where are we today? The Life Insurance growth strategy is focused on capturing 5% of the long-term profit pool by delivering competitive products and services, primarily to the IFA market. 30 | CLEARVIEW ANNUAL REPORT 2018 in cash reservesNet assets in capital reserves including $371m$98mZERO$72mTotal incurred claims liabilitiesin financial year 2017Life insurance inforce premiumIP claimants engaged in rehabilitation compared with an industry average of 6%*25%Litigations or investigationsLife claimsLifeSolutions portfolio is reinsured with Swiss ReHighest capital coverageratio of Australian registered life insurers 75%25%2%10%OtherTerminalillnessLife insurance50%Income protection13%Trauma646152474242Trauma claimsAverage claim agePlanner SatisfactionNo. 1 for overall planner satisfactionby Investment Trends^Customers and their families paid benefits 600$189.5mBreakdown of claims lodged in FY17IP claimsHighly-rated by Investment Trends, DEXX&R/Money Management/Canstar/Money Magazine/Beddoes InstituteAQUA integrated eQuote and eApp platform Established infrastructure and distribution 12Ranked fi rst and second quartile on IRESS Established in 2011DIRECTORS’ REPORT (CONTINUED) The core of ClearView’s success has been its strong growth in life insurance new business flows and in-force premiums. However, it takes some time for this to be reflected in the financial results. When ClearView was established in 2011, it was effectively a start up in the life advice market. As a new player, it has laid a solid foundation for future success by building competitive products (with some innovation) and establishing a distribution network. Increasing new business flows and market share was the next step. Over the period from 2013, ClearView’s share of new policies written in the IFA channel rose steadily from a standing start, just over 8%, which resulted in material growth in the in-force portfolio over time. ClearView’s distribution universe currently consists of two national aligned dealer groups and a rapidly growing network of IFAs. The Life Insurance distribution strategy has shifted over time to incorporate the valued IFA channel which is an important lever to grow and diversify sales: • The aligned adviser network (CFA and Matrix) provides a solid distribution base, but the IFA market represents ClearView’s largest, fastest growing sales channel. • Growth in sales since 2014 has been the result of building out the IFA footprint: • ClearView is still relatively early in the process of penetrating the IFA channel; • ClearView continues to increase its wallet share of existing APLs over time; and • LifeSolutions sales growth continues to outperform the market (+5% growth in a declining market). It is evident there is a significant lag time in relation to the profitability cycle when building a distribution network. ClearView will continue to gain market share from the maturation of current APLs and by accessing new APLs. A step-change in ClearView’s addressable market is expected if open APLs are implemented by the industry (regulatory change is required in this regard). In summary it is expected organic growth opportunities will be derived from three sources: • The maturation of relatively recent APLs; • Access to new APLs; and • The potential opening up of APLs (should this be implemented). ClearView has recently completed significant enhancements to its life insurance quote and application system. These include a new-look user face that is supported by an integrated eQuote and eApplication system. This means that the application process and related tele-interviewing and tele-underwriting processes have been streamlined. These enhancements (launched in January 2018) underpin our life insurance platform, AQUA – which stands for Adviser Quote Underwriting and Apply. Looking forward ClearView has strong momentum embedded in its expanding distribution footprint which will drive future growth. In FY19, key focus areas will include: • Maturation of the existing Life Insurance APLs and gaining access to new APLs; • • • • • Lobbying for change and opening up of competition - if the transition to open APLs occurs, the addressable market will expand materially for ClearView; Further investment in systems and product upgrades to improve competitiveness, back-office services, efficiency and automation; Capturing opportunities from the convergence of life and wealth by providing products that improve adviser efficiency and customer experience; Completion of the direct remediation program that commenced in FY18 ; and In line with ClearView’s regular program of review and enhancement, ClearView is undergoing a product and pricing review which will be completed in 1H FY19. The competitiveness of premium rates (in particular for part of the lump sum portfolio) have changed over time and will be addressed with price changes as part of the product review. CLEARVIEW WEALTH LIMITED | 31 DIRECTORS’ REPORT (CONTINUED) Financial Performance The FY18 financial performance is discussed below. Life Insurance financial result: 12 Months to 30 June 2018 ($M)1 1H 2H FY17 1H 2H FY18 Change2 2017 2018 % 177.7 104.7 110.5 215.2 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) Reported NPAT 84.4 1.2 (11.8) (20.3) (27.8) (24.2) 16.7 18.2 (5.5) 12.7 (1.4) (6.9) 4.4 93.3 1.1 (13.2) (24.0) (29.9) (23.7) 13.8 17.4 (5.2) 12.2 (1.4) 1.0 11.8 2.3 (25.0) (44.3) (57.7) (47.9) 30.5 35.6 (10.7) 24.9 (2.8) (5.9) 16.2 1.1 (16.9) (27.2) (33.7) (24.3) 14.2 17.9 (5.4) 12.5 (1.4) (0.7) 10.4 1.2 2.3 (16.0) (30.0) (30.0) (24.9) (32.9) (57.2) (63.7) (49.2) 21% (2%) 32% 29% 10% 3% 8.9 23.1 (24%) 19.6 (6.0) 13.6 (1.4) (0.2) 12.0 37.5 (11.4) 26.1 (2.8) (0.9) 6% 7% 5% 0% (85%) 22.4 39% Analysis of Profit ($M) Expected Underlying NPAT3 Claims experience Lapse experience Expense experience Other Underlying NPAT 2017 2018 % 1H 2H FY17 1H 2H FY18 Change2 14.2 (0.6) (0.7) (0.3) 0.1 12.7 15.1 (1.3) (1.3) (0.1) (0.2) 12.2 29.3 (1.9) (2.0) (0.4) (0.1) 24.9 16.0 (3.2) (0.8) 0.2 0.2 16.2 (2.3) (1.3) 0.3 0.7 32.2 (5.5) (2.1) 0.5 0.9 12.5 13.6 26.1 10% Large 8% Large Large 5% 2017 2018 % Key Statistics And Ratios ($M) 1H 2H FY17 1H 2H FY18 Change2 New business LifeSolutions Non-Advice In-force premium LifeSolutions Non-advice (closed to new business) 22.1 20.6 1.5 171.0 126.1 44.9 20.2 19.7 0.5 189.5 146.1 43.4 42.3 40.3 2.0 189.5 146.1 43.4 22.6 22.6 0.0 209.9 167.5 42.4 19.7 19.7 0.0 42.4 42.4 0% 5% 0.0 (99%) 224.8 224.8 184.2 184.2 40.6 40.6 19% 26% (7%) Cost to income ratio 28.7% 25.4% 27.0% 23.2% 22.5% 22.9% 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 FY17 to FY18. 3 Expected Underlying NPAT of $32.2 million (+10% FY17 to FY18) reflects expected profit margins on in-force portfolios based on actuarial assumptions. 32 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) ClearView has generated solid Underlying NPAT growth (adjusting for claims volatility between periods) driven by growth across in-force life insurance portfolios. ClearView also generates positive cash flows from its in-force portfolio which are subsequently reinvested into new business generation. ClearView reinvests these cash flows each year at an appropriate ROE hurdle but given the quantum of new business written relative to the size of the in-force book to date, the cash flows generated have been insufficient to fund new business growth, known as upfront capital strain. This strain has reduced materially since the ‘start up’ phase with ClearView now approaching self-funding capability from the in-force portfolio flows. The following graphs illustrate the performance of the Life Insurance business and the growth profile of the business. Chart 1: Life Insurance key performance indicators Active Life APLs1 with ClearView products Life in-force premium2 ($M) Life new business3 ($M) 450 400 350 300 250 200 150 100 50 0 419 343 240 200 160 256 191 119 $m 120 80 87.5 45.2 40 5.6 36.7 115.7 71.0 9.6 35.1 224.8 184.2 50 40 30 $m 23.6 189.5 146.1 150.7 105.7 10.9 34.1 10.7 32.7 9.6 30.9 27.5 14.3 12.1 11.5 13.2 20 10 0 42.4 19.7 40.3 19.7 22.6 20.6 34.7 19.0 15.7 FY14 FY15 FY16 FY17 FY18 0 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 Old Book Direct LifeSolutions 1H 2H The fundamentals of the business continue to be strong with gross premiums up 21% to $215.2 million and Life Insurance sales of contemporary products up 5% at $42.4 million: 2.2 2.2 • • • There has been further broadening of the IFA footprint (sales of $33.8 million; +17%) with 80% of new Life business originating from the IFA channel (68% in FY17); LifeSolutions is now available on 419 APLs, up 22%; and Further embedded growth in the distribution footprint. As expected, the closure of the direct business impacted the overall growth rate of Life Insurance sales. Direct sales receded from the 2H of FY17, as new business was slowed intentionally, marking the exit from direct sales ($2.0 million of sales was achieved in FY17). In the short-term, the impacts of regulatory reforms and media scrutiny have resulted in an industry slowdown in overall new business volumes. Despite this, ClearView continues to outperform the market with continued growth in contemporary new business sales (+5% in a declining market), albeit at a slower rate than previous years given the overall context of the market. This is expected to unwind over the longer term as the regulatory focus shifts back to a more normalised environment. In-force premiums increased 19% to $224.8 million in FY18. The Life Insurance in-force movement is driven by the net impacts of new business, price increases, lapse and CPI/aged-based variances. This is reflected in the chart on the next page. 1 Approved Product Lists. 2 3 In-force premium is defined as annualised premium in-force at the balance date. Life Insurance contemporary new business or sales represents the amount of new LifeSolutions annual written premium sold during the period, net of policies cancelled from inception and excludes age-based/ CPI increases. CLEARVIEW WEALTH LIMITED | 33 DIRECTORS’ REPORT (CONTINUED) Chart 2: Life insurance in-force movement ($M) 42.4 224.8 (18.8) 10.0 1.7 189.5 $m 250 230 210 190 170 150 1 July 2017 CPI / Age IP pricing increase New business Lapses 30 June 2018 The Life Insurance in-force portfolio at 30 June 2018 is made up of LifeSolutions, ($184.2 million; +26%); non-advice ($9.6 million; -10%) and the Old Life Book ($30.9 million -5%): • • • • The mix of products making up the in-force portfolio has changed materially with LifeSolutions now representing 82% of total in-force premiums. This links to the margin shifts across the portfolio; IP price increases were implemented in HY17 and increased the in-force book by $1.7 million for policies that subsequently renewed in 1H FY18; The direct business was closed to new business in 2H FY17 which means in-force portfolios are in run off; and The increased scale of the in-force premium (+19%) is driven by sales of new contemporary products. This has progressively reduced expense overruns with actual non-deferred overruns reflecting an experience profit of $0.5 million in FY18. 34 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) FY18 Life Insurance earnings The Life Insurance segment result for the year ended 30 June 2018 is shown in the chart below: Chart 3: Life Insurance Underlying NPAT analysis 32.2 75.5 (2.1) (5.5) 0.5 1.0 26.1 35 30 25 20 15 10 5 $m 0 FY18 Expected U n derlying N PAT1 Claim s Volatility I m pact2 Lapse I m pact2 Expense I m pact2 Other2 FY18 Actual U n derlying N PAT Underlying NPAT for Life Insurance was $26.1 million (+5%) compared to the expected Underlying NPAT of $32.2 million. The expected Underlying NPAT reflects the anticipated FY18 profit margin release from the in-force life insurance portfolios, based on best estimate long-term actuarial assumptions. The negative variance in performance can be broadly explained by material claims volatility and adverse lapse experience. Net claims of $32.9 million were up 32% on the prior year. The poor claims experience (relative to the claims assumptions in the life insurance policy liability determined at 30 June 2017) across products resulted in an experience loss in FY18 of $5.5 million (FY17: $1.9 million loss). This is broken down by product as follows: • • • LifeSolutions Lump Sum portfolio reflects adverse experience in FY18 of $1.4 million (FY17: $1.6 million positive experience); LifeSolutions IP portfolio reflects adverse experience of $1.9 million in FY18 (FY17: $1.1 million adverse experience after adjusting for enhanced reserving basis – see below); and Direct portfolios (closed to new business) reflects adverse experience in FY18 of $2.1 million (FY17: $0.2 million positive experience). 1 2 Expected Underlying NPAT of $32.2 million (+10% FY17 to FY18) reflects expected profit margins on in-force portfolios based on actuarial assumptions adopted 30 June 2017. Reflects actual experience for relevant item in the FY18 result and the difference between actual and expected experience for the relevant period. CLEARVIEW WEALTH LIMITED | 35 DIRECTORS’ REPORT (CONTINUED) The following graphs reflect the claims experience over the last five-years: Chart 4: Claims experience ($M) Total claims experience1 Total Claims Experience LifeSolutions Lump sum claims experience1 Lump Sum Claims Experience 2.0 1.0 0 -1.0 $m -2.0 -3.0 -4.0 1.1 0.0 0.1 1.7 36.8 (0.3) (0.7) (0.6) (1.3) (3.2) (2.3) $m 1.0 0.5 0.0 -0.5 -1.0 -1.5 0.3 0.3 0.1 0.2 0.8 0.9 0.7 36.8 (0.4) (0.4) (1.0) Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Claims experience Average claims experience Claims experience Average claims experience LifeSolutions Income protection claims experience1 Income Protection Claims Experience Non-advice/Legacy claims experience1 Non-advice/Legacy Claims Experience 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 $m 0.0 (0.1) 0.1 0.1 0.1 0.1 -0.1 (1.1) (1.0) (1.6) (1.6) $1.0m increase in claims reserving basis $1.6m increase in claims reserving basis (0.3) -0.2 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 $m 0.8 0.8 1.2 -0.0 (0.3) (0.6) (0.4) (1.0) (1.1) (1.0) Dec 13 Jun 14 Dec 15 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 13 Jun 14 Dec 15 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Claims experience Incease in reserving basis Average claims experience Claims experience Average claims experience Key observations of the claims experience data are as follows: • • • • Adopting a longer term view, overall net claims performance has an average $0.6 million adverse impact per half year that is mainly attributed to the IP book, with the lump sum portfolio having a net neutral experience over the same five-year period. Actuarial best-estimate assumptions adopt a long-term view and are based on expectations that claims experience will average out over time; The claims experience on the LifeSolutions lump sum portfolio has been profitable over the last five-years (average annual experience profits of $0.3 million), albeit with some volatility between periods, in particular 2H FY18. Given the size of the portfolio and reinsurance arrangements in place, some statistical volatility is normal; Overall, the direct portfolios, including the book that was closed to new business in FY17, has an average annual experience loss of $0.3 million over the preceding five-years. This offsets the profits made on the LifeSolutions lump sum portfolio. It should also be noted that the surplus reinsurance program of the Old Book (acquired in 2010) retains more risk than LifeSolutions products but has historically reflected claims profits over a long period of time, albeit with some volatility between periods; and An enhanced actuarial reserving basis was adopted for IP claims in FY17 resulting in a $2.6 million loss in the prior year. The poor IP experience in the first half of FY17 and FY18 was driven predominantly by the incidence of claims (relative to the enhanced basis adopted) with an improvement in performance in the second half of both financial years. Actuarial claims assumptions have been further updated at June 2018 reflecting the longer term performance of the IP portfolio, with an increase (+15%) in the projected claims costs of the IP portfolio that is expected to reduce the adverse experience over time. This had an adverse impact of $5.4 million on Embedded Value at 30 June 2018. Notwithstanding this however, the IP portfolio remains profitable and earns an appropriate ROE. 1 Experience measured against the assumptions applicable at each reporting date. 36 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) The adverse lapse experience (relative to the lapse assumptions in the Life Insurance policy liability determined at 30 June 2017) across products resulted in an experience loss in FY18 of $2.1 million (FY17: $2.0 million loss). This is broken down by product as follows: • LifeSolutions lump sum portfolio reflects adverse experience in FY18 of $1.4 million (FY17: $0.5 million adverse experience); • • LifeSolutions IP portfolio reflects adverse experience in FY18 of $0.4 million (FY17: $1.2 million adverse experience); and Direct portfolios (closed to new business) reflects adverse experience in FY18 of $0.3 million (FY17: $0.3 million adverse experience). The following graphs reflect the lapse experience over the last five years: Chart 5: Lapse experience ($M) Total lapse experience1 Total Lapse Experience LifeSolutions Lump sum lapse experience1 Lump Sum Lapse Experience 1.0 0.5 0.0 -0.5 -1.0 -1.5 $m 0.7 0.3 (0.2) (0.2) (0.5) (0.5) (0.7) (0.8) $m (1.3) (1.3) 0.3 0.6 0.3 0.3 0.7 0.1 (0.3) (0.2) (0.5) 36.8 (0.9) 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Lapse experience Average lapse experience Lapse experience Average lapse experience LifeSolutions Income protection lapse experience1 0.6 Non-advice/Legacy lapse experience1 Non-advice/Legacy Lapse Experience $m 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 0.3 0.2 0.2 Policy renewal period 0.4 -0.0 (0.1) (0.1) (0.2) (0.2) (1.1) $m IP price increases implemented in Oct 2016 ‘shock lapse’ from price increases Dec 13 Jun 14 Dec 15 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Lapse experience Average lapse experience (0.5) (1.1) (1.3) 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 (0.2) (0.2) (0.3) (0.3) (0.1) 0.0 (0.2) Exit from the lower socio demographic market Closure of Direct business Dec 13 Jun 14 Dec 15 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Lapse experience Average lapse experience Key observations from the lapse data are as follows: • • • • Adopting a longer term view, overall lapse experience has an average $0.4 million adverse impact per half year over a five- year period. LifeSolutions has been broadly neutral across products over the five-year period, albeit with more recent losses from the LifeSolutions lump sum portfolio; LifeSolutions IP price increases were implemented in October 2016 to help manage the product’s ongoing margin. Lapse rates trended upwards after the IP price increase for both lump sum and IP policies. This occurred because lump sum and IP policies renewed on the new rates. Furthermore these policies are generally sold together and are therefore likely to lapse at the same time. This response had largely washed through the portfolio by December 2017 with an improvement in IP lapses in FY18; There are suggestions of some heightened lapses in the lead up to the LIF reforms which went live on 1 January 2018, in particular for policies with upfront commission. Prima facie, this is likely to be a short-term effect, but it is unlikely to have immediately ceased post the implementation date, with some flow through into the 2H FY18 result; The repositioning and repricing of the LifeSolutions lump sum product in CY18, coupled with the impact of the LIF reforms, is expected to improve lapse performance so it is in line with best estimate lapse assumptions (as at 30 June 2018) over the longer term. The LIF reforms include a two-year responsibility period whilst there are indications that the competitiveness of LifeSolutions’ lump sum premium rates have changed over time which has adversely impacted lapse rates; and 1 Experience measured against the assumptions applicable at each reporting date. CLEARVIEW WEALTH LIMITED | 37 DIRECTORS’ REPORT (CONTINUED) • ClearView made a strategic decision to exit the Direct business in FY17. Over time, lapse experience improved significantly as ClearView exited the direct business and is likely to further recede with the run-off of the book. In the shorter term, lapses may be impacted by the direct remediation program that is underway. Operating expenses increased in the Life Insurance segment by 3% and is substantiated by: • • • Activities that support business growth and require an increase in front-end costs. This includes initiatives like broadening the IFA footprint; An increase in life insurance administration and back-end costs due to the growth in the in-force portfolio (+19%). These administration costs include underwriting, claims, administration and contact centre costs; and The closure of the Direct business has reduced costs by $3.8 million. This includes a reduction in the fixed cost base of the business combined with the volume-based cost structure (i.e., call centre sales and quality assurance agents). The retention team has been retained and integrated into the centralised operations to manage the in-force book. Although expense overruns initially depressed reported profits, they have been eliminated in Life Insurance as scale is achieved, thereby increasing underlying profit on the growing in-force portfolio. Non-deferred expense experience improved from a $0.4 million loss in FY17 to a $0.5 million profit in FY18, demonstrating that expense overruns are being absorbed as scale is achieved. Other key points to note in the FY18 Life Insurance result: • • • • • • Investment earnings are impacted 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 and reflects the upfront reinsurance support provided in the first year of a policy by the reinsurer. Growth in Life Insurance initial commission in FY18 was driven by the upfront variable commission cost related to higher new business volumes in LifeSolutions. 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 have been implemented with caps on upfront commission. In the short-term, the implementation of the LIF reforms will reduce profit margins given the shift to a hybrid commission model but will unwind and improve as the upfront commission cap reduces from 80% to 60% over the next few years. Lapse rates are likely to improve (post implementation of the reforms) given the increased clawback period. Furthermore, the return on capital will also increase given the reduced capital requirements via lower upfront commissions paid to advisers. Increased variable expenses relate to stamp duty and medical policy acquisition costs driven by increased new business volumes. The strong growth in the in-force portfolios of contemporary products is partially offset by the run-off of the higher margin Old Life insurance book. This has more recently become less of an impact given the proportion of LifeSolutions portfolio to the overall in-force base (82%). 1 Life insurance framework. 38 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Operating segment review Wealth Management Approach While Life Insurance has been the key value driver, ClearView continues to invest significantly in Wealth Management product development and systems given the opportunities ahead. ClearView has a relatively new status in Wealth Management but we believe that convergence of life insurance and superannuation will be a significant driver of shareholder value creation over the medium term. Life Life through Superannuation • • Platform Standalone Wealth Advisers sell both life insurance and wealth management products to customers, they are a natural fit. Manufacturers that have products in both markets have a clear advantage by maximising individual adviser relationships, and facilitating both life insurance and superannuation sales. Life insurance (risk products) can be sold via superannuation on two common bases: • • Platform-linked life insurance is life insurance that is sold as a benefit on a superannuation wealth account; and Standalone life insurance sold within superannuation. Both can provide the policyholder with a tax-effective way to buy life insurance: • • Platform-linked sales require superannuation wealth products to be provided. Tax credits on standalone life insurance requires both superannuation wealth accounts to generate the tax benefits and administration flexibility to pay the credit. ClearView is able to do both. Competitors (especially those with material legacy issues or those that are divesting their businesses) cannot offer both easily (or at all), providing ClearView with a significant competitive advantage. ClearView has intentionally chosen not to participate in the group life insurance market and will provide these products on an individual basis through superannuation. CLEARVIEW WEALTH LIMITED | 39 DIRECTORS’ REPORT (CONTINUED) Where are we today? ClearView’s strategy is to build a material Wealth Management business by manufacturing and distributing contemporary platforms and products, and leveraging existing Life Insurance relationships: New contemporary technology platform for WealthFoundations; Private label for WealthSolutions (Wealth migration of Master Trust Product onto new platform completed in FY18) Highly Rated by Chant West Chant West 2018 rating of 4 Apples for ClearView WealthFoundations Super and Pension, and ClearView WealthSolutions Super and Pension. A 4 Apples rating reflects a “high quality fund”. Established in 2011 Established in 2014 Model portfolios Balance Growth Equity growth Moderate Conservative Income Growth 40 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) ClearView offers a range of contemporary wealth products, which are available through financial advisers: • • WealthSolutions: A full service wrap platform that allows sophisticated clients to invest in various asset classes including direct shares, access tax and portfolio performance reports, and efficiently manage their client’s accounts; WealthFoundations: A slimmed-down platform for mid-level clients based on 14 multi-manager model portfolios that are constructed and managed internally by ClearView’s in-house investment research team who leverage the expertise of third-party fund managers. This product is ideally suited to traditional risk advisers looking to expand into wealth management; and • External platforms: ClearView MIS platform funds are available on selected third-party platforms. ClearView continues to maintain the Master Trust product that includes life investment contracts issued by ClearView Life. The product is in run-off as it is no longer marketed to new customers. ClearView’s Wealth Management business includes an in-house research and investment arm that builds and actively manages a range of implemented model portfolios including Separately Managed Accounts (SMAs). ClearView’s model portfolios invest in various independent asset manager funds. Key benefits of model portfolios include: • Advisers can efficiently meet the investment needs of clients by recommending well-researched, well-constructed diversified multi-manager portfolios that target clearly defined investment objectives (for example, asset protection, retirement income, moderate risk and high growth); • Advisers gain access to specialist asset managers who are not directly available to retail clients; • • ClearView charges a model portfolio fee and earns a margin on Wealth Management FUM by using our scale to negotiate wholesale asset management fees from underlying managers; and Sharper focus on asset allocation, manager selection and portfolio management, as ClearView does not directly manage investments in underlying assets (this is outsourced to third-party asset managers). ClearView has followed a program of ongoing development and refinement of wealth products over time with contemporary products including SMA capabilities to support both aligned and third-party advisers. ClearView also has the ability to place in- house model portfolios on external platforms. Further system and product development is required to broaden out the product offering to IFA market. Looking forward To capitalise on the Group’s significant investment in Wealth Management, key focus areas in FY19 include: • • • • • Increasing penetration of the aligned network (CFA4 and Matrix4) by delivering excellent service; Leveraging the Life Insurance IFA distribution network to gain inclusion on additional third-party APLs; Marketing ClearView platform funds in the external platform market to allow further participation in the funds management margin; Further investment in the contemporary platform and product in FY19 to improve competitiveness (including analysis of fee rates in light of recent competitor price reductions), back office services, efficiency and automation to allow the broader roll out to the IFA market over time. This will ensure that the product rating and pricing improves its competitiveness; and Capturing opportunities from the convergence of Life Insurance and Wealth Management by providing products that improve adviser efficiency, customer experience and reinforce ClearView’s competitive advantage in licensing solutions. CLEARVIEW WEALTH LIMITED | 41 DIRECTORS’ REPORT (CONTINUED) Financial Performace Wealth Management financial result: 12 Months to June ($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 Key Statistics And Ratios ($M) Net Flows Master Trust WealthSolutions WealthFoundations External platforms Total FUM ($b) Master Trust WealthSolutions WealthFoundations External Platforms Cost to Income Ratio 2017 2018 % 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) 0.4 FY17 32.8 0.3 (6.5) (8.1) (13.8) 4.6 (0.7) 3.9 (4.4) (0.5) 2017 1H 2H FY17 59.5 145.4 204.9 (81.5) (66.3) (147.8) 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 1H 18.0 0.2 (3.3) (4.7) (7.0) 3.3 (0.7) 2.6 0.0 2.6 1H 163.6 (65.6) 103.9 66.0 59.3 2.73 0.96 1.22 0.38 0.18 2H 18.2 0.2 (3.2) (4.8) (7.5) 3.0 (0.4) 2.6 (0.1) FY18 Change2 36.2 0.5 (6.4) (9.5) (14.5) 6.2 (1.1) 5.2 10% 49% (1%) 17% 5% 34% 54% 31% (0.1) (98%) 2.5 5.1 Large 2018 % 2H FY18 Change2 43.6 207.2 1% (60.4) (126.0) (15%) 58.6 32.8 12.6 2.79 0.90 1.29 0.41 0.19 162.5 (18%) 98.8 71.9 2.79 0.90 1.29 0.41 0.19 12% 9% 12% (9%) 19% 37% 58% 42.9% 41.4% 42.1% 38.9% 41.2% 40.0% 1 2 3 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. % change represents the movement from FY17 to FY18. 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 42 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) ClearView has started to generate strong Underlying NPAT growth driven by strong net flows in contemporary products and growth in FUM balances. ClearView began investing significantly in its Wealth Management business in FY15: • • 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. This resulted in an adverse $3.2 million (after tax) impact on Underlying NPAT in FY15. • Stronger inflows and scale benefits for WealthSolutions with continued support for WealthFoundations. ClearView now has a competitive product suite and a growing distribution network. As in Life Insurance, steadily increasing net flows will lead to comparable market share growth in FUM which is a key profit driver. The following graphs illustrate the performance and growth profile of the Wealth Management business. Chart 1: Wealth Management key performance indicators Active Wealth APLs1 with ClearView Products Wealth In-Force FUM2 ($B) Wealth Contemporary Net Flows3 ($M) 45 36 27 18 9 0 44 30 9 5 1 1 FY14 FY15 FY16 FY17 FY18 3.0 2.5 2.0 $b 1.5 1.0 0.5 0.0 2.50 0.06 0.12 0.30 2.13 1.90 0.11 0.61 0.20 0.80 1.08 2.79 0.19 0.41 1.29 1.18 1.07 1.00 0.90 1.66 0.41 1.25 FY14 FY15 FY16 FY17 FY18 Old Book WealthSolutions WealthFoundations External Platforms 2.2 400 300 $m 200 100 0 353 212 335 176 159 141 333 104 229 275 150 125 153 68 85 FY14 FY15 FY16 FY17 FY18 1H 2H 2.2 ClearView is a positive net flow business. The proportion of the new contemporary product suites as a percentage of FUM balances are starting to outweigh the decline of the very profitable Master Trust product. Wealth Management fees are up 10% to $36.2 million and net flows in contemporary products are up 1% to $207 million, including an improvement in Master Trust outflows: • WealthSolutions recorded net inflows of $163 million (-18%). • WealthFoundations recorded net inflows of $99 million (+12%). • External platform net inflows of $72 million (+9%). • Master Trust net outflows of $126 million (-15%). Inflows represent a material portion of overall FUM balances. Gross inflows of $568.8 million was achieved in FY18 predominantly into contemporary products (+11%). Furthermore, the number of Wealth Management APLs has increased to 44, up 42% by leveraging the Advised Life Insurance distribution network. To date, WealthSolutions and WealthFoundations have primarily been distributed by aligned advisers with efforts to expand the distribution footprint having commenced in FY17. 1 APLs are where ClearView products that are placed on third-party dealer group approved product lists. 2 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. 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. 3 CLEARVIEW WEALTH LIMITED | 43 DIRECTORS’ REPORT (CONTINUED) FUM balances are up 12% to $2.79b at 30 June 2018. Wealth Management FUM movement is driven by the net impacts of net flows, funds management fees and investment market movement-based variances. This is shown in the following graph. Chart 2: Wealth Management FUM movement FY17 – FY18 ($B) 0.16 0.10 2.50 (0.13) 0.15 0.07 (0.05) (0.02) 2.79 3.0 2.5 2.0 1.5 1.0 0.5 0.0 O pening FU M 1 Jul 2017 W ealthSolutions netflo w W ealthFou n dations netflo w External Platfor m s netflo w M aster Trust netflo w M arket m ove m ent M anage m ent fees Others Closing FU M 30 Ju ne 2018 Wealth Management FUM is made up of WealthSolutions ($1.3 billion; +19%), WealthFoundations ($0.4 billion; +37%), External Platforms ($0.2 billion; +57%) and Master Trust ($0.9 billion;-9%): • • The mix of products making up the portfolio has changed materially with contemporary products (including ClearView platform funds on external platforms) now representing 68% of total FUM. This links to the margin shifts across the portfolio; and Performance of investment markets remains key to attracting flows and supporting the Master Trust FUM given the product is not actively marketed to new customers. Performance has lagged in the shorter term given the defensive positioning of the portfolios that are currently under review. FY18 Wealth Management earnings The profitability of the Wealth Management segment is largely driven by fees earned from FUM less expenses incurred. One of the key differences between Wealth Management and Life Insurance is the way costs are accounted for. In Wealth Management, the customer acquisition costs are all expensed up front so any increase in wealth acquisition, distribution and related upfront costs acts reduce reported earnings. However, the profit pool of Wealth Management is similar to Life Insurance and as ClearView’s share of FUM starts to approach its share of net flows, its share of the industry profit pool will increase significantly. Underlying NPAT in FY18 was $5.2 million (+31%) and includes the positive impact on net fee income from FUM growth (+12%). Investment market performance of 6% was achieved compared to a 5% investment return in FY17. The Master Trust product is effectively a closed book with a portion of FUM in pension phase. The FY18 result includes impacts from the margin compression of the gradual run-off of the Master Trust product that is being replaced by lower margin new business written for new contemporary products (fee income +10% overall). The net flows of the new contemporary product suites are starting to outweigh the profit drag of pension outflows with the above factors assumed in Embedded Value (EV) calculations. The decrease in variable expenses (-1%) can be attributed to a reduction in the inter-segment advice fee (50bps) paid to Financial Advice on Master Trust FUM (in line with average Master Trust FUM). This reduction was partially offset by higher platform fees payable on the WealthSolutions portfolio (in line with growth in average WealthSolutions FUM). Funds management expenses increased in line with the expanded wealth product range (WealthFoundations launch and MIS growth on platforms) and increased FUM between periods. 44 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) The increase in operating expenses (+5%) can be attributed to the costs incurred to migrate the Master Trust product to the new platform along with further investment to enhance the contemporary platform and product (including increased technology and software amortisation costs). The front-end costs to support business growth have remained broadly consistent (notwithstanding an 11% increase in contemporary product new flows). Distribution will expand further in the IFA market after additional system and product upgrades are completed. There has been a reduction in wealth administration costs due to greater efficiencies from the increased scale of business and migration of the Master Trust product onto a single administration platform (completed at end of FY18), albeit with the cost benefits expected to flow through from FY19. Expense overruns (after tax) increased to $3.0 million in FY18 (FY17: $2.7 million). The current overruns reflects the investment in the contemporary platform and WealthFoundations product that is yet to achieve scale relative to initial system and ramp up costs. The tax expense includes a tax benefit of $0.8 million in FY18 (FY17: $0.7 million) comprising exempt fees in the Master Trust product range ($0.2 million), the positive impact from a tax benefit arising from superannuation insurance premium deductions ($0.6 million) and the prior year’s favourable tax adjustments ($0.1 million). Investment earnings are impacted by the reallocation of shareholder cash between segments and movement in market interest rates between periods. CLEARVIEW WEALTH LIMITED | 45 DIRECTORS’ REPORT (CONTINUED) Operating segment review Financial Advice Approach ClearView has focused on building an aligned financial adviser network with high quality IFAs. In its early years, ClearView was precluded from participating in the IFA market through restricted APLs and prohibitive shelf space fees. ClearView therefore chose to build its own dealer group with an open life insurance APL that allowed its new contemporary products to be distributed to customers. ClearView focused carefully on recruiting high quality advisers into the network. The institutional model of vertical integration within the banks became out of favour with consumers and financial advisers. This created an opportunity for a client-centric, non-institutional challenger with a competitive dealer service that offered an holistic advice framework, to partner with advice practices. The ClearView dealer groups have, over time, developed into businesses that support advisers to transition from transactional product-based advice, to holistic strategic advice which considers a client’s total financial needs and goals. Alongside traditional dealer services, it provides practice management solutions, coaching and technology-based tools - helping advisers shape, sell and price their value proposition - to achieve sustainable profit and growth. Consolidation, regulatory uncertainty and increasing dissatisfaction among institutionally-aligned dealer groups is creating further opportunities. However, ClearView remains focused on selectively recruiting high quality advisers who have the right cultural fit for the ClearView and Matrix dealer groups. It should also be noted that the current licensing regime is under the spotlight, with self-licensing gaining popularity in the adviser market. ClearView is therefore positioning itself as a participant in the D2D model given it has the infrastructure, services and systems for compliance, supervision and monitoring for those businesses that choose to self-license or join boutique dealer groups. This is likely to expand the revenue base and services within the financial advice segment. Where are we today? ClearView has focused on building an aligned financial adviser network with high quality IFAs. st1 st1 Australia’s leading Licensee 20171 Australia’s leading Licensee 20181 40 103 15 33 Aligned nework (Advisors #) 25 13 4 46 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) ClearView’s national dealer groups, ClearView Financial Advice (CFA) and Matrix Planning Solutions (MPS) segment their advisers and operations into the following categories: • • • CFA employed advisers: These are the employed, salaried advisers. ClearView retains 100% of the fees charged to clients and pays the advisers in accordance with Clearview’s remuneration policy. The number of employed advisers has steadily declined over time with many transitioning to the self-employed model. ClearView has 9 employed advisers to date of this report. CFA self-employed advisers: These advisers pay CFA a fee to operate under its AFSL and utilise the Group’s support services. CFA provides a range of services to these advisers including compliance, practice management solutions, IT support and software. Traditionally, CFA advisers have focused on life insurance advice but there is emerging growth in wealth management. CFA has 125 financial advisers at the date of this report. MPS self-employed advisers: These advisers pay MPS a fee to operate under the Matrix AFSL and utilise the Group’s support services. MPS provides a range of services to these advisers including compliance, practice management solutions, IT support and software. Traditionally, MPS advisers have focused on wealth management advice. Matrix advisers received shares as consideration for the acquisition of MPS in 2014. The performance-based shares vested in FY18, noting that the shares are no longer held in trust and have been issued to the vendors MPS. MPS has 99 financial advisers at the date of this report. The following represents the graphical representation of ClearView’s aligned adviser network: Looking forward Key measures in Financial Advice include: • • • The retention of compliant practices and attracting quality firms to join the business with a continued focus on quality not quantity; The training and development of advisers including helping them transition to the new financial education standards; and In light of regulatory changes, broaden out the back-end service offering to the independent dealer group market by entering the D2D market. Financial Performance Financial Advice financial result: 12 months to June ($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 ($M) FUMA ($b)4 PUA ($m)3 Financial advisers 2017 2018 % 1H 8.6 0.5 (7.4) 1.7 (0.5) 1.2 (0.5) 0.7 1H 8.5 233 243 2H 8.3 0.1 FY17 16.9 0.6 (7.0) (14.4) 1.5 (0.4) 1.0 (0.5) 0.5 2017 2H 8.9 237 243 3.2 (0.9) 2.2 (1.0) 1.2 FY17 8.9 237 243 1H 8.8 0.2 (7.6) 1.3 (0.4) 1.0 (0.6) 0.4 1H 9.3 247 246 2H 8.7 0.3 FY18 Change2 17.4 3% 0.5 (26%) (7.7) (15.3) 6% 1.3 (0.4) 0.8 (0.5) 0.3 2.6 (20%) (0.8) (18%) 1.8 (20%) (1.1) 14% 0.7 (47%) 2018 % 2H 9.6 270 233 FY18 Change2 9.6 270 233 7% 14% (4%) 1 Shareholder view excludes the life investments contracts (i.e. unit linked business) and deconsolidates retail unit trusts and reflects fees earned by the shareholder less expenses incurred. Inter-segment revenues/expenses are not eliminated in the shareholder view. 2 % change represents the movement from FY17 to FY18. 3 Premiums Under Advice is life insurance in-force premium that are externally managed and administered (Third Party Products) and in-force LifeSolutions premium FUMA includes FUM5 and funds under advice that are externally managed and administered. FUM includes Funds Under Management (ClearView Master Trust, WealthFoundations and ClearView Managed Investment Schemes), Funds Under Administration on WealthSolutions and FUM in ClearView MIS platform funds on external platforms. 4 5 CLEARVIEW WEALTH LIMITED | 47 DIRECTORS’ REPORT (CONTINUED) Chart 1: FY18 - Key performance indicators FUMA ($B)2 Premiums Under Advice ($M)1 Adviser Force - Aligned advisers4 10 8 6 4 2 0 4.2 3.6 0.6 5.4 3.4 2.0 ClearView FUMA Matrix FUMA FUM FUA 9.6 7.0 2.6 Total 300 240 180 120 60 0 77 66 11 193 126 67 ClearView PUA Matrix PUA 270 192 78 Total LifeSolutions Premiums Under Advice 235 243 233 89 91 99 221 82 245 210 175 140 $m 117 105 70 35 0 127 138 143 125 98 19 FY14 12 FY15 8 FY16 9 FY17 9 FY18 Employed ClearView Self-Employed Matrix Self-Employed The FUMA movement in the dealer group is driven by the net impacts of net flows, funds management fees and investment market movement-based variances. Premiums under advice (PUA) is driven by the net impacts of new life insurance business, price increases, lapse and CPI/aged-based variances. Financial Advice FUMA is $9.6 billion at 30 June 2018, up 7% with PUA of $270 million, up 14%: • • • FUMA was positively impacted by the movement in investment markets, change in adviser numbers and composition period to period (including changes in underlying practices licenced by the dealer groups); PUA is impacted by the net impact of adviser recruitment, composition and changes in underlying practices; Of the $9.6 billion in FUMA, $1.9 billion was in contemporary in-house products and $0.9 billion was in the Master Trust product (FY17: $9.3 billion, $1.5 billion); • Of the $270 million PUA in-force, $78 million was in LifeSolutions (FY17: $237 million, $70 million); and • Financial advisers decreased 4% to 233 with a continued focus on selectively recruiting high quality advisers that have the right cultural fit. FY18 Financial Advice earnings Key drivers of financial performance in the Financial Advice segment are as follows: • Net adviser service fees and membership fees earned; • Financial support from ClearView’s manufacturer businesses; • Grandfathered platform rebates; and • Dealer service fees (DSF) earned on the new contemporary platforms. (As the FUM increases on these platforms this is expected to continue to grow as grandfathered rebates run off). Underlying NPAT was $1.8 million (-20%) but would have been broadly flat period-to-period if the abnormal other income items are excluded. Notable items include: • Growth in net financial planning fees (+3%) with marginal increases across all key revenue line items; • • 1 2 3 Increased operating expenses of $15.3 million in FY18 (+6%) which was driven by the increase in operational and compliance head count, system costs and investment in strategic advice and D2D services model, partially offset by lower conference costs. Dealer group overheads include staff, marketing, rent, professional indemnity insurance and shared services allocation; and Interest relates reflect the reallocation of shareholder cash between segments and changes in market interest rates between periods. Premiums Under Advice is life insurance in-force premium that are externally managed and administered (Third Party Products) and in-force LifeSolutions premium. FUMA includes FUM3 and funds under advice that are externally managed and administered. FUM includes Funds Under Management (ClearView Master Trust, WealthFoundations and ClearView Managed Investment Schemes), Funds Under Administration on WealthSolutions and FUM in ClearView MIS platform funds on external platforms. 4 Aligned advisers are licenced by the ClearView Financial Advice Pty Ltd and Matrix Planning Solutions Ltd dealer group. 48 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Operating segment review Listed Entity/Other Approach This segment includes the Investment earnings on cash and investments held in the listed and central services entities and in the shareholders’ fund of ClearView Life, less costs associated with maintaining a listed entity. The Company manages capital at the listed entity level in accordance with its Internal Capital Adequacy Assessment Process (ICAAP) policy. FY18 Listed Entity/Other Earnings Listed Entity/Other financial result: 12 months to June 2018 ($M)1 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 Direct closure provision Reported NPAT 2017 2018 % 1H 0.2 (0.4) (0.2) (0.1) (0.3) (0.1) (0.4) (0.5) 0.0 (0.9) 2H 0.1 (0.6) (0.5) 0.3 (0.2) (0.1) (0.3) (0.1) (2.4) (2.8) FY17 0.3 (1.0) (0.7) 0.2 (0.5) (0.2) (0.7) (0.6) (2.4) (3.7) 1H 0.1 (0.7) (0.6) (0.1) (0.7) (0.2) (0.8) (0.3) 0.0 (1.1) 2H 0.2 (0.5) (0.2) 0.5 0.3 (0.2) 0.1 (0.5) 0.0 (0.4) FY18 Change2 0.3 (1.2) (0.8) 9% 18% 22% 0.4 152% (0.4) (0.3) (0.7) (0.8) (23%) 65% (0%) 34% 0.0 Large (1.5) (60%) The Listed segment financial results for the year ended 30 June 2018 are shown in the previous table. Underlying NPAT was -$0.7 million (broadly flat). Notable items include: • • • • Investment earnings which are broadly in line between periods, albeit with some reallocation of physical cash between segments; Higher expenses given the increased investor relations costs coupled with the allocation of insurance costs in FY18 to the listed segment, noting changes to Board composition between periods; Interest on corporate debt relating to loan establishment and line fees on the $60 million NAB debt facility that was refinanced in June 2017. This reflects the increased costs of the facility given the movement in interest rates; and Tax benefits (+$0.6m) driven by the research and development grant and a deferred tax benefit arising from the tax deduction of costs associated with the performance rights issued to the Senior Management Team (SMT) in FY18. 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 FY17 to FY18. CLEARVIEW WEALTH LIMITED | 49 DIRECTORS’ REPORT (CONTINUED) Statement of financial position The Group’s Statement of financial position, which is set out on page 78, reflects the key metrics below. • Net assets at 30 June 2018 increased to $444.3 million (June 2017: $415.6 million) comprising: • • • • Reported profit of $26.6 million; FY17 net cash dividend (-$6.0 million); Movements in the Share Based Payments Reserve due to the treatment of the ESP in accordance with the accounting standards (+$2.2 million), ESP loans settled through the FY17 final dividend (+$0.8 million); and The proceeds from ESP shares sold via off-market transfer, including repayment of ESP loans and the impact of the sale of vested shares (+$5.0 million). • Net tangible assets increased to $399.1 million ($431.4 million including ESP loans) (June 2017: $371.0 million); • Net asset value per share (including ESP loans) of 71.3 cents per share (June 2017: 68.6 cents per share); and • Net tangible asset value per share (including ESP loans) of 62.2 cents per share (June 2017: 61.8 cents per share). The net asset value per share and net tangible asset value per share are reflected above on a fully diluted basis, as ClearView ESP shares have been issued to employees and contractor participants as at 30 June 2018 (in accordance with the ClearView ESP Rules). The ClearView ESP shares on issue have a corresponding non-recourse loan from ClearView to facilitate the purchase of ClearView ESP shares by the participants. The shares and loans are not reflected in the statutory accounts as they are accounted for as an option in accordance with Australian Accounting Standards. If the loan is not repaid, the relevant ClearView ESP shares are cancelled or reallocated in accordance with the ClearView ESP Rules. Embedded Value Life Insurance and Wealth Management are long-term businesses that involve long-term contracts with customers and complex accounting treatments. Embedded Value (EV) represents the discounted value of the future net cash flows anticipated to arise from the in-force life policies, investment client balances and advice client recurrent revenue as at the valuation date. 50 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) EV calculations at a range of risk discount margins (DM) is shown below. Risk margin over risk free rate: ($M), (unless stated otherwise) 3% DM 4% DM 5% DM Life Insurance Wealth Management Financial Advice Value of In-Force (VIF) Net Worth Total EV ESP Loans Total EV Incl. ESP Loans Franking Credits: Life Insurance Wealth Management Financial Advice Net Worth Total EV Incl. Franking Credits and ESP Loans EV per Share Incl. ESP Loans (cents) EV per Share Incl. Franking Credits and ESP Loans (cents) 429.4 404.2 381.9 70.6 27.1 66.7 24.9 63.2 23.0 527.0 495.8 468.1 60.8 60.8 60.8 587.9 556.6 528.9 32.3 32.3 32.3 620.2 588.9 561.2 70.1 19.0 8.4 20.7 65.9 18.0 7.7 20.7 62.3 17.1 7.2 20.7 738.3 701.1 668.4 92.8 88.1 84.0 110.5 104.9 100.0 The key movement in EV between FY17 and FY18 is described in detail below. Net capital applied (+$1.3 million) driven by: • • • FY17 final cash dividend (-$18.1 million) paid in September 2017 with $12.2 million reinvested as part of the Dividend Reinvestment Plan; Movements in the Share Based Payments Reserve including ESP shares sold via off-market transfer (+$5.0 million), treatment of the ESP in accordance with the accounting standards (+$2.2 million), and ESP loans settled through the FY17 final dividend (+$0.8 million); and Costs considered unusual to the ordinary activities predominantly related to expenses incurred in relation to the associated Cooperation Agreement between ClearView and Sony Life. These costs are expected to cease from the end of July 2018, being the date of termination of the Cooperation Agreement (-$0.8 million). Expected gain (+$36.2 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 (+$12.0 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. LifeSolutions continues to be the key driver of VNB given increased scale and volumes, albeit in the short term VNB has been adversely impacted due to the aquisition costs incurred and the hybrid commission model under the LIF reforms (noting VNB will improve as the upfront commission cap reduces from 80% to 60% over the next few years). The claims experience (-$5.5 million): • • Adverse claims experience loss (relative to planned margins) across all products. The loss for the second half of FY18 of -$2.3 million was lower than the first half loss of -$3.2 million; Adopting a longer term view, the overall net adverse claims performance is mainly attributed to the IP portfolio, with the lump sum portfolio having a net neutral experience over a five-year period. Claims assumptions have been updated for the IP portfolio at June 2018, with the expectation that overall claims performance will fit within best estimate claims assumptions (as at 30 June 2018) over the longer term. CLEARVIEW WEALTH LIMITED | 51 DIRECTORS’ REPORT (CONTINUED) The impact of lapses on the life insurance book and FUMA discontinuances (-$3.5 million): • Life Insurance lapse impact of -$2.9 million was mainly driven by higher-than-expected lapses for LifeSolutions arising from heightened lapses in lead up to the 1 January 2018 regulatory changes, the tail-end of the effect of income protection price increases implemented in HY17 and a drift in the competitive position of LifeSolutions lump sum premium rates. LifeSolutions lapse rates have been broadly neutral over a five-year period. The repositioning and repricing of the LifeSolutions lump sum product in CY18, coupled with the impact of the LIF reforms (given the increased clawback period), is expected to improve lapse performance to be in line with best estimate lapse assumptions (as at 30 June 2018) over the longer term. • For the Wealth Management business, discontinuance rates overall were slightly higher than expected overall resulting in a -$0.6 million impact. FUMA mark to market and business mix (+$2.2 million): • The EV increased by $2.2 million due to the business mix and 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. Maintenance, listing and interest expenses (-$1.4 million): • Maintenance expense overruns versus the long-term unit costs assumed. Emerging life insurers invest and incur overhead costs ahead of “getting to scale”. The maintenance 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, it is expected that the expense overruns will be eliminated, thereby increasing underlying profit margins on the in-force portfolio and removing the drag on the EV. • Listing and interest expenses were impacted by the Group’s listed overhead costs and line fee on corporate debt which are not allowed for in the EV Change in assumptions (-$6.5 million): • This includes a -$5.4 million impact due to claims assumption changes mainly to reflect higher expected claims cost for LifeSolutions IP and non-advice business. Significant product upgrade and pricing repositions planned for 1HFY19. This will include updated reinsurance terms and inforce policy pricing changes. Actuarial assumptions updated reflected in current prospective profit margins and EV for inforce. Objective for pricing and reinsurance on inforce is to have a broadly neutral impact. In addition, this includes a -$1.1 million impact due to expected pricing changes on the Funeral Plan business to provide better value at older ages. ESP loans/franking credits and other items (+$4.4 million): • Reflects the net movement in ESP loans and franking credits between periods. The balance includes modelling enhancements, one-off reinsurance impacts, restatements, timing effects and tax impacts of the policy liability discount rate effect in the period. Chart 2: Embedded Value movement analysis @ 4%DM Inflation -0.5%;+0.5% -5.5 5.8 Rate-free rate +1%;-1% -22.9 FUMA -10%;+10% -8.2 8.2 Expenses +10%;-10% -14.5 14.5 Discontinuance Rates +1%;-1% -23.4 26.1 26.2 Claims +10%;-10% -16.6 16.7 -25 -20 -15 -10 -5 00 5 10 15 20 25 52 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Dividends The Board has declared a fully franked dividend in 2018 of $20.05 million (2017: $18.14 million). This equates to 3.00 cents per share (2017: 2.75 cents per share), representing approximately 60% of FY18 Underlying NPAT in line with the company’s dividend policy (+9% 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 Underlying NPAT. Furthermore, it is the Company’s intention to maximise the use of its franking account by paying fully franked dividends. The Company’s DRP (Dividend Reinvestment Plan) will operate for the FY18 dividend in accordance with the DRP rules below: • • • Shareholders will have the opportunity to reinvest into the Company while retaining capital within the Group; Given Clearview’s preference to retain capital, it is not considered appropriate to minimise the dilutive impact of the DRP through the on-market purchase of the number of shares to satisfy the DRP participation; and It is the intention to seek support for any shortfall in shareholder participation by underwriting the shortfall to maintain the capital base within the group. This will be reconsidered in future years given the cash flow profile of the business. Substantial shareholders have committed to participate in the DRP at a fixed price of $1.05 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 shareholding above 15%). No interim dividend was paid during the year (2017: Nil). To date, the ability to pay an interim dividend has been limited by the effect on tax paid of the changes in the long-term discount rates used to determine the insurance policy liabilities between the half-year and year-end. As a sufficient franking credit balance has been progressively established, the payment of interim dividend can be considered in future periods. ClearView’s ability to pay a franked dividend depends upon factors including its profitability, the availability of franking credits and its funding requirements which in turn may be affected by trading and general economic conditions, business growth, and regulation. Accordingly, 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 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; and To meet the liquidity needs of the Group or to capitalise on other opportunities should they arise. This replaced the $50 million facility that was due to expire in December 2017. Chart 1: Capital Position as at 30 June 2018 Capital Position ($m) – 30 June 2018 Reserved capital ($m)1 – 30 June 2018 500 400 $m 300 200 100 0 399.1 27.2 (306.7) 100 80 $m 60 40 20 0 24.3 92.5 (77.8) 14.7 50.1 3.4 77.8 Net Tangible Assets Less: Capital Base Adjustments Regulatory Capital Base Less: Reserved Capital Capital Surplus PCA Risk Capital Working Capital Reserve Reserved Capital 1 Reserved capital includes the minimum regulatory capital, risk capital which is additional capital held to address the risk of breaching regulatory capital and a working capital reserve held to support the capital needs of the business beyond the risk reserving basis. CLEARVIEW WEALTH LIMITED | 53 DIRECTORS’ REPORT (CONTINUED) Chart 2: Capital Position as at 30 June 2018 by Regulated Entities and Segment e c n a r u s n I e f i L t n e m e g a n a M h t l a e W $M $M 373.2 12.2 (13.5) (4.8) 359.8 7.4 d e t a l u g e R A R P A s e i t i t n E $M 389.5 (18.3) 371.1 r e h t O $M 4.0 0.0 4.0 Net Assets Goodwill & Intangibles Net Tangible Assets Capital Base Adjustment: Deferred Acquisition Costs (DAC) (304.7) 0.0 0.0 (304.7) Other Adjustments to Capital Base (1.6) (0.0) Regulatory Capital Base 53.5 7.4 0.0 4.0 (1.7) 64.8 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 $M $M $M $M $M 17.3 25.1 414.6 29.7 444.3 (7.8) (7.8) (26.1) (19.1) (45.2) 9.5 17.3 388.5 10.7 399.1 0.0 0.0 9.5 0.0 (304.7) 0.0 (304.7) 0.0 (1.7) (0.3) (2.0) 17.3 82.1 10.3 92.5 t n e m e g a n a M h t l a e W $M 7.8 0.0 7.8 0.0 0.0 7.8 Prescribed Capital Amount (11.8) (3.4) (3.4) (18.6) (5.0) (0.7) (5.7) (24.3) 0.0 (24.3) Available Enterprise Capital 41.6 3.9 0.6 46.2 2.8 8.8 11.7 57.8 10.3 68.2 Enterprise Capital Benchmark (ECB) Working Capital Risk Capital (5.7) 0.0 0.0 (5.7) 0.0 0.0 0.0 (5.7) 2.3 (3.4) (35.9) (2.7) 0.0 (38.6) (2.3) (3.1) (5.4) (44.0) (6.0) (50.1) Net Capital position as at 30 June 2018 0.0 1.2 0.6 1.8 0.5 5.7 6.2 8.1 6.6 14.7 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. The regulated entities had $8.1 million of net assets in excess of internal benchmarks as at 30 June 2018. 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 of $3.4 million as at 30 June 2018 to fund anticipated new business growth over the medium-term. The Group has $14.7 million of net assets in excess of internal benchmarks at 30 June 2018. 1 As at 30 June 2018, risk capital is held in regulated entities at 97.5% probability of adequacy (POA). Risk capital at 99% POA is held in the NOHC². 2 NOHC is a non operating holding company regulated by APRA under the Life Insurance Act. 54 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) The net capital position of the Group as at 30 June 2018 represents a decrease of $1.8 million since 30 June 2017. This decrease reflects the following key items: • • • • • • • • • The Underlying NPAT for the year (+$32.4 million); The net capital absorbed by the growth of the business over the period (-$33.6 million); The decrease in the working capital reserve (+$13.6 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 (-$7.5 million), and the net impacts of capitalised software, acquired intangibles and deferred tax (-$6.0 million); Decrease in asset concentration risk reserve given reinsurance asset concentration limits have changed over the period (+$1.4 million); The net impacts of the movements in the Share Based Payments reserve due to the treatment of the ESP in accordance with accounting standards, ESP loans settled through the FY17 dividend and the proceeds from ESP shares sold via off market transfer, including the repayment of ESP loans (+$8.0 million); The after tax costs predominantly associated with the Sony Life Cooperation Agreement and after tax interest cost on debt (-$1.1 million); The net impacts of the tax effect on the change in policy liability discount rate (+$0.4 million); and The net impact of the final FY17 cash dividend paid in September 2017 (-$6.0 million). 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 (which has been in place since 19 December 2014) until December 2018. 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 2018. Outlook Market outlook • • • • • • • • Long-term market growth fundamentals remain sound driven by population increases, inflation and real GDP growth and underpinned by a compulsory retirement savings regime (superannuation). Short-term challenges and opportunities include: Life Insurance Reforms (LIF) implemented on 1 January 2018 - changes include reduced commissions and new clawback provisions that will have a short term impact on profit margins, but overall will increase return on equity and improve margins as upfront commission caps reduce to 60% over the next few years. Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 – features fee caps and changes to group life insurance inside superannuation. ClearView does not participate in group life but continues to advocate for reforms requiring all members to consciously opt-in for group insurance. Banking and Financial Services Royal Commission – ongoing hearings and potential recommendations likely to create further disruption to existing revenue streams and industry structures. Industry-wide reputational damage is impacting financial services. Parliamentary Joint Committee (PJC) Report on the life insurance industry - the reform agenda is designed to boost competition, drive efficiency and deliver improved consumer outcomes. ClearView has advocated for open life insurance APLs as an important step to ensuring conflicts of interest are properly managed. This would lead to a step-change in ClearView’s distribution profile if open life insurance APLs are mandated. Heightened M&A activity - as banks refocus on their core business lines, there has been an emergence of foreign institutions investing in the Australian life insurance industry along with a trend towards banks demerging their wealth operations. This is likely to drive investment in the industry and boost competition leading to improved consumer outcomes. Retail Income Protection - industry participants have progressively increased prices driven by losses on IP portfolios. ClearView increased prices in HY17 (10% on average) to manage margins, resulting in some short-term elevated lapses which is subsiding. The broader industry pricing cycle and performance of IP portfolios continues to be closely monitored. CLEARVIEW WEALTH LIMITED | 55 DIRECTORS’ REPORT (CONTINUED) • Scrutiny on Direct Life Insurance Sales Practices - ClearView closed its Direct Life operation to new business in FY17 given a number of issues associated with the direct distribution (non-advice) channel. ClearView is currently undertaking a Direct Remediation Program to compensate a number of Direct Life insurance customers who may have been affected by inappropriate sales practices. Provision for the remediation program has already been made and it is not expected to have a material further financial impact on the Group. Business outlook • • Life Insurance remains the key profit driver. The underlying performance remains strong with the expanding distribution footprint and strong new business volumes leading to a material increase in the in-force portfolios which underpins the growth profile, noting: • Maturation of existing Life Insurance APLs and gaining access to new APLs. If transition to open life insurance APLs occurs, addressable market will expand materially. ClearView is focused on offering both life insurance and wealth management products that can maximise adviser relationships and further cementing its position with quality advisers by offering dealer group services to third party dealer groups (D2D): • • Positioning itself as a participant in the D2D market given it has infrastructure, services and systems for compliance, supervision and monitoring for those third party dealer groups that choose to self license or currently have their own licence; and Continued significant investment in building a contemporary wealth management platform and products (noting competitive pricing pressures) with ability to leverage off ClearView’s Life Insurance distribution network over time. • The Group maintains a positive outlook and is well positioned to outperform the market and generate material growth in Group FY19 Underlying NPAT (versus FY18), noting: • • There can be some claims volatility between periods and shorter term lapse impacts; and Difficult regulatory backdrop with increased media scrutiny – Royal Commission hearings to take place in September may impact on consumer sentiment in short to medium term (including overall industry sales volumes). Changes in state of affairs There were no other significant changes in the state of affairs of the Group apart from than those discussed above, during the year ended 30 June 2018. 56 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Other Executive KMP • • • • • • • • Christopher Blaxland-Walker General Manager, Distribution Athol Chiert Chief Financial Officer and Company Secretary 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 Elizabeth Briggs (Appointed 4 April 2018) General Counsel and Company Secretary Louise Hulley (Appointed 4 April 2018) General Manager, Technology Former Executive KMP • Sarah Cummings (Ceased 31 January 2018) General Manager, Development 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 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 2018. 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: • • • • • • • • • Bruce Edwards (Chairman, Independent Non-executive Director) Andrew Sneddon (Resigned 1 March 2018) (Independent Non-executive Director) David Brown (Independent Non-executive Director) Gary Burg (Independent Non-executive Director) Michael Alscher (Alternate Non-executive Director to Mr Thomson) Michael Lukin (Revoked 1 March 2018) (Alternate Non-executive Director to Michael Alscher) Nathanial Thomson (Non-executive Director) Satoshi Wakuya (Non-executive Director) Susan Young (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: Managing Director • Simon Swanson Managing Director CLEARVIEW WEALTH LIMITED | 57 DIRECTORS’ REPORT (CONTINUED) 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). 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) under 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 58 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) 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 Board (on recommendation of the Remuneration Committee). For FY18, 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. For FY19, personal targets and objectives will be set for the KMP by the Managing Director, in addition to Company goals. 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 2018 financial year. The 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 2018 Fixed Remuneration. CLEARVIEW WEALTH LIMITED | 59 DIRECTORS’ REPORT (CONTINUED) Company 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 FY18 0% 50% 60% 0% 0% 25% 30% 0% 0% 25% 30% 0% 1 UNPAT for the purposes of bonus calculations excludes the after tax interest on corporate debt. 0% 100% 120% 0% Overall 0% 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. The FY18 STI was based on financial outcomes that were adversely impacted by the poor claims and lapse experience across each of the key contributors to the STI calculation. This resulted in no STI being made payable to the SMT. However, this does not reflect the numerous achievements made in FY18 that will underpin the future financial results. The underlying performance remains strong with the expanding distribution footprint and strong new business volumes leading to a material increase in the in-force portfolios which underpins the growth profile. 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. 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. 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 Elizabeth Briggs Louise Hulley Deborah Lowe Gregory Martin Justin McLaughlin Sarah Cummings Todd Kardash 60 | CLEARVIEW ANNUAL REPORT 2018 Target STI % Maximum STI % Minimum STI % Actual Achieved % 50% 30% 30% 30% 30% 30% 30% 30% 30% 30% 60% 36% 36% 36% 36% 36% 36% 36% 36% 36% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% DIRECTORS’ REPORT (CONTINUED) 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; 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 originally 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; 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). CLEARVIEW WEALTH LIMITED | 61 DIRECTORS’ REPORT (CONTINUED) 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-execuive 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 62 | CLEARVIEW ANNUAL REPORT 2018 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). 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. DIRECTORS’ REPORT (CONTINUED) 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. (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. Services from consultants - 2018 review and new LTIP 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. 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. 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. Given ClearView’s recent growth, it was considered appropriate for the Remuneration Committee to engage AON 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 and future financial years (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. An 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: CLEARVIEW WEALTH LIMITED | 63 DIRECTORS’ REPORT (CONTINUED) 1. Provides appropriate remuneration to the SMT to ensure a component of remuneration remains delivered in equity and is focused on longer term performance; 2. Acts as an incentive to remain employed at ClearView (a delayed vesting mechanism); and 3. 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. 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. The first awards under the new LTI were made in FY18. The key terms of the LTIP plan are set out in the table below. Performance rights granted as compensation The number of performance rights granted as compensation to each participant, as per the Board approvals and is accordance with the 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 Todd Kardash Elizabeth Briggs Louise Hulley Total 2018 issue 1,142,857 357,143 285,714 114,286 428,571 250,000 285,714 44,643 44,643 2019 issue2 718,899 224,656 179,725 71,890 269,587 157,259 179,725 129,897 129,897 2,953,571 2,061,533 Key Scheme Details Description 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. The awards also have the ability to be cash settled in certain circumstances. 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, being the share price at grant date and a notional value applied to the award, based on typical performance or valuation discounts derived from remuneration consultants research. 4. Performance Period The Performance Rights are be subject to a performance period that ends on 30 June 2019. 1 Performance rights to be granted to Simon Swanson can 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 Annual General Meeting. 2. Number of performance rights approved to be issued to participants in July 2018 but not yet granted. 64 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Key Scheme Details Description 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 include: • • 50% of the Performance Rights will be measured against an Embedded Value target as set out in the FY18 Business Plan and measured immediately after the financial year 30 June 2019. At 90% achievement of embedded value, 50% of the awards will vest with straight line vesting between 90% and 100%. 50% of the Performance Rights will be measured against a relative Total Shareholder Return target, based on an agreed basket of peer companies (ranked against the S&P ASX 200 Diversified Financials Index). To measure the performance against the TSR condition: • The TSR of the companies in the peer group is calculated for the relevant period, with the share price at the start and end based on a 5 day VWAP price; and • The companies in the peer group are ranked according to their TSR performance. CleaView’s TSR is calculated for the relevant period and ranked based on its percentile performance against the peer group. The number of rights that vest are determined according to a vesting scale: at less than the 50th percentile no rights vest, at the 50th percentile 50% vests and at the 75th percentile 100% vests. Straight line vesting applies between the 50th and 75th percentiles. 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. The TSR falls away in these circumstances. Sales of ESP Shares From August 2018, the Board resolved that interest would only be charged on vested shares. The Board further resolved and acknowledged, given the length of time between the initial ESP share issues, that management are likely to start selling vested shares on the ASX during the appropriate trading windows going forward. Retention Plan Given the decision to end the Collaboration Agreement with Sony Life, the Board has taken into consideration that there is a period of uncertainty and there may be external competition for key ClearView employees. Retaining skilled and dedicated employees is paramount to maintaining momentum in the business and navigating the industry maelstrom. As such, the Board has agreed to a retention plan to retain key individuals to: • Ensure ClearView retains its existing senior management team as this is considered critical to the continuation of the outperformance of ClearView in the medium term; • Maintain momentum and navigate the industry disruption that will inevitably now take time to settle given the level of change and uncertainty that has been generated; and • Alleviate uncertainty and counter external competition. The terms of the retention plan are as follows: • Retention pool of $1.8 million for KMP; • Payable on 1 September 2018; and • A Clawback agreement will be put in place (prior to payment) prorated over a two year period to 31 August 2020. The proposed retention payments to KMP employees is as follows: CLEARVIEW WEALTH LIMITED | 65 DIRECTORS’ REPORT (CONTINUED) SMT Member Simon Swanson Athol Chiert Greg Martin Justin McLaughlin Christopher Blaxland-Walker Todd Kardash Deborah Lowe Elizabeth Briggs Louise Hulley Total Retention Payment 300,000 210,000 210,000 180,000 200,000 200,000 180,000 160,000 160,000 1,800,000 The Board also endorsed retention payments for a small number of key individuals which will also be paid on 1 September 2018 with clawback agreement to 31 August 2019. This amounts to a further payment of $0.3 million. The full retention cost of $2.1 million will be a cost that will be incurred in FY19, and as it is a cost considered unusual to the ordinary activities will be reported as such, below the line in the FY19 financial result. Consequences of ClearView’s performance on shareholder wealth The following tables set out the summary information about the Group’s earnings and movements in shareholder wealth for five years to 30 June 2018: Revenue1 ($’000) Net profit after tax ($’000) Underlying Net Profit after Tax Dividend (Final) (cents) Basic EPS (cents) Diluted EPS (cents) Fully diluted Underlying EPS (cents) Embedded Value2 ($m) Embedded Value per share (cents)2 Share Price at the beginning of the year (cents) 30 Jun 18 30 Jun 17 30 Jun 16 30 Jun 15 30 Jun 14 372,207 333,503 295,828 253,640 190,301 26,596 13,150 32,353 30,362 23,615 27,235 12,572 20,533 13,880 19,738 3.00 4.33 4.14 5.03 701 104.9 145.0 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 Share Price at the end of the year (cents) 116.0 145.0 1 Revenue from continuing operations excludes net fair value gains/losses in financial assets. 2 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. 66 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) 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 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 (2017: $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. The fees per Board member would be reconsidered at the appropriate time. CLEARVIEW WEALTH LIMITED | 67 DIRECTORS’ REPORT (CONTINUED) The compensation of each Non-executive Director for the year ended 30 June 2018 is set out below: Short term employee benefits Post employment Share based payments Total Salary & Fees 2018 $ Non-executive Directors B Edwards D Brown G Burg M Lukin 1 N Thomson2 A Sneddon3 M Alscher 4 S Wakuya5 S Young Total 150,000 77,626 85,000 - 85,000 58,145 53,333 80,000 86,758 675,862 Bonus $ Non- monetary Termination Payment Superannuation $ $ $ Executive Share Plan of total remuneration $ $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7,374 - - - - - - 8,242 15,616 - - - - - - - - - - 150,000 85,000 85,000 - 85,000 58,145 53,333 80,000 95,000 691,478 1 Mr Lukin received no fees as an Alternate Director. Mr Lukin’s appointment as Alternate Director for Mr Alscher was revoked 1 March 2018. 2 Mr Thomson has agreed that he will receive no fees as a Director although fees are payable to Crescent Partners Pty Limited of which he is an employee. 3 Mr Sneddon resigned as a Director on 1 March 2018. 4 Mr Alscher resigned as a Director and was appointed as an Alternate Director to Mr Thomson on 1 March 2018. During he tenure as a Director Mr Alscher agreed that he will receive no fees as a Director although fees are payable to Crescent Partners Pty Limited of which he is an employee. Mr Alscher receives no fees as an Alternate Director. 5 Mr Wakuya has agreed he will receive no fees as a Director although fees are payable to Sony Life Insurance Co., Ltd The 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 Salary & Fees 2017 $ 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 Superannuation $ $ $ Executive Share Plan of total remuneration $ $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7,374 7,374 - - - - - 6,397 21,145 - - - - - - - - - - 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. 68 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Managing Director and Senior Management Team remuneration The compensation of each member of the KMP of the Group for the year ended 30 June 2018 is set out below: Short term employee benefits Post employment Share based payments Total Salary & Fees Bonus Non- monetary Termination Payment Superan- nuation Executive Share Plan1 $ $ $ $ $ $ Long Term Incentive Plan $ Perfor- mance based % $ 2018 S Swanson A Chiert G Martin J McLaughlin T Kardash 678,756 398,456 414,564 337,897 344,160 C Blaxland-Walker 347,566 D Lowe S Cummings2 303,577 178,314 E Briggs3 L Hulley4 Total 264,673 22,321 255,732 21,657 - - - - - - - - 14,635 11,476 14,635 - 11,476 11,476 4,764 - - - - - - - - - - 20,032 20,032 20,032 26,833 20,032 20,032 23,432 - 352,859 33.1% 1,066,282 48,300 110,269 26.9% 588,533 48,300 132,322 28.7% 629,853 - 77,188 17.5% 441,918 19,564 88,215 22.3% 483,447 8,697 88,215 20.4% 475,986 16,100 35,286 13.4% 383,159 144,976 13,092 13,496 - 3.9% 349,878 - - 20,032 4,830 5,333 10.2% 317,189 21,347 - 5,333 8.9% 304,069 3,523,695 43,978 68,462 144,976 204,896 159,287 895,020 21.8% 5,040,314 Benefit calculated under the Binomial model in respect of the future value of the ESP shares issued. Ceased General Manager, Development on 31 January 2018. 1 2 3 Appointed as General Counsel and Company Secretary on 4 April 2018. Bonus relates to period from 1 July 2017 to 3 April 2018. 4 Appointed as General Manager, Technology on 4 April 2018. Bonus relates to period from 1 July 2017 to 3 April 2018. 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 Salary & Fees $ Bonus $ Post employment Share based payments Non- monetary Termination Payment Superannuation Executive Share Plan1 Performance based $ $ $ $ Total $ 2017 S Swanson A Chiert G Martin T Kardash D Charlton2 635,610 292,121 13,980 380,556 104,915 10,876 385,204 110,425 13,980 J McLaughlin 328,732 92,504 - 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. CLEARVIEW WEALTH LIMITED | 69 DIRECTORS’ REPORT (CONTINUED) 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 2018 and 30 June 2017: 2018 S Swanson A Chiert G Martin J McLaughlin T Kardash C Blaxland-Walker D Lowe S Cummings E Briggs L Hulley Total 2017 S Swanson A Chiert G Martin J McLaughlin T Kardash D Charlton Balance at beginning Loans Granted $ Interest charged1,2 $ Repay- ments $ Loan Cancelled $ Balance at end $ Highest in period $ 5,998,853 2,026,710 2,526,710 1,268,824 1,263,355 1,244,192 493,325 358,728 147,998 69,628 15,398,323 Balance at beginning 6,126,353 - - - - - - - - - - - 100,700 (145,750) 47,018 (36,438) 61,385 (43,725) 29,972 (21,863) 30,578 (21,863) 30,564 (18,183) 8,356 6,056 1,067 494 (7,630) (6,754) (2,289) (2,186) - - - - - - - - - - 5,953,803 5,998,853 2,037,290 2,037,290 2,544,370 2,544,370 1,276,933 1,276,933 1,272,070 1,272,070 1,256,573 1,256,574 494,051 358,030 494,051 358,728 146,776 147,998 67,936 69,628 316,190 (306,681) - 15,407,832 Loans Granted2 $ Interest charged1 $ Repay- ments $ Loan Cancelled $ Balance at end $ Highest in period $ - 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 D Lowe S Cummings Total 500,000 364,636 - - 12,560,494 3,408,951 - - - - - - - - - - (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 1 2 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 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 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. 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 became interest bearing from 30 November 2017 at 3 year month rate plus a margin of 1%. This limited recourse facility is reflected as loans on balance sheet of the listed entity. 70 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Shares granted to KMP and equity holdings During and since the end of the financial year no shares (2017: Nil) 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: Director, KMP, to which the series relates Justin McLaughlin Athol Chiert / Justin McLaughlin Simon Swanson Simon Swanson Simon Swanson Greg Martin Todd Kardash Share series Series 61,2,6,8 Series 71,2,6,8 Series 101,3,6,8 Series 111,4,6,8 Series 121,5,6,8 Series 151,5,6,8 Series 161,5,6,8 Series 161,5,6,8 Chris Blaxland-Walker Series 16 1, 8,6,10 Series 267 Series 267 Series 267 Series 438 Series 448 Series 458 Series 51a9 Series 51b9 Louise Hulley Athol Chiert Greg Martin Todd Kardash Chris Blaxland-Walker Chris Blaxland-Walker Chris Blaxland-Walker Deborah Lowe / Sarah Cummings/ Elizabeth Briggs Deborah Lowe / Sarah Cummings/ Elizabeth Briggs 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 0.10 0.29 0.29 0.29 0.20 0.23 0.27 0.10 0.59 51,500 30/06/2013 0.10 0.11 0.08 0.06 0.13 0.13 0.13 0.13 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 0.50 0.57 0.57 0.57 1.01 1.01 1.01 98,057 224,074 323,295 241,927 196,271 127,366 127,366 19,105 29/09/2014 26/03/2015 26/03/2015 26/03/2015 01/07/2015 01/09/2016 01/09/2016 01/09/2016 289,798 Change in control 289,798 Change in control 144,899 Change in control 16,718 19,372 21,883 25/11/2018 25/11/2019 25/11/2020 0.19 n/a 0.96 86,453 23/12/2020 0.22 n/a 0.96 98,966 23/12/2021 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. 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. Vesting conditions have been met up to the date of this report. Elizabeth Briggs became KMP on 4 April 2018. 8 9 10 Louise Hulley became KMP on 4 April 2018. 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 Nil1 Nil1 Nil2 Nil2 Nil2,4 Nil Nil Nil Nil Nil CLEARVIEW WEALTH LIMITED | 71 DIRECTORS’ REPORT (CONTINUED) Series Vesting Conditions Performance Conditions Series 15 – 18 August 2011 Issue Series 16- 6 October 2011 Issue Series 24- 22 August 2012 Issue Series 26- 16 April 2013 Issue 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 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 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%. 72 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) 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. LTIP Awards The following LTIP Awards were in existence at the end of the current reporting period: Tranche Issue Date Number Grant date Vesting date Vesting conditions Fair value at grant date 1A 1B 2A 2B 6 October 2017 1,432,143 6 October 2017 1,432,143 20 October 2017 20 October 2017 30 June 2019 Embedded Value (EV) target 30 June 2019 Total shareholder return (TSR) performance 4 April 2018 44,643 4 April 2018 30 June 2019 Embedded Value (EV) target 4 April 2018 44,643 4 April 2018 30 June 2019 Total shareholder return (TSR) performance $1.38 $0.03 $1.38 $0.03 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 2018: 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 11,638 599,900 - 10,918,090 - - 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 - - 2018 B Edwards G Burg S Swanson A Chiert S Young J McLaughlin T Kardash G Martin - 10,000,000 14,549,021 1,000,000 1,500,000 2,899,247 - - 79,217 - 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 D Lowe E Briggs L Hulley 523,505 157,052 - - 588,445 172,450 - 150,000 164,706 - - - - - - - - - - - - 89,998 14,639,019 - 10,000,000 - 10,000,000 - 2,899,247 1,000,000 1,500,000 - 1,500,000 1,566 80,783 - - - - - 1,647,060 - 1,500,000 - 1,500,000 - 1,647,059 500,000 1,000,000 - 1,000,000 14,241 3,734,141 1,000,000 2,000,000 - 2,000,000 - 1,247,525 247,525 1,000,000 - 1,000,000 - 588,445 523,505 304 172,754 157,052 - - - 164,706 - 150,000 - - - - - 150,000 CLEARVIEW WEALTH LIMITED | 73 DIRECTORS’ REPORT (CONTINUED) 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. Notice period by either the employee or the Company Other Term Ongoing 12 months In the case of redundancy, a severance payment of 13 weeks' base salary (or any greater payment required under the National Employment Standards (NES)). Target Incentive % of base salary Maximum Incentive % of base salary 50% 60% KMP Simon Swanson Athol Chiert Ongoing 6 months notice for the first 3 years of employment, 3 months notice after 3 years For all terminations after the first 3 years of employment an additional 26 week payment is payable. 30% 36% Christopher Blaxland- Walker Ongoing 12 months In the case of redundancy, a severance payment of 13 weeks' base salary (or any greater payment required under the NES). 30% 36% Deborah Lowe Ongoing 6 months Elizabeth Briggs Ongoing 6 months Greg Martin Ongoing 6 months Justin McLaughlin Ongoing 12 months notice for the first 3 years of employment, 6 months notice after 3 years Louise Hulley Ongoing 6 months Todd Kardash Ongoing 12 months In the case of redundancy, a severance payment of 13 weeks' base salary (or any greater payment required under the NES). In the case of redundancy, a severance payment of 13 weeks' base salary (or any greater payment required under the NES). In the case of redundancy, a severance payment of 13 weeks' base salary (or any greater payment required under the NES). 30% 36% 30% 36% 30% 36% 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 NES). In the case of redundancy, a severance payment of 13 weeks' base salary (or any greater payment required under the NES). 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 22 August 2018 74 | CLEARVIEW ANNUAL REPORT 2018 DIRECTORS’ REPORT (CONTINUED) Auditor’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 22 August 2018 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 2018, 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. 2018 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 77 78 79 81 82 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 82 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 84 95 100 104 106 108 108 108 108 111 112 112 113 113 113 114 114 115 116 The Financial Report was authorised for issue by the Directors on 22 August 2018. 117 118 119 120 121 121 131 131 132 133 134 137 145 149 149 150 150 150 150 151 152 157 159 76 | CLEARVIEW ANNUAL REPORT 2018 Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June 2018 Consolidated Note 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 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 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. 8 9 10 10 25 25 25 11 14 215,171 (56,741) 158,430 127,744 86,033 177,674 (43,130) 134,544 116,462 - - - - - - - - 82,497 23,845 21,154 372,207 333,503 23,845 21,154 41,195 62,432 - - 413,402 (94,161) 61,244 395,935 (72,206) 47,182 (129,903) (120,510) (101,687) (10,432) 17,234 4,599 (97,570) (13,637) 21,879 170 (72,041) (100,419) (55,733) (44,593) 23,845 21,154 - - - - - - (2,735) (5,680) - - - - - - - - - - 32,522 5,926 26,596 16,231 3,081 13,150 21,110 (1,085) 22,195 15,474 (2,034) 17,508 26,596 13,150 22,195 17,508 4.33 4.14 2.20 2.11 - - - - CLEARVIEW WEALTH LIMITED | 77 Consolidated statement of financial position For the year ended 30 June 2018 Assets Cash and cash equivalents Investments Receivables Fixed interest deposits Reinsurers’ share of life insurance policy liabilities 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. Consolidated Note 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 15 16 17 18 26 24 21 19 20 22 23 25 25 24 26 12 12 12 12 176,363 222,197 8,047 5,880 2,057,192 1,814,049 412,359 377,159 43,088 98,685 38,243 10,979 1,150 20,452 24,710 37,947 78,327 15,338 10,509 1,425 20,452 24,202 17,682 13,689 - - - - 179 310 - - - - - - 2,470,862 2,224,446 438,267 397,038 31,106 39,909 8,146 6,634 523 8,460 (197,116) (207,632) 1,198,780 1,177,290 976,079 788,427 2,924 1,819 2,026,553 1,808,796 9,241 8,145 26 - - - 1,042 18,454 352 523 18 - - - 591 1,484 444,309 415,650 419,813 395,554 438,289 (9,274) 12,509 - 2,785 421,717 (15,648) 10,068 - (487) 438,289 (64,969) 12,509 31,200 2,785 421,717 (61,379) 10,068 25,635 (487) 444,309 415,650 419,813 395,554 78 | CLEARVIEW ANNUAL REPORT 2018 Consolidated statement of changes in equity For the year ended 30 June 2018 Consolidated Balance at 1 July 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 Profit for the year Total comprehensive income for the year Recognition of share based payments Recognition of LTIP ESP payments (including tax) Dividend paid (inclusive of costs) Dividend Reinvestment Plan Dividend Reinvestment Plan Costs ESP loans settled through dividend ESP shares vested/(forfeited) Transfers Share based payments reserve $’000 8,342 - - 1,012 - - Share capital $’000 417,850 - - - (3) (12) - 1,011 - - - - - 12,217 (36) - 4,391 - - - 985 1189 - - - 771 (504) - (2,085) - - - - - - - - - - - - - - 1,187 2,085 2,785 3,882 (297) 421,717 10,068 1,598 (487) Balance at 30 June 2018 438,289 12,509 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 - - - - - - - - - - - - - - - - - - - - (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 26,596 26,596 - - (18,136) - - - - (2,085) (9,274) 26,596 26,596 985 1,189 (18,136) 12,217 (36) 771 5,074 - 444,309 CLEARVIEW WEALTH LIMITED | 79 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) Company Balance at 1 July 2016 Profit for the year Total comprehensive profit/(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 ESP shares vested/(forfeited) Balance at 30 June 2017 Profit for the year Total comprehensive profit/(loss) for the year Recognition of share based payments Recognition of LTIP ESP payments (including tax) Dividend paid (inclusive of costs) Dividend Reinvestment Plan Dividend Reinvestment Plan Costs ESP loans settled through dividend ESP shares vested/(forfeited) Transfers Share based payments reserve $’000 8,342 - - 1,012 - - 1,011 (297) Share capital $’000 417,850 - - - (3) (12) - 3,882 421,717 10,068 - - - - - 12,217 (36) - 4,391 - - - 985 1,189 - - - 771 (504) - Balance at 30 June 2018 438,289 12,509 To be read in conjunction with the accompanying Notes. Profit reserve Retained losses Attributable to the owners of the parent $’000 $’000 General reserve $’000 (2,085) 21,090 (57,887) 387,310 - - - - - - 1,598 (487) - - - - - - - - 1,187 2,085 2,785 21,000 (3,492) 21,000 (3,492) - (16,454) - - - - - - - - 17,508 17,508 1,012 (16,458) (12) 1,011 5,183 25,636 (61,379) 395,554 23,700 (1,505) 23,700 (1,505) - - (18,136) - - - - - - - - - - - - (2,085) 22,195 22,195 985 1,189 (18,136) 12,217 (36) 771 5,074 - 31,200 (64,969) 419,813 80 | CLEARVIEW ANNUAL REPORT 2018 Consolidated statement of cash flows For the year ended 30 June 2018 Consolidated Note 2018 $’000 2017 $’000 2018 $’000 Cash flows from operating activities Receipts from clients 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 Income taxes paid 610,882 472,320 (347,754) (306,663) - - (299,786) (225,031) 20,441 25,306 (1,129) (3,502) 17,529 23,040 (827) (5,350) Net cash (utilised)/generated by operating activities 32 4,457 (24,982) - (280) 17,890 - - 145 (419) (3,502) 13,834 Company 2017 $’000 - (3,901) 10,028 - - 154 (257) (5,350) 674 Cash flows from investing activities Net cash movement due to investment in subsidary - - (35,200) (23,000) 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/(repaid) Dividends received from subsidiary Net cash (utilised) by investing activities (1,402,009) (1,967,063) 1,253,078 1,863,056 - (2,200) (426) (10,263) (20,358) (2,124) (240) (7,072) 1,257 (4,585) - - - - - - (57) - - 23,700 (182,102) (116,847) (11,557) - - - - - - (3,409) 21,000 (5,409) Cash flows from financing activities Net movement in liability of non-controlling interest in unit trusts 131,920 156,627 Share issue expenses Repayment of ESP loans ESP shares vested/(forfeited) Dividend paid (net of costs) - 771 5,074 (5,954) (12) 1,012 5,183 - - 771 5,074 - (12) 1,012 5,183 (16,457) (5,954) (16,457) Net cash generated in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 15 Cash and cash equivalents at the end of the financial year To be read in conjunction with the accompanying Notes. 131,811 146,353 (45,834) 4,524 222,197 217,673 176,363 222,197 (109) 2,167 5,880 8,047 (10,274) (15,009) 20,889 5,880 CLEARVIEW WEALTH LIMITED | 81 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 There were no new and revised standards and interpretation have been adopted and have affected the amount reported in these financial statements. 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 2019 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 2018. For annual reporting periods beginning before 1 January 2018, an entity may early adopt either AASB 9 (December 2009) or AASB 9 (December 2010) and the relevant amending standards. 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 AASB 17 - Insurance Contracts 1 January 2021 30 June 2022 82 | CLEARVIEW ANNUAL REPORT 2018 Notes to the Financial Statements For the year ended 30 June 2018 2. Application of new and revised accounting standards Continued 2.3 Impact of changes to Australian Accounting • 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 9 ‘Financial Instruments’ AASB 9 Financial Instruments replaces AASB 139 Financial Recognition and Measurement. AASB 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculation of impairment on financial assets, and new general hedge accounting requirements. It also carries forward guidance on recognition and derecognition of financial instruments from AASB 139. The standard will become mandatory for reporting periods beginning on or after 1 January 2018. The adoption of AASB 9 changes the Group’s accounting for impairment losses for financial assets by replacing AASB 139’s incurred loss approach with a forward-looking expected credit loss (“ECL”) approach. AASB 9 requires an allowance to be recognised for ECLs on all loans and other debt financial assets not held at FVPL. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and the cash flows that are expected to be received. The shortfall is then discounted at an approximation to the asset’s original effective interest rate. The Group has undertaken an assessment of the impact to classification and measurement and the accounting for impairment losses under the new standard below: • The Group’s investments are designated at fair value through profit or loss on initial recognition and are subsequently remeasured to fair value at each reporting date. The Group’s other financial instruments (i.e. loans, receivables and payables) are held at amortised cost. Under the current business model, the adoption of AASB 9 does not materially change the accounting for investments and other financial instruments; For Contract assets and Trade and Other Receivables, the Group will adopt the simplified approach to calculate ECLs based on lifetime expected credit losses. A provision model has been established based on historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. There is currently no indication that a material lifetime expected credit loss would be recognised upon initial adoption of the standard. • For other debt financial assets (such as adviser loans), the ECL impact analysis is based on the 12-month ECL. The 12-month ECL is the portion of lifetime ECLs that results from default events on a financial instrument that are possible within 12 months after the reporting (or assessment) date. However, when there has been a significant increase in credit risk since origination, the allowance will be based on the lifetime ECL. The Group has assessed its loans and other receivables under the 12-month ECL model and there is currently no indicators that the expected credit losses would be material upon adoption of the standard. Upon initial adoption of the standard it is the Group’s policy to recognise any initial increase in allowance through opening retained earnings with any future impairment allowances recognised through profit or loss, however the adoption of AASB 9 is not expected to result in any material adjustment on initial adoption. AASB 15 ‘Revenue from Contracts with Customers’ 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 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 AASB 15 applies to annual periods beginning on or after 1 January 2018. CLEARVIEW WEALTH LIMITED | 83 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 2. Application of new and revised accounting standards Continued AASB 15 introduces a single model for the recognition of revenue based on when control of goods and services transfers to a customer. Revenues derived under the Insurance Contracts and Financial Instruments standards, which represents a large proportion of the Groups revenue, are excluded from AASB 15 and hence, that revenue is not impacted by the adoption of the standard. The Group has assessed its contracts with customers and the key revenues impacted by the adoption of the standard are derived from contracts entered into with clients to provide advisory services and asset management services. Our assessment of these contracts and the requirements under the standard regarding the estimation and constraint of variable consideration noted that the transaction price is highly susceptible to factors outside ClearView’s influence such as client retention, changes in-force premiums, flows of funds under management and investment market movements. Prior experience with contracts of this nature is considered of little predictive value in determining the transaction price and it is the Group’s view that these revenues are constrained until those uncertainties are resolved over the passage of time. This earnings pattern is consistent will the Group’s current accounting policy and does not result in any material changes upon initial recognition. The Group intends to adopt the modified approach under which the standard from the date of initial application. Under this approach opening balance of equity is adjusted at the date of initial application but prior year comparatives not. The adoption of AASB 15 does not result in a material adjustment opening retained earnings. 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 Group is not currently a party to any material leases which would be in place as at the first reporting period subsequent to initial adoption of AASB 16. It is not practicable to provide an estimate of the effect of AASB 16 until the Group enters into a lease agreement which extends beyond the first reporting period affected by the new Accounting Standard. 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 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’). The financial statements were authorised for issue by the Directors on 22 August 2018. (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: 84 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies Continued • • • 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 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. CLEARVIEW WEALTH LIMITED | 85 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies continued (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 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. 86 | CLEARVIEW ANNUAL REPORT 2018 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 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. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies continued 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. (f) 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 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 portfolio management fees earned via the platform is recognised on an accrual fees (such as model and SMA account) 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. (g) 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. CLEARVIEW WEALTH LIMITED | 87 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies continued (h) 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. (i) 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. 88 | CLEARVIEW ANNUAL REPORT 2018 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). 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. (j) 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. (k) 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. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies continued (l) Policy acquisition costs Life insurance contracts 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. (m) 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. These expenses are related to non-participating business as ClearView Life only write this category of business. 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 for part of the year. 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). (n) Policy liabilities Policy liabilities consist of life insurance policy liabilities and life investment policy liabilities. 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. (o) 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. (p) 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. CLEARVIEW WEALTH LIMITED | 89 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies continued (q) Share based payment arrangements 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 27 and 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. (r) 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 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 90 | CLEARVIEW ANNUAL REPORT 2018 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. Current and deferred tax for the year Current and deferred tax are recognised in profit or loss, 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. (s) 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 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies continued 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. (t) 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. An internally-generated intangible asset arising from development (or from the development phase of an internal 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. (u) 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 CLEARVIEW WEALTH LIMITED | 91 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies continued 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. (v) 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. 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. Onerous contracts 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. 92 | CLEARVIEW ANNUAL REPORT 2018 (w) 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. 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. Effective interest method 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 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies continued • 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 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. 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 process in accordance with the policy adopted by the custodian on the reporting date. 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. 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. 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. 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. 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. Impairment of financial assets Derecognition 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 The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the CLEARVIEW WEALTH LIMITED | 93 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies continued 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. 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 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. 94 | CLEARVIEW ANNUAL REPORT 2018 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. 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 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. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 3. Significant accounting policies continued 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; and • Deferred tax assets. 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 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 $6.4 million (2017: $10.4 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 CLEARVIEW WEALTH LIMITED | 95 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 4. Critical accounting judgments and key sources of estimation uncertainty continued 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 $6.2 million (2017: $10.2 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. The Life Insurance Client Book was written off over 8 years on a straight line basis. The triggers that were considered in testing for annual impairment for the Life Insurance Client Book were as follows: • Mortality and morbidity (claims); • Maintenance costs; • Persistency (lapse); and • Discount rates. During the year the Life Insurance Client Book was fully amortised. In the prior 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 $6.2 million at 30 June 2018. 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 30 June 2018, 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 $18.3 million (2017: $13.8 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, the launch of WealthFoundations that is hosted on the new platform and any development costs associated with the Master Trust and MIS products. The Master Trust and MIS products were migrated onto the new platform in the 2018 financial year. No impairment was required to the carrying values of internally generated software as at 30 June 2018. Impairment of goodwill The carrying amount of goodwill at the reporting date was $20.5 million (2017: $20.5 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. 96 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 4. Critical accounting judgments and key sources of estimation uncertainty continued Goodwill 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 2018. 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 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 and competitive 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. As at 30 June 2018, no impairment was required to the carrying value of the goodwill. 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. CLEARVIEW WEALTH LIMITED | 97 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 4. Critical accounting judgments and key sources of estimation uncertainty continued The methods used for the major product groups are as follows: Related Product Group Method Profit carrier 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 Projection Premiums Projection Premiums Projection Premiums Projection Premiums Projection Premiums Fund 2 Investments Fund 4 Investments Accumulation Accumulation n/a n/a 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 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 2018) Effect on profit margins Increase/ (decrease) Effect on policy liabilities Increase/ (decrease) $’000 $’000 5,666 (3,488) - - (6,369) (704) - - - (3,488) Assumption category Discount rates and inflation Maintenance expenses Lapses Mortality and morbidity Total Key assumptions used in the calculations of life insurance policy liabilities are as follows: Discount rate (c) Processes used to select assumptions 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 2.7% (2017: 3.0%). Acquisition expenses: Per policy acquisition expense assumptions were based on the actual acquisition expenses incurred for the 12 months to 30 June 2018. 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. Maintenance expenses and inflation 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 2018 business plan. Expense inflation of 2.5% p.a. (2017: 2.5% p.a.) was assumed. Maintenance expenses are set having regard to the cost base in the three year Board adopted business plan. Per policy maintenance expenses are assumed to increase in the future with inflation, at a rate that allows for basic price increases (CPI). 98 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 4. Critical accounting judgments and key sources of estimation uncertainty continued 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 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. (d) Sensitivity analysis 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. 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. CLEARVIEW WEALTH LIMITED | 99 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 4. Critical accounting judgments and key sources of estimation uncertainty continued The table below illustrates how outcomes during the financial year ended 30 June 2018 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 17,720 $’000 16,039 (20,061) (18,157) - - - - - - - - - - $’000 (12,404) 14,042 (5,660) 5,660 (2,687) 2,687 (1,580) $’000 (11,227) 12,710 (1,737) 1,737 (2,440) 2,440 (1,580) Change in variable + 100 bp - 100 bp 110.0% 90.0% 110.0% 90.0% 110.0% 1,580 * 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. 90.0% 1,580 - - 5. Risk management 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; • Insurance 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. 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 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 100 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 5. Risk management continued 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). Insurance risk 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. (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 reinsurers 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; CLEARVIEW WEALTH LIMITED | 101 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 5. Risk management continued • Formal internal policy document and Product Disclosure Statement due diligence review and sign-off processes; and • Budgeting and expense management reporting and management processes; • Modelling of anticipated client loss rates and ongoing • The ability to re-price products (change premium rates monitoring of discontinuance 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); • The assets held to support the capital guaranteed units in the ClearView Life 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 • Adoption of appropriate business retention strategies; and • Maintaining strong distribution partner relationships. Non-Financial Risks – regulatory environment, 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 • 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: 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. 102 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 5. Risk management continued 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 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. CLEARVIEW WEALTH LIMITED | 103 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 6. 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 ClearView Life Assurance Limited 2018 $’000 3,832 - 3,832 2018 $’000 373,248 (13,486) 359,762 - (1,643) (3,450) - - (304,658) 382 (19) 363 20.1 - (19) - - - - 53,461 (11,849) 41,612 4.5 (4,115) (2,678) - (6,509) 1,453 - 2018 $’000 1,221 - 1,221 - - - 1,221 (14) 1,208 93.9 - (5) - (9) - - 2018 $’000 11,013 (4,827) 6,186 (34) - - 6,152 (3,425) 2,727 1.8 - (429) - (2,996) - - 2018 $’000 389,314 (18,313) 371,001 (1,677) (3,450) (304,658) 61,216 (15,307) 45,910 4.0 (4,115) (3,131) - (9,514) 1,453 - (19) (11,849) (14) (3,425) (15,307) 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 104 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 6. Capital adequacy (ClearView Life Assurance Limited) 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 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 WEALTH LIMITED | 105 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 7. 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 106 | CLEARVIEW ANNUAL REPORT 2018 in December 2011. WealthSolutions includes a menu of approximately 250 investment funds, ASX listed shares, term deposits, 8 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. 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. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 7. Segment information continued 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 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2018 $’000 2017 $’000 160,702 126,350 114,546 343 136,913 111,977 112,783 314 - - - - (29,734) (28,484) - - 160,702 126,350 84,812 343 136,913 111,977 84,299 314 Consolidated segment revenue 401,941 361,987 (29,734) (28,484) 372,207 333,503 2018 Underlying net profit/(loss) after tax Amortisation of acquired intangibles1 AIFRS policy liability discount rate effect (net of tax)2 Strategic review cost (net of tax)3 Reported profit/(loss) 2017 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)4 Life Insurance Wealth Management Financial Advice Listed Entity/ Other 26,085 (2,833) (906) - 5,163 (90) - - 1,780 (1,121) - - 22,346 5,073 659 24,867 (2,833) (5,918) - - 3,942 (4,378) 2,231 (980) - - - - - - (676) - - (806) (1,481) (678) - - (683) (2,420) (3,781) Total 32,352 (4,044) (906) (806) 26,596 30,362 (8,191) (5,918) (683) (2,420) 13,150 Reported profit/(loss) 16,116 (436) 1,251 1 2 3 4 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 underlying net profit 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 under- lying earnings. This movement in policy liability creates a cash flow tax effect. Certain costs were recognised predominantly in relation to Cooperation Agreement entered into with Sony Life and 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 Underlying NPAT. 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 Underlying NPAT. CLEARVIEW WEALTH LIMITED | 107 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 8. 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 2018 $’000 83,379 43,312 1,053 2017 $’000 76,918 38,470 1,074 127,744 116,462 Company 2017 $’000 2018 $’000 - - - - - - - - Consolidated Company 2018 $’000 25,202 20,441 40,390 86,033 2017 $’000 23,267 17,529 41,701 82,497 2018 $’000 145 2017 $’000 154 23,700 21,000 - - 23,845 21,154 Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’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 36,113 9,505 45,618 50,713 1,880 376 819 32,402 8,130 40,532 49,120 1,012 798 845 Total employee costs and directors’ fees 53,788 51,775 Other expenses Interest and other costs of finance Strategic review costs Direct restructure and remediation costs Total other expenses Total operating expenses Depreciation and amortisation expenses Depreciation expenses Software amortisation Amortisation of acquired intangibles Total amortisation and depreciation expenses 108 | CLEARVIEW ANNUAL REPORT 2018 1,129 1,152 - 2,281 827 978 3,458 5,263 101,687 97,570 677 5,711 4,044 639 4,808 8,190 10,432 13,637 595 - 595 10 - - 559 569 419 1,152 - 1,571 2,735 - - - - 346 - 346 12 - - 629 641 257 978 3,458 4,693 5,680 - - - - NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 10. Operating expenses continued 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 2018 $ 2017 $ Company 2017 $ 2018 $ 323,350 318,000 105,750 104,200 101,350 99,400 130,100 127,600 - - - - 554,800 545,000 105,750 104,200 133,450 106,050 133,450 106,050 121,950 46,400 121,950 26,800 417,134 358,386 135,400 310,976 - - - 135,976 Total remuneration for non-audit services 807,934 821,812 255,400 268,826 Total remuneration 11. Income tax a) Income tax recognised in profit or loss Income Tax expense/(benefit) comprises: Current tax expense Deferred tax expense 1,362,734 1,366,812 361,150 373,026 Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 6,564 (203) 4,827 322 (398) (379) (1,709) 52 Over provided in prior years – current tax expense (1,566) (2,860) (1,269) (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 b) Tax losses Unused tax losses for which no deferred tax asset has been recognised 1,131 5,926 (176) 1,105 929 792 3,081 961 802 (1,085) (2,034) 292 823 1,115 131 451 582 263 591 854 40,998 54,293 32,635 32,635 Potential tax benefit 10,627 11,956 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: c) Reconciliation of income tax expense to prima facie tax payable Profit before income tax expense 32,522 16,231 21,110 15,474 Policyholder tax (expense) credit recognised as part of the change in policyholder liabilities in determining profit before tax 5,991 5,092 - - Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 CLEARVIEW WEALTH LIMITED | 109 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 11. Income tax continued 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) d) Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or (credited) to equity: Consolidated Company 2018 $’000 38,513 11,554 2017 $’000 21,323 6,397 2018 $’000 21,110 6,333 2017 $’000 15,474 4,642 - (765) 121 1,213 (206) - 11,917 (5,991) 5,926 - (7,110) (6,300) (601) 406 2,449 (463) (15) 8,173 (5,092) 3,081 - - - - - - (308) - (376) - (1,085) (2,034) - - (1,085) (2,034) Current tax Deferred tax - (294) - - - - - - 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. Relevance of tax consolidation to the Group Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 29,520 27,610 29,520 27,610 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 includes subsidiaries as 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. 110 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 11. Income tax continued 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 Retained losses Balance at the beginning of the financial year (15,648) (12,344) (61,379) (57,887) Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 Net profit/(loss) attributable to members of the parent entity Transfer from General Reserve3 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 Proceeds from sale of ESP shares vested/forfeited (net of tax) Balance at end of the financial year 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 Reserve2 Balance at the beginning of the financial year Transfer to retained losses3 Gain on sale of unvested ESP shares (net of tax) Balance at end of the financial year 26,595 (2,085) 13,150 - (18,136) (16,454) (1,505) (2,085) - (3,492) - - (9,274) (15,648) (64,969) (61,379) 10,068 2,174 771 (504) 8,342 1,012 1,011 (297) 10,068 2,174 771 (504) 8,342 1,012 1,011 (297) 12,509 10,068 12,509 10,068 - - - - - - - - 25,635 23,700 21,089 21,000 (18,136) (16,454) 31,200 25,635 (487) 2,085 1,187 2,785 (2,085) - 1,598 (487) (487) 2,085 1,187 2,785 (2,085) - 1,598 (487) 1 2 3 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. The general reserve comprises the profit on sale of forfeited ESP shares ($2.8 million) where the shares were sold via an off market transfer with the proceeds being received by the Company. 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. $2.1m had previously been recognised in the general reserve in relation to a fair value adjustment for contingent consideration on the acquisition of Matrix Planning Solutions Limited. During the year the contingency period ended with the consideration (ClearView Wealth Limited Shares held in Trust) being released to the beneficiaries of the Trust. Subsequent to this, the general reserve was transferred to retained earnings. CLEARVIEW WEALTH LIMITED | 111 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 13. Sources of profit (ClearView Life Assurance Limited) 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 Profit for ClearView Life Assurance Limited 14. Earnings per share Earnings per share (cents) Basic earnings (cents) Diluted earnings (cents) Basic earnings per share Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 24,816 3,835 21,683 4,187 (5,913) (4,182) 2,441 25,179 (2,739) 18,949 2,623 2,623 2,812 2,812 27,828 21,735 1 13 27,829 21,748 - - - - - - - - - - - - - - - - - - - - Consolidated 2018 2017 4.33 4.14 2.20 2.11 The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: Profit for the year attributable to owners of the Company ($'000) Earnings used in the calculation of basic earnings per share ($'000) 26,596 26,596 13,150 13,150 Weighted average number of ordinary shares for the purpose of basic earnings per share ('000's) 614,309 597,808 Diluted earnings per share The earnings used in the calculation of diluted earnings per share are as follows: Profit for the year attributable to owners of the Company ($'000) Earnings used in the calculation of total diluted earnings per share 26,596 26,596 13,150 13,150 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) 614,309 597,808 28,414 25,550 642,723 623,358 112 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 15. Cash and cash equivalents Cash at bank Total cash and cash equivalents 16. 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 Company 2018 $’000 2017 $’000 176,363 222,197 176,363 222,197 2018 $’000 8,047 8,047 2017 $’000 5,880 5,880 Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 - - 412,359 377,159 303,467 262,428 545,055 433,603 - - - - 848,522 696,031 412,359 377,159 483,205 393,339 448,086 357,944 876,544 806,030 - - 332,126 311,988 332,126 311,988 - - - - - - - - - - - - 2,057,192 1,814,049 412,359 377,159 Consolidated 2018 $’000 391 6,148 (956) 2,512 2017 $’000 392 3,909 (800) 2,036 917 10,317 6,643 4,050 - 8,638 10,736 4,009 43,088 3,622 3,298 - 4,530 8,612 2,031 Company 2017 $’000 2018 $’000 - - - - - - 31 6,464 7,719 3,468 - - - - - - - 30 6,472 3,774 3,409 4 37,947 17,682 13,689 $7.8 million (2017: $5.6 million) of Total consolidated receivables are expected to be recovered more than 12 months from the reporting date and $0.01 million (2017: $3.4 million) of Total receivables for the Company are expected to be recovered more than 12 months from the reporting date. CLEARVIEW WEALTH LIMITED | 113 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 18. Fixed interest deposits Fixed interest term deposits Consolidated Company 2018 $’000 2017 $’000 98,685 78,327 2018 $’000 - 2017 $’000 - Fixed interest term deposits, held at year end, yield an average fixed interest rate of 2.39% (2017: 2.37%) 19. Goodwill Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 Gross carrying amount Balance at the beginning of the financial year 20,452 19,952 Additional amount recognised through acquisition of business1 - 500 Balance at the end of the financial year 20,452 20,452 Net book value Balance at the beginning of the financial year Balance at the end of the financial year 20,452 20,452 19,952 20,452 - - - - - - - - - - 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 2018, no impairment was required to the carrying value of goodwill. Further details have been provided in Note 4. 114 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) Capitalised software $’000 CWT software $’000 Client Book $’000 Matrix Website $’000 Matrix Brand $’000 Total $’000 Consolidated Balance at the beginning of the year 16,923 1,500 54,775 20. Intangible assets 2018 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 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 30,683 1,500 65,017 10,263 40,946 - - 1,500 65,017 5,711 22,634 - 1,500 4,044 58,819 13,760 18,312 - - 10,242 6,198 23,611 1,500 63,317 7,072 30,683 - 1,500 1,700 65,017 $’000 $’000 $’000 $’000 $’000 $’000 20 - 20 20 - 20 - - 200 - 97,420 10,263 200 107,683 - - - 73,218 9,755 82,973 200 200 24,202 24,710 20 - 20 20 - 20 - - 200 - 200 - - - 88,648 8,772 97,420 60,220 12,998 73,218 200 200 28,428 24,202 Balance at the beginning of the year 12,115 1,500 46,585 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 4,808 16,923 - 1,500 8,190 54,775 11,496 13,760 - - 16,732 10,242 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 WEALTH LIMITED | 115 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 21. Property, plant and equipment 2018 Gross carrying amount Balance at the beginning of the financial year Additions Transfers 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 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 Office furniture Office equipment Computer hardware Leasehold improvements $’000 $’000 $’000 $’000 Consolidated Total $’000 449 123 - 572 435 36 471 101 81 8 - 89 51 16 67 22 1,534 3,724 5,788 159 - 1,693 136 (24) 3,836 426 (24) 6,190 1,302 2,575 4,363 171 1,473 454 3,029 677 5,040 220 807 1,150 $’000 $’000 $’000 $’000 $’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 No property, plant and equipment is held by the Company. 116 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 22. Payables Trade payables Reinsurance premium payable Employee entitlements Life insurance premiums in advance Life investment premium deposits Lease incentive in advance Payables to controlled entities Outstanding investment settlements Other creditors Total payables Consolidated Company 2018 $’000 4,881 2017 $’000 5,180 15,162 12,127 5,021 672 856 847 - 6,962 566 2,298 1,194 2018 $’000 197 - 6 - - - - 9,035 2,766 11,239 901 343 - 3 31,106 39,909 9,241 2017 $’000 292 - 10 - - - - - 50 352 $1.6 million (2017: $0.9 million) of Total consolidated payables are expected to be settled more than 12 months from the reporting date and nil (2017: nil) of total payables of the Company are expected to be settled more than 12 months from the reporting date. CLEARVIEW WEALTH LIMITED | 117 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 23. Provisions Current and non current Make good provision Employee leave provisions Provision for restructuring Provision for remediation Other provisions Total Make good provision1 Balance at the beginning of the financial year Additional provisions raised Utilised during the period Unutilised provisions transferred Balance at the end of the financial year Employee leave provision2 Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 374 4,342 - 1,815 103 6,634 419 136 (49) (132) 374 419 3,849 1,408 1,623 1,161 8,460 270 149 - - 419 - - - - 26 26 - - - - - - - - - - - - - - - - - 18 18 (10) - 26 - - - - 18 18 - - - - - - - - - - - - - - - - - 26 24 (10) (22) 18 Balance at the beginning of the financial year 3,849 3,540 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 Unutilised provisions transferred Balance at the end of the financial year Provision for remediation4 Balance at the beginning of the financial year Additional provisions raised Utilised during the period Balance at the end of the financial year Other provisions5 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 1,093 (600) 4,342 1,407 - (1,172) - - 1,623 576 (385) 1,815 1,161 95 (1,153) - 103 890 (581) 3,849 20 1,834 (447) - 1,407 - 1,623 - 1,623 1,385 24 (248) - 1,161 1 2 3 4 5 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. The provision for remediation relates to the direct remediation program, remaining compensation and consulting costs as at 30 June 2018. Other provisions related 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 wealth platform. 118 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 24. Deferred tax balances Deferred tax assets Deferred tax liabilities Deferred tax assets The balance comprises temporary differences attributable to: Accruals not currently deductible Depreciable and amortisable assets Provisions not currently deductible Unrealised losses carried forward Capital business expense Rental lease incentives Share trust funding costs Deferred tax asset Deferred tax liabilities The balance comprises temporary differences attributable to: Unrealised gains on investments Prepaid expenses Fees not delivered Research and Development Capitalised assets Deferred tax liability Consolidated Company 2018 $’000 10,979 (2,924) 2017 $’000 10,509 (1,819) 2018 $’000 179 (1,042) 2017 $’000 310 (591) 519 1,606 3,195 4,825 139 132 563 440 15 4,329 5,265 267 193 - 40 - - - 43 - - - 139 267 - - - - 10,979 10,509 179 310 396 526 960 1,042 2,924 512 1,307 - - 1,819 - - - 1,042 1,042 - - - 591 591 Consolidated 2018 Gross deferred tax liabilities Gross deferred tax assets Total 2017 Gross deferred tax liabilities Gross deferred tax assets Total 2018 Gross deferred tax liabilities Gross deferred tax assets Total 2017 Gross deferred tax liabilities Gross deferred tax assets Total Opening balance $’000 (1,819) 10,509 8,690 (996) 10,801 9,805 $’000 (591) 310 (281) - 573 573 Transfers from subsidiaries $’000 Sharehold- er Equity $’000 - - - - - - - 294 294 - - - $’000 $’000 - - - - - - - - - - - - (Charge)/ Credit to income $’000 (1,105) 176 (929) (823) (292) (1,115) $’000 (451) (131) (582) (591) (263) (854) Closing balance $’000 (2,924) 10,979 8,055 (1,819) 10,509 8,690 Company $’000 (1,042) 179 (863) (591) 310 (281) 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 $41 million (tax effected $10.6 million) consolidated and $32.6 million (tax effected $9.8 million) for the Company. Refer to Note 11 for further details. CLEARVIEW WEALTH LIMITED | 119 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 25 Policy liabilities (a) Reconciliation of movements in policy liabilities Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 Life investment policy liabilities Opening gross life investment policy liabilities Net increase in life investment policy liabilities reflected in the income statement 1,177,290 1,152,554 72,041 100,419 Decrease in life investment policy liabilities due to management fee reflected in the income statement (22,150) (22,503) Life investment policy contributions recognised in policy liabilities 269,366 175,231 Life investment policy withdrawals recognised in policy liabilities (296,766) (228,411) Closing gross life investment policy liabilities 1,198,780 1,177,290 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 (207,632) (203,830) 27,750 18,077 (17,234) (21,879) (197,116) (207,632) 1,001,664 969,658 (15,338) (18,300) (4,599) 703 (15,871) (170) (38,243) (15,338) 963,421 954,320 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 $59.4 million (2017: $65.5 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 2018 $’000 350,316 449,010 2017 $’000 292,852 353,242 (1,384,891) (1,201,508) (585,565) (555,414) 350,205 332,444 (235,360) (222,970) Company 2017 $’000 2018 $’000 - - - - - - - - - - - - (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. 120 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 26. Issued capital 2018 2018 2017 No. of Shares $’000 No. of Shares Company 2017 $’000 Issued and fully paid ordinary shares Balance at the beginning of the financial year 603,266,050 421,717 597,429,600 417,850 Dividend Reinvestment Plan Dividend Reinvestment Plan Costs Dividend costs Entitlement offer costs related to prior year 8,789,480 12,217 - - - (36) - - - - - - - - (3) (12) Shares issued during the year (ESP vested/forfeited) 7,203,482 4,391 5,836,450 3,882 Balance at the end of the financial year 619,259,012 438,289 603,266,050 421,717 Executive share plan Balance at the beginning of the year Shares granted under employee share plan (note 27) Shares forfeited during the year Shares exercised during the year Balance at the end of the financial year 56,207,077 - (2,521,437) (4,682,045) 49,003,595 - - - - - 60,743,527 1,300,000 (3,693,143) (2,143,307) 56,207,077 - - - - - 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. 27. Share based payments Executive Share Plan 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: 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. • • 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 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: CLEARVIEW WEALTH LIMITED | 121 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 27. Share based payments continued • • 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 • 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 122 | CLEARVIEW ANNUAL REPORT 2018 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. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 27. Share based payments continued • “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. Long Term Incentive Plan Since October 2017, ClearView operates the ClearView Long Term Incentive Plan (LTIP). The LTIP underpins the Group’s strategy of rewarding performance and retaining its key talent. Offer and consideration Under the LTIP, the Board may invite Eligible Employees to participate in an offer of performance rights in ClearView (Awards). Each Award represents a right to receive one ordinary share in the capital of the Company (Share) or to receive a cash payment equal to the value of one ordinary share, subject to the rules of the LTIP Plan (LTIP Rules) and the terms and conditions which an Eligible Employee is invited to participate in the Plan (Invitation). Vesting and exercise conditions The Awards are divided into two equal tranches. Each tranche is subject to separate vesting conditions. The rights will vest on the earlier of 30 June 2019 (“Vesting Date”) and the 2nd anniversary of the Offer Date (i.e. 6 October 2019) only where the Eligible Employees Recipient (Recipient) remains employed by the Company and the vesting conditions are satisfied. The Awards are not subject to any Exercise Conditions. A Recipient will be able to exercise their vested Awards, in accordance with the LTIP Rules upon receiving a vesting notice. Settlement mechanism Upon exercise the Board will determine whether the Awards will be Equity Settled and/or Cash Settled. If an Award is to be Equity Settled, the Company will arrange for the Recipient to receive the requisite number of shares. If an Award is to be Cash Settled, the Recipient will receive a cash payment equal to: • • the volume weighted average share price (VWAP) at which the Company’s Shares were traded on the ASX in the 90 days up to and including the day on which the Award is validly exercised, or as otherwise determined by the Board (acting reasonably); or if the cash payment is calculated at a time of a Change of Control Event, the price per share paid by the entity acquiring the Company under the Change of Control Event, or such other higher amount as otherwise determined by the Board (acting reasonably). Change of control and expiry date On the occurrence of a ‘Change of Control Event’ (as defined in the LTIP Rules, which includes when a bona fide takeover bid is made to the holders of Shares), the Board may in its absolute discretion determine (having regard to various factors) the manner in which any or all of the Recipient’s Award to be dealt with. The expiry date of the Award is the fifth (5th) anniversary of the Grant Date of the Award. Employee share trust (EST) The Board may elect to use on such terms and conditions as determined by the Board in its absolute discretion an employee share trust for the purposes of holding Shares before or after the exercise of an Award or delivering any shares under these Rules. Under an employee share trust structure, the trustee of the employee share trust would be registered as the legal owner of the shares but the recipient would be the beneficial owner. Administration of the LTIP and EST The LTIP and EST (where used) is administrated by the Board. The Board may make rules and regulations for its operation that are consistent with the rules of the LTIP. The Company pays all costs and expenses of operating the LTIP and EST (where used) as well as the funding for the EST (where used). Employees are liable for any brokerage and tax payable associated with their participation in the Awards. CLEARVIEW WEALTH LIMITED | 123 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 27. Share based payments continued Termination of the LTIP The Board may resolve at any time to terminate, suspend, or reinstate the operation of the LTIP. 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 Issue price at grant date $ Expiry date9 Fair value at grant date (pre modifica- tion1) $ Fair value at grant date (post modifica- tion1) $ Series Series 66 30/06/2008 KMP 500,000 30/06/2008 30/06/2013 Series 72,6 29/09/2009 KMP and SM 2,600,000 29/09/2009 29/09/2014 Series 103,6 25/06/2010 MD 2,000,000 25/06/2010 26/03/2015 Series 114,6 25/06/2010 MD 4,000,000 25/06/2010 26/03/2015 Series 125,6 25/06/2010 MD 4,000,000 25/06/2010 26/03/2015 Series 155,6 18/08/2011 SM 2,000,000 1/07/2011 1/07/2015 Series 165,6 Series 175,6 Series 186 Series 196 Series 206 Series 216 Series 226 Series 236 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 2,900,000 1/09/2011 1/09/2016 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 Series 245,6 22/08/2012 SM 300,000 22/08/2012 22/08/2017 Series 256 21/12/2012 CP 1,300,000 21/12/2012 21/12/2017 Series 266,7 16/04/2013 SM 2,575,000 12/04/2013 Series 276 16/04/2013 SM 75,000 12/04/2013 50% Change in Control; 50% 1 year after 1 year post Change in Control 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 1,625,666 27/06/2013 27/06/2018 275,000 14/10/2013 Change in Control 1 year post Change in Control Change in Control 1 year post Change in Control Series 32 14/10/2013 SM 275,000 14/10/2013 Series 35 31/01/2014 SM 75,000 31/01/2014 Series 36 31/01/2014 SM 75,000 31/01/2014 124 | CLEARVIEW ANNUAL REPORT 2018 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 0.65 0.65 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 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 0.20 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 27. Share based payments continued Issue Date Type of Arrangement8 Number Grant date Issue price at grant date $ Expiry date9 Fair value at grant date (pre modifica- tion1) $ Fair value at grant date (post modifica- tion1) $ Series Series 37 Series 38 Series 39 Series 40 Series 41 Series 42 Series 43 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 656,334 30/05/2014 30/05/2018 656,334 30/05/2014 30/05/2019 656,333 30/05/2014 30/05/2020 1,950,000 30/05/2014 30/05/2019 4,560,760 9/07/2014 8/07/2019 26/11/2014 SM including KMP 181,518 26/11/2014 25/11/2018 26/11/2014 SM including KMP 2,594,886 26/11/2014 25/11/2019 and CP 26/11/2014 SM including KMP 181,518 26/11/2014 25/11/2020 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 141,667 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 25,773 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 602,032 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 20/06/216 SM including KMP 79,601 20/06/2016 20/06/2021 14/06/2017 CP 1,300,000 14/06/2017 14/06/2022 0.65 0.75 0.75 0.75 0.75 0.79 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 na na 0.17 0.17 0.19 0.22 0.19 0.17 0.19 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. 9 Expiry date represents either the relevant vesting or holding lock period. CLEARVIEW WEALTH LIMITED | 125 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 27. 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) Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) 126 | CLEARVIEW ANNUAL REPORT 2018 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 35 Series 36 0.64 0.64 36.90 5.00 0.61 0.61 22.20 5.00 0.61 0.61 22.20 6.00 0.65 0.65 22.01 5.00 0.65 0.65 22.01 6.00 Series 37 Series 38 Series 39 Series 40 Series 41 0.65 0.65 22.01 5.00 0.75 0.75 21.12 4.00 0.75 0.75 21.12 5.00 0.75 0.75 21.12 6.00 0.75 0.75 21.12 5.00 Series 42 Series 43 Series 44 Series 45 Series 46 0.79 0.79 16.78 5.00 1.01 1.01 19.79 4.00 1.01 1.01 21.56 5.00 1.01 1.01 24.18 6.00 1.00 1.00 20.84 4.00 Series 47 Series 48 Series 49 Series 50a Series 50b 1.00 1.00 20.84 5.00 1.00 1.00 20.84 6.00 0.97 0.97 20.15 5.00 0.97 0.97 20.15 4.00 0.97 0.97 20.15 5.00 Series 50c Series 51a Series 51b Series 52 Series 53 0.97 0.97 20.15 6.00 0.96 0.96 20.03 5.00 0.96 0.96 20.03 6.00 0.93 0.93 20.31 5.00 0.93 0.93 20.31 5.00 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 27. Share based payments continued Inputs into the model Grant date share price ($) Anticipated vesting price ($) Expected volatility (%) Anticipated option life (years) Series 54 Series 55 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 Exercised during the year Balance at the end of the financial year 2018 2017 Weighted average exercise price Number of shares Weighted average exercise price 0.61 60,743,527 - 1,300,000 1.39 0.53 0.57 (3,693,143) (2,143,307) 56,207,077 0.64 1.38 1.32 0.82 0.61 Number of shares 56,207,077 - (2,521,437) (4,682,045) 49,003,595 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 As at the date of this report, ClearView has a total of 49,003,595 ESP shares on issue of which 23,522,207 have been issued to select financial advisers. No new shares were granted to financial advisers in the year ended 30 June 2018. During the financial year, 4,682,045 vested ESP shares were exercised with the outstanding ESP loan balance proceeds being received by the Company. During the financial year, the forfeited 2,521,437 ESP 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 Condi- tions 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 Nil1 Nil1 Nil2 Nil2 Nil2,4 Nil4 Nil4 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 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil CLEARVIEW WEALTH LIMITED | 127 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 27. Share-based payments continued Series Vesting Conditions 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 Performance Condi- tions Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 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%. 128 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 27. 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 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 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. CLEARVIEW WEALTH LIMITED | 129 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 27. 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 11/09/2017 11/09/2017 11/09/2017 11/09/2017 11/09/2017 11/09/2017 11/09/2017 11/09/2017 11/09/2017 11/09/2017 11/09/2017 11/09/2017 Total Number of share cancelled 148,515 371,665 55,476 317,633 500,000 164,075 40,982 50,503 537,975 64,937 202,423 67,253 2,521,437 Cancelled from Series 43, 44, 45 Series 29 Series 37 Series 37 Series 41 Series 41 Series 42 Series 42 Series 42 Series 42 Series 42 Series 42 Shares that were exercised during the year The following table shows the shares that were exercised due to the vesting conditions being met. Date 9/08/2017 28/08/2017 11/09/2017 10/11/2017 25/01/2018 26/03/2018 4/05/2018 7/05/2018 7/06/2018 Total LTIP Awards Number of share exercised Exercised from 500,000 300,000 259,530 2,000,000 90,820 33,855 1,000,000 297,840 200,000 4,682,045 Series 23 Series 23 Series 23 Series 23 Series 25 Series 25 Series 22 Series 19 Series 23 The following LTIP Awards were in existence at the end of the current reporting period: Tranche Issue Date Number Grant date Vesting date Vesting conditions Fair value at grant date 1A 1B 2A 2B 6 October 2017 1,432,143 20 October 2017 30 June 2019 Embedded Value (EV) target $1.38 6 October 2017 1,432,143 20 October 2017 30 June 2019 Total shareholder return (TSR) performance $0.03 4 April 2018 4 April 2018 44,643 44,643 4 April 2018 30 June 2019 Embedded Value (EV) target $1.38 4 April 2018 30 June 2019 Total shareholder return (TSR) performance $0.03 130 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 28. Shares granted under the executive share plan In accordance with the provisions of the ESP, as at 30 June 2018, key management, members of the senior management team, the managing director and contractor participants have acquired 49,003,595 (2017: 56,207,077) ordinary shares. Shares granted under the ESP carry rights to dividends and voting rights. Financial assistance amounting to $32,270,871 (2017: $36,780,762) 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. 29. Dividends Dividend payments on Ordinary shares 2017 final dividend (2017: 2016 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 2018 $’000 Per share 2017 $’000 Per share 2.75 2.75 18,136 18,136 2.50 2.50 16,454 16,454 2018 final dividend (2017: 2017 final dividend) (cps) 3.00 20,048 2.75 18,136 Dividend franking account Amount of franking credit available for use in subsequent financial years 29,520 27,610 1 2 The impact on the dividend franking account for the final dividend declared is expected to reduce the franking account by $8.6 million (2017: $7.8 million). There are no other income tax consequences for dividends not recognised in the statement of financial position. The total 2018 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 2019 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 2018 of $20.05 million (2017: $18.14 million). CLEARVIEW WEALTH LIMITED | 131 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 30. Reconciliation of net profit for the year to net cash flows from operating activities Net profit/(loss) for the year Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 26,596 13,150 22,195 17,508 Fair value gains on financial assets at fair value through profit and loss (41,194) (62,432) - - - - 2,174 1,012 - - 10,432 2,174 23 - 13,637 1,012 (306) - (23,700) (21,000) (49,681) (32,041) (1,826) 55,733 3,035 44,593 - - - (5,685) (17,563) 5,163 635 (9,474) 9,101 7,623 4,457 1,115 4,761 4,893 1,164 (24,982) 131 249 - 7,622 13,834 - - - 2,306 263 (579) - 1,164 674 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 Net cash (utilised)/generated by operating activities 132 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 31. Subsidiaries Name of Entity Parent entity Principal Activity Parent Entity Country of incorporation 2018 % 2017 % 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 Controlled unit trusts International Fixed Interest Fund Fund of Funds Australian Equity Fund Bond Fund Fund of Funds International Equity Fund Property Fund Money Market Fund Infrastructure Fund Emerging Markets Fund (Previously CVW Platinum International Shares Fund) CVW Antipodes Global Fund CVW Hyperion Australian Shares Fund CVW Vanguard Listed International Infrastructure Fund CVW Vanguard Emerging Markets Fund CVW Plato Australian Shares Fund (Previously CVW MFS International Shares Fund) CVW Stewart Investors Worldwide Sustainability Fund Advice Company Non operating 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 95 42 56 93 67 70 50 49 21 94 99 99 77 21 100 100 100 100 100 100 100 100 96 47 58 93 51 72 56 56 30 92 99 98 77 21 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 WEALTH LIMITED | 133 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 32. 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 57 to 74 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 2018 2017 4,311,997 4,843,740 365,488 1,054,307 389,144 176,233 5,731,792 5,409,117 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 became interest bearing from 30 November 2017 at 3 month 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 2018 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. 134 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 2018 ClearView Wealth Limited ClearView Life Assurance Limited ClearView Financial Management Limited ClearView Financial Advice Pty Limited Matrix Planning Solutions Limited ClearView Administration Services Pty Limited ClearView Life Nominees Pty Limited 32. 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 t n e m e r i t e R w e V r a e l C i n a l P $ 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 l a t o T $ - (3,757,852) 1,089,188 604,816 (278,190) (242,824) 14,567 7,718,520 - 5,148,224 3,757,853 - (239,290) (637,743) 9,220 (4,338,103) - - - (1,448,063) (1,089,188) 239,290 - (36,002) - (327,725) 231,459 - 916,510 (65,656) (604,816) 637,743 36,002 278,190 (9,220) - - - - (1,207,563) - (335,579) 242,824 4,338,103 327,725 1,207,563 335,579 (14,567) - (231,459) ClearView (7,718,520) - - Retirement Plan CFML Managed Investment Schemes - - (916,510) - - - - - - - - - - - - - - - - - - - (1,138,634) - (66,609) - 6,451,794 - (246,026) - (7,718,520) - (916,510) - - - - (5,148,224) 1,448,063 65,656 1,138,634 66,609 (6,451,794) 246,026 7,718,520 916,510 - CLEARVIEW WEALTH LIMITED | 135 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 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 t n e m e r i t e R w e V r a e l C i n a l P $ 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 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 - 756,350 177,057 (992,035) 634,285 66,280 211,021 (7,358) - - 7 (7) (1,027,033) - (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) 2017 ClearView Wealth Limited ClearView Life Assurance Limited ClearView Financial Management Limited ClearView Financial Advice Pty Limited Matrix Planning Solutions Limited ClearView Administration Services Pty Limited ClearView Life Nominees Pty Limited ClearView Retirement Plan CFML Managed Investment Schemes (10,246,556) 8,885,946 (177,057) 1,318,510 293,773 (4,776,495) 171,642 3,773,887 756,350 - (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. 136 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 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. (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 3 year facility was put in place in July 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 2018, 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. 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 2018 Equity Securities Fixed Interest Securities Unit Trusts Total 2017 Equity Securities Fixed Interest Securities Unit Trusts Total Level 1 Level 2 Level 3 $’000 $’000 $’000 Total $’000 303,467 - - 483,205 1,270,520 - 1,573,987 483,205 262,428 - - 448,086 1,103,535 - 1,365,963 448,086 - - - - - - - - 303,467 483,205 1,270,520 2,057,192 262,428 448,086 1,103,535 1,814,049 CLEARVIEW WEALTH LIMITED | 137 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 33. Financial instruments continued Financial Liabilities 2018 Life investment policy liability Total 2017 Life investment policy liability Total Level 1 Level 2 Level 3 $’000 $’000 $’000 Total $’000 - - - - 1,198,780 1,198,780 1,177,290 1,177,290 - - - - 1,198,780 1,198,780 1,177,290 1,177,290 (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 Total Financial liabilities Policyholder liabilities Payables Current tax liabilities Provisions Total Consolidated Company 2018 $’000 2017 $’000 2018 $’000 2017 $’000 - - 412,359 377,159 176,363 222,197 8,047 5,880 98,685 78,327 2,057,194 1,814,049 - - - - 43,088 37,947 17,682 13,689 2,375,330 2,152,520 438,088 396,728 963,421 954,320 31,106 39,909 8,145 6,634 523 8,460 - 9,241 8,145 26 1,009,306 1,003,212 17,412 - 352 523 18 893 (f) Financial risk management objectives 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. 138 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 33. Financial instruments continued (g) Market risk (h) Credit risk 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. 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 2018, 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. 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 WEALTH LIMITED | 139 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 33. Financial instruments continued The following table reflects the shareholder financial assets with credit risk exposure monitored by the CIC Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 169,406 156,319 169,406 156,319 8,047 8,047 5,880 5,880 holdings at call and an appropriate overdraft facility. 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 $38.2 million (2017: $15.3 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 140 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 33. 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. 2018 Receivables Outstanding life insurance premiums net of provision Accrued dividends Investment income and distribution income Loans Prepayments Related party receivables Total 2017 Receivables Outstanding life insurance premiums net of provision Accrued dividends Investment income and distribution income Loans Prepayments Related party receivables Total Less than 3 months 3 to 6 months 6 months to a year 1 year and over Consolidated Over 5 years $’000 - - - - Total $’000 11,042 5,194 2,514 917 $’000 1,770 $’000 1,185 2 - - - - - $’000 7,645 5,167 2,514 917 442 2,169 917 $’000 442 25 - - 172 671 - 4,019 5,498 604 10,735 748 - 462 7,719 14,864 - - 4,050 8,636 604 43,088 19,771 1,310 6,539 5,152 3,078 2,036 10,317 1,234 1,910 756 692 25 - - 80 834 - 24,483 1,631 432 6 - - 38 - - - 1,450 5,579 554 3,774 6,216 - - 5,617 - - - - - - - - 6,314 3,109 2,036 10,317 8,343 3,298 4,530 37,947 Company 2018 Trade receivables Amounts from controlled/associated entities Loan receivables Related party receivables Total 2017 Trade receivables Amounts from controlled/associated entities Loan receivables Related party receivables Total Less than 3 months 3 to 6 months 6 months to a year 1 year and over Over 5 years $’000 $’000 $’000 $’000 $’000 6 6,464 - - 6,470 19 6,472 - - 6,491 5 - - - 5 15 - - - 15 8 - - 3,468 3,476 - - - 3,774 3,774 13 - 7,719 - 7,732 - - 3,409 - 3,409 - - - - - - - - - - Total $’000 32 6,464 7,719 3,468 17,683 34 6,472 3,409 3,774 13,689 CLEARVIEW WEALTH LIMITED | 141 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 33. 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 2018 Payables Current tax liabilities Provisions Reinsurance payable1 Total 2017 Payables Current tax liabilities Provisions Reinsurance payable1 Total 2018 Payables Current tax liabilities Provisions Total 2017 Payables Current tax liabilities Provisions Total Less than 3 months 3 to 6 months 6 months to a year 1 year and over Over 5 years $’000 85 - 963 - $’000 486 8,146 1,883 - $’000 570 - $’000 1,487 - 1,685 1,149 - - 10,515 2,255 2,636 1,048 153 523 1,204 - 321 - 784 - 830 - 84 - 2,895 2,070 - - 1,518 1,091 5,025 2,154 $’000 13,315 - 954 15,162 29,431 26,394 - 1,507 12,127 39,104 Less than 3 months 3 to 6 months 6 months to a year 1 year and over Over 5 years $’000 7,843 - - 7,843 352 - - 352 $’000 81 8,146 26 8,253 - 523 18 541 $’000 1,316 - - 1,316 - - - - $’000 $’000 - - - - - - - - - - - - - - - - Total $’000 15,943 8,146 6,634 15,162 45,885 27,782 523 8,460 12,127 48,892 Company Total $’000 9,241 8,146 26 17,413 352 523 18 893 1 Reinsurance payable represents reinsurance premium payable on reinsurance due in respect of life insurance premium. 142 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 33. 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 2018 $’000 2017 $’000 Fair value hierarchy Valuation techniques and key inputs Equity Securities 303,467 262,428 Level 1 Fixed Interest Securities 483,205 448,086 Level 2 Unit Trusts Total 1,270,519 1,103,535 Level 1 2,057,191 1,814,049 (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 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 1,598 1,598 - - 2,000 2,000 - - 60,000 50,000 - - - - - - - - - - As at the reporting date the Company had a $60 million facility agreement with the National Bank Australia. This facility was unused and available for immediate use. Interest on the loan accrued at BBSY plus a margin of 0.67% per annum, and was payable monthly. Furthermore, a line fee of 0.65% 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. 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 2018. There is an additional $0.25 million credit card facility with National Australia Bank in the name of ClearView Administration Services Pty Limited. CLEARVIEW WEALTH LIMITED | 143 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 33. 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. 2018 Financial assets Variable interest rate instruments: Cash and cash equivalents Fixed interest securities Total 2017 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 0.61 2.39 0.62 2.37 70,723 98,683 169,406 77,992 78,327 156,319 0.60 - 0.62 - 8,047 - 8,047 5,880 - 5,880 Interest rate sensitivity analysis for floating rate financial instruments The sensitivity analysis below has 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% (2017: 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. 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 2018 $’000 +537 2017 $’000 ±496 2018 $’000 +537 2017 $’000 ±496 2018 $’000 +28 2017 $’000 ±21 2018 $’000 ±28 2017 $’000 ±21 ±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. 144 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 33. Financial instruments continued (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. 34. Disaggregated information by fund Abbreviated income statement 2018 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 life investment policy liabilities Change in reinsurers’ share of life insurance 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 - - - 12 - 12 - - - - - - 12 (11) 214,905 (56,696) - 2,293 - 160,502 (94,161) 61,244 17,185 266 (45) 15 5 - 241 - - 49 - - 22,135 54,977 11,333 88,445 - - - 215,171 (56,741) 22,150 57,287 11,333 249,200 (94,161) 61,244 17,234 - (7,705) (64,336) (72,041) 4,829 (113,424) 36,175 (10,983) (230) (36) (7,681) 8,272 - 4,599 (19,804) (133,264) 4,305 (2,260) 32,811 (4,982) 1 25,192 591 2,045 27,829 CLEARVIEW WEALTH LIMITED | 145 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 34. Disaggregated information by fund continued Abbreviated statement of financial position 2018 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 3,450 $’000 $’000 $’000 $’000 - 433 1,198,109 1,201,992 Australian Non-Participating Policy liabilities ceded under reinsurance - 38,243 - - 38,243 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 3,129 6,579 - - 2,747 2,747 3,832 163,446 201,689 (197,116) (904) 13,992 179,663 (471) 1,212,101 1,419,898 - - (197,116) - 383 1,198,397 1,198,780 25,557 (2,075) 2,691 28,920 (171,559) (1,692) 1,201,088 1,030,584 373,248 1,221 11,013 389,314 (48,293) 193,256 1 - (20,000) (68,293) 72,125 25,192 3,400 - 221,848 151,400 3,832 373,248 2,267 591 8,931 2,045 156,161 27,829 (1,837) (1,563) - - 1,021 200 1,221 - (20,000) 9,413 1,600 163,989 225,325 11,013 389,314 146 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 34. Disaggregated information by fund continued 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 CLEARVIEW WEALTH LIMITED | 147 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 34. 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 - 15,108 128,839 143,947 (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 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 148 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 35. 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 Antipodes Global Fund (Previously 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 Stewart Investors Worldwide Sustainability Fund (Previously CVW MFS International Shares Fund) Total 36. Leases Not longer than 1 year Longer than 1 year and not longer than 5 years Total Lease committments relate to: Consolidated 2018 Consolidated 2017 Type $’000 % $’000 % Debt Equities Debt Equities Property Debt Property Equities Equities Equities Property Equities Equities Equities 19,741 112,758 356,281 96,536 21,465 222,097 146,017 90,883 31,656 17,736 14,701 10,520 44,284 13,867 95.45 42.36 55.70 92.99 66.51 70.19 50.29 48.72 21.08 93.72 99.00 98.70 77.49 20.70 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 1,198,542 1,176,277 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 Consolidated 2018 $’000 2,168 2,606 4,337 2017 $’000 2,007 3,356 5,363 Company 2017 $’000 - - - 2018 $’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. In respect of non-cancellable operating leases the following liabilities have been recognised: Make good provision (note 23) Current Non-current Total Consolidated 2018 $’000 2017 $’000 2018 $’000 Company 2017 $’000 100 274 374 109 310 419 - - - - - - CLEARVIEW WEALTH LIMITED | 149 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 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. 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. 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 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). The Group has contractual agreements with a limited number of advisers to purchase the adviser’s business should the Other than the above, the Directors are not aware of any other contingent liabilities in the Group at the year end. 38. Capital commitments The Group has committed to the following capital commitments subsequent to the year end. Technology projects Total Consolidated Company 2018 $’000 5,526 5,526 2017 $’000 385 385 2018 $’000 - - 2017 $’000 - - 39. Guarantees The facility entered into with the National Australia Bank is guaranteed jointly and severally by: • 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 guarantees are supported by collateral (in the form of the shares) of the entities. 40. Subsequent events Dividends On 22 August 2018, the Group proposed a final dividend of $20.05 million representing 3.00 cents per share fully franked. The record date for determining entitlement to the dividend is 12 September 2018 and the dividend will be paid on 28 September 2018. Since the dividend has not been declared at year end it has not been recognised as payable in these accounts. 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. 150 | CLEARVIEW ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) 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 22 August 2018 CLEARVIEW WEALTH LIMITED | 151 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) Independent Auditor’s Report 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 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 2018, 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 2018 and of their financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion those standards are We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under 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 in 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. 152 | CLEARVIEW ANNUAL REPORT 2018 Independent Auditor’s Report INDEPENDENT AUDITOR’S REPORT (CONTINUED) 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 2018 the Group’s life insurance policy liabilities are $(197.1) 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 components the policy liabilities; Margin of Allowances for discretions; and Quality of data used for the valuation. Valuation of Intangibles As at 30 June 2018 the Groups carrying amount of intangible assets and goodwill was $45.2 million as disclosed in note 4. The intangible assets are allocated to three cash- generating units (CGUs) which are tested separately for impairment. 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; reviewing the reasonableness of the year’s changes reserves and analysis of profit conducted by management; in • 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 WEALTH LIMITED | 153 INDEPENDENT AUDITOR’S REPORT (CONTINUED) INDEPENDENT AUDITOR’S REPORT (CONTINUED) The Entity performs an Embedded Value (EV) calculation to support its impairment analysis. 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, discount rates, maintenance costs; and Wealth management and financial planning intangible: 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 the model historical 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 its indicators and 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; 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 2018, 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. 154 | CLEARVIEW ANNUAL REPORT 2018 INDEPENDENT AUDITOR’S REPORT (CONTINUED) 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. 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. CLEARVIEW WEALTH LIMITED | 155 INDEPENDENT AUDITOR’S REPORT (CONTINUED) INDEPENDENT AUDITOR’S REPORT (CONTINUED) 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 57 to 74 of the Directors’ Report for the year ended 30 June 2018. In our opinion, the Remuneration Report of ClearView Wealth Limited, for the year ended 30 June 2018, 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, 22 August 2018 156 | CLEARVIEW ANNUAL REPORT 2018 Shareholders’ Information As at 3 August 2018 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 257,900,632 65,091,098 99,326,068 38.6% 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 38.6% 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 August 2018) 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 CCP Trusco 4 Pty Limited Citicorp Nominees Pty Limited CCP Bidco Pty Limited CCP Bidco Pty Ltd CCP Trusco 5 Pty Limited CCP Trusco 1 Pty Limited BNP Paribas Noms Pty Ltd Portfolio Services Pty Ltd J P Morgan Nominees Australia Limited CCP Trusco 3 Pty Limited CCP Trusco 2 Pty Limited National Nominees Limited Portfolio Services Pty Ltd Mr Simon Swanson Salamanca Group Trust (Switzerland) SA Wintol Pty Ltd Australian Foundation Investment Company Limited Avanteos Investment Limited No. of shares as per notice % of issued capital 144,905,579 21.68% 65,091,098 42,327,004 33,681,012 32,848,053 30,899,994 30,035,374 27,668,287 21,900,002 18,300,838 17,925,239 15,810,448 13,175,374 11,036,385 10,304,057 10,000,000 8,235,295 6,302,827 5,704,350 4,639,019 9.74% 6.34% 5.04% 4.92% 4.62% 4.49% 4.14% 3.25% 2.74% 2.68% 2.37% 1.97% 1.65% 1.54% 1.50% 1.23% 0.94% 0.85% 0.69% CLEARVIEW WEALTH LIMITED | 157 SHAREHOLDERS’ INFORMATION AS AT AUGUST 2018 (CONTINUED) Ordinary share capital There are 668,262,607 fully paid ordinary shares held by 1,815 shareholders. All the shares carry one vote per share. Distribution of shareholders The distribution of Shareholders as at 31 July 2018 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 $1.10 per unit Shares under voluntary escrow There are no shares subject to voluntary escrow as at 30 June 2018. Total holders 320 441 280 547 227 Units 109,478 1,283,457 2,135,680 17,847,234 646,886,758 1815 668,262,607 % of issued capital 0.02 0.19 0.32 2.67 96.80 100 Minimum parcel size 455 Holders 200 Units 16,117 158 | CLEARVIEW ANNUAL REPORT 2018 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) David Brown Gary Burg Michael Alscher (Alternate to Mr Thomson) Nathanial Thomson Satoshi Wakuya Susan Young Simon Swanson Managing Director Simon Swanson Joint Company Secretaries Athol Chiert Elizabeth Briggs 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 | 159 ClearView Wealth Limited ABN 83 106 248 248 www.clearview.com.au ASX code CVW 8 1 / 5 9 1 8 0 _ M V C
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