Ecclesiastical Insurance Office plc Annual Report 2015

Plain-text annual report

CONTENTS Contents Our strategic goal is to be the most trusted and ethical specialist ﬁnancial services group About Us A different kind of business Ecclesiastical at a glance Our businesses Strategic Report Chairman's Statement Chief Executive's Report Global trends in ﬁnancial services Our Business Model and Strategy Strategy in action Key Performance Indicators Financial Performance Report Risk Management Report Corporate Responsibility Report Governance Board of Directors Directors’ Report Corporate Governance Financial Statements Consolidated Statement of Proﬁt or Loss 136 Consolidated and Parent Statement of Comprehensive Income Consolidated and Parent Statement of Changes in Equity Consolidated and Parent Statement of Financial Position Consolidated and Parent Statement of Cash Flows Notes to the Financial Statements Other Information Directors and Executive Management United Kingdom Regional Centres United Kingdom Business Division and International Branches Insurance Subsidiaries and Agencies Notice of Meeting 137 138 139 140 141 197 199 200 201 202 5 6 10 14 16 22 26 29 38 44 48 62 80 82 86 Independent Auditor’s Report 130 ANNUAL REPORT & ACCOUNTS 2015 1 SECTION ONE – ABOUT US r o t c o r P r a k s O y b h p a r g o t o h P 2 ANNUAL REPORT & ACCOUNTS 2015 SECTION ONE – ABOUT US A different kind of business Ecclesiastical at a glance Our businesses 5 6 10 ANNUAL REPORT & ACCOUNTS 2015 3 A DIFFERENT KIND OF BUSINESS A different kind of business We are a specialist ﬁnancial services group, with a strong portfolio of insurance, investment management, broking and advisory businesses in the UK, Ireland, Canada, and Australia. Owned by a charity, we are a commercial business with a charitable purpose – a rarity in our sector. This means that we grant a signiﬁcant proportion of our proﬁts to our charitable owner Allchurches Trust Limited (ATL), which in turn invests them independently into the heart of communities, helping to change people’s lives for the better. We also have our own programme of charitable giving. We strive to be the most ethical and trusted business in our chosen markets. This has helped us to build enduring relationships with our customers and partners, giving us a deep knowledge and understanding of their needs. As a result, we offer products and services that are trusted and add real value, giving us the competitive edge that allows us to deliver signiﬁcant ﬁnancial returns to ATL. At a time when the ﬁnancial services sector is under increasing scrutiny, we believe our business model sets us apart, enabling us to beneﬁt not only our customers but also the wider community. ANNUAL REPORT & ACCOUNTS 2015 5 SECTION ONE – ABOUT US Ecclesiastical at a glance UK’S 13TH LARGEST CORPORATE DONOR TO CHARITY* *DSC GUIDE TO CHARITABLE GIVING UK’S N INSURER1O 129 FOR CHARITABLE GIVING* *DSC GUIDE TO CHARITABLE GIVING YEARS’ EXPERIENCE Established in 1887 to provide ﬁre protection to Anglican churches. OWNED BY CHARITY Our charitable owner is Allchurches Trust Limited (ATL) £0.5 BN NET ASSETS £2.3 BN FUNDS UNDER MANAGEMENT WHAT WE DO INSURE £276BN OF PROPERTY WORLDWIDE 6 ANNUAL REPORT & ACCOUNTS 2015 WHAT WE DO LEADING INSURER FOR THE ANGLICAN CHURCH in all our territories LEADING MULTI-FAITH INSURER Insuring synagogues and mosques in all our territories INSURE 10 OF THE UK’S WORLD HERITAGE SITES* INCLUDING STONEHENGE AND CANTERBURY CATHEDRAL *alongside other insurers INSURE MANY THOUSANDS 40,000+ OF CHARITIES IN THE UK ALONE MAIN INSURER OF THE UK’S GRADE 1 LISTED BUILDINGS MAJOR INSURER OF INDEPENDENT SCHOOLS 50% + 40% + OF INDEPENDENT OF CAIS* MEMBERS SCHOOLS IN THE UK *Canadian Accredited Independent Schools AWARD-WINNING ETHICAL INVESTMENT PROVIDER 2009 2015 UK’S N INSURER1O FOR CHARITABLE GIVING* *DSC GUIDE TO CHARITABLE GIVING UK’S 13TH LARGEST CORPORATE DONOR TO CHARITY* *DSC GUIDE TO CHARITABLE GIVING 129 YEARS’ EXPERIENCE Established in 1887 to provide ﬁre protection to Anglican churches. £0.5 NET ASSETS BN OWNED BY CHARITY Our charitable owner is Allchurches Trust Limited (ATL) £2.3 BN FUNDS UNDER MANAGEMENT WHAT WE DO INSURE £276BN OF PROPERTY WORLDWIDE ECCLESIASTICAL AT A GLANCE WHAT WE DO LEADING INSURER FOR THE ANGLICAN CHURCH in all our territories LEADING MULTI-FAITH INSURER Insuring synagogues and mosques in all our territories INSURE 10 OF THE UK’S WORLD HERITAGE SITES* INCLUDING STONEHENGE AND CANTERBURY CATHEDRAL *alongside other insurers INSURE MANY THOUSANDS 40,000+ OF CHARITIES IN THE UK ALONE MAIN INSURER OF THE UK’S GRADE 1 LISTED BUILDINGS AWARD-WINNING ETHICAL INVESTMENT PROVIDER 2009 2015 MAJOR INSURER OF INDEPENDENT SCHOOLS 50% + 40% + OF CAIS* MEMBERS OF INDEPENDENT SCHOOLS IN THE UK *Canadian Accredited Independent Schools ANNUAL REPORT & ACCOUNTS 2015 7 SECTION ONE – ABOUT US 95% OF CUSTOMERS HOW WE DO BUSINESS SATISFIED WITH HOW THEIR CLAIM IS HANDLED 99% in UK; 96% in Ireland 98-100% UK CUSTOMER SATISFACTION Across all the sectors we measure OUR CORPORATE RESPONSIBILITY MORE THAN 40% OF OUR EMPLOYEES HOURS VOLUNTEER OVER 3,500 VOLUNTEER FOR THREE CONSECUTIVE YEARS 1 of only 5 insurers with CII chartered status across whole UK business 95 +% OF BROKERS SATISFIED WITH OUR SERVICE 95% in Canada; 96% of key brokers in UK IN 2015, WE GAVE £20.6M TO CHARITY £20m to ATL and £0.6m via our Greater Giving programme BEST IN CLASS STANDARD OUR PEOPLE TOP EMPLOYERS FOR YOUNG PEOPLE Canadian and Australian businesses named in national awards (see ‘Strategy in action’) 88% OF EMPLOYEES UNDERSTAND OUR VALUES +7% above private sector norm OUR FINANCIAL PERFORMANCE £20M GRANT TO ATL £23.5M IN PREVIOUS YEAR £43.2M INVESTMENT RETURN £46.2M IN PREVIOUS YEAR 92.0% COMBINED OPERATING RATIO +3.2pp £53.6M PROFIT BEFORE TAX 3.0 PRA CAPITAL COVER 2.9 in previous year 8 ANNUAL REPORT & ACCOUNTS 2015 ECCLESIASTICAL AT A GLANCE HOW WE DO BUSINESS OUR CORPORATE RESPONSIBILITY 95% OF CUSTOMERS SATISFIED WITH HOW THEIR CLAIM IS HANDLED 99% in UK; 96% in Ireland 98-100% UK CUSTOMER SATISFACTION Across all the sectors we measure MORE THAN OF OUR EMPLOYEES 40% VOLUNTEER OVER 3,500 VOLUNTEER HOURS IN 2015, WE GAVE £20.6M TO CHARITY £20m to ATL and £0.6m via our Greater Giving programme BEST IN CLASS STANDARD OUR FINANCIAL PERFORMANCE £20M GRANT TO ATL £23.5M IN PREVIOUS YEAR £43.2M INVESTMENT RETURN £46.2M IN PREVIOUS YEAR 92.0% COMBINED OPERATING RATIO +3.2pp £53.6M PROFIT BEFORE TAX 3.0 PRA CAPITAL COVER 2.9 in previous year ANNUAL REPORT & ACCOUNTS 2015 9 FOR THREE CONSECUTIVE YEARS 1 of only 5 insurers with CII chartered status across whole UK business 95 +% OF BROKERS SATISFIED WITH OUR SERVICE 95% in Canada; 96% of key brokers in UK OUR PEOPLE TOP EMPLOYERS FOR YOUNG PEOPLE Canadian and Australian businesses named in national awards (see ‘Strategy in action’) 88% OF EMPLOYEES UNDERSTAND OUR VALUES +7% above private sector norm SECTION ONE – ABOUT US Our businesses We are organised into three divisions: Specialist Insurance, Investment Management, and Broking and Advisory. All are underpinned by a reputation for delivering an outstanding service to our customers. We provide products and services to businesses, organisations and retail customers, both directly and through intermediaries. Operating primarily from the UK, our Divisions and their associated companies are: Specialist Insurance Ecclesiastical UK / Ansvar UK / Ansvar Australia / Ecclesiastical Canada / Ecclesiastical Ireland Our insurance businesses offer insurance products and risk management services to customers in the faith, heritage, charity, education, and property investor markets. We have particular expertise in valuing and protecting distinctive properties both old and new – from cathedrals to concert halls, schools to stately homes and iconic modern buildings to youth hostels. We also provide a discrete range of specialist products including household insurance for church and congregations and ﬁne art insurance to the high net worth market. Investment Management EdenTree Investment Management (EdenTree) Our multi-award winning investment management team manages and sells ethically screened and non-screened investment products to institutional customers, including the charity and faith markets, and to retail customers through the advisory market. In July 2015, the investment business was rebranded to EdenTree Investment Management, to achieve greater resonance in the socially responsible investment market. EdenTree also manages the majority of the Group’s ﬁnancial investments. Broking and Advisory SEIB Insurance Brokers (SEIB) / Ecclesiastical Financial Advisory Services (EFAS) / Lycetts Insurance Brokers* / Lycetts Financial Services* * Part of Ecclesiastical Insurance Group (EIG) Our specialist brokers, SEIB and Lycetts, provide tailored insurance products for customers, particularly those in the high net worth, farming and rural estates, equine, animal trades, and specialist motor insurance sectors. EFAS and Lycetts offer ﬁnancial advice to businesses and individual customers including Church of England clergy. EFAS also marketed and administered prepayment funeral plans under the Perfect Choice brand. 10 ANNUAL REPORT & ACCOUNTS 2015 r o t c o r P r a k s O y b h p a r g o t o h P SECTION TWO – STRATEGIC REPORT Chairman's Statement Chief Executive's Report Global trends in ﬁnancial services Our Business Model and Strategy Strategy in action Key Performance Indicators – ﬁnancial Key Performance Indicators – non-ﬁnancial Financial Performance Report Risk Management Report - Principle risks Corporate Responsibility Report - Doing what’s important - Our themes - Our overall CR framework - Workplace – our people and culture - Sustainability – responding to climate change - CR stories from around our Group 14 16 22 26 29 38 41 44 48 51 62 65 66 70 72 74 75 ANNUAL REPORT & ACCOUNTS 2015 13 SECTION TWO – STRATEGIC REPORT Chairman’s Statement Financial performance Ecclesiastical has delivered another set of strong and consistent results in 2015, testimony to the transformation in its performance over the last two years. Proﬁt before tax grew by 11% to £54m, with underwriting proﬁts and investment returns both performing well despite a challenging business climate. These are pleasing results, but insurance remains a cyclical business and the industry is facing soft markets and lower investment returns. To prosper in these conditions, Ecclesiastical will continue to provide a specialist trusted proposition, backed up by disciplined underwriting and expense control. The proﬁts we made in 2015, combined with our strong balance sheet, have enabled us to pay a grant of £20m to our charitable owner, bringing the total we have granted ATL since 2014 to £43.5m. Including all other charitable giving, we have given £45.8m to charitable causes in that time, taking us closer to our goal of giving £50m to charity over three years. Group underwriting proﬁts increased from £11m to £16m, generating a combined operating ratio (COR) of 92.0% against 95.2% in 2014. In the UK and Ireland, the impact of challenging property claims and December’s storm and ﬂood events were offset by the improvement in the performance of our liability book. This helped us deliver an overall COR of 90.4% compared to 94.0% in our home market, the previous year. We achieved a return on our equity portfolio that exceeded FTSE All-Share Index returns. We also enhanced our investment property portfolio during 2014 and 2015 which generated a return of 11% during the year. 14 ANNUAL REPORT & ACCOUNTS 2015 CHAIRMAN'S STATEMENT Investment returns were on budget at £43m in 2015, despite falling global equity markets and a reduction in the capital value of ﬁxed interest investments due to rising yields. We achieved a return on our equity portfolio that exceeded FTSE All-Share Index returns. We also enhanced our investment property portfolio during 2014 and 2015 which generated a return of 11% during the year. Ecclesiastical has a sound capital base, which enables us to pursue our long-term strategy while being cognisant of short-term volatility. People First and foremost, our current and future success rests with our people. Ecclesiastical has a skilled, adaptable and dedicated team and I would like to thank and congratulate them for this year’s successes and the transformation they have achieved. We have continued to invest in our employees through a comprehensive, ongoing programme of training and development. In 2015, we provided over 3,000 technical and personal development training courses and over 500 management courses, many in conjunction with our business partners. We have also recruited to augment our underwriting and risk management capability. Board I would like to thank my fellow directors for their support and hard work in the past year. In particular, I want to express my thanks to David Christie, who retires as a non-executive director in March 2016. David has made an invaluable contribution to our company and we wish him well in his future endeavours. This is my ﬁnal review as Chairman of Ecclesiastical, as I will be retiring in March 2016 after ten years with the Company. It has been an honour to lead it through this period of transformation and to work with the committed and motivated people who work here. My successor, Edward Creasy, brings to Ecclesiastical a wealth of ﬁnancial services and board level experience and I wish him every success as he takes the Company forward. Ecclesiastical is a company with distinctive ethical values. Its ongoing success will come from a judicious fusion of the best of those values with a keen acceptance of the change required to succeed in a competitive insurance and investment market. I ﬁrmly believe that, with the substantial changes made to the Board and executive management team over the last three years, we have the necessary skills in place to embrace that change and take Ecclesiastical to even greater success. Group underwriting proﬁts increased to £16m generating a combined operating ratio of 92.1%. Will Samuel Chairman Corporate culture The Board recognises the importance, particularly in times of change, of ensuring that our corporate culture supports long-term success. To that end we are reviewing our leadership and talent development strategy, to ensure that the values Ecclesiastical espouses are combined with outstanding commercial acumen. Customer service is central to our corporate culture; our most recent surveys show customer satisfaction of between 98% and 100% across all measured groups and territories. We are committed to putting the customer at the heart of our business, for example by conducting regular ‘listening exercises’ with small groups of customers to discuss their current and emerging needs and concerns. ANNUAL REPORT & ACCOUNTS 2015 15 SECTION TWO – STRATEGIC REPORT Chief Executive’s Report Customers and partners often tell us that our charitable purpose sets us apart. Founded 129 years ago to insure the Church of England, we have always had a strong sense of moral purpose. Today, as we face the modern challenge of public mistrust in ﬁnancial services, that purpose inspires our drive to be a very different kind of business. In 2014, we set out a strategic goal for the Group that built upon our ethical foundations. It was clear, stretching and inspirational: To work together to be the most trusted and ethical specialist ﬁnancial services group, giving £50m to charity over three years. Put simply, we want to deliver on our promises. We want to do the right thing for our customers and partners. And, above all, we want to give help, support and money to those who need it most. That is not just an adjunct to what we do; it is the reason we exist. Another strong year As a commercial business with a charitable purpose, we are focused on delivering strong and sustainable returns. To do good, we know we must be good. That is why it gives me immense pleasure to report another year of strong results. We have achieved a pre-tax proﬁt of £53.6m compared to £48.2m in 2014 and an underwriting proﬁt of £15.9m, up from £10.7m the previous year. Our capital strength has also been enhanced and our net assets ended the year at £505m, a record high, compared to £495m in 2014. 16 ANNUAL REPORT & ACCOUNTS 2015 All this been delivered against a backdrop of volatile investment markets, unusually high property losses, and severe weather events, including Canada’s exceptionally cold January and the storms that hit the UK at the end of the year. Last year, I described our results as ‘nothing short of transformational’. This year’s results signal that our ambitious change programme, new leadership teams and the tough decisions that we have taken over the past few years are reaping further dividends. Our momentum is building and we are now well placed to invest more in our future so that, over time, we can grow both our business and our charitable giving. Being good to do good Our charitable purpose shapes every aspect of how we do business. For example, unlike many of our competitors, we do not have to pay hefty returns to external shareholders. This means we are not driven by short-term decisions focused mainly on the bottom line. Instead, we can focus on longer-term goals that are in our customers' best interests. We are very conscious that trust in ﬁnancial services companies has declined sharply in recent years. In a deliberate move to buck this trend, we have set about securing the trust of our customers and business partners for the long-term. In practice, this means meeting or exceeding our customers’ expectations, being honest and professional at every turn and, most important, being unfailingly supportive in times of need. You meet claims fairly and promptly, and your valuation service is highly valued and unique. Broker, London and South East The human side and the caring that everyone at Ecclesiastical showed has been so tremendous. I don’t know how we’d have got through it all without your support. Kathryn Creese, churchwarden and treasurer, St. Michael and All Angels Church, Tirley CHIEF EXECUTIVE'S REPORT This is where we differentiate ourselves in today’s competitive environment. By being the most intelligent and knowledgeable player in our chosen markets, by offering real value for money and by always delivering on our promises, we know we are honing a competitive edge. A raft of independent data shows that we have already made enormous progress. Our latest UK customer satisfaction levels are 98-100% across the board and satisfaction with claims handling sits at 99% in the UK and 96% in Ireland. UK brokers have recognised us as the best charity, education and heritage insurer for the ninth consecutive year. In home insurance, we top the UK’s Fairer Finance league table and pay 93% of claims against an industry average of just 79%. Our investment management business has been voted Moneyfact’s Best Ethical Investment Provider for seven consecutive years and achieved the top assessment rating from the UN Principles of Responsible Investment. All this reinforces my belief that, while not perfect, we are getting many things right. The case studies in this report and on our website show how highly our customers and partners think of us, and I thank them all for their kind words. They represent just a fraction of the positive comments we receive, such as the handful shown: It is also appropriate here to salute the insurance companies, many of which have been praised for the speed and nature of their response to those ﬂooded. Affected churches have greatly valued the service of the Ecclesiastical Insurance Group in particular during recent weeks. Rt. Revd. Nick Baines, Bishop of Leeds, speaking in the House of Lords We should perhaps praise the Lord there is an insurer out there with a conscience… Patrick Collinson, personal ﬁnance editor, Guardian (on our behaviour towards a policyholder) ANNUAL REPORT & ACCOUNTS 2015 17 CHIEF EXECUTIVE'S REPORT I would like to thank and congratulate every one of my Ecclesiastical colleagues, who work tirelessly to deliver the service that elicits comments like these. They illustrate better than any words I could ever write how we are fulﬁlling our commitment to being the most trusted and ethical ﬁnancial services group. Doubly rewarding is the fact that by doing so, we are also meeting our ultimate goal of giving £50m to charity over three years. Progress in detail Our focus is ﬁrmly on taking the right decisions to create long-term ethical and sustainable growth. In 2015, we continued to apply strong underwriting disciplines across the Group, which saw our overseas businesses achieve an increase in gross written premium (GWP) although our global GWP declined slightly. We won a number of signiﬁcant accounts such as the Canadian Cancer Society, Scouts New South Wales, National Trust of Victoria and the Irish Management Institute, and we now insure the majority of Grade I listed buildings in the UK. In the UK, we maintained high retention levels, despite further losses of academies to the Department for Education's risk protection arrangement for academy trusts, and managed our portfolio rigorously, with a deliberate emphasis on delivering proﬁt in a highly competitive market. This approach lies behind the year’s 7% fall in GWP and has contributed to the £5.2m increase in underwriting proﬁts. Our aim is to achieve moderate GWP growth over the coming years, by adding proﬁtable business at a sustainable rate. Our Australian and Canadian businesses continued to achieve measured growth, increasing GWP by 4% and 9% respectively in local currency. Australia delivered an underlying underwriting proﬁt of £0.1m and COR of 99.3%. Canada secured another set of robust underwriting results despite a record ‘freeze’ at the beginning of the year. The investment management division, which rebranded as EdenTree Investment Management (EdenTree) during the year, delivered a proﬁt of £2m against £3m in 2014. We invested substantially in this business during 2015, with the launch of the new brand and successful implementation of a new IT platform. Investment like this takes time to bear fruit but we are conﬁdent that it will enable us to make our offer clearer, more distinct and give it a wider appeal. The name of the company may have changed but the proﬁts with principles ethos remains as strong as ever. ANNUAL REPORT & ACCOUNTS 2015 19 r o t c o r P r a k s O y b h p a r g o t o h P SECTION TWO – STRATEGIC REPORT Our independently run broking operation, SEIB, had a more difﬁcult year as it dealt with the transition of one scheme to another provider. This resulted in a £0.8m decrease in proﬁt from £3.0m to £2.2m, although in part this reﬂected a programme of investment in new employees, systems, websites, and marketing. I know that our ﬁnancial strength and committed ethical approach give us strong foundations upon which we can build our business and grow our charitable giving. We have high aspirations, we are on target to give £50m to charity over three years, and there is abundant energy and goodwill drawing us together to achieve this. Working together for the greater good In 2015, we gave £20.6m to charity, including grants to our charitable owner and through our wider Greater Giving programme. Yes, this is a big number. But for us, what really matters is the lives we are able to improve. And having seen ﬁrst-hand the impact of our giving, there is no doubt that we make a real and life-changing difference to many vulnerable people in the markets and communities in which we operate. That is the reason why so many of us support Ecclesiastical, either as employees, customers or business partners. I thank all our customers and our business partners whom we serve, and whose expectations we aim to exceed. It is only with their support that we can give so much to good causes. I would also like to take the opportunity to invite prospective partners and customers to consider working with us and experience the ‘Ecclesiastical difference’ for yourselves. I would also encourage potential employees from all walks of life to consider joining us. Our doors are always open to like-minded individuals and organisations who share our aspirations and can help us to help others. I am conﬁdent that with the ongoing support and commitment of our extraordinary people, we will deliver this exciting new chapter and build a Group that stands by its customers ever more ﬁrmly. A Group that is formed from a unique blend of business, charity and faith. A Group that is changing people’s lives. Mark Hews Group Chief Executive Looking forward to our future I see 2016 as an exciting year of transition: a year where one successful chapter of transformation draws to a close and a fresh new chapter of investment in our future begins. We are enormously grateful to Will Samuel for his outstanding chairmanship in recent years. There is no doubt that with his guidance we have made huge strides in reshaping and repositioning our Group, going through each of our businesses thoroughly, taking decisive action to improve them and delivering a Group-wide change programme. This has all contributed to strong results and increased grants for our charitable owner. In our next chapter, we have much to look forward to. We will launch and drive forward the next stage of our transformation programme, led by an exceptionally committed and energised team in each of our territories and businesses around the world. I know they are keen to build on our recent success and deliver against our charitable purpose. We know that challenges lie ahead and are prepared for them. We expect market volatility to continue in the near term and are positioned for this, taking a defensive stance where appropriate. Equity markets have performed strongly over the long term but we know that the level of return cannot be guaranteed. However, our ﬁnancial strength and unique ownership allow us to take a long-term view and ride out periods of market turbulence. In 2016, institutions in England and Wales will be scrutinised as the Independent Inquiry into Child Sexual Abuse starts its investigations. We welcome the openness and transparency that the Inquiry heralds and recognise it may result in more victims and survivors feeling able to come forward. Our reserving techniques for latent claims of this nature have been developed and enhanced over a number of years; ensuring appropriate reserves are held which take into account the typically higher uncertainties that are attached to this kind of risk. The general insurance market remains very competitive in some of our markets; however, our results demonstrate that with our specialist focus, disciplined underwriting and premium service we can successfully confront these challenges. 20 ANNUAL REPORT & ACCOUNTS 2015 CASE STUDY Helping hand for a hurricane-damaged school In November 2015, Manchester Grammar School celebrated the opening of its new, state-of-the-art sports hall by ex-England cricket captain Mike Atherton OBE. Just 20 months earlier, their old hall had been damaged beyond repair by hurricane-force winds. We worked alongside the school from start to ﬁnish, quickly assessing the damage, agreeing options for the use of temporary facilities and supporting the school’s ambition to improve its sporting facilities. The brand-new two-storey sports hall includes four cricket nets, separate badminton, basketball and volleyball courts, a ﬁve-a-side football pitch and an indoor hockey pitch. We are delighted that our specialist claims consultants were invited to the reopening ceremony. I would like to extend my sincere thanks to Ecclesiastical, our insurance company, for their help and support throughout this project and enabling us to build this fantastic new venue. It has been a pleasure to work with them and I am extremely grateful for their assistance in helping us create this fantastic facility. Dr Martin Boulton High Master, The Manchester Grammar School ANNUAL REPORT & ACCOUNTS 2015 21 SECTION TWO – STRATEGIC REPORT Global trends in ﬁnancial services We monitor a number of global trends that we believe will affect our business in the future. Our insight and response to these trends is shown over the next few pages: Trend Our perspective Our response Regulation Developments in technology, data and analytics With Solvency II now live, regulators will continue to focus on capital strength, transparency and governance. Customer focus will be central to ensuring a successful response to regulatory requirements. Along with increased management attention, businesses will need to invest further in the systems, processes and organisational culture that help them meet customers’ needs. Businesses are seeking deeper insights into customer behaviour to gain competitive advantage. Such data underpins insurance pricing models, offering the potential for superior risk selection, better risk pricing, an improved offering to customers and, ultimately, an enhanced underwriting result. Businesses continue to invest in systems and technology in order to improve operational efﬁciency. We met Solvency II requirements by 1 January 2016, resulting in a step change in the Group’s management of risk and capital. All frameworks are embedded and operational, and we have agreed a scheduled application submission for the Internal Model in 2017. We have already begun to prepare for future regulatory requirements, such as the EU Insurance Mediation Directive (IMD2) and planned updates to Markets in Financial Instruments Directive (MiFiD2). Consideration is being given to the potential impact of any regulatory decisions regarding the distribution model in our Broking and Advisory division. We already place customers at the heart of our business. Our ethical approach and the enduring relationships we build with our customers mean that we are well placed to respond to regulatory requests for greater transparency and improved customer relationships. As part of our long-term strategy, we have begun to make signiﬁcant investments in upgrading and replacing the technology across the Group. We have streamlined the front-end operations of EdenTree, our investment management business, with the implementation of the specialist platform Charles River. Plans are underway to migrate the underlying trading platforms in our major broker businesses onto a single IT architecture, using the technology expertise in our SEIB broker business. Our UK underwriting business is evaluating options for its underlying platform to enhance data analytics and remove unnecessary processes from operational areas. 22 ANNUAL REPORT & ACCOUNTS 2015 GLOBAL TRENDS IN FINANCIAL SERVICES Trend Our perspective Our response Changing demographic and social trends; increased customer expectations Advances in technology are helping businesses gain a better understanding of their property portfolio. Unmanned drones are used increasingly to map buildings by 3D laser and built-in sensors are used to detect environmental changes such as the escape of water. Demographics and social proﬁles are changing across our key markets and territories. In particular, increased immigration and ethnic diversity will provide new opportunities for companies operating in faith markets. Customers and intermediaries expect increasingly enhanced levels of service and tailored products that meet their speciﬁc needs. Customers are actively seeking ethical and trusted providers. Corporate responsibility is also increasingly being taken into account during the procurement process. We scan the horizon to anticipate and understand the potential impact of emerging technologies on the broader environment, our business and our customers. We have deepened our understanding of customer and broker needs, supported by an ongoing programme of market and customer research. In the UK, we have established our ‘Select Broker’ programme. This offers an enhanced proposition and specialist in-house support to our brokers. We look at developing opportunities in new and emerging markets. For example, our broking businesses have been developing their expertise in the alternative energy sector. We have appointed directors to manage each of our UK divisions, with responsibility for continuing to ensure that customers’ needs are understood and that our products and services meet those needs. Our underwriting Business Model is based on the creation of longstanding trusted relationships, which we achieve through partnerships with our customers, brokers and ourselves as the insurer. This has attracted many prestigious customers in 2015, including the Canadian Cancer Society, Scouts New South Wales, National Trust of Victoria, and the Irish Management Institute. We strive to be the most trusted and ethical ﬁnancial services group and this is a cornerstone of our Business Model. Our investment management team, which launched one of the UK’s ﬁrst socially responsible retail funds, continues to win awards for its ethical investment proposition. ANNUAL REPORT & ACCOUNTS 2015 23 SECTION TWO – STRATEGIC REPORT Trend Our perspective Our response Low trust in ﬁnancial services Climate change Our strategic goal is to become the most trusted and ethical specialist ﬁnancial services group. This shapes the way we do business across all our markets and territories. As a commercial business with a charitable purpose, we grant a signiﬁcant proportion of our proﬁts to ATL for distribution to charitable causes and communities. Our research tells us that this resonates positively with key customer groups. We are the UK’s top charitable donor in the insurance sector and have publicly announced our intention to give £50m to charity over three years. In 2015 alone, we granted £20m to ATL and £0.6m to our own Greater Giving programme, making a cumulative total of £20.6m at the end of the year. We ﬁnd it disappointing that consumers’ trust in ﬁnancial services is expected to remain low, though there are signs of a slight recovery as indicated by the 2015 Edelman Trust barometer. A recent survey by the Financial Services Compensation Scheme (FSCS) indicated that banks are now more trusted than insurance companies. Ecclesiastical has an unusual level of trust among brokers. A recent independent survey shows that 61% of brokers trust us to do the right thing compared to only 37% who trust the insurance industry and 24% the UK ﬁnancial services industry. The world’s climate has changed over the past decade, with average temperatures rising by just over one degree. Potentially, this will lead to less predictable and more extreme weather events. This is likely to result in a greater concentration of insurance losses and will require changes in the way risk is evaluated and managed. Alternative energy sources are being considered and the impact of businesses on the environment will be scrutinised more closely. We are using predictive tools and expertise to map the probability and potential impacts of major weather events, helping us to understand the longer-term impact of climate change and the implications for our customers and our business. We have deepened our understanding of ﬂood risk, monitoring high-risk areas and providing proactive risk management advice and assistance to help customers develop informed ﬂood resistance and resilience plans. Our broker businesses have specialist expertise in many kinds of renewable energy. They offer commercial policies for a range of renewable energy sources, such as biomass, geothermal and wind. EdenTree, with its award-winning ethical investment track record, is engaging proactively with public policy issues, signing the Paris Pledge and the COP21 Investor Statement on Climate Change and joining the Institutional Investors Group on Climate Change (IIGCC). 24 ANNUAL REPORT & ACCOUNTS 2015 Trend Our perspective Our response GLOBAL TRENDS IN FINANCIAL SERVICES Cyber security In 2016, we will use third-party expert insurers to ﬁnd solutions to cyber security challenges for our customers, including the provision of new products and specialist advice. We have a number of controls operating within our technology infrastructure, which aim to safeguard and deny unauthorised or malicious access to our systems, internal data and infrastructure. Our specialist broker, SEIB, has created a specialist product for SMEs to address the gap in commercial combined insurance, with increased indemnity limits for denial of service and cyber-attacks. They have also worked with both Essex Police and the Serious Fraud Ofﬁce to raise awareness of internet-enabled crime among the local business community. Third party cyber- attacks on businesses are becoming larger, more complex and more commonplace, according to Arbor Networks’ 11th Worldwide Infrastructure Security Report. While the loss of data is damaging in itself, it also has wider impacts on companies’ ﬁnances and reputations. Companies will see increased regulatory scrutiny, particularly given the impending introduction of the EU General Data Protection Regulations, which will require compulsory reporting and increased ﬁnancial sanctions for any breaches. ANNUAL REPORT & ACCOUNTS 2015 25 SECTION TWO – STRATEGIC REPORT Our Business Model and Strategy FULFIL OUR CHARITABLE PURPOSE – WE’RE OWNED BY A CHARITY Contribute to society’s greater good STRIVE TO BE THE MOST TRUSTED AND ETHICAL FINANCIAL SERVICES GROUP BUILD ENDURING RELATIONSHIPS, BASED ON TRUST DELIVER GROWING FINANCIAL RETURNS TO OUR OWNER PROVIDE PRODUCTS AND SERVICES THAT OUR CUSTOMERS VALUE AND TRUST DEVELOP DEEP SPECIALIST UNDERSTANDING AND EXPERTISE Like all commercial businesses, our aim is to create long-term value for our shareholders, by using our skills and approach that differentiates us to create competitive advantage. What sets us apart from others in the ﬁnancial services sector is the fact that our Group's owner is a charity. Our purpose is, therefore, to deliver growing ﬁnancial returns to our shareholder and owner, which are in turn distributed to charitable causes and communities, contributing to society’s greater good. Our charitable purpose underpins our culture, enhancing the Group’s reputation as an ethical business. This helps us build longstanding relationships and high levels of customer loyalty. These enduring relationships mean we really understand our customers and sectors, and have built deep expertise within them, allowing us to provide highly valued products and services. All these factors help us to deliver sustainable and growing returns over the long term. 26 ANNUAL REPORT & ACCOUNTS 2015 OUR BUSINESS MODEL AND STRATEGY The most trusted specialist insurer Our aim is to be the most trusted specialist insurer, offering unrivalled expertise and knowledge in our core markets, with appealing customer propositions and an excellent claims service that meet the concerns and needs of our customers and business partners. The most trusted specialist adviser We aim to be the most trusted specialist adviser in our chosen markets, providing our customers with the best independent and impartial insurance or ﬁnancial advice in order to meet their needs. The best ethical investment provider We aim to be the best ethical investment provider and thought leader on socially responsible investment. Building on an impressive track record, we will continue to enhance our proposition and our ethical credentials, leading the debate on the ethical investment issues that matter to our customers. ANNUAL REPORT & ACCOUNTS 2015 27 r o t c o r P r a k s O y b h p a r g o t o h P STRATEGY IN ACTION Strategy in action Giving £50m to charity over three years In 2014, we set out our goal to give £50m to charity over a three-year period. In 2015, we gave £20.6m to charity, including £20m in grants to ATL and £0.6m in donations via our own Greater Giving programme. With £45.8m donated to date, we are well on our way to achieving that goal. Most trusted specialist insurer We achieve this by being Customer focused – keeping customers at the heart of our business and aiming to deliver exceptional customer service Disciplined in our underwriting – having a well-deﬁned risk appetite that supports proﬁtability and sustainability in our business mix Strategy in action We measure UK performance against the 15 guiding principles of our new Ecclesiastical Promise, which will be introduced across our other territories in 2016 To support our outstanding reputation for risk management advice, we have introduced thermographic imaging and will launch drone technology in Australia in 2016. This will help us provide preventative guidance to customers and support a speedy response to those affected by extreme weather events We have made signiﬁcant hires into the business including the further strengthening of our underwriting and risk management capabilities, particularly in the UK Focused on relationships – building strong, lasting relationships with brokers, with a focus on trilateral relationships between brokers, customers and ourselves Real specialists – building a deep knowledge of those areas of ﬁnancial services in which we specialise Prepared to invest – investing in our operational capability, to create the best possible experience for our customers, our business partners and our people We have established Centres of Excellence to share best practice and learning across core disciplines We have enhanced our technology landscape including the mobilisation of a programme of systems development in the UK Our Select Broker programme was introduced at the start of 2015, to build even stronger relationships with these brokers ANNUAL REPORT & ACCOUNTS 2015 29 SECTION TWO – STRATEGIC REPORT Most trusted specialist insurer Highlights UK customer satisfaction sits at 98-100% across every sector we measure We are top of the independent Fairer Finance rankings for our home insurance offerings Customer satisfaction with claims handling stands at 99% in the UK and 96% in Ireland Ecclesiastical Canada was named one of Canada’s Top Employers for Young People for the fourth successive year 88% of our UK brokers and 95% of our Canadian brokers are satisﬁed with our service We are recognised by brokers as the best insurer in the charity, education and heritage sectors for the 9th consecutive year, according to an independent survey by FWD Our UK Corporate Chartered Insurance status was renewed by the Chartered Insurance Institute (CII), illustrating our commitment to its code of ethics and our professionalism Ansvar Australia was selected as a ﬁnalist for Youth Development Insurer of the Year in the ANZIIF 2015 Insurance Industry Awards The UK’s Landmark Trust, which we have insured for 25 years, has selected us as their ﬁrst Corporate Patron together with their insurance broker, JLT Specialty 98-100% UK CUSTOMER SATISFACTION 30 ANNUAL REPORT & ACCOUNTS 2015 CASE STUDY Dealing sensitively with ﬂood damage For many of our customers in Cumbria, Lancashire and Yorkshire, December 2015 was a traumatic and emotional time as they wrestled with the devastation caused by extreme ﬂooding. In Carlisle, the Grade II Listed church of St. Aiden’s was ﬂooded along with the attached church hall, as was the vicarage a few hundred yards away. Floodwater, in places two to three feet deep, deposited huge amounts of silt and debris which damaged the timber parquet ﬂoor, sandstone walling and columns and timber panelling. Our priority was to provide quick and effective support. We sent out our specialist claims handlers to assess the situation and helped St. Aiden’s vicar, Rev. Keith Teasdale, to secure alternative accommodation. We also brought in loss adjusters and restorers with a deep, specialist knowledge of working with listed properties. I cannot fault Ecclesiastical at all. Their timing, care and attention to detail has been ﬁrst class, both in respect of the church and the hall, as well as the vicarage, where we had over ﬁve feet of water. Ecclesiastical has provided emergency funding and called me regularly to check on progress. They even turned up with a hamper to provide a bit of Christmas cheer! I’ve been recommending Ecclesiastical to my ﬂooded neighbours, not all of whom have such wonderfully understanding insurers. Rev. Keith Teasdale ANNUAL REPORT & ACCOUNTS 2015 31 CASE STUDY An enduring customer relationship When the Nova Scotia Schools Insurance Exchange (NSSIE) appointed a new broker, strong customer relationships saw Ecclesiastical Canada retain and refresh this remarketed account. NSSIE has been an Ecclesiastical customer since 2009 and has chosen to remain with us through three changes of broker. The non-proﬁt organisation manages all insurance placements for Nova Scotia schools and adult community colleges via its School Insurance Programme – a total insured value of around CAD$5.8bn. We know that our risk management, underwriting and claims expertise was central to NSSIE’s decision to reappoint us in 2015, together with coverage enhancements that met their speciﬁc needs. The partnership between the School Insurance Program (SIP) and Ecclesiastical is more than just an insured–insurer relationship. SIP’s business is to provide quality insurance services to Nova Scotia schools. As a non-proﬁt organisation, we welcome an insurer whose vision includes working for the greater good. This is one of the many reasons SIP ﬁnds an excellent ﬁt with Ecclesiastical. Diane McRae Chief Executive Ofﬁcer NSSIE 32 ANNUAL REPORT & ACCOUNTS 2015 STRATEGY IN ACTION Most trusted specialist adviser We achieve this by Strategy in action Highlights Providing excellent service – building long-term sustainable relationships with our customers and their insurers Strengthening our proposition – deepening our expertise further in our chosen markets, cementing our position as market leaders in these areas Building our business – delivering growth by developing new offerings and schemes which complement our existing niche markets Working more closely together – developing closer operational links across the Group to offer solutions that meet our customers’ needs Diversiﬁed into insurance for commercial drone operators We rebranded South Essex Insurance Brokers to SEIB Insurance Brokers, increasing business opportunities by removing perceived regional ties Integrated the 2014 acquisition of Lansdown successfully into SEIB Working with other Ecclesiastical companies, we have created a number of focussed propositions, including a joint offering to Church of England clergy SME business opportunities have been developed with the Essex Chamber of Commerce Sourced a new insurance product to address cybercrime issues Finalists in Insurance Times Awards for Brand Campaign of the Year – Broker Finalists at the UK Broker Awards for Schemes Broker of the Year Our UK Corporate Chartered Insurance status was renewed by the CII across our UK operations SEIB maintained an exceptional customer satisfaction score of 97% ANNUAL REPORT & ACCOUNTS 2015 33 CASE STUDY From cyber security to commercial drones: SEIB meets new customer needs Our specialist brokers pride themselves on anticipating their customers’ changing needs and developing new products to meet them. When internet-enabled crime emerged as a growing issue, SEIB sourced a new insurance product to address it, partnering with a leading specialist insurer for cybercrime. Designed especially for small and medium-sized companies, the product offers increased indemnity limits for incidents such as denial of service and cyber- attacks. It also aims to meet businesses’ speciﬁc needs following an attack or accidental loss of data, by providing a dedicated helpline. SEIB has recently diversiﬁed into insurance for commercial drone operators, again demonstrating that it is at the forefront of understanding and catering for emerging risks. Essex Chambers of Commerce is particularly grateful to SEIB for helping us to understand the implications of cyber-related crime to our business and to source suitable cover to match our business needs, as well as those of our business members. Furthermore, they are also successfully raising the awareness and importance of cyber insurance cover through membership of the Essex Business Crime Forum, which is chaired by the Police and Crime Commission for Essex. Denise Rossiter Chief Executive, Essex Chambers of Commerce 34 ANNUAL REPORT & ACCOUNTS 2015 STRATEGY IN ACTION Best ethical investment provider We achieve this by Strategy in action Highlights Creating a platform for growth – we are upgrading our IT capabilities to create a platform for growth and increase processing efﬁciency Reﬁning our service – we are enhancing our services to keep pace with the evolving needs of our customers Promoting socially responsible investment – we have an industry-leading reputation for our socially responsible investment funds and investment thought leadership Delivering long-term performance – we use a consistent proven approach to delivering long-term investment success Developing our offering – we are developing and deepening our fund offering with particular focus on institutional investors and the charity segment The investment management business has been rebranded to EdenTree Investment Management A market-leading investment website has been launched to service all clients, including institutional and charity investors, ﬁnancial advisers and private investors We have implemented an investment management system that supports electronic trading and automated compliance monitoring Our investment team sustained its award-winning track record, securing numerous plaudits based on its above-average long-term performance record Secured top assessment rating of A+ from UNPRI (United Nations Principles of Responsible Investment) – an external, independent validation of EdenTree’s responsible investment process afﬁrming our leadership position among our global peers 2015 Citywire Platinum rated for Mixed Asset Sector 2015 Lipper’s Best Group over 3 years for Mixed Assets Small Won FUNDCLASS European Funds Trophy for Best European Asset Manager – for 4 to 7 rated funds for the fourth year in a row Awarded the Moneyfacts Best Ethical Investment Provider Award for the seventh year in a row, voted for by the Independent Financial Adviser community ANNUAL REPORT & ACCOUNTS 2015 35 CASE STUDY EdenTree Higher Income Fund continues to win supporters Launched in 1994, our award winning Higher Income Fund has demonstrated a strong long-term performance history. In February 2015 it was selected by Hargreaves Lansdown as one of their favourite funds and joined their Wealth 150+ list. Hargreaves Lansdown is one of the largest investment platforms in the UK for private investors and the funds for this list are chosen following detailed assessments of fund investment strategies, in-depth mathematical analysis to ﬁnd those funds that have produced consistent outperformance and thousands of hours of interviews with leading fund managers. Hargreaves Lansdown believe this list offers the ultimate combination of ‘best in class’ performance potential and low management charges. Hargreaves Lansdown 36 ANNUAL REPORT & ACCOUNTS 2015 SECTION TWO – STRATEGIC REPORT Key Performance Indicators – ﬁnancial Measure Performance Donations The amount donated by Ecclesiastical to charities and our charitable owner each year. This is the main measure of our ambition, which is to give £50m to charity over three years. In 2014, transformation of our results allowed us to make £23.5m of grants to our charitable owner as well as £1.7m donations to other good causes. Another year of consistent ﬁnancial results has enabled us to continue our targeted level of charitable giving, with £20.6m of donations paid in 2015. We have now made donations of £45.8m towards our goal of giving £50m to charity over three years. Donations (£m) 0 20 30 10 11.7 20.6 25.2 Ecclesiastical’s capital position has remained strong throughout its period of transformation. We have balanced the need to retain proﬁt within the business to support future growth and development with our target to distribute £50m to charity over three years. 5.7 The Group’s regulatory capital requirements ’12 changed on 1 January 2016 as Solvency II was launched in the European Union. We have agreed a set of targets for capital cover on both the regulatory standard formula basis and our own view of economic capital. We are comfortable that we will be able to meet the Solvency II capital requirements. ’11 ’14 ’15 ’13 5.5 Regulatory capital* The capital resources available to meet the Prudential Regulation Authority’s (PRA) regulatory requirements. The Enhanced Capital Requirement (ECR) is a risk-based statistical calculation based on the business written and assets held. ECR coverage is the ratio of PRA capital available to meet this requirement. Our requirement is to exceed regulatory capital requirements at all times. PR capital and ECR cover (£m) Broker Satisfaction Survey (%) 100 94 94 88 79 38 ANNUAL REPORT & ACCOUNTS 2015 200 100 0 142 ’11 51 ’12 102 98 15 ’13 ’14 ’15 50 0 (£m) Donations (£m) PR capital and ECR cover (£m) Proﬁt/(Loss) before tax (£m) 30 20 10 0 (£m) 400 300 200 100 0 200 100 0 25.2 20.6 5.5 400 300 200 100 0 353 362 371 379 371 3.1x 2.7x 2.6x 2.9x 3.0x 67 54 48 38 -8 92 96 103 105 109 90 100 110 500 400 300 200 100 484 481 399 329 308 46 39 40 40 36 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 -20 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 11.7 ’11 5.7 ’12 PRA Capital ECR PR capital and ECR cover (£m) Proﬁt/(Loss) before tax (£m) 353 362 371 379 371 3.1x 2.7x 2.6x 2.9x 3.0x 80 60 40 20 0 67 54 48 38 -8 92 96 103 105 109 Combined Operating Ratio (%) Gross Written Premium (£m) Net Expense Ratio (%) 484 481 399 329 308 46 39 40 40 36 ’11 ’12 ’13 ’14 ’15 -20 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 Combined Operating Ratio (%) Gross Written Premium (£m) Net Expense Ratio (%) 80 60 40 20 0 90 100 110 100 80 60 40 20 0 100 50 0 500 400 300 200 100 100 50 0 100 50 0 50 45 40 35 30 25 100 50 0 100 50 0 50 45 40 35 30 25 100 50 0 Broker Satisfaction Survey (%) 100 94 94 88 79 Select broker satisfaction survey (%) 96 Claims Satisfaction Survey – Direct (%) SEIB Customer Satisfaction Survey (%) Risk Management Satisfaction Survey – Direct (%) 96 97 97 99 97 97 97 97 98 100 ’12 ’13 ’14 ’15 ’15 ’12 ’13 ’14 ’15 ’14 ’15 ’12 ’13 ’14 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Select broker satisfaction survey (%) 96 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Very Satisﬁed Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Claims Satisfaction Survey – Direct (%) SEIB Customer Satisfaction Survey (%) Risk Management Satisfaction Survey – Direct (%) 96 97 97 99 97 97 97 97 98 100 50 0 100 80 60 40 20 0 PRA Capital ECR PR capital and ECR cover (£m) 142 ’11 51 ’12 102 98 15 ’13 ’14 ’15 ’12 ’13 ’14 ’15 ’15 ’12 ’13 ’14 ’15 ’14 ’15 ’12 ’13 ’14 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Very Satisﬁed Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed KEY PERFORMANCE INDICATORS Measure Performance Proﬁt/(loss) before tax* PR capital and ECR cover (£m) Better-than-expected Group underwriting proﬁt, supported by stable total investment returns, delivered a year-on-year improvement in total proﬁt which increased to £53.6m 362 371 379 371 300 in 2015. 353 400 200 100 2.6x 3.1x Our Investment Management and Broking 2.7x 3.0x and Advisory divisions also continued to contribute consistent proﬁts to the Group result. 2.9x 0 ’12 ’13 ’14 ’11 ’15 More information on underwriting PRA Capital performance is given below. ECR See the Financial Performance Report on page 44 for more details. (£m) Proﬁt/(Loss) before tax (£m) 80 60 40 20 0 67 54 48 38 -8 Combined Operating Ratio (%) Gross Written Premium (£m) Net Expense Ratio (%) 92 96 103 105 109 90 100 110 500 400 300 200 100 484 481 399 329 308 46 39 40 40 36 -20 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 Donations (£m) The Group’s proﬁt or loss (excluding discontinued operations) before deduction of tax. 25.2 20.6 ’15 5.7 5.5 ’12 Each year, refreshed 11.7 targets are set in relation to the Group’s business plans for proﬁt ’14 ’13 ’11 before tax. Details of the target that was set for 2015 can be found in the Group Remuneration Report on page 123. Our short-term target is to generate sufﬁcient proﬁt to enable us to give £50m to charity over three years. Combined operating ratio (COR)* Proﬁt/(Loss) before tax (£m) 80 60 40 67 The COR has improved for a fourth consecutive year, reﬂecting the Group’s focus on underwriting and pricing discipline Broker Satisfaction Survey prioritising proﬁt over growth in the (%) competitive business environment. The ratio exceeded our longer-term target for the ﬁrst 88 time since 2009 primarily driven by better- than-expected performance of our liability ’12 ’11 business in 2015. 50 20 100 ’14 ’13 ’15 38 48 54 94 79 94 -20 -8 0 See the Financial Performance Report on page 44 for more details. 0 (%) 90 100 110 Combined Operating Ratio (%) Gross Written Premium (£m) Net Expense Ratio (%) 92 Select broker satisfaction survey (%) 96 103 96 109 ’12 ’13 ’14 ’15 100 105 80 60 ’11 40 20 0 Claims Satisfaction Survey 484 481 – Direct (%) 399 329 308 96 97 97 99 SEIB Customer 46 Satisfaction Survey (%) 39 40 97 40 36 97 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 Risk Management Satisfaction Survey – Direct (%) 97 97 98 100 500 400 300 100 200 100 50 0 ’12 ’13 ’14 ’15 ’15 ’12 ’13 ’14 ’15 ’14 ’15 ’12 ’13 ’14 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Very Satisﬁed Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed PR capital and ECR cover (£m) 362 371 379 371 The sum of Ecclesiastical’s general insurance incurred losses and expenses PR capital and ECR cover divided by earned 2.9x (£m) premiums for each ﬁnancial year. 2.7x 2.6x 3.0x 353 3.1x 15 ’15 ’15 51 ’13 ’11 ’12 ’12 ’13 ’14 ECR 102 Each year, refreshed ’11 targets are set in PRA Capital relation to the Group’s business plans for the 98 142 Group COR. Details ’14 of the target that was set for 2015 can be found in the Group Remuneration Report on page 123. Our target over the longer term is to achieve a 95% COR. 30 20 10 0 400 300 200 100 200 0 100 0 Donations (£m) 30 20 10 0 25.2 20.6 11.7 5.5 5.7 ’12 ’11 ’13 ’14 ’15 * These ﬁgures have not been restated, they are as reported in the appropriate year’s report and accounts PR capital and ECR cover (£m) Broker Satisfaction Survey (%) 100 94 94 88 79 Select broker satisfaction survey (%) 96 ANNUAL REPORT & ACCOUNTS 2015 Claims Satisfaction Survey – Direct (%) 39 SEIB Customer Satisfaction Survey (%) Risk Management Satisfaction Survey – Direct (%) 96 97 97 99 97 97 97 97 98 100 200 100 0 142 ’11 51 ’12 102 98 15 ’13 ’14 ’15 50 0 100 80 60 40 20 0 100 50 0 100 50 0 ’12 ’13 ’14 ’15 ’15 ’12 ’13 ’14 ’15 ’14 ’15 ’12 ’13 ’14 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Very Satisﬁed Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed 50 45 40 35 30 25 100 50 0 50 45 40 35 100 30 25 50 0 100 50 0 SECTION TWO – STRATEGIC REPORT Donations (£m) PR capital and ECR cover Proﬁt/(Loss) before tax (£m) (£m) 25.2 20.6 353 362 371 379 371 3.1x 2.7x 2.6x 2.9x 3.0x 400 300 200 100 0 11.7 5.5 5.7 ’12 PRA Capital ECR 80 60 40 20 0 67 54 48 38 -8 90 100 110 ’11 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 -20 ’11 ’12 ’13 ’14 ’15 30 20 10 0 200 100 0 PR capital and ECR cover (£m) Broker Satisfaction Survey (%) 100 94 94 88 79 Select broker satisfaction survey (%) 96 142 ’11 51 ’12 102 98 15 ’13 ’14 ’15 50 0 100 80 60 40 20 0 96 100 50 0 Measure Performance Net expense ratio (NER)* Donations (£m) 11.7 ’11 5.7 ’12 30 20 10 0 PR capital and ECR cover (£m) Proﬁt/(Loss) before tax (£m) 25.2 20.6 5.5 400 300 200 100 0 353 362 371 379 371 3.1x 2.7x 2.6x 2.9x 3.0x 80 60 40 20 0 67 54 48 38 -8 92 96 103 105 109 90 100 110 500 400 300 200 100 Combined Operating Ratio (%) Gross Written Premium (£m) Net Expense Ratio (%) 484 481 399 329 308 46 39 40 40 36 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 -20 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 92 Combined Operating Ratio Total expenses as a (%) proportion of the net premium earned in the year. These expenses 96 include acquisition costs, administration costs, the movement in deferred acquisition costs and ’14 ’12 commission paid less commission received. 103 109 105 ’11 ’13 ’15 Our aim is to make year- on-year improvements in the NER. Gross Written Premium (£m) Our NER increased in 2015 to 46% with an 11% fall in net earned premium, offsetting a 2% decrease in 484 481 net expenses. 399 329 308 The storm and ﬂood events in the UK signiﬁcantly affected commission income from reinsurers, with the reduction contributing to 2% of the overall increase in NER. ’11 ’12 ’13 ’14 ’15 500 400 300 200 100 We expect to continue to control our costs, seeking efﬁciencies where we can to ensure we can continue to invest in systems and processes that beneﬁt our customers. Net inﬂows (investments) Net inﬂows are the difference between the gross sales and redemptions made during the period from third parties in the range of funds our investment division offers. Claims Satisfaction Survey – Direct (%) Each year refreshed targets are set which take into account current 97 market conditions and potential new initiatives. 97 99 2015 proved to be a volatile and difﬁcult year for many investment management companies and EdenTree was similarly affected, particularly in the second half of the year. Gross inﬂows remained similar to 2014, but outﬂows were almost equal to inﬂows leaving a net result of £15m for the year. This was SEIB Customer below our target to maintain net inﬂows Satisfaction Survey (%) at levels similar to those achieved in 2013 and 2014. We expect the 97 continuing market volatility to depress net inﬂows during 2016. 100 97 50 (%) Net Expense Ratio (%) PRA Capital ECR 50 45 40 35 30 25 46 39 40 40 36 ’11 ’12 ’13 ’14 ’15 PR capital and ECR cover (£m) Broker Satisfaction Survey (%) 100 94 94 88 79 Select broker satisfaction survey (%) 96 Claims Satisfaction Survey – Direct (%) SEIB Customer Satisfaction Survey (%) Risk Management Satisfaction Survey – Direct (%) 96 97 97 99 97 97 97 97 98 100 142 51 102 98 15 50 0 100 80 60 40 20 0 100 50 0 100 50 0 ’12 Risk Management Satisfaction Survey ’11 – Direct (%) ’13 ’14 ’15 97 97 98 100 ’12 ’13 ’14 ’15 ’15 ’12 ’13 ’14 ’15 ’14 ’15 ’12 ’13 ’14 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Very Satisﬁed Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed (£m) 200 100 0 100 50 50 45 40 35 30 25 100 50 0 * These ﬁgures have not been restated, they are as reported in the appropriate year’s report and accounts 0 0 ’12 ’13 ’14 ’15 ’15 ’12 ’13 ’14 ’15 ’14 ’15 ’12 ’13 ’14 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Very Satisﬁed Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed 40 ANNUAL REPORT & ACCOUNTS 2015 30 20 10 0 200 100 0 Donations (£m) PR capital and ECR cover Proﬁt/(Loss) before tax (£m) (£m) Combined Operating Ratio (%) Gross Written Premium (£m) Net Expense Ratio (%) 25.2 20.6 353 362 371 379 371 3.1x 2.7x 2.6x 2.9x 3.0x 400 300 200 100 0 80 60 40 20 0 67 54 48 38 -8 92 96 103 105 109 90 100 110 500 400 300 200 100 484 481 399 329 308 46 39 40 40 36 ’11 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 -20 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 11.7 5.5 5.7 ’12 PRA Capital ECR KEY PERFORMANCE INDICATORS Key Performance Indicators – non-ﬁnancial Donations (£m) PR capital and ECR cover (£m) Measure 30 Performance 20 25.2 20.6 10 Direct customer satisfaction Broker Satisfaction Survey 11.7 (%) Results from customer satisfaction surveys carried 94 out each year, relating to how well customers felt their claims were handled. The results of this survey include settled and partially settled property claims. ’11 79 94 88 40 0 PR capital and ECR cover (£m) 142 ’11 51 ’12 102 98 15 ’13 ’14 ’15 100 50 0 Donations (£m) ’13 Customers are asked to rate their ’14 ’12 experience on a six-point scale: 1 – extremely dissatisﬁed to 6 – extremely satisﬁed. Very Satisﬁed Extremely Satisﬁed ’15 30 20 10 0 11.7 ’11 Fairly Satisﬁed We measure the level of 400 25.2 positive satisfaction, particularly 300 extremely and very satisﬁed. 20.6 200 Our target is to achieve at least 100 90% very or extremely satisﬁed. 5.7 0 5.5 ’13 ’12 ’14 Broker satisfaction ’15 Results from broker opinion surveys carried out each year. Brokers are asked to rate their experience, on a six-point scale: 1 – extremely dissatisﬁed to 6 – extremely satisﬁed. We measure the level of positive satisfaction, particularly extremely and very satisﬁed. Our aim is to achieve over 90% satisﬁed score. PR capital and ECR cover (£m) 142 ’11 51 ’12 102 98 15 ’13 ’14 ’15 200 100 0 100 50 0 80 5.7 ’14 ’12 ’15 Select broker satisfaction survey (%) We take pride in placing the 5.5 customer at the heart of everything 96 ’13 100 we do, particularly when they are in real need of help and support at the time of a claim. In 2015, 94% of customers surveyed were either extremely or very satisﬁed with the way their claim was handled and 99% were satisﬁed overall. 60 20 0 ’15 Very Satisﬁed Extremely Satisﬁed PR capital and ECR cover (£m) Similar results were also seen in the responses for customer surveys on general satisfaction levels. Fairly Satisﬁed In particular, 100% of our home 362 371 379 371 353 insurance customers were satisﬁed with their new business experience 2.7x 2.9x 3.1x with us. 2.6x 3.0x 80 60 40 20 ’11 ’12 ’13 ’14 ’15 PRA Capital ECR 0 -20 200 100 The Group continued to score a PR capital and ECR cover good level of satisfaction with our (£m) brokers in 2015, although the overall result has dropped by 6% over the prior year. Results have polarised this year with 6% more brokers being extremely/very satisﬁed with service. 102 51 In 2015, 63% of our brokers were 0 extremely/very satisﬁed. ’12 142 ’15 ’11 ’13 ’14 98 15 The result for our Select Brokers, a programme launched in 2015 aimed at our key broker relationships, was an additional 11% stronger on overall extremely/very satisﬁed. In 2015, 69% of our Select Brokers Broker Satisfaction Survey were extremely or very satisﬁed while (%) satisfaction remains at 96%. The Net Promoter Score (NPS) has increased 94 from 32% to 42% in 2015. 88 94 79 This polarisation is also mirrored in Ansvar UK’s results, which has 7% more brokers extremely/very satisﬁed with service over the prior year and a signiﬁcant increase in ’12 NPS form 38% in 2014 to 57% in 2015. Extremely Satisﬁed ’13 ’14 ’15 Very Satisﬁed Fairly Satisﬁed 50 45 40 35 30 25 50 0 90 100 110 500 400 300 200 100 100 50 0 100 50 0 50 45 40 35 30 25 100 50 0 (%) 50 45 40 35 30 25 100 50 0 100 50 0 353 362 371 379 371 3.1x 2.7x 2.6x 2.9x 3.0x Claims Satisfaction Survey – Direct (%) ’11 ’12 ’13 96 97 PRA Capital ’14 97 ’15 99 ECR 400 300 200 100 (%) 0 100 50 0 ’13 ’12 ’14 Proﬁt/(Loss) before tax (£m) Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed 67 54 48 38 -8 Proﬁt/(Loss) before tax (£m) 80 60 40 20 0 54 48 38 -8 SEIB Customer Satisfaction Survey (%) Combined Operating Ratio (%) Gross Written Premium (£m) Net Expense Ratio (%) Risk Management Satisfaction Survey 103 105 – Direct (%) 109 92 96 500 400 300 200 100 484 481 399 329 308 46 39 40 40 36 -20 ’11 100 ’12 ’14 ’15 97 100 ’11 ’12 ’13 ’14 97 97 ’15 98 100 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 67 ’13 97 50 0 ’15 ’14 ’15 ’12 ’13 ’14 ’15 Combined Operating Ratio (%) Very Satisﬁed Satisﬁed 92 96 103 105 109 90 100 110 Gross Written Premium Extremely Satisﬁed Net Expense Ratio (£m) 484 481 Very Satisﬁed Fairly Satisﬁed 399 329 308 46 39 40 40 36 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 (%) 100 50 0 100 80 60 40 20 0 Broker Satisfaction Survey (%) 94 79 94 88 Select broker satisfaction survey (%) 96 100 80 60 40 20 0 Claims Satisfaction Survey – Direct (%) SEIB Customer Satisfaction Survey (%) Risk Management Satisfaction Survey – Direct (%) 96 97 97 99 97 97 97 97 98 100 ’12 ’13 ’14 ’15 ’15 ’12 ’13 ’14 ’15 ’14 ’15 ’12 ’13 ’14 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Very Satisﬁed Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Select broker satisfaction survey (%) Claims Satisfaction Survey – Direct (%) SEIB Customer Satisfaction Survey (%) Risk Management Satisfaction Survey – Direct (%) 96 ’15 100 50 0 96 97 97 99 97 97 97 97 98 100 ’12 ’13 ’14 ’15 ’14 ’15 ’12 ’13 ’14 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed ANNUAL REPORT & ACCOUNTS 2015 41 Very Satisﬁed Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Donations (£m) PR capital and ECR cover Proﬁt/(Loss) before tax (£m) (£m) Combined Operating Ratio (%) Gross Written Premium (£m) Net Expense Ratio (%) 80 60 40 20 0 67 54 48 38 -8 92 96 103 105 109 90 100 110 500 400 300 200 100 484 481 399 329 308 46 39 40 40 36 ’11 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 -20 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 30 20 10 0 11.7 5.5 5.7 ’12 25.2 20.6 353 362 371 379 371 3.1x 2.7x 2.6x 2.9x 3.0x 400 300 200 100 0 PRA Capital ECR 0 20 40 60 80 100 105 ’11 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 -20 ’11 ’12 ’13 ’14 ’15 ’11 80 60 0 40 20 0 67 ’12 ’13 ’14 48 54 ’15 38 Extremely Satisﬁed -8 Very Satisﬁed Fairly Satisﬁed 90 100 110 PR capital and ECR cover (£m) Broker Satisfaction Survey (%) 100 94 94 88 79 Donations (£m) PR capital and ECR cover Proﬁt/(Loss) before tax 50 (£m) 25.2 20.6 0 142 353 ’11 51 ’12 102 98 362 371 379 371 ’13 ’14 ’15 15 3.1x 2.7x 2.6x 2.9x 3.0x 200 (£m) 100 400 300 200 100 0 PRA Capital ECR 11.7 5.5 5.7 ’12 PR capital and ECR cover (£m) Broker Satisfaction Survey (%) 100 94 94 88 79 Select broker satisfaction survey (%) 96 30 20 10 0 200 100 0 142 ’11 51 ’12 102 98 15 ’13 ’14 ’15 50 0 100 80 60 40 20 0 100 50 0 96 ’12 ’12 ’13 ’14 ’15 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed 50 45 40 35 30 25 100 50 0 Risk Management Satisfaction Survey – Direct (%) 97 97 98 100 ’12 ’13 ’14 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed SEIB Customer Satisfaction Survey (%) 97 97 Net Expense Ratio (%) 39 ’14 40 Very Satisﬁed 36 Satisﬁed 46 ’15 40 (%) 100 50 50 0 45 40 35 30 25 SECTION TWO – STRATEGIC REPORT Measure Performance SEIB customer satisfaction Select broker satisfaction survey (%) Results from a satisfaction survey carried out by our 96 broker SEIB. The survey was set up in 2014 and covers the administration, Combined Operating Ratio claims, commercial (%) client and new business departments, and relates to how satisﬁed SEIB’s ’15 customers were with the 96 service they received. 103 Extremely Satisﬁed 92 109 ’12 Very Satisﬁed ’13 Fairly Satisﬁed Customers were asked to rate their service ’15 experience on a ten-point scale: 10 – very satisﬁed to 0 – not satisﬁed. ’14 100 50 96 97 99 Claims Satisfaction Survey – Direct (%) SEIB customer satisfaction results have been very pleasing over the past 2 years with 97% of SEIB’s customers who 97 responded to the survey, being either very satisﬁed or satisﬁed in 2015. From these results, a staggering 87% of SEIB’s customers fell into the very satisﬁed category rating the service they received 484 481 as a 9 or 10. This is well above our target ’14 ’13 399 for 90% satisfaction. Gross Written Premium (£m) ’12 ’15 500 0 400 300 200 100 Extremely Satisﬁed 329 308 Very Satisﬁed Fairly Satisﬁed We have measured the level of positive satisfaction and we have based the results on scores of 7-8 being satisﬁed and scores of 9-10 being very satisﬁed. Our target is to achieve at least 90% of customers being satisﬁed or very satisﬁed with the service they receive. Risk management satisfaction survey – direct ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 Risk Management Satisfaction Survey – Direct (%) 97 97 98 100 (%) 100 50 0 ’12 ’13 ’14 ’15 Extremely Satisﬁed Very Satisﬁed Fairly Satisﬁed SEIB Customer Our Risk Management team supports Satisfaction Survey (%) our customers in the identiﬁcation, quantiﬁcation (including valuations), assessment and improvement of risk. 100 97 97 50 Our surveyors and consultants conduct on-site survey assessments at periodic intervals with a view to helping our customers understand and protect themselves from risk. 0 ’14 ’15 We also provide customer guidance Very Satisﬁed online and via regular risk insight updates. Satisﬁed Having a strong in-house risk management service is seen as a key competence for the Group and is clearly valued by our customers who responded to the survey, with 92% very or extremely satisﬁed with their risk management survey and 100% satisﬁed. Of those customers surveyed, 98% are satisﬁed with their risk management report of which 88% are very or extremely satisﬁed. Claims Satisfaction Survey – Direct (%) 99 97 This is a new KPI. Following our site surveys, customers are asked to 97 complete a customer satisfaction report in respect of their on-site experience with our surveyor or consultant and the quality and clarity of ’13 advice provided. Extremely Satisﬁed Customers are asked Very Satisﬁed to rate their experience Fairly Satisﬁed on a six point scale 1 – extremely dissatisﬁed to 6 – extremely satisﬁed. ’15 ’14 We measure the level of positive satisfaction, particularly extremely and very satisﬁed. Our target is to achieve at least 90% very or extremely satisﬁed customer feedback. 42 ANNUAL REPORT & ACCOUNTS 2015 r o t c o r P r a k s O y b h p a r g o t o h P SECTION TWO – STRATEGIC REPORT Financial Performance Report We delivered another year of strong and consistent ﬁnancial results, reporting a pre-tax proﬁt of £53.6m (2014: £48.2m). Our underwriting performance improved again, despite a more active year for property claims across all of our territories. Investment returns were also similar to last year in the face of challenging markets, particularly in the second half of the year. Our consistent ﬁnancial performance and continuing strong capital position have enabled us to make further substantial charitable grants to ATL. Grants of £20m were paid during the year taking our total charitable giving since the start of 2014 to £45.8m. We invested in our investment management business during the year, rebranding as EdenTree and continuing the modernisation of their IT systems. We continued to streamline and develop our broking and advisory business in the year, successfully concluding the sale of our legacy mortgage book in the early months of the year. General insurance Our underwriting performance for the year was a proﬁt of £15.9m (2014: £10.7m proﬁt), resulting in a Group COR of 92.0% (2014: 95.2%). Each of our business units has delivered an underlying underwriting proﬁt for a second year. United Kingdom and Ireland Our insurance businesses in the UK and Ireland reported an underwriting proﬁt of £14.5m (2014: £10.4m proﬁt) and a COR of 90.4% (2014: 94.0%). It has been a more active year for property claims with a higher than average cost of large losses, particularly ﬁre losses, together with the storms and ﬂoods that hit the UK in December. We incurred net losses of £12.2m in respect of those weather events which were adequately reserved for at the year end. The performance of our liability book, however, has continued to improve and produced strong proﬁts, enhancing the overall positive underwriting performance for the year. Current year claims performance has been better than expected, and we have also had the beneﬁt of reserve releases as historical claims have been settled at amounts that were less than anticipated. In 2015, GWP has fallen by 7% to £228m (2014: £246m). Retention levels were high at 85%, despite further losses of academies to the Department for Education's risk protection arrangement for academy trusts. We considered all new business carefully and did not seek to write business at prices we considered unsustainable. Our Strategy over the medium-term is to seek moderate GWP growth by adding good-quality business at a steady pace, but we expect the market environment to remain very competitive, particularly for commercial property business. We will not expect to change our approach, in accordance with our philosophy of not putting our underwriting performance at risk by seeking growth above proﬁt. Ansvar Australia Australia achieved an underlying underwriting proﬁt of AUD$0.2m (COR 99.3%) before the impact of movements on discount rates, which resulted in an underwriting loss of AUD$0.7m overall (2014: AUD$2.1m loss). The business was affected by a higher than average number of catastrophe events during the year, which was an issue for the whole Australian market. However, the reinsurance arrangements in place reduced the impact of these losses to a manageable level. 44 ANNUAL REPORT & ACCOUNTS 2015 FINANCIAL PERFORMANCE REPORT GWP grew by 4% in local currency to AUD$76.2m (2014: AUD$73.5m). Retention rates remained very strong and new business was 40% ahead of the prior year. Canada Canada continued its track record of delivering strong, proﬁtable growth, reporting a 9% increase in GWP in the year in local currency. The branch’s contribution to GWP increased to CAD$77.9m (2014: CAD$71.6m). The territory reported an underwriting proﬁt of CAD$2.0m (2014: CAD$3.0m proﬁt), a COR of 96.5%. As with other territories, it has been a more active year for property claims than in the prior year with higher than expected costs coming from large losses. Other insurance operations Proﬁts were improved by releases of reserves from our businesses in run-off, resulting in an overall proﬁt of £0.8m (2014: £0.2m loss). Investments Against the backdrop of rising political tensions across the world, increased concern over the extent of the economic slowdown in China, and deterioration of growth in emerging economies, market volatility increased in the second half of 2015. The price of oil and other major resources continued to fall, hitting multi-year lows, signiﬁcantly damaging many companies’ balance sheets and dividend-paying ability. Over the course of 2015, the FTSE All-Share Index produced a return of 1.0% while the FTSE 100 Index ended the year down 4.9%. By contrast, our UK equity portfolio increased by 4.4%, outperforming both indices, reﬂecting its lower weighting in poorly performing sectors such as oil and mining. Government bond yields ended the year marginally higher, though they succumbed to signiﬁcant bouts of volatility. Quantitative easing from the Eurozone and Japan, the surprise devaluation of the Chinese Yuan in August, fears about a Chinese growth slowdown and persistent commodity price declines all pushed global bond yields lower at different times throughout the year. The end of 2015 was dominated by central bank monetary policy divergence between the US Federal Reserve and the European Central Bank (ECB). While the Federal Reserve saw ﬁt to begin the process of interest rate normalisation, the ECB took the opposite approach, extending the duration of its asset purchase programme. These policy announcements triggered a bond sell-off which caused yields to rise in the ﬁnal weeks of the year. In 2015, our UK bond portfolio produced a total return of 1.1%, which compared favourably against the FT All Stocks Gilt Index’s 0.6% return for the same period, due to its short dated position. Investment management The Group’s investment management business completed a successful rebrand as EdenTree during 2015, as ethical investment continues to become more main-stream in investment management markets, reﬂecting the future growth ambitions of the company. The new brand coincided with the launch of a new EdenTree website, digital advertising, use of social media and national outdoor advertising. The team also launched a new front ofﬁce IT platform to support investment trading and compliance activities, delivering better service to clients. Despite the change in name, there has been no change to the strategic aims of the business as it continues to focus on an active, value-based and long-term approach to stock picking, building upon its long track record of delivering proﬁt with principles for investors and charities. EdenTree beneﬁted from receipt of a one-off performance fee of £0.7m in 2014, which was not repeated in 2015, meaning overall fee income for the year decreased by 4.7% to £13.6m (2014: £14.3m). Pre-tax proﬁts fell to £1.8m (2014: £3.2m) reﬂecting the level of investment made during the year in the operations of the business. ANNUAL REPORT & ACCOUNTS 2015 45 SECTION TWO – STRATEGIC REPORT Stock market volatility increased during the second half of the year and led to greater investor caution with the industry as a whole generally experiencing net outﬂows in 2015. Faced with a challenging investment environment, EdenTree generated net inﬂows to its funds of £15m (2014: £98m net inﬂow), holding assets under management at the end of the year of £2.3bn (2014: £2.3bn). EdenTree has maintained its track record as a multi-award-winning ethical investment provider, with the company winning the Moneyfacts Best Ethical Investment Provider Award for a seventh consecutive year. Its funds continue to win awards, as shown earlier in the Strategic Report on page 35. EdenTree was rated platinum by Citywire, and across the team our Fund Managers continue to be highly rated. Long-term insurance The long-term insurance business result for 2015 was a proﬁt of £1.0m (2014: £0.2m loss). Ecclesiastical Life Limited is closed to new business and the expected favourable run-off of the business during the year was enhanced by the positive impact of increased bond yields. Broking and advisory The broking and advisory business comprises our insurance broker business SEIB and EFAS, our small ﬁnancial advisory business. In 2015, SEIB was affected by disruption during the transition of one scheme to another provider. Proﬁt before tax reduced to £2.2m (2014: £3.0m). EFAS completed the sale of its mortgage book in early 2015, as the business looks to focus on its core independent ﬁnancial advisory and funeral plan administration business. It reported a small loss of £0.3m in the year (2014: £1.0m loss which included £0.6m of costs in relation to the sale of the mortgage book). Overall, our broking and advisory business delivered a stable pre-tax proﬁt of £1.9m (2014: £2.0m proﬁt). Ian Campbell Group Chief Financial Ofﬁcer Grants of £20m were paid during the year taking our total charitable giving since the start of 2014 to £45.8m. 46 ANNUAL REPORT & ACCOUNTS 2015 SECTION TWO – STRATEGIC REPORT Risk Management Report Introduction The Group’s Business Model is explained in detail on page 26. The operations of the Group present a number of risks including Insurance, Market, Credit, Operational, and Strategic. An enterprise-wide risk management framework has been embedded across the Group, with the purpose of providing the tools, guidance, policies, standards and deﬁned responsibilities to enable us to achieve our Strategy and objectives. This also ensures that individual and aggregated risks to our objectives are identiﬁed and managed on a consistent basis. The risk management framework is integrated into the culture of the Group and is owned by the Board. Responsibility for the implementation and oversight is delegated to the Group Risk Function, led by the Group Chief Risk Ofﬁcer. This is supported by three executive Risk Management Committees: the (Non-Life) Insurance Risk Committee which has oversight of the non-life insurance risks of the Group including counterparty risk; the Investment and Market Risk Committee which has oversight of the investment and market risks of the Group; and the Group Operational Risk Committee which has oversight for all the operational risks of the Group. The insurance risks relating to our life business are overseen by the Life Management Committee. The risk management process demands accountability and is embedded in performance measurement and reward, thus promoting clear ownership for risk and operational efﬁciency at all levels. CE N FE E RISK STRATEGY RISK APPETITE RISK POLICIES & STANDARDS R I S K INTERNAL MODEL S OF D E E LIN E R D TH N K A R O EW M A RISK MANAGEMENT PROCESS STRESS & SCENARIO TESTING ORSA R E P O R T I N G & M O N I T O R I N G BUSINESS PERFORMANCE & CAPITAL MANAGEMENT VALUES & CULTURE PEOPLE, SYSTEMS & PROCESSES GOVERNANCE OL FR NTR O AL C N R INTE 48 ANNUAL REPORT & ACCOUNTS 2015 RISK MANAGEMENT REPORT On an annual basis, the Group Risk Committee (on behalf of the Board) identiﬁes key strategic risks for the Group with input from the Group Management Board (GMB) and the Strategic Business Units (SBUs). The Group Risk Committee allocates responsibility for each of the risks to individual members of the Group’s executive management. Any risk management actions that arise are regularly monitored and any gaps in risk mitigants challenged. The key to the success of this process is the deployment of a strong Three Lines of Defence Model whereby the: 1st Line (Business Management) is responsible for strategy, performance and management of risks arising; 2nd Line (Reporting, Oversight and Guidance) is responsible for establishing minimum standards, appropriate reporting, oversight and challenge of our risk proﬁles and risk management activities within each of our businesses. This includes executive Risk Management Committees and is subject to oversight and challenge by the Group Risk Committee; and the 3rd Line (Assurance) provides independent and objective assurance of the effectiveness of the Group’s systems of internal control. This activity principally comprises the Group Internal Audit function which is subject to oversight and challenge by the Group Audit Committee. We have a continuously evolving approach to enterprise risk management and use emerging experience to reﬁne our approach. During 2015, key improvements included: formal documentation of the risk management framework; further embedding of the risk management framework within the 1st line of defence; consolidation of the qualitative risk proﬁles with a focus on business plans; signiﬁcant development of quantitative risk proﬁling capabilities to ensure capture of all material risks and the development of an Internal Model validation framework; a revised Group risk appetite to strengthen risk oversight which was approved by the Group Risk Committee on behalf of the Board and refreshed SBU risk appetites aligned to the Group appetite; enhanced stress testing and scenario analysis; enhanced control risk and self-assessment (CRSA) process; implementation of a policy framework supported by standards and guidance; and improvements were made to the Own Risk and Solvency Assessment (ORSA) process. ANNUAL REPORT & ACCOUNTS 2015 49 SECTION TWO – STRATEGIC REPORT Risk appetite The risk appetite deﬁnes the level of risk-taking that the Board feel is appropriate for the Group as we pursue our business objectives. It has been deﬁned in line with the different categories of risk that the Group faces, and provides the backdrop against which the business plan is developed and validated. This ensures that the risk proﬁle resulting from the business plan is in line with the risk-taking expectations of the Board. Compliance with the risk appetite is reported to the Group Risk Committee at each meeting. A formal escalation process exists for activities outside of the risk appetite. The risk appetite is refreshed at least annually and is signed-off and approved by the Board. The Board takes the reputation of the Group seriously and will not undertake any activity whose outcome might reasonably be expected to have a sufﬁciently negative reputational impact on the Group and undermine the sustainability of the Business Model. Our overarching risk appetite sets the minimum levels of capital and solvency that the Group wishes to maintain, and contains statements detailing the maximum exposure to different risk types that are deemed to be desirable. This includes limits on the type, nature, size and concentration of insurance risks that will be accepted by the Group and limits on the mix of assets to be held within the Group’s investment portfolio. The main objective of our risk appetite is to ensure that we have sufﬁcient capital to meet our liabilities and maintain our ﬁnancial strength in extreme adverse scenarios. The risk appetite aims to achieve and support a credit rating of at least single A minus from Standard & Poor’s (S&P). Quantitative risk measures and stress testing framework The tool we use to measure aggregate risk is our Internal Model, which has been calibrated to estimate the internal view of the capital resources required to deliver our business plan. Over the last year we have improved both the scope and methodology of our Internal Model to better reﬂect the risk proﬁle. The model has become further embedded in our strategic decision-making processes. As an example, the Internal Model was used as an input to the development of our reinsurance strategy and pricing decisions and setting of investment strategy. Under the Solvency I Regime this model was used to calculate our capital requirements. With the introduction of Solvency II our regulatory capital requirement will be calculated using the standard formula, although we will continue to use and develop our Internal Model alongside this. Our intention is to seek regulatory approval for our Internal Model as the basis for the calculation of our regulatory capital requirements during 2017. We have continued to reﬁne a comprehensive stress testing and scenario analysis framework to complement our quantitative risk measures. This framework seeks to stress the business plan and identiﬁes potential outcomes generated from a range of scenarios, providing evidence to the Board that the plan is robust. These stress tests are also used to identify additional actions that can be taken, including contingency plans, to mitigate any risks or potential adverse experiences identiﬁed. As such the Group uses stress and scenario testing as a key component of its business planning process. 50 ANNUAL REPORT & ACCOUNTS 2015 RISK MANAGEMENT REPORT Principle risks The Board of directors has carried out a robust assessment of the principal risks that could have the highest potential to damage the Business Model, the Strategy or solvency of the Group both in the short and long term. Those risks identiﬁed are as follows: Risk type and description Insurance risks Why we have it How we mitigate it Business mix, underwriting and pricing risk General insurance is our core business. It is a highly competitive business. The premium required for an insurance policy needs to reﬂect the cover provided and the risk factors present. The risk of failure to price insurance products adequately for claims costs, expenses, cost of capital and proﬁt requirements; failure to manage portfolio risk according to the underwriting cycle; failure to establish appropriate underwriting disciplines. Disciplined underwriting and pricing is central to our business and the success of the Group. We have targeted training programmes in place to ensure the correct skill set is maintained and developed. There continues to be signiﬁcant investment in underwriting and pricing capabilities across the Group, and the organisational structure in the UK General Insurance business is now well established. A documented underwriting strategy and risk appetite is in place to ensure there is a clear focus on our chosen niches and classes of business, and all underwriters have documented authority levels to which they must adhere. This risk has not changed materially over the year. Actions continue to be taken to improve our underwriting capabilities and improve the quality of the business we write. Claims reserving risk The risk of actual claims payments exceeding the amount we are holding in reserves. Claims reserving risk is a natural consequence of incurring insurance claims. Throughout the lifecycle of a claim the estimated ultimate cost will vary as additional information becomes available. The Goddard inquiry, which is an independent inquiry into child sexual abuse in England and Wales, in the UK may have an impact on the frequency and severity of Physical and Sexual Abuse (PSA) claims across the insurance industry. This is an emerging risk that we are actively monitoring. Claims development and reserving levels are closely monitored. Claims reserving risk primarily arises from long-tail liability business. For statutory and ﬁnancial reporting purposes, prudential margins are added to a best estimate outcome to allow for uncertainties. This approach may result in a favourable release of the previous year’s provisions within the current ﬁnancial year. Claims reserves are reviewed and signed-off by the Board acting on the advice and recommendations of the Group Reserving Actuary, Actuarial Function Director, the Reserving Committee and the Group Audit Committee. Further information on this risk is given in notes 2, 3 and 27 to the ﬁnancial statements in section 4 of this Annual Report and Accounts. We believe that this risk has remained at a similar level during the year given our prudent approach to reserving. ANNUAL REPORT & ACCOUNTS 2015 51 SECTION TWO – STRATEGIC REPORT Risk type and description Insurance risks Reinsurance mix The risk of failing to access and manage reinsurance capacity at a reasonable price. Why we have it How we mitigate it This risk is managed by taking a long-term relationship view towards reinsurance purchases to deliver sustainable capacity rather than beneﬁt from opportunistic results. Strict criteria exist which relate to the ratings of the reinsurers we choose and a Reinsurance Security Committee approves all of our reinsurance partners. We purchase reinsurance to protect against property catastrophe events that are predicted to occur up to every 250 to 500 years, depending upon the territory. The level of this risk has remained broadly similar over the year. Reinsurance is a central component of our Business Model, enabling us to insure a portfolio of large risks in proportion to our capital base. The current Business Model for our Australian subsidiary utilises a 100% property reinsurance arrangement. The global reinsurance market has seen a large amount of merger and acquisition activity during 2015. This has not restricted the capacity available or adversely affected our ability to place the reinsurance programme. Concentration and model error risk The risk of failure to manage risk concentrations across our different business and risk areas, and including reliance on models which if found to be wrong could give rise to signiﬁcant unplanned losses. Exposure measures are fundamental to determining our reinsurance purchases. Errors within the models could fail to identify signiﬁcant concentrations of risk and lead to the Group having net retentions which are in excess of our risk appetite. Risk appetite limits have been established to manage our concentrations of risk and these are reviewed regularly by the Group Risk Committee. The risk is mitigated through the use of industry recognised models that have been validated by the vendors as well as our own assessments of their appropriateness, alongside our scenario and stress testing framework. The level of risk has remained static during the year. 52 ANNUAL REPORT & ACCOUNTS 2015 Risk type and description Market risk Market risk The risk of adverse movements in net asset values arising from a change in interest rates, equity and property prices, credit spreads and foreign exchange rates. RISK MANAGEMENT REPORT Why we have it How we mitigate it Market risk principally arises from investments held by the Group. We accept such risks to seek enhanced returns on these investments. Our investment strategy for assets backing reserves is primarily focused on ﬁxed income stocks. This gives us exposure to interest rate risk. We also hold some of our investments in corporate bonds, which expose us to credit spread risk, for which higher expected yields are obtained. Market risk also arises as we have a signiﬁcant equity portfolio. A proportion of our equity portfolio is invested in overseas equities. This gives us exposure to wider investment opportunities and diversiﬁed returns but also introduces currency risk. A robust investment risk management framework is in place to mitigate the impact of changes in ﬁnancial markets. Our Fund Manager, EdenTree, manages our funds in accordance with the investment strategy and guidelines agreed by the Finance and Investment Committee. Interest rate risk is partly managed through selecting stocks of an appropriate duration that will match the expected cash ﬂows from longer-term liabilities, and partly through holding stocks with a relatively short period to maturity, that are not exposed to signiﬁcant volatility upon changes in interest rates. Credit spread risk is controlled through the investment strategy and guidelines agreed by the Finance and Investment Committee. It is managed by EdenTree’s assessments of risk and by limiting our exposure to both non-rated and lower-rated bonds, and ensuring that we adhere to the limits set for exposure to any single issuer. We hold a relatively signiﬁcant equity portfolio in order to deliver a risk-adjusted long-term investment return on capital. When we feel it is appropriate, we will use derivatives to reduce equity exposure. A small amount of hedging of equity risk was in place during 2015. We manage our exposure to liabilities in our overseas businesses by holding appropriate levels of cash and investments in local currencies. We ensure that currency risk is appropriately monitored and controlled and is overseen by our Group Finance function in order to reduce the impact of ﬂuctuating currency rates. Currency risk arising from holding overseas equities is accepted as part of the decision to invest in such assets. We have increased diversiﬁcation in our asset portfolio by investing more in property. We mitigate investment property risk by ensuring that appropriate due diligence is conducted on all prospective investments and through the monitoring of concentration risk, performance, sector allocation and income. Further information on this risk is given in note 4 to the ﬁnancial statements starting on page 153. This risk has not changed materially over the year. ANNUAL REPORT & ACCOUNTS 2015 53 SECTION TWO – STRATEGIC REPORT Risk type and description Credit risk Credit risk The risk of non-payment of their obligations by counterparties and ﬁnancial markets borrowers. Why we have it How we mitigate it Our principal exposure to credit risk arises from reinsurance, which is central to our Business Model. Additional credit risk arises from our investment in debt securities, cash deposits and amounts owed to us by intermediaries and policyholders. Reinsurer credit risk is overseen by the Group Reinsurance Security Committee, principally through careful selection and monitoring of reinsurance partners. All reinsurers on the 2015 and 2016 reinsurance programmes have a minimum rating of A minus from S&P or an equivalent agency at the time of purchase. Reliance on a single counterparty by our subsidiary, Ansvar Australia, continued due to the reinsurance arrangement with National Indemnity, which is part of the Berkshire Hathaway Group; however, it has a very strong S&P rating of AA+. Investment credit default risk is managed using the same processes as for credit spread risk as noted under Market Risk. We utilise robust agency and collection procedures to ensure that our credit and bad debt risk from our intermediaries and policyholders is minimised. The level of this risk remained largely unchanged during the year. Further information on this risk is given in note 4 to the ﬁnancial statements starting on page 153. Operational risks IT systems, data quality and business intelligence risk The risk of shortfalls in the quality or availability of management information required for decision-making, inadequate, ageing or unsupported systems and infrastructure, and system failure preventing processing efﬁciency. Accessing claims data in relation to the risk offered is a key tool in enabling sufﬁcient and competitive pricing. Other management information is vital to ensure timely decision making or responses to claims or other market developments. Efﬁcient and reliable systems are paramount to delivering excellent customer service and business processing. There has been signiﬁcant focus on the accuracy, completeness and appropriateness of data and on the development of a strategic data warehouse. A number of projects are underway to replace legacy systems and upgrade the key business systems. An enablement strategy has been developed to deﬁne the long-term approach for our systems, processing and data. The level of this risk has remained the same this year. 54 ANNUAL REPORT & ACCOUNTS 2015 RISK MANAGEMENT REPORT Risk type and description Why we have it How we mitigate it Operational risk Regulatory and legal risk Regulatory and legal risk is the risk of non- compliance with applicable law and regulations, unenforceable contractual rights and any dispute resolution or other proceedings arising in relation to legal rights. This includes the conduct elements of failing to deliver fair outcomes for consumers or resulting in consumer detriment. Cyber security risk The risk of criminal or unauthorised use of electronic information, either belonging to the Group or its stakeholders. Conduct risk The risk of unfair outcomes arising from the Company’s conduct in its direct relationship with customers, or where the Company has a direct duty to customers. Regulatory and legal risk arises in each territory in which we write business and this can result in signiﬁcant cost and reputational implications if it is not managed appropriately. Legal and regulatory developments are monitored throughout the Group and working parties are established where necessary to consider signiﬁcant developments which affect our business. The regulatory compliance function is key to the oversight of this risk and provides advice and guidance to the 1st line of defence. Regulatory compliance continued to increase in importance during 2015 with the continuing development of the PRA and Financial Conduct Authority (FCA) regimes. The level of this risk has remained the same during the year. Increasing reliance is placed on electronic processing, storage and transmission of customer, company and employee information. Cyber security threats from malicious parties are increasing. We have a number of proactive and preventative technical controls to deny malicious or unauthorised access to our systems, conﬁdential data and internal infrastructure. These controls operate at different levels within our technology infrastructure, strategically placed to restrict access and safeguard our systems and data. The level of the risk has increased over the year due to the increasing number and sophistication of threats seen by many organisations across all industries. The management of this risk is owned by the Board. As a Company, we place the customer at the heart of the business, treating them fairly and ethically, whilst safeguarding the interests of all other key stakeholders. Regulatory principles in the territories in which we operate aim to protect customers. A conduct risk framework has been developed during 2015 which includes enhanced Consumer Risk Board reporting alongside speciﬁc risk appetite metrics. A project is underway which includes the development of customer charters and improvements to the product review process across the Group. The level of this risk has remained the same this year. ANNUAL REPORT & ACCOUNTS 2015 55 SECTION TWO – STRATEGIC REPORT Risk type and description Why we have it How we mitigate it Operational risk Other operational risks The risk of unexpected loss or cost arising from other operational risks not covered above but includes employee risks, internal or external events, and inadequate or inefﬁcient processes. Operational risk is inherent in the business and it is not always cost effective or possible to completely eradicate such risks by the implementation of mitigating actions. Reputational risk The risk of a reduction in trust by customers, brokers, reinsurers and other stakeholders as a result of an event or series of events. As a specialist ﬁnancial services group with a distinctive ethical positioning, maintaining our reputation in our chosen markets is key to our success. We always aim to be fair to our stakeholders. However, if disagreements occur, it could result in negative commentary in many forms of media. During 2015 we continued to strengthen our operational risk management through the consolidation and embedding of the risk management framework. This includes the continued development of the operational risk proﬁles which capture risks and management actions within each of our business areas. These proﬁles are speciﬁcally focused on the delivery of individual business area's plans and objectives. On an annual basis a CRSA process is undertaken by each SBU and they attest to the overall effectiveness of their management of risk. The Group risk appetite contains a number of statements which clearly deﬁne the appetite for operational risk. In addition operational risk scenario analysis is undertaken which helps to identify additional management actions required and the results are taken into account in capital requirement considerations. Each area of our Group has a disaster recovery and business continuity plan in place that is regularly tested and updated. The level of this risk is largely unchanged over the year. Reputational risk is primarily managed through our approach to treating stakeholders fairly, combined with the other actions taken to manage risks to our ﬁnancial position. Our Group’s purpose is to contribute to society’s greater good by managing a portfolio of businesses operating to the highest ethical principles and delivering signiﬁcant ﬁnancial returns to ATL and this is reﬂected in all our business activities and operations. More information on our Group’s ambitions can be found in our Business Model and our Strategy sections starting on page 26 and 29 respectively. Reputational risk is overseen by the GMB together with the Group Risk Committee. Our reputation is fundamental to our business and we will not accept risks that will materially damage our reputation. We monitor a variety of communication channels and proactively gather feedback to ensure there is no detriment to our reputation. The level of this risk is largely unchanged over the year. 56 ANNUAL REPORT & ACCOUNTS 2015 RISK MANAGEMENT REPORT Why we have it How we mitigate it Financial services are highly competitive business. There are a number of companies operating within our markets which means that competitor activity remains a signiﬁcant threat to our strategic objectives. The GMB and SBUs monitor key competitors on a regular basis, reacting as appropriate to competitor developments. We have a strategy to deliver excellent customer service through multiple distribution channels to ensure diversiﬁcation risk. The level of this risk has increased over the year due to competitor activity within our chosen markets. Risk type and description Operational risk Competition The risk of failure to recognise and address changes in a competitive market, particularly competitor actions, distribution channels, an imbalance of bargaining power with distributors, business concentration and resource issues and the impact to the Group of a loss of a key account or niche market. Strategic risks Increasing or strained expense base The risk of failure to maintain the expense base within targets and in line with competitors. While we do not seek to compete on price alone and service has been a key differentiator for us, the fact remains that we are competing in a highly commoditised and price- focussed insurance market. Therefore, controlling expenses relative to the size of the Group is important to ensure the continued proﬁtability of our Business Model. We manage our cost base closely and have taken many difﬁcult decisions over the last few years to ensure our cost base remains sustainable. Our internal operating costs are 5% lower than they were ﬁve years ago, and the average rate of commission paid to our brokers has remained stable over the same period. Our costs have not reduced as quickly as our GWP has over the last three years, and we recognise that the level of this risk has increased over the year due to reduced GWP to support the expense base. Strategic execution delivery The risk of failure to deliver our strategic initiatives underpinning our strategic plan and failure to meet stakeholder expectations resulting in negative reactions from our owner, the regulator or rating agencies. Delivering the initiatives underpinning our strategic plan is critical to ensuring the achievement of our corporate strategy and ensuring the ongoing conﬁdence of key stakeholders, including our owner, the regulator and rating agencies. A three-year Group-wide strategic programme of change is underway, with enhanced governance, agreed prioritisation, regular reporting (including to the Board) and alignment with incentive schemes implemented. A Group Programme Director is in place to oversee delivery of the group's strategic initiatives. The level of this risk has remained similar over the year. ANNUAL REPORT & ACCOUNTS 2015 57 SECTION TWO – STRATEGIC REPORT Risk type and description Group risks Why we have it How we mitigate it Governance and oversight of SBU The risk of failure to effectively manage the different parts of the Group across different territories in accordance with social, economic and regulatory expectations. The Group consists of a number of different business divisions which operate across a number of territories and regulatory regimes. Failure to effectively manage our operations in line with Group expectations could lead to sub-optimal business performance or damage to our reputation. The expectations of the SBU have been deﬁned and they have all conﬁrmed the adoption of the required standard. Alongside this all SBU’s have locally adopted risk appetites, which are regularly monitored with formal escalation processes in place for potential breaches. Annual risk reviews and CRSA’s are undertaken. Additionally, Group Internal Audit reviews are carried out. The level of this risk has reduced over the year due to increased 2nd line oversight and challenge, and greater clarity around SBU expectations and obligations. Longer-term viability statement The directors conﬁrm that they have a reasonable expectation that the Group will continue in operation and meet its liabilities as they fall due over the next three years. While the directors have no reason to believe the Group will not be viable over a longer period, the three-year outlook period has been selected as it aligns with the planning horizon in the business plan. The directors have assessed the viability of the Group with reference to the business plan, which includes stress tests and scenario analysis, taking into account the current position of the Group and the potential impact of the principal risks. Production of the business plan incorporates submissions from SBUs who consider the Strategy of the Group and use their expert knowledge, before submitting their ﬁnancial plans. All of the plans are reviewed and challenged by the GMB and a Group-wide consolidated business plan is produced for consideration and approval by the Board. The key assumptions underlying the business plan relate to premium retention, rate changes, new business, claims experience, inﬂation, investment performance and the cost of the reinsurance programme. The stress testing and scenario analysis encompass a spectrum of potential outcomes designed to assess the impact of certain events on the Group’s proﬁtability, solvency and liquidity. The stresses are designed to be severe but plausible and are linked to the key principal risks starting on page 51. They include: catastrophe claim events – insurance risks; the performance of equity markets – market risk; default of key reinsurers – credit risk; the loss of signiﬁcant lines of business – operational risk; a sustained economic downturn – insurance risks and market risk; and premiums, claims and the expense base differing materially from expectations – strategic risks. In addition, the solvency position of the Group has been projected as part of the Own Risk and Solvency Assessment, which has a forward-looking emphasis to ensure that business strategy and plans are formulated with full recognition of the risk proﬁle and future capital needs, with the results showing the Group to have sufﬁcient capital resources to cover its capital requirements for the period of the Business Plan. In making their assessment, the directors have taken into account the Group’s very strong capital position, the strong risk management framework in place and the Group’s resilience to the variety of adverse circumstances as demonstrated in the results of the stress testing. The directors have also considered the potential mitigating actions management would take should any of these scenarios arise. 58 ANNUAL REPORT & ACCOUNTS 2015 r o t c o r P r a k s O y b h p a r g o t o h P SECTION TWO – STRATEGIC REPORT 2015 Highlights £20 M TOTAL CHARITABLE GRANTS TO ATL ECCLESIASTICAL IS A BITC COMMUNITY MARK COMPANY 40% OF UK STAFF VOLUNTEERED £21 NEARLY M TOTAL ECCLESIASTICAL GROUP GIVING TO CHARITIES 38% ECCLESIASTICAL GROUP PRE-TAX PROFIT GIVEN TO CHARITY TOP EMPLOYERS FOR YOUNG PEOPLE IN CANADA OVER £400,000 GIVEN IN EMPLOYEE TIME, PARTNERSHIP FUNDING AND IN-KIND SUPPORT OVER €20,000 RAISED FOR IRELAND CHARITY PARTNER SOAR LIVING WAGE STAUS ACHIEVED ANSVAR AUSTRALIA HAS GIVEN OVER $10 MILLION to education and life skills programmes since 1994 60 ANNUAL REPORT & ACCOUNTS 2015 r o t c o r P r a k s O y b h p a r g o t o h P SECTION TWO – STRATEGIC REPORT Corporate Responsibility Report Ecclesiastical has always been committed to giving back to the communities, where it operates. In 2015, we launched our ‘Greater Giving’ programme – the new shape of our Group-wide corporate responsibility (CR) approach. This new CR programme gives us an ambitious goal, clear focus and a strong structure to ensure we are fulﬁlling our responsibilities and challenging ourselves to improve. It’s also very clearly aligned to our business strategy. Structure and governance Corporate responsibility at Ecclesiastical has an established structure and governance: Board overall responsibility for CR, review and sign-off of reporting General Management Board reviews policies and directs CR strategy and objectives Strategic Business Units local development and implementation of the Group CR strategy, monitoring and reporting on CR activities CR Steering Group drives the development and leadership of CR within the business Pillar responsibility functional responsibility for key aspects of CR, for example environmental management and workplace responsibilities Community advocates networks of advocates enthusiastically support local community investment at all of our locations 62 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE RESPONSIBILITY REPORT The external environment Monitoring and auditing Our community investment approach is audited and accredited independently by Business In The Community (BITC) through its CommunityMark standard. Ecclesiastical’s UK operation has completed BITC’s CR Index submission to guide its development. We are facing many issues and trends in our markets – many of which are covered in our Strategy in action section starting on page 29, and Global trends in ﬁnancial services section starting on page 22. These affect our customers, our partners and the future sustainability of our business. Within EdenTree, we are fortunate to have colleagues whose business it is to monitor and advise on global corporate responsibility trends. Head of corporate governance and socially responsible investment analyst Neville White comments: Neville White Head of SRI Policy & Research at EdenTree There are many macro and local issues affecting our business – in fact, there have never been more issues to consider and tackle. For Ecclesiastical in particular, technology, regulation, an ageing population, climate change and trust in ﬁnancial services are major issues which will all have a varying impact now and in the near future. Ecclesiastical also faces speciﬁc issues such as the preservation of heritage properties – a key area of specialist insurance for the Group. The protection of vulnerable people is also a major consideration, whether from ﬂood, abuse or ﬁnancial mis-selling. And as a ﬁnancial services business with charitable ownership we are in a strong position to face up to customers’ lack of trust in the sector. ANNUAL REPORT & ACCOUNTS 2015 63 CORPORATE RESPONSIBILITY REPORT Doing what’s important A key aspect of the Greater Giving programme involved a review and refresh of the themes around which our CR programme is aligned. To achieve this, we consulted with: our charitable owner ATL; our staff across the entire Group. Over 500 people responded to our survey, with over 95% supporting each of the ﬁrst two themes and 84% the third. They also gave useful feedback on how we might support and embed them across all aspects of our business activity; and we also have plans to engage with stakeholders to build an even more thorough picture of materiality. Our themes are: preserving heritage; engagement with our communities; and promoting ethics in ﬁnancial services. ANNUAL REPORT & ACCOUNTS 2015 65 SECTION TWO – STRATEGIC REPORT Our themes: what we achieved Promoting ethics in ﬁnancial services Preserving heritage Why is this theme important? What we planned to achieve This theme, introduced formally in 2015, draws together several aspects of our performance and behaviour as an ethical ﬁnancial services business, underpinning our business practices and ambition to achieve a leadership position as a responsible business. To reach the highest standards of responsible business practice: l achieve and maintain BITC ‘CommunityMark’ status in 2016 l enter BITC’s CR Index l achieve relevant business standards To promote ethical business practice through thought leadership: l produce at least three issue papers each year – generate positive media coverage and distribute to all advisors To select partnerships that promote ethical practice and measure their success: l including schools partnership – reach at least 100 students with employment advice and support, raise their aspirations and understanding. To maintain our position as a thought leader in heritage preservation and protection, including our number 1 brand position as voted for by brokers in 2015. To build awareness and understanding of heritage protection issues, using dedicated research to identify issues and communicate them to leading heritage inﬂuencers. To speciﬁcally support the preservation and protection of Anglican Church buildings, providing risk management support to customers. Ecclesiastical is the UK’s leading heritage insurer, protecting more Grade I listed buildings than any other insurer, including prestigious properties such as Stonehenge and Canterbury Cathedral. It is important that we play a leading role in the protection and preservation of UK heritage, by creating strong partnerships and raising the proﬁle of issues. 66 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE RESPONSIBILITY REPORT What are we doing and what has been achieved? We have reached the highest standards of responsible business practice. In the UK, we are a CommunityMark company accredited by BITC and will undertake the reaccreditation process in 2016. We achieved UK Living Wage status in 2015 and maintained our UK Chartered Insurance Institute status, being one of only ﬁve composite insurers who are chartered for their entire UK General Insurance operations and one of only 29 insurers who hold the Charter. EdenTree continued to promote ethical business practice through thought leadership. In 2015, our investment management business published ﬁve reports on healthcare, shipping, corporate misconduct, big data, and digital planet. We have participated in BITC’s three-year Business Class programme to help educate young people about ﬁnancial services and improve employability. This programme has delivered a range of beneﬁts including: l Training eight staff and matching them to mentor students l Conducting mock interview sessions for 20 students l Careers event support, work experience placements and revision help l Supporting an employability day for 30 students – 85% of students agreed that it gave them a clearer idea of what they might do in the future and over 80% of business volunteers felt it improved their skills and gave them greater motivation for their organisation and role. Established strategic partnerships with, among others, English Heritage/Historic England, The Heritage Alliance, and the Historic Houses Association. Conducted research among around 200 heritage members and 79 insurance brokers, identifying wear and tear, lack of funding and weather/water damage as the biggest risks. Established a core stakeholder group, bringing together key heritage stakeholders for the ﬁrst time in a roundtable discussion. 100% of attendees found it a useful networking event and everyone was interested in maintaining contact as part of this group to discuss future heritage issues. Supported initiatives which assure the long-term preservation of heritage. For example, we sponsor students completing the Sustainable Heritage degree at University College London and a stonemasonry apprenticeship scheme run by the Cathedrals Workshop Fellowship. Shared best practice in the insurance sector, with seminar and training programmes including a programme of six events covering topics such as architecture, construction and repair. Our ﬂagship event at the Society of Antiquaries attracted over 70 leading insurance brokers; 100% rated the event as excellent or good and over 90% found the speakers useful and informative. As a leading voice in the heritage sector we attend and share our views at various forums including The Church Buildings Council, Institute of Fire Engineers, and Fire Sector Federation. We lead the market in risk management advice and support on heritage issues, with a team of over 50 ﬁeld staff who survey and provide risk management support to our customers. We conduct 8,000 site assessments annually – two-thirds on heritage properties – and recommend 20,000 risk improvements. ANNUAL REPORT & ACCOUNTS 2015 67 SECTION TWO – STRATEGIC REPORT Why is this theme important? What we planned to achieve Engagement with our communities This broad theme encapsulates our direct community investment activity, guiding how we structure our programme of giving to ensure it is focused and impactful. To increase engagement and support from our employees for community investment activities. Speciﬁcally: l increase volunteering levels in 2015 to 30% (2014: 24%) l increase matching from £25,000 l target 60% of staff to give their personal grant with half of these volunteering for the same cause To focus our giving to charities and causes which align behind this theme, improving its effectiveness and impact: l at least 90% of charitable support to align with our core themes l give to every Disasters Emergency Committee international appeal. 85% OF STUDENTS AGREED THAT IT GAVE THEM A CLEARER IDEA OF WHAT THEY MIGHT DO IN THE FUTURE OVER 8,000 SITE VISITS 68 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE RESPONSIBILITY REPORT What are we doing and what has been achieved? In 2015, we clariﬁed the offer of support for employees by improving internal branding, launching a new publication and enhancing our policy. Following outperformance in 2014, we offered every member of staff a personal grant of £125 to give to any charity of their choice. Over 60% took up the grant, with 32% volunteering for their chosen cause to secure matched funding from the Company. In total, we have given over £90,000 to charities through the scheme. Overall, 40% of our employees volunteered in 2015 – the second-highest level of engagement ever recorded and above best practice benchmarks. We continued our community grant-giving programme through the Gloucestershire Community Foundation, investing a further £10,000 and are making plans to develop the Foundation further. Since establishing the fund, we have given 19 grants and invested over £75,000, beneﬁting from 50 or 100% Government matching of over £30,000. Projects supported have all been aligned to our core themes and have delivered measurable community impact. In 2015, we agreed an approach to international giving through a partnership with DEC, the Disasters Emergency Committee. We supported several appeals including the Ebola crisis, where our donation helped DEC to: l reach over 869,000 people with aid l give 807,000 people Ebola prevention messages l train 4,800 people to deliver Ebola education l provide 53,000 hygiene kits and 12,000 food packages l ﬁnd homes for 150 orphans We broadened our support for charities. In 2015, this included subsidising rent for three charities based in our ofﬁces in Gloucester, increasing professional volunteering support, and increasing partner engagement with our giving, for example by taking part in a joint volunteering initiative with one of our brokers. OVER £90,000 GIVEN TO GOOD CAUSES THROUGH OUR EMPLOYEE PERSONAL GRANT SCHEME ANNUAL REPORT & ACCOUNTS 2015 69 SECTION TWO – STRATEGIC REPORT Our overall CR framework Considering sustainability, community, workplace and marketplace Our focus on core themes is central to our CR programme, as well as a balanced consideration of all aspects of being a responsible business, from environmental impact to workplace support and customer selling practices. The following infographic highlights our core priorities in each area, as well as some headline achievements and some detail on our activity. COMMUNITY COMMUNITY WORKPLACE WORKPLACE COMMUNITY WORKPLACE £0.6M TOTAL GROUP GIVING OVER 3,500 HOURS OF VOLUNTEERING LIVING WAGE ACHIEVED OVER 3,000 TRAINING COURSES In the UK, we achieved our second-highest level of employee volunteering ever at nearly 40% – well above industry benchmarks. Nearly two-thirds of our employees used their £125 personal grant and we increased our fundraising matching to 100% for any cause. Further aﬁeld, we gave to several Disasters Emergency Committee appeals and our businesses worldwide all partnered with local causes. In total, we have given over £1m to charitable causes – and much more when considering in-kind support such SUSTAINABILITY as subsidising rent for several charities using our ofﬁce space or donating old computer monitors to an IT initiative for Africa. SUSTAINABILITY Caroline Taplin, Group HR Director COMMUNITY COMMUNITY We’re proud to have achieved Living Wage status for our UK operation in 2015, marking our commitment to fair pay. We invested in many aspects of our working environment and the wellbeing of our people, including ofﬁce refurbishments, free ﬂu jabs and pedometers. We also ran over 3,000 training courses and tripled the number of ‘bitesize’ courses, many of which we extended to our broker partners. Our annual independent employee survey, ‘MySay’, saw a high response rate and strong levels of engagement, commitment and pride. We’re improving MARKETPLACE communication; investing in systems, processes and learning and development; and staying true to delivering on our commitments. MARKETPLACE WORKPLACE Caroline Taplin, Group HR Director WORKPLACE £75,000 GIVEN TO EMERGENCY APPEALS TOP PRIORITIES promotion National Giving Ecclesiastical Foundation TOP PRIORITIES 80% OF STAFF Living Wage L&D review Wellbeing environment BELIEVE WE’RE A ‘SOCIALLY RESPONSIBLE EMPLOYER’ – MYSAY SURVEY SUSTAINABILITY SUSTAINABILITY MARKETPLACE MARKETPLACE In 2015, we completed the Government-backed Energy Saving Opportunity Scheme (ESOS) review in the UK, as well as independent reviews in other Group businesses. ESOS assessed 30 buildings as well as our business travel and we’ll be making plans in 2016 based on the ﬁndings. We also continued with our ongoing programme of continuous improvement, reducing energy usage in our head ofﬁce in Gloucester despite moving more people in; reducing our energy usage by half for our London ofﬁce as a result of relocation; and recycling over 30 tonnes of paper. We’re also reviewing our climate change policy in line with our Strategy. In 2015, we spent a great deal of time internally and talking to our Board about our aspirations for our ‘customer promise’. This will drive our future customer strategy and plans, and includes our conduct, our service, our advice, our products and our pricing. Alongside this, we completed a full product and proposition review and expect to be sharing this work with partners and customers in 2016. We also continued to improve our supply chain practices – focusing on the corporate responsibility approaches of our most material suppliers in our UK claims network. Ian Campbell, Group Chief Financial Ofﬁcer John Schoﬁeld, Group Chief Risk Ofﬁcer 70 ANNUAL REPORT & ACCOUNTS 2015 RITAG E E H G N I V R E S E R P . 1 2. ENGAGE COM M E M U N T N W I T I I T E H S O U R GREATER GIVING PROGRAMME 3. PROMO T I N G E T HICS R VICE IN FINAN C I A L S E 30 BUILDINGS ASSESSED FOR ENERGY USAGE ESOS review Recycling/waste management Climate change policy review TOP PRIORITIES 31 TONNES OF PAPER RECYCLED ON TRACK TO GIVE £50M+ TO CHARITY Customer Promise review Product & Proposition review Sustainability in supply chain TOP PRIORITIES PRODUCED CUSTOMER PROMISE 100% 155 PRODUCT & PROPOSITION REVIEWS SUSTAINABILITY 50% REDUCTION IN ENERGY USAGE AS A RESULT OF LONDON OFFICE MOVE TOP 5 CLAIMS SUPPLIERS CR CREDENTIALS REVIEWED MARKETPLACE CORPORATE RESPONSIBILITY REPORT £0.6M TOTAL GROUP GIVING OVER 3,500 HOURS OF VOLUNTEERING LIVING WAGE ACHIEVED OVER 3,000 TRAINING COURSES COMMUNITY WORKPLACE TOP PRIORITIES Living Wage L&D review Wellbeing environment 80% OF STAFF BELIEVE WE’RE A ‘SOCIALLY RESPONSIBLE EMPLOYER’ – MYSAY SURVEY 2. ENGAGE COM M E M U N T £75,000 GIVEN TO EMERGENCY APPEALS TOP PRIORITIES promotion National Giving Ecclesiastical Foundation RITAG E E H G N I V R E S E R P . 1 ESOS review N I T I W I T E H S O U R GREATER GIVING PROGRAMME 3. PROMO T I N G E T HICS R VICE IN FINAN C I A L S E Customer Promise review 30 BUILDINGS ASSESSED FOR ENERGY USAGE Recycling/waste management Climate change policy review Product & Proposition review Sustainability in supply chain TOP PRIORITIES 31 TONNES OF PAPER RECYCLED ON TRACK TO GIVE £50M+ TO CHARITY TOP PRIORITIES PRODUCED CUSTOMER PROMISE 100% 155 PRODUCT & PROPOSITION REVIEWS SUSTAINABILITY 50% REDUCTION IN ENERGY USAGE AS A RESULT OF LONDON OFFICE MOVE TOP 5 CLAIMS SUPPLIERS CR CREDENTIALS REVIEWED MARKETPLACE ANNUAL REPORT & ACCOUNTS 2015 71 SECTION TWO – STRATEGIC REPORT Workplace – our people and culture We are committed to giving opportunities to our employees, embracing initiatives which develop talent at all levels, supporting diversity, staff development and providing positive and engaging working environments. We are focused on: Enabling our people to fulﬁl their potential, equipping them with the right skills to manage their career supported by our talent and learning approach Attracting, retaining and getting the best from our people with the right approach to remuneration and performance management Engagement – building an engaged and motivated team l Engagement is the sum of many parts. We regularly request our people’s views through our independent ‘MySay’ survey. We look at all aspects of what it is like to work here, from management to strategy and wellbeing, and we act on what we hear Diversity – respecting and developing diversity Supporting the health, safety and wellbeing in everything we do of our people These core areas are underpinned by: Values – our core values are shaped by our unique Business Model l Our charitable purpose, our strong dedication to serving and supporting our customers and our commitment to supporting communities shape the way we do business l We encourage diversity across all elements of our business, gathering and publishing key data such as gender by level, and analysing performance and pay by gender. We provide diversity training for all of our people and train recruiting managers in how to avoid unconscious bias We are focused on TALENT AND LEARNING REMUNERATION AND PERFORMANCE HEALTH AND SAFETY AND WELLBEING Underpinned by VALUES ENGAGEMENT DIVERSITY 72 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE RESPONSIBILITY REPORT Talent and learning We have actively developed a learning culture within our organisation. In 2015 we provided over 3,000 technical and personal development training courses for our people. We delivered over 500 management and personal development courses, many in conjunction with our broker partners. We retained our Corporate Chartered Insurer status, reﬂecting our high professional standards and our promise to provide expert and trusted advice to our customers. Our talent strategy focuses on continually developing our employees and ensuring that those with high potential have the opportunity to develop and add enhanced value across the Group. and, as an added bonus, halving our energy use. We also run a Wellbeing Week and provide a range of other beneﬁts and support including a conﬁdential employee assistance helpline and bespoke workplace assessments. Employee diversity Diversity is important to Ecclesiastical and we recognise that diversity at all levels in the business will enhance our business performance. The table below shows the split of employees by gender and level, and is based on the number of individual employees as at 31 December 2015. Remuneration and performance We develop our remuneration strategy in line with market practice and regulatory requirements, in particular Solvency II, and aim to attract and retain the very best people. Reward is linked strongly to how well we serve and support our customers, with customer conduct measures embedded in our bonus scheme. Directors1 Senior managers2 Employees Gender Numbers Male Female Male Female Male Female 7 4 23 13 476 551 Health and safety and wellbeing Providing a safe working environment is of paramount importance to us. We also strive to provide a supportive and productive working environment for our people. For example, we moved our London team to a new ofﬁce in 2015, providing a much improved working environment 1 This includes non-executive and executive directors for Ecclesiastical Insurance Ofﬁce plc only. 2 This includes the leadership teams and the direct reports to the Group Chief Executive. Overall engagement scores: ENGAGEMENT SCORE 74%OUR OVERALL 83%IN MY OPINION THIS COMPANY IS COMMITTED TO CUSTOMER SATISFACTION 77%I AM PROUD TO WORK FOR ECCLESIASTICAL INSURANCE GROUP 80%ECCLESIASTICAL INSURANCE GROUP IS A SOCIALLY RESPONSIBLE EMPLOYER ANNUAL REPORT & ACCOUNTS 2015 73 SECTION TWO – STRATEGIC REPORT Sustainability – responding to climate change Climate change represents a material risk to the planet, people and society. It also represents a material business risk for the insurance industry and Ecclesiastical. As a Group, we are responding to climate change in several ways: Our General Insurance business has: Our Investment Management business, EdenTree has: continued to support our customers in the taken a ‘no oil sands or Arctic drilling’ aftermath of major weather events – for example the Cumbria ﬂoods. Our claims support plan was put into action, responding within our target timescales. In this instance, we worked with the Fireﬁghters Charity to get the immediate clean-up task completed as quickly as possible; used our geographical mapping systems expertise and data analytics to map and plan the risks and impact of major weather events – to better understand and account for risk and to continually improve our approach to supporting our customers; worked in partnership with our customers and supply chain to ﬁnd sustainable solutions to climate change impact – for example offering cash settlements where appropriate for customers to invest in ﬂood-resilient improvements as part of the restoration process; managed our own energy and waste – making reductions and reducing our impact where we can. stance within the Amity range of ethically screened Funds; maintained a below-benchmark weighting to fossil fuels as the Amity Funds have no mining and very little oil-related investments. Coal-ﬁred power generation is also minimal; produced an in-house carbon footprint analysis of the Amity UK Fund and commissioned an independently veriﬁed carbon footprint; joined the IIGCC to lead our collaborative investor public-policy engagement; participated in collaborative engagement on climate change with UNPRI investors on Arctic drilling and oil sands; lobbied the Alberta Government on emissions reduction; signed the Paris Pledge and the COP21 Investor Statement on Climate Change; supported ‘Aiming for A’ shareholder resolutions on climate change portfolio resilience at BP and Shell where these are held in institutional funds; produced a client SRI Expert Brieﬁng on Fossil Fuel Divestment. 74 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE RESPONSIBILITY REPORT CR stories from around our Group Ecclesiastical Canada continued to be a proud sponsor of the Kids Help Phone (KHP). Staff across Canada rallied to fundraise $21,400 and participated in Canada’s largest walk in support of KHP and the mental health of young Canadians. Broker teams at Lycetts and SEIB led a charity cycle ride of over 300 miles between their ofﬁces in South Essex and Newcastle, raising over £11,000 for seven charities. Ansvar Australia’s ‘Superheroes’ community fundraising champions led company fundraising of over $30,000 and a 50% increase in volunteering. Ireland gave over €20,000 to their charity partner SOAR, including a cycle challenge from East to West Ireland. Ansvar Superheroes Ireland cycle challenge r o t c o r P r a k s O y b s h p a r g o t o h P Broker cycle challenge ANNUAL REPORT & ACCOUNTS 2015 75 SECTION TWO – STRATEGIC REPORT Our Canadian ofﬁce was recognised as a ‘Top Ansvar UK continued their partnerships with Employer for Young People’. The award is given to employers that offer the nation’s best workplaces and programs for young people just starting their careers. several charities including the UK Rock Challenge, a performing arts competition encouraging young people to take an active role in building safe and healthy communities. Our UK IT team gave 500 computer monitors to the IT Africa project – they used their volunteering time to box them up for shipping and donated their personal grants too. Our UK Group Internal Audit team spent some time volunteering at the National Trust’s Lodge Park in Gloucestershire, repairing parts of the 40km of dry stone walls at the estate. One of our UK volunteers gave their time to help Over 100 Ecclesiastical staff volunteered for set up a new accounting system at the Gloucester Academy of Music, using their professional skills to make a huge difference to the future running of the charity. ‘Hamper Scamper’, a Christmas campaign to give hampers and gifts to disadvantaged children and families in Gloucestershire. Canada Top Employer Flavia at the Academy IT Africa monitors r o t c o r P r a k s O y b s h p a r g o t o h P National Trust volunteering 76 ANNUAL REPORT & ACCOUNTS 2015 STRATEGIC REPORT Strategic Report approval The Strategic Report, outlined on pages 16 to 76, incorporates the Chief Executive’s Review, the Business Model and Strategy, the Key Performance Indicators, reviews of Financial Performance and Position and Risk Management, and the Corporate Responsibility Report and, when taken as a whole, is considered by the directors to be fair, balanced and understandable. By order of the Board Mark Hews Group Chief Executive 16 March 2016 ANNUAL REPORT & ACCOUNTS 2015 77 SECTION THREE – GOVERNANCE Board of Directors Directors’ Report Corporate Governance - Group Finance and Investment Committee Report - Group Nominations Committee Report - Group Risk Committee Report - Group Audit Committee Report - Group Remuneration Report Independent Auditor’s Report 80 82 86 90 92 96 98 106 130 r o t c o r P r a k s O y b s h p a r g o t o h P ANNUAL REPORT & ACCOUNTS 2015 79 SECTION THREE – GOVERNANCE Board of Directors Will Samuel BSc, FCA* (a) (b) Chairman Appointed to the Board in January 2006 and became Chairman in June 2009. He is Chairman of TSB Bank plc and Chairman of Howden Joinery Group plc (formerly Galliform plc). Previously he was a Senior Adviser to Lazard & Co. Limited, Senior Adviser to the PRA, Trustee and Honorary Treasurer of International Alert, a Non-Executive Director of Edinburgh Investment Trust, Director of Schroder plc, Vice Chairman of Investment Banking of Citigroup Europe and Deputy Chairman and Senior Independent Non-Executive Director of Inchcape plc. David Christie BA, BSc (Econ) Dip. Ed.* (a) (b) (e) Deputy Chairman and Senior Independent Director Appointed to the Board in 2001 and was appointed as the Deputy Chairman and Senior Independent Director in February 2013. He retired as Warden of St Edward’s School, Oxford, in 2004. Previously he taught and researched economics in schools and universities in the UK and Europe, and has been a trustee to a number of charities. He was appointed as a Trustee of Allchurches Trust Limited in June 2013. Mark Hews BSc (Hons), FIA Group Chief Executive Appointed Group Chief Executive in May 2013 and was previously the Group Chief Financial Ofﬁcer for the Group. Appointed to the Board in June 2009 and appointed to the Board of MAPFRE RE in December 2013. He was formerly a Director of HSBC Life and Chief Executive of M&S Life. Prior to this he was Finance Director at Norwich Union Healthcare. He started his ﬁnancial career at Deloitte as a consultant and actuary. S. Jacinta Whyte MC Inst. M, ACII (c) John Hylands FFA* (b) (c) (d) Anthony Latham ACII* (a) (c) (d) Appointed to the Board in September 2007. Until March 2007 he was an Executive Director of Standard Life plc. He is currently a Director of The Insurance Board of Lloyd's Banking Group and of Alliance Trust PLC, Chairman of the trustees of the BOC Pension Schemes, a Governor of the Royal Conservatoire of Scotland and a school governor. Appointed to the Board in March 2008. Until December 2007 he was a member of the Group Executive of RSA Group plc. He is Chairman of Pool Reinsurance Limited and a Director of Codan A/S. Deputy Group Chief Executive Appointed Deputy Group Chief Executive and to the Board in July 2013. She is responsible for the Group’s General Insurance business globally. She is the Interim UK Managing Director and was also appointed to the Ansvar Australia Board during 2013. She joined Ecclesiastical in 2003 as a General Manager and Chief Agent of the Group’s Canadian business, a role which she continues to hold. Having commenced her career as an Underwriter with RSA in Dublin in 1974, she moved with them to Canada in 1988, holding a number of senior executive positions in both Ireland and Canada. 80 ANNUAL REPORT & ACCOUNTS 2015 BOARD OF DIRECTORS Key to membership of Group Board Committees (a) Group Finance and Investment (b) Group Nominations (c) Group Risk (d) Group Audit (e) Group Remuneration * Non-executive directors (NEDs) The Venerable Christine Wilson* (e) Appointed to the Board in June 2012 and has served for 15 years in parochial ministry. She was Chaplain to the High Sheriff of East Sussex in 2008 and has been Archdeacon of Chesterﬁeld in the Diocese of Derby since 2010. She was also a member of the Church of England General Synod from 2010 - 2015. In December 2013, she was elected as the East Midlands female regional representative to the House of Bishops. She has also been chair of a number of charities. Denise Wilson BA (Hons), OBE, FCII* (d) (e) Appointed to the Board in December 2010. She is currently CEO for the Lord Davies Review of Women on Boards, Chairman of the Friends Board at the Royal Academy of Arts. In a prior Executive capacity, at National Grid until 2011 and previously BG Group and British Gas, she has served in many senior roles including Head of Investor Relations, Global Audit Director, and Commercial and Customer Director, and started her career in insurance with RSA. Tim Carroll BA, MBA, FCII* (a) (c) (d) Appointed to the Board in March 2013, he is an international business leader with signiﬁcant London Market and Lloyd’s experience, including roles as CEO of Swiss Re’s UK holding company, CEO Europe of GE Insurance Solutions, President and CEO of GE Reinsurance Inc in the USA and Active Underwriter of Canopius Syndicate 4444 at Lloyd’s. He has held a number of industry positions including Chairman of the International Underwriting Association and President of the Insurance Institute of London. Caroline Taylor BSc (Hons) Banking and International Finance* (e) Appointed to the Board in September 2014. Until May 2012, she was an Executive Director of Goldman Sachs Asset Management International. She is currently a Non-Executive Director of Brewin Dolphin Holdings plc. Ian Campbell BSc (Econ) Hons, ACA, Group Chief Financial Ofﬁcer Appointed to the Board in April 2014. He is a Chartered Accountant with more than 27 years’ experience in the ﬁnancial services sector. His career started at KPMG where he spent 13 years in their Insurance and Consulting Practice covering a wide range of projects for Lloyd's, London, market and life insurance companies. Since then he has held executive positions at a number of insurance companies. Before joining Ecclesiastical in 2012, he was Group Chief Financial Ofﬁcer for Torus Insurance where his role included acquisitions, ﬁnance, investment and tax management, capital raising, actuarial and reinsurance. Edward Creasy, MBA, MA (Cantab), FCII* (a) Appointed to the Board on 10 February 2016. He has extensive experience in the insurance sector, in broking, underwriting and management. He is currently Chairman of insurance brokers Lycetts, one of the Ecclesiastical Insurance Group of companies, and is the non-executive Chairman of Charles Taylor plc and a Director of Paciﬁc Horizon Investment Trust plc. He is also a Director of WR Berkley Insurance (Europe) Ltd and WR Berkley Syndicate Management Ltd. He is a member of The Lloyd's Market Supervisory and Regulatory Committee, and a previous Director of the Lloyd's Franchise Board. He was also Chairman and Chief Executive of the Kiln Group. ANNUAL REPORT & ACCOUNTS 2015 81 SECTION THREE – GOVERNANCE Directors’ Report The directors submit their Annual Report and Accounts for Ecclesiastical Insurance Ofﬁce plc, together with the consolidated ﬁnancial statements of the Company for the year ended 31 December 2015. The Group Chief Executive’s Review, Strategic Report and Corporate Governance section (this includes Board Governance, the Group Finance and Investment Committee Report, the Group Nominations Committee Report, the Group Risk Committee Report, the Group Audit Committee Report, and the Group Remuneration Report) are all incorporated by reference into this Directors’ Report. Information about the use of ﬁnancial instruments by the Group is given in note 23 to the ﬁnancial statements. Principal activities The Group operates principally as a provider of general insurance in addition to offering a range of ﬁnancial services, with ofﬁces in the UK, Ireland, Canada, and Australia. A list of the Company’s main subsidiary undertakings are given on page 201 and details of international branches are shown on page 200. Ownership At the date of this report, the entire issued Ordinary share capital of the Company and none of the issued 8.625% Non-Cumulative Irredeemable Preference Shares of £1 each (‘Preference shares’) were owned by Ecclesiastical Insurance Group plc. In turn, the entire issued Ordinary share capital of Ecclesiastical Insurance Group plc was owned by Allchurches Trust Limited (ATL), the ultimate parent of the Group. 82 ANNUAL REPORT & ACCOUNTS 2015 DIRECTORS' REPORT Board of directors The directors of the Company at the date of this report are stated on page 80 and 81. Edward Creasy was appointed as a NED of the Company on 10 February 2016. Will Samuel and David Christie will resign as directors and Chairman and Deputy Chairman at the conclusion of the Board meeting on 16 March 2016. Edward Creasy will succeed Will Samuel as Chairman. In line with the Financial Reporting Council’s (FRC) 2012 UK Corporate Governance Code (the Code) the Board has voluntarily chosen to comply with the recommended annual re-election of directors. With the exception of Will Samuel and David Christie, all directors that have served since the last annual general meeting (AGM) will be proposed for Directors David Christie Mark Hews Will Samuel re-election at the forthcoming AGM and Edward Creasy will be recommended for election at the forthcoming AGM following recommendation from the Group Nominations Committee. The Company has made qualifying third-party indemnity provisions for the beneﬁt of its directors. These were in place throughout the year and remain in force at the date of this report. Neither the directors nor their connected persons held any beneﬁcial interest in any Ordinary shares of the Company during the year ended 31 December 2015. There has been no change in this position since the end of the ﬁnancial year and the date of this report. The following directors of the Company, and their connected persons, held Preference shares in the capital of the Company at 31 December 2015: Nature of interest Director Connected person Director Number of Non-Cumulative Irredeemable Preference Shares held 11,079 75,342 151,000 There have been no changes to their holdings between the end of the ﬁnancial year and the date of this report. No contract of signiﬁcance existed during or at the end of the ﬁnancial year in which a director was or is materially interested. Dividends Employees Dividends paid on the Preference shares were £9,181,000 (2014: £9,181,000). The directors do not recommend a ﬁnal dividend on the Ordinary shares (2014: £nil), and no interim dividends were paid in respect of either the current or prior year. Charitable and political donations Charitable donations paid, and provided for, by the Group in the year amounted to £20.6 million (2014: £25.2 million). During the last 10 years, a total of £130.0 million (2014: £115.2 million) has been provided by Group companies for church and charitable purposes. It is the Company’s policy not to make political donations. The Group recognises the importance of employee communication and aims to keep employees informed about its affairs through the use of brieﬁng groups, Group newsletters and the publication of ﬁnancial reports. Regular meetings are held between management and other employees and discussion encouraged. It is the Group’s policy to give full consideration to applications for employment by disabled persons. Appropriate adjustments are arranged for disabled persons, including retraining of employees for alternative work who become disabled, to promote their career development within the organisation. Principal risks and uncertainties The directors have carried out a robust assessment of the principal risks facing the Group including those that threaten its Business Model, future performance, solvency and liquidity. The principal risks and uncertainties, together with the ﬁnancial risk management objectives and policies of the Group, are included in the Risk Management section of the Strategic Report and can be found starting on page 48. ANNUAL REPORT & ACCOUNTS 2015 83 SECTION THREE – GOVERNANCE Going concern Directors’ responsibilities The Financial Performance section on page 44 and Risk Management section of the Strategic Report starting on page 48 provide a review of the Group’s business activities and describe the principal risks and uncertainties, including exposures to insurance and ﬁnancial risk. The Group has considerable ﬁnancial resources: ﬁnancial investments of £833.4m, 96% of which are liquid (2014: ﬁnancial investments of £892.3m, 98% liquid); cash and cash equivalents of £118.4m and no borrowings (2014: cash and cash equivalents of £107.5m and no borrowings); and a regulatory enhanced capital cover of 3.0 (2014: 2.9). Liquid ﬁnancial investments consist of listed equities and OEICs, government bonds and listed debt. As a consequence, the directors have a reasonable expectation that the Group is well placed to manage its business risks successfully and continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Auditor and the disclosure of information to auditor So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information that the auditor is unaware of, that could be needed by the auditor in order to prepare their report. Having made enquiries of fellow directors and the Group’s auditor, each director has taken all the steps that they ought to have taken as a director, in order to make themselves aware of any relevant audit information, and to establish that the auditor is aware of that information. This conﬁrmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. The Group Audit Committee reviews the reappointment of the auditor, including the auditor’s effectiveness and independence, and recommends the auditor’s reappointment and remuneration to the Board. Further details are disclosed in the Group Audit Committee Report starting on page 98. In accordance with Section 489 of the Companies Act 2006, a resolution proposing that Deloitte LLP be reappointed as auditor of the Group will be put to the forthcoming AGM. The directors are responsible for preparing the Annual Report and the ﬁnancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare ﬁnancial statements for each ﬁnancial year. Under that law the directors are required to prepare the Group ﬁnancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the International Accounting Standards (IAS) Regulation and have also chosen to prepare the parent company ﬁnancial statements under IFRSs as adopted by the European Union. Under company law, the directors must not approve the accounts unless they are satisﬁed that they give a true and fair view of the state of affairs of the Company and of the proﬁt or loss of the Company for that period. In preparing these ﬁnancial statements, IAS 1 requires that directors: properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the speciﬁc requirements in IFRSs are insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the Company’s ﬁnancial position and ﬁnancial performance; and make an assessment of the Company’s ability to continue as a going concern. The directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the Company and enable them to ensure that the ﬁnancial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. 84 ANNUAL REPORT & ACCOUNTS 2015 DIRECTORS' REPORT Responsibility statement We conﬁrm that to the best of our knowledge: The ﬁnancial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the Company and the undertakings included in the consolidation taken as a whole. The Strategic Report (which is incorporated into this Directors' Report) includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. The Annual Report and ﬁnancial statements, taken as a whole, are fair, balanced and understandable, and provide the information necessary for shareholders to assess the Company’s position and performance, Business Model and Strategy. By order of the Board Will Samuel Chairman Mark Hews Group Chief Executive 16 March 2016 16 March 2016 ANNUAL REPORT & ACCOUNTS 2015 85 SECTION THREE – GOVERNANCE Corporate Governance The Board of directors is committed to applying the highest standards of corporate governance and believe that the affairs of the Company should be conducted in accordance with best business practice. Accordingly, the Company has chosen to voluntarily comply with the Code’s Main Principles and Code Provisions throughout the year ended 31 December 2015, where relevant to the Company. The Code is available from the FRC’s website. The Company does not have any shares with a Premium Listing on the London Stock Exchange and is therefore not legally required to comply with the Code or other legislation relating solely to quoted companies. The Corporate Governance disclosures include the Board Governance section, Group Nominations Committee Report, Group Risk Committee Report, Group Audit Committee Report and Group Remuneration Report. Board Governance The Board The Chairman and Group Chief Executive Senior Independent Director The roles of the Chairman and the Group Chief Executive are undertaken by separate individuals. The Chairman, Will Samuel, is responsible for leadership of the Board. The day-to-day management of the business is undertaken by the Group Chief Executive, Mark Hews, assisted by the Group Management Board. Will Samuel will resign as a director at the conclusion of the Board meeting held on 16 March 2016. Edward Creasy will succeed Will Samuel as Chairman. David Christie, Deputy Chairman, has been appointed as the Senior Independent Director (SID). The SID supports and acts as a sounding board for the Chairman and is responsible for overseeing the governance practices of the Company and leading the directors in their appraisal of the Chairman. Along with the Chairman, the SID is the primary contact for the shareholder and they meet regularly to share and understand views. David Christie will resign as a director at the conclusion of the Board meeting held on 16 March 2016. John Hylands will succeed David Christie as Deputy Chairman and SID. 86 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE Directors’ conﬂicts A Conﬂicts Register is maintained by the Group Company Secretary to monitor and manage any potential conﬂicts of interest. Training on the Companies Act 2006 has been given to all directors and directors are regularly reminded of their duties. Any conﬂicts are declared at the ﬁrst Board meeting at which the director becomes aware of a potential conﬂict and then recorded in the Conﬂicts Register. The Board considers all conﬂicts in line with the provisions set out in the Company’s Articles. The directors are required to review their interests recorded in the Conﬂicts Register on a biannual basis. Role of the Board The Board is responsible to the Group’s shareholders for the long-term success of the Group, its strategy, values and its governance. Great importance is placed on a well-informed and decisive Board, and Board meetings are scheduled and held regularly throughout the year. A one-year rolling plan of business for discussion is reviewed and agreed by the Board annually to ensure that the Board is focused on the right issues at the right times and sufﬁcient time is allowed for appropriate consideration and debate. The Board sets annual objectives for each year in addition to setting the Group’s strategic direction. These are implemented through approval and regular assessment of the business plan and strategy process. At each Board meeting, the directors discuss strategic and business matters, ﬁnancial, operational and governance issues, and other relevant business items that arise. Following Committee meetings, the Board receives oral reports from the Chairs of each Committee at the next Board meeting. A Directors’ and Ofﬁcers’ Insurance Policy is in place for all Group directors. Board Committees The Group has ﬁve Board Committees which are shown below: Ecclesiastical Board of Directors Group Finance & Investment Committee Group Nominations Committee Group Risk Committee Group Audit Committee Group Remuneration Committee Details of all the Board Committees are contained within their respective reports that follow: the Group Finance and Investment Committee Report on page 90; the Group Nominations Committee Report on page 92; the Group Risk Committee Report on page 96; the Group Audit Committee Report on page 98; and the Group Remuneration Report on page 106. The Terms of Reference (ToR) for all ﬁve Board Committees can be obtained from either the Company’s registered ofﬁce address or the website at: www.ecclesiastical.com/general/investorrelations/corporategovernance/termsofreferenceofcommittees Attendance at meetings Directors are required to attend all Board meetings and strategy days as well as Committee meetings where they are members. In 2015, six scheduled Board meetings, and one off-site strategy day was held. In addition, four scheduled training sessions took place. Will Samuel met with the non-executive directors (NEDs) without the executive directors present on a number of occasions throughout the year. All directors receive papers and minutes for all meetings, unless restricted due a conﬂict of interest. Papers are circulated electronically, generally one week in advance of all scheduled meetings. All directors have access to the Group Company Secretary and to independent professional advice at the Company’s expense as required. It is the Board’s policy to record any unresolved concerns about the running of the Company or any proposed action in the Board minutes. During 2015, no director had any such concerns. ANNUAL REPORT & ACCOUNTS 2015 87 SECTION THREE – GOVERNANCE Below is a record of the directors’ attendance for the Board meetings (including the off-site strategy day) during 2015: Board attendance table Executive directors Non-executive directors Mark Hews S. Jacinta Whyte Ian Campbell Will Samuel (Chairman) David Christie (SID) Tim Carroll John Hylands Anthony Latham Caroline Taylor Christine Wilson Denise Wilson Director since June 2009 July 2013 April 2014 January 2006 January 2001 March 2013 September 2007 March 2008 September 2014 June 2012 December 2010 Meetings eligible to attend Meetings attended 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 6 7 7 6 7 7 6 During 2015, the Board made decisions on the following business issues and routine matters: Routine matters Operational matters Board’s annual objectives Financial performance and statements Risk management, appetite, and registers Overview of compliance and audit work undertaken by the Group Audit Committee Dividends, charitable donations and Gift Aid Setting and reviewing budgets Committee reports and recommendations Health and safety Performance, strategic and business plans for Group businesses Group reinsurance arrangements General insurance claims reserves Treating Customers Fairly and complaints handling Determining NEDs’ fees for recommendation at a general meeting Stakeholder relationships Review of General Insurance business including niches Review of other strategic businesses Employee engagement Cyber security Projects Review of Group structure Proposition review Review of IT strategy Change programme and Group Vision Rebranding of the Investment division Review of corporate responsibility (CR) strategy Governance and regulatory matters Board composition Taxation matters Implementation of actions arising from the evaluation of the Board Capital requirements, solvency position and ORSA Relationship with the regulator 88 ANNUAL REPORT & ACCOUNTS 2015 Internal controls Relationship with shareholder CORPORATE GOVERNANCE Ecclesiastical Insurance Group owns the entire issued Ordinary share capital of Ecclesiastical Insurance Ofﬁce. Ecclesiastical Insurance Group in turn is wholly owned by ATL with whom the Board has an open and constructive relationship. The Chairman ensures that the views of ATL are communicated to the Board as a whole following regular meetings with Sir Philip Mawer (Chairman of ATL). In addition, David Christie and Denise Wilson have been appointed as 'Common Directors' of both companies which enables ATL to effectively communicate its views and expectations to the Board. In turn, the common directors are able to support the directors of ATL to understand the performance and strategic issues faced by the Company. A conﬂict of interest policy which sets out how actual and perceived conﬂicts of interests between the two companies are managed is in place. By order of the Board Mrs. R. J. Hall Group Company Secretary 16 March 2016 The Board is ultimately responsible for the systems of risk management and internal control maintained by the Group and reviews their appropriateness and effectiveness annually. The Board views the management of risk as a key accountability and is the responsibility of all management and believes that, for the period in question, the Group has maintained an adequate and effective system of risk management and internal control that complies with the Code. Further details are set out in the Risk Management Report starting on page 48. The Group embeds risk management into its strategic and business planning activities whereby major risks that could affect the business in the short and long term are identiﬁed by the relevant management together with an assessment of the effectiveness of the processes and controls in place to manage and mitigate these risks. The Group’s internal control framework is vital in setting the tone for the Group and in creating a high degree of control consciousness in all employees. A code of conduct and a code of ethics are embedded into the culture of the Group and is accessible to all staff via the intranet. Assurance on the adequacy and effectiveness of internal control systems is obtained through management reviews, control self-assessment and internal audits. Systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide reasonable, but not absolute assurance as to the prevention and detection of ﬁnancial misstatements, errors, fraud or violation of law or regulations. ANNUAL REPORT & ACCOUNTS 2015 89 SECTION THREE – GOVERNANCE Group Finance and Investment Committee Report Chairman’s introduction I am pleased to present the Group Finance and Investment Committee Report describing the work we have undertaken during the past year. Our main purpose is to ensure that the management of the Group’s ﬁnancial assets, including its investment portfolio, is properly governed, controlled and performing as expected. We also review and advise on any major ﬁnancial decisions on behalf of the Board. This report gives more information on how we performed our duties during 2015. Tim Carroll Chairman of the Group Finance and Investment Committee Membership The members of the Group Finance and Investment Committee are shown in the table below: Committee members Tim Carroll (Chairman) David Christie Will Samuel Anthony Latham Member since August 2013 September 2010 March 2006 February 2009 Meetings eligible to attend Meetings attended 4 4 4 4 4 4 4 4 90 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE The Committee reviews its ToR annually and during the year held four scheduled meetings. The remit of the Committee, in line with its ToR and designated ﬁnancial limits, is to: consider and review Group treasury management and Group tax strategies; consider and review Group capital management, taking into consideration the Individual Capital Assessment (ICA) and risk appetite; consider and review major capital projects and contracts; consider and review major investments of the Group including the acquisition or disposal of interests of more than 5% in the voting shares of any listed company; consider and review acquisitions and disposal of investment property or businesses by the Group, and enter into formal discussions with the intention of making a takeover offer; consider and review borrowing monies, committing any Group Company to a guarantee or indemnity for the performance of a subsidiary, or authorising a mortgage or a charge over the whole or any part of the Group’s undertaking; consider and review circulars to shareholders and listing particulars; During 2015, the Committee’s main activities were in line with its remit and included: review of the annual investment strategy; review of quarterly investment reports and investment performance against benchmark levels; consideration of a potential acquisition of a business; review of tax strategy; review of bond default risk; review of the Group’s ﬁnancial risk appetite statement; review of the acquisition strategy; oversight of a pension scheme triennial valuation; and consideration of the potential acquisition of shares in a business. By order of the Board Tim Carroll Chairman of the Group Finance Investment Committee provide broad Group strategy and set investment 16 March 2016 parameters for Group portfolio investment matters including derivative instruments within the context of overall risk to the business and monitor adherence to parameters; consider monthly investment reports and review investment performance against benchmark levels; and oversee and review the performance of delegated funds. ANNUAL REPORT & ACCOUNTS 2015 91 SECTION THREE – GOVERNANCE Group Nominations Committee Report Chairman’s introduction I am pleased to present the Group Nominations Committee’s Report describing the work we have carried out in 2015. Our main purpose is to ensure that there is an appropriate balance of skills, knowledge and experience on the Board, its Committees and within the Group’s subsidiary companies. This report gives more detailed information on how we performed our duties during the year. Will Samuel Chairman of the Group Nominations Committee Membership The Group Nominations Committee comprises the NEDs shown below and are appointed by the Board: Committee members Will Samuel (Chairman) David Christie John Hylands Member since June 2008 January 2001 May 2013 Meetings eligible to attend Meetings attended 5 5 5 5 5 5 92 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE The Committee held three scheduled meetings during the year and two ad-hoc meetings. The remit of the Committee, in line with its ToR, is to: Board composition and independence review the structure, size and composition of the Board and its Committees; conduct evaluations of the Board and Committees and make recommendations to the Board; oversee and approve the Board composition and ofﬁcer changes in Group subsidiaries and senior management changes within the Group; consider Board and senior executive succession planning for the Group; assess and review directors’ skills, knowledge and experience; review the Group’s leadership needs in order to compete effectively in the target markets; undertake recruitment of new directors and executives to the Board, utilising external search consultancy as appropriate; and oversee the content and operation of the induction programme, annual training programme, and continuous professional development (CPD) of directors. The principal activities of the Committee during 2015 included: review of the Board and Committee’s composition; review and agreement of the matrix of the Board’s leadership skills and technical skills to identify gaps; review of the succession plans for the Board and senior management; commencement of a selection process for a new NED; selection and recommendation of the appointment of Edward Creasy as a new NED and Chairman elect to the Board; consideration of a new Deputy Chairman and SID to succeed David Christie during 2016. monitoring the implementation of the actions arising from the external Board evaluation at the end of 2014; review of the directors’ annual appraisal and development needs; review of the CPD programme for directors; and The Board comprises a non-executive Chairman, eight other NEDs and three executive directors. The Group believes the size and composition of the Board gives it sufﬁcient independence, balance and broad experience to consider the issues of strategy, performance, resources and standards of conduct. The strong representation of NEDs on the Board demonstrates its independence, provides a greater depth of experience and facilitates challenge. Board appointments All NEDs are provided with a letter of appointment on acceptance of the appointment, which includes the terms and conditions of their role. Letters of appointment are available on request from the Group Company Secretary. Appointment of Edward Creasy, non-executive director and Chairman elect In autumn 2014, it was agreed that the key priority for the Committee and the Board would be the appointment of a new Chairman. The incumbent Chairman, Will Samuel, did not take part in the selection process but was consulted given his extensive knowledge of the role. A selection panel led by David Christie and comprising John Hylands, The Venerable Christine Wilson and Tim Carroll was established in February 2015. An external search consultant, Egon Zehnder International (who had no other connection to the Group and are signatories to the Voluntary Code of Conduct on gender diversity and best practice) were engaged to support the selection process. In addition, a web-based search agent, Nurole, assisted the selection in the recruitment process. Nurole had assisted the Group’s ultimate parent, ATL, in the recruitment of a Trustee in 2015. A candidate proﬁle was developed, which is summarised as follows: experience of leading a Board and displaying behaviours consistent with the culture and values of the Group; review of the Board training programme. commercial business leader with signiﬁcant experience in the management and governance of a ﬁnancial services company; ANNUAL REPORT & ACCOUNTS 2015 93 SECTION THREE – GOVERNANCE independent-minded and robust; able to voice well-grounded opinions and facilitate rigorous challenge and debate; a clear structured thinker with a strategic outlook; and a commitment to the highest standards of integrity and a reputation for sound judgement. The initial candidate list was reduced to a short list for consideration by the selection panel. The short list was further reduced by the selection panel based on the skills and knowledge of the candidate and identiﬁed Board skills gaps. After a series of interviews and further due diligence, Edward Creasy emerged as the preferred candidate. This was based on consideration of personal attributes, external commitments and needs of the Board. Given the importance of the role to the Group, all members of the Board met with Edward Creasy and provided feedback. In addition, discussions were held with ATL. At the end of the process the full Board approved the appointment of Edward Creasy, which was announced in December 2015. Edward has over 35 years’ experience in the insurance industry as both a broker and underwriter. He brings robust leadership, integrity and expertise consistent with the Group’s culture and values. In addition, his extensive insurance market background will assist the Board in giving consideration to its business strategies and in particular, meeting one of the Group’s objectives of becoming the Most Trusted Specialist Insurer. Edward Creasy was independent on appointment to the Group. Board diversity Ecclesiastical recognises the beneﬁts of having a diverse Board. It is committed to improving diversity on the Board, including gender diversity and acknowledges diversity both improves performance of the Board and strengthens the business. Currently, the representation of women on the Board stands at 33%, with four women members in a current membership of 12. As at 31 December 2015, the representation of women on the Board stood at 36%, with four women members in a membership of 11. The Board will take the opportunity, as and when appropriate, to improve further its gender balance. The Board also recognises the importance of improving gender balance at senior levels within the organisation and is actively reviewing diversity across the Group. Further information is provided in the Corporate Responsibility Report. Board performance and evaluation Induction All directors are required to undertake a formal and comprehensive induction to the Group upon joining the Board. The induction is a three-stage process and is led by the Legal and Secretarial Department. On acceptance of a position on the Board, all directors receive an induction pack, which includes their appointment letter and terms; latest audited report and accounts; constitutional documents; protocols on conﬂicts of interest, the handling of price-sensitive information, directors’ duties, share dealing, data protection and Board procedures; the Code; Board minutes for the current and past year; the Governance Framework (including Expectations of SBUs and Board Charter) and Board dates and contact details. After appointment, a two-day induction programme is provided where presentations are given by Legal and Secretarial, Group Compliance, Finance, Group Risk, Actuarial, Group Strategy, and heads of the Group’s trading businesses. The programme is also offered to other directors as a refresher every two years and when a programme is being run. New directors also meet individually with the Chairman of ATL, the Group Chairman, the Deputy Chairman and the SID, and each of the executive directors. The third stage of the induction is participation in the Board’s CPD programme. Training Throughout the year, directors participate in the CPD programme, which includes internal training on topical issues (including business familiarisation) relevant to the Group’s commercial and regulatory environment and attendance on relevant external CPD opportunities, funded by the Company. In 2015, four internal training sessions took place and covered Solvency II, Conduct Risk and Anti-Bribery. 94 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE The Group Company Secretary maintains annual CPD records for all directors, which the Chairman reviews as part of their annual appraisal. Training and development needs of Board members are also reviewed by the Committee. Performance evaluations Given the anticipated changes to the Board, it was agreed that a formal Board evaluation would be deferred. During the year, the Board supported by the Group Nominations Committee, monitored the implementation of the agreed recommendations arising from the 2014 Board evaluation focusing on the Group’s long-term strategy, developing a structured approach to succession plans, and enhancing the Board’s understanding of competitors and markets. The Board evaluation in 2014 was conducted by Lintstock Limited; who are not connected to the Group. The Board was satisﬁed that the Board and its Committees were effective and that progress had been made against all objectives. It is the Board’s policy for its evaluations to be facilitated every two years with the next external evaluation expected to be undertaken at the end of 2016. All directors receive an annual appraisal from the Chairman. The Chairman is appraised by the Board, in his absence, led by the SID. Re-election of directors In line with the Code, the Board has voluntarily chosen to comply with the annual re-election of directors who have served their initial term. NEDs are appointed for a period of three years, and are expected to serve a minimum of two consecutive terms, subject to satisfactory performance. Where NEDs have served for more than six years, the Committee has undertaken a rigorous annual review before they are recommended for annual re-election. The report and accounts accompany the AGM notice. The biographical information for the Board members seeking election and re-election is contained within the Report and Accounts. The Board believes that all the NEDs were independent throughout 2015. Independence is reviewed as part of each director’s annual appraisal, considered by the Committee, and agreed by the Board annually. In 2015, two NEDs, Will Samuel and David Christie have served for more than nine years on the Board, and John Hylands and Anthony Latham have served for more than six years. In addition, two directors, David Christie and Denise Wilson are directors of ATL. The Committee has considered the circumstances and relationships of all NEDs and, following rigorous review, the Committee conﬁrmed to the Board that all NEDs remained independent in character and judgement. No individual participated in the discussions relating to their own independence. The Chairman is satisﬁed that the performance of each NED is effective and sufﬁcient time has been spent on the Group’s affairs. Will Samuel and David Christie will resign as directors on 16 March 2016. All other directors are proposed for re-election at the forthcoming AGM. Executive directors’ other commitments External directorships are considered to be valuable in terms of broadening the experience and knowledge of executive directors, provided there is no actual or potential conﬂict of interest, and the commitment required is not excessive. All appointments are subject to approval by the Board, and the Conﬂicts Register maintained by the Group Company Secretary is used to monitor external interests. Any monetary payments received by executive directors from outside directorships are paid over to and retained by the Group. Non-executive directors’ commitments The Committee evaluates the time NEDs spend on the Company’s business annually and is satisﬁed that, in 2015, the NEDs continued to be effective and fulﬁlled their time commitment as stated in their letters of appointment. Accordingly, all NEDs at the date of this report are recommended for re-election at the AGM. By order of the Board Will Samuel Chairman of the Group Nominations Committee 16 March 2016 ANNUAL REPORT & ACCOUNTS 2015 95 SECTION THREE – GOVERNANCE Group Risk Committee Report Chairman’s introduction I am pleased to present the Group Risk Committee's Report describing the work done by the Committee during the past year. The Group has voluntarily chosen to include a Group Risk Committee Report in the Annual Report of the Company in addition to the disclosures in the Risk Management section on page 48. The Group Risk Committee was created in June 2010 and comprises the directors shown in the table below who were appointed by the Board. In addition, Will Samuel (Chairman of the Board) is normally in attendance at the meetings. The Group Chief Risk Ofﬁcer reports to the Committee and has direct access to the Chairman of the Committee and the NEDs. The Committee ensures that they meet with the Group Chief Risk Ofﬁcer at least once a year without the executives present. Anthony Latham Chairman of the Group Risk Committee Membership The Group Risk Committee members and their attendance at meetings during the year are shown below: Member since Meetings eligible to attend Meetings attended Committee members Anthony Latham (Chairman) June 2010 S. Jacinta Whyte Tim Carroll John Hylands February 2014 August 2013 September 2010 5 5 5 5 5 5 4 5 96 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE The remit of the Committee is to: capital requirements across the Group including recommend to the Board the Group’s overall risk appetite tolerance and strategy in the context of the current and prospective macroeconomic and ﬁnancial environment and monitor compliance with it; ensure a risk management culture is embedded across the Group; recommend to the Board the Group’s strategy, policy and processes for risk management, and monitor compliance; monitor the operational effectiveness of the Group’s Enterprise Risk Management Framework, risk policies and systems; receive and review risk-based management reports and other information, making recommendations for change as appropriate; ensure that material risks facing the Group have reviewing the Group’s Internal Capital Assessment; amendments to and implementation of the Control and Risk Self-Assessment process at Group level; the implementation of Solvency II and the implications for the Group, including Board training; the implications of the Senior Insurance Manager's Regime; the appropriateness of the Standard Formula; continuing development and integration of the Group’s Internal Model, and the approach to validation; review of the Governance and Overarching Policy Framework; reports from Group Compliance; been identiﬁed and addressed appropriately; the implications of FloodRe; and the Group’s relationship with its regulators including reviewing statutory returns and the output from PRA and FCA visits. By order of the Board Anthony Latham Chairman of the Group Risk Committee 16 March 2016 consider the material ﬁndings of Compliance and Internal Audit reports carried out for the Group Audit Committee and their effect on the Group’s risks; recommend to the Board the Own Risk and Solvency Assessment (ORSA) and Internal Model changes; approve the appointment or removal of the Group Chief Risk Ofﬁcer; ensure the Board receives adequate training on risk matters; and ensure appropriate liaison with other Board Committees, e.g. the Group Remuneration Committee and the Group Audit Committee. During 2015, the Committee held ﬁve meetings. In addition to the routine matters highlighted above, it also considered speciﬁcally: the Group’s risk proﬁle, ensuring that this reﬂected the Group’s key risks during the year; the annual review and recommendation of the Group’s risk appetite (including catastrophe risk appetite); the ORSA at Group level; a review of the risk impact of remuneration proposals and the Group Chief Risk Ofﬁcer’s reports to the Group Remuneration Committee; discussion and approval of reverse stress test results and recommendations arising there from; ANNUAL REPORT & ACCOUNTS 2015 97 SECTION THREE – GOVERNANCE Group Audit Committee Report Chairman’s overview A key aspect of the Group Audit Committee’s work this year was to oversee a formal and comprehensive tender process for the external auditor appointment. After careful consideration of the strength of each proposal, the Board accepted the recommendation from the Group Audit Committee (the Committee) to retain the services of our external auditor, Deloitte LLP (Deloitte). The audit tender process is described in more detail in the following pages, together with the Committee’s other principal activities during the year. A particular focus of the Committee last year was the appropriateness of the Group’s general insurance liability claims reserves and, in particular, the reserves held in respect of physical and sexual abuse (PSA) claims. We have continued to focus on both PSA and other liability reserves during 2015 and undertook a detailed review of changes to the approach to setting reserves in respect of asbestos-related diseases in the second half of the year. From an accounting and reporting perspective, the signiﬁcant issues considered in detail by the Committee are set out on pages 100 and 101. The Committee seeks to ensure that the identiﬁcation and management of signiﬁcant risks is embedded across all areas of the business, with continued and effective oversight from the Group Management Board (GMB). We are satisﬁed that the business has maintained a robust risk management and internal controls culture, supported by strong overall governance processes. The Group’s principal risks and uncertainties are set out on pages 51 to 58. We have reviewed these in detail and are comfortable that the business has addressed them appropriately within its ongoing operating model and identiﬁcation of strategic priorities. John Hylands Chairman of the Group Audit Committee 98 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE Membership The Committee members have been selected with the aim of providing the wide range of ﬁnancial and commercial expertise necessary to fulﬁl the Committee’s duties. The Board considers that John Hylands has recent and relevant ﬁnancial experience, as required by the UK Corporate Governance Code. The Committee members and their attendance at meetings during the year are shown below: Committee members John Hylands (Chairman) Tim Carroll Anthony Latham Denise Wilson Member since March 2008 April 2013 December 2008 August 2011 Meetings eligible to attend Meetings attended 6 6 6 6 6 5 6 5 Committee meetings During the year, the Committee had six scheduled meetings. In addition to the members of the Committee, the Chairman of the Board, the Group Chief Executive, the Group Chief Financial Ofﬁcer and the Director of Group Internal Audit (GIA) attend meetings by invitation. Other relevant people from the business are invited to attend certain meetings in order to provide a deeper level of insight into key issues and developments. Deloitte is invited to attend meetings, and during 2015 they attended ﬁve of the six meetings held. The Committee meets with the Director of GIA on an annual basis, in the absence of management to discuss the GIA function and any issues arising from its activity. In addition, the Committee meets with Deloitte on an annual basis, without management present, to discuss the external audit and any issues arising from it. The Committee’s key responsibilities include: monitoring the integrity of the ﬁnancial statements; challenging the Group’s ﬁnancial reporting, and reporting upon anything that it is not satisﬁed with; reviewing the Group’s whistleblowing arrangements; reviewing the Group’s audit arrangements, both externally and internally; and reviewing the effectiveness of the Group’s systems of internal ﬁnancial controls and the management of ﬁnancial risks. A summary of the main activities of the Committee during the year are shown on the next few pages. Appropriateness of the Group’s external ﬁnancial reporting The primary role of the Committee in relation to ﬁnancial reporting is to review, challenge and agree the appropriateness of the half-year and annual ﬁnancial statements concentrating on, amongst other matters: the quality and acceptability of the Group’s accounting policies and practices; the clarity of the disclosures and compliance with ﬁnancial reporting standards and relevant ﬁnancial and governance reporting requirements; material areas in which signiﬁcant judgements have been made by the Group or there has been discussion with the external auditor; whether the Group’s Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s position and performance, Business Model and Strategy; and any correspondence from regulators in relation to ﬁnancial reporting. The Committee gave consideration to the presentation of the ﬁnancial statements, and in particular the coherence and consistency between the risks, critical accounting estimates and accounting policies disclosed within the Annual Report. To aid their review, the Committee considered reports from the GMB, the Group Chief Financial Ofﬁcer and reports from Deloitte on the outcomes of their half- year review and annual audit. ANNUAL REPORT & ACCOUNTS 2015 99 SECTION THREE – GOVERNANCE The signiﬁcant areas of focus considered by the Committee in relation to the 2015 accounts, and how these were addressed, are outlined below. These were discussed and agreed with management during the course of the year, and we also discussed them with Deloitte at both the half year and year end. The nature of these issues and how they are mitigated is explained in more detail in the Risk Management Report on page 51, and also note 2 to the ﬁnancial statements on page 148. Issue Assessment General insurance claims reserves The estimation of the ultimate liability arising from claims made under general business insurance contracts is a critical accounting estimate. There is uncertainty as to the total number of claims made on each class of business, the amounts that such claims will be settled for and the timings of any payments. The Committee considered detailed reports provided by the Group’s Reserving Actuary and the Actuarial Function Director on the adequacy of the Group’s general insurance reserves at both the half year and the full year. We also considered reports from Deloitte following their audit. There was evidence of an improvement in the performance of general liability claims in the UK during the year and the Committee considered in detail the resulting favourable development of prior year reserves recommended by management, taking into account the Group Reserving Actuary’s assessment of the sufﬁciency of these reserves. The Committee agreed that the proposed releases were reasonable and that the reserves remained appropriately prudent. At the half year, management also reviewed the historic exposure proﬁle and claims resulting from asbestos-related diseases and increased the reserves accordingly. The Committee held had a detailed session with the Group’s Reserving Actuary to consider changes to the basis of modelling these reserves. After consideration, the Committee agreed it was appropriate to strengthen reserves for this long-tail risk in line with the management recommendation. There was a particular focus on PSA reserves last year, and the Committee reviewed actual claims experience against expectations throughout the year. It was noted that experience was better than expected over 2015, but after discussions with management we agreed that it was appropriate to maintain reserves at their current level given the likely volatility in claims patterns from year to year. Following all of our reviews and discussions, the Committee was satisﬁed that the reserving process and outcomes were robust and well managed and that the overall reserves set were reasonable. The calculation of the Group’s life insurance reserves requires management to make signiﬁcant judgements about bond yields, discount rates, credit risk, mortality rates and current expectations of future expense levels. The Actuarial Function Holder’s proposed assumptions are reviewed, challenged and agreed by the Ecclesiastical Life Limited Board. Any one-off or unusual items are referred to the Committee for further approval. During 2015, the Committee considered proposed changes to mortality assumptions and the assumptions for the pattern of reductions in the Group’s expenses as the business runs off. Following their review and consideration of Deloitte’s report, the Committee was satisﬁed that the changes proposed were appropriate and overall the judgements made in respect of the reserves were reasonable. Life insurance reserves 100 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE Issue Assessment Carrying value of goodwill The judgements in relation to asset impairment largely relate to the assumptions underlying the calculation of the value in use of the business being tested for impairment, primarily the achievability of the long-term business plan and macroeconomic assumptions underlying the valuation process. The Committee addresses these matters by receiving reports from management outlining the basis for the assumptions used. Business plans are reviewed, challenged and signed off by the Board. During 2015, the Committee considered management’s proposal to change the discount rate used. The Committee was satisﬁed that the proposed rate better reﬂected current market assessments of the time value of money and the asset-speciﬁc risk. After review, the Committee agreed with management’s conclusions that no material impairment was required for any of the businesses under review. Valuation of deﬁned beneﬁt pension scheme liability Although the Group’s main deﬁned beneﬁt pension scheme remains in surplus, the liabilities of the schemes are material in comparison to the Group’s net assets and the valuation requires many actuarial assumptions, including judgements in relation to long-term interest rates, inﬂation, longevity and investment returns. The actuarial assumptions used are based on advice from the Group’s pension adviser, who also performs the calculations in respect of the schemes. The Committee considered the assumptions used, and also compared them to benchmark data. In addition, the Committee considered whether it was appropriate to recognise the pension fund surplus as an asset of the Group. The Committee noted the recent clariﬁcation of International Financial Reporting Interpretations Committee (IFRIC) 14 regarding the continuance of a minimum funding requirement for contributions relating to future service. After review of the assumptions used, the external advice provided, benchmark data and careful consideration of the requirements of IAS 19(R) and IFRIC 14, the Committee concluded that reasonable assumptions had been used and recognition of part of the surplus as an asset of the Group was appropriate. Carrying value of tax liabilities The calculation of tax liabilities requires management to make judgements in respect of the expected tax payable for the current and prior periods based on the interpretation of applicable tax legislation. The Committee considered the tax provisions proposed by management and the material judgements management had applied. We reviewed the calculation for the release of deferred tax provision following the recently enacted changes in the future corporation tax rate. Following our review, the Committee concluded that tax provisions were appropriate. ANNUAL REPORT & ACCOUNTS 2015 101 SECTION THREE – GOVERNANCE Fair, balanced and understandable At the request of the Board, the Committee as considered whether, in its opinion, the 2015 Annual Report and Financial Statements are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s position and performance, Business Model and Strategy. An early draft of the Annual Report was provided to the Committee for initial review and feedback at its February meeting. Feedback was provided by the Committee highlighting any areas where they believed further clarity was required in the ﬁnal version. The ﬁnal draft was provided one week prior to the meeting at which it would be requested to provide its ﬁnal opinion, and further minor feedback from the Committee was incorporated into the ﬁnal version. The Committee was provided with comprehensive veriﬁcation of all the information and facts in the Annual Report, and any statements of belief were highlighted and considered separately by the Committee. When forming its opinion, the Committee reﬂected on information it had received and its discussions throughout the year as well as their own knowledge of the business and its performance. The Committee also asked an employee of the Group, who does not work in a ﬁnancial or actuarial area and is not involved in the production of the Annual Report or ﬁnancial results, to review a near-ﬁnal draft and give their opinion on whether they consider it to be fair, balanced and understandable. Guidance on what is meant by these statements and aspects the employee may wish to consider when forming an opinion was provided. The employee produced a written report for the Committee which gave their overall opinion on the Annual Report and also set out their view of the strengths and any areas for development for the future. Following its review, the Committee was of the opinion that the 2015 Annual Report is representative of the year and presents a fair, balanced and understandable overview, providing the necessary information for shareholders to assess the Group’s performance, Business Model and Strategy. There has been no correspondence from regulators in relation to ﬁnancial reporting during the year. Overseeing the relationship with and performance of the external auditor External audit tender Last year, we advised that Deloitte had been the external auditor of the Group since 1998 and that there had been no tender held for audit services since their appointment. We advised that, after considering the longer-term implications of the recently adopted EU legislation requiring mandatory audit ﬁrm rotation, which will apply from June 2016 and The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the Committee had determined that an external audit tender would commence in the spring of 2015 for the 2015 year-end audit. The Committee took the decision to invite three ﬁrms to tender for the audit. It was the Committee’s intention to complete this process in time to make a recommendation to the Board at its August 2015 meeting with a view to making any new appointment on 1 September 2015. The Committee felt this gave any new audit ﬁrm sufﬁcient time to prepare for the year-end audit. Governance The proposal to tender for the audit work of the Group was overseen by the Committee Chairman. The tender process involved several stages, which are summarised below: Consideration of ﬁrms to invite. After consideration of the skills and resources required to undertake the external audit of the Group and any potential conﬂicts of interest, the Committee decided to invite three ﬁrms to tender, one of which was the incumbent Deloitte. Identiﬁcation of key criteria and development of documentation. The Committee considered and agreed the key criteria and the format of the invitation to tender. These were then shared with the invited ﬁrms. Interview phase. Each ﬁrm was invited to an extensive series of interviews with members of the Committee, members of the Board and a number of the Group’s senior management team. These interviews formed part of a formal assessment process where each ﬁrm was scored against the key criteria, including matters such as the strength and experience of senior team members and their ﬁrm’s ability to serve effectively the Group’s diverse operations. 102 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE Submission of a written proposal document. Each ﬁrm was asked to provide detailed information in writing on certain matters in support of their proposal. Tender presentations. All three of the ﬁrms were invited to present their audit proposition to the full Committee. The Group Chief Executive and Group Chief Financial Ofﬁcer were also in attendance for these presentations. Following the presentations, the Committee considered the strength of each proposal, discussed the strengths and weaknesses of each ﬁrm against the key criteria and considered feedback and scoring provided by the Board members and senior managers who had met the ﬁrms during the tender process. The Committee in turn provided a recommendation to the Board for consideration and approval. Outcome. The Committee unanimously agreed to recommend to the Board that the services of Deloitte be retained, and the Board accepted this recommendation. Accordingly, subject to shareholders’ approval, Deloitte will be reappointed as auditor. The Committee also recommended that the Group move the external audit of all its subsidiaries to Deloitte and no longer use any non-Deloitte component audit ﬁrms, which the Board also agreed. We believe that the audit tender was a valuable exercise, and the Group expects to achieve a number of improvements to its audit service as a result. Audit planning The Committee oversees the plans for the external audit to ensure it is comprehensive, risk based and cost effective. Deloitte drafted an initial audit plan for the 2015 audit in conjunction with executive management and presented it for review by the Committee at its November meeting. The plans describe the proposed scope of the work and the approach to be taken. They also propose the materiality levels to be used. In order to focus the audit work on the right areas, the auditors identify particular risk issues based on their knowledge of the business and operating environment, discussions with management and the half-year review. The fee for the audit is also proposed as part of this discussion. The Committee discussed the audit plan for the 2015 audit with Deloitte. The proposed change in approach to setting materiality was considered reasonable, and the Committee agreed that the right key audit risks had been identiﬁed. External audit process effectiveness The Committee is required to assess the qualiﬁcations, expertise, resources and independence of the external auditor and the objectivity and effectiveness of the audit process. At the conclusion of each audit, the Committee performs a speciﬁc evaluation of the performance of the external auditor. This assessment was carried out shortly before the start of the external audit tender process and was based on the Committee’s own appraisal of the performance of the auditor and the views of the senior management team as well as consideration of materials provided by the auditor. The criteria used for this assessment remained unchanged from last year and were as follows: delivery of a thorough and efﬁcient global audit in compliance with agreed plan and timescales; provision of accurate, robust and perceptive advice on key accounting and audit judgements, technical issues and best practice; a high level of professionalism and technical expertise consistently demonstrated by all audit staff and maintenance of continuity within the core audit team; and strict adherence to independence policies and other regulatory requirements. There were no signiﬁcant ﬁndings from the evaluation this year, although points were identiﬁed for improving the overall external audit process which was taken into account in the external audit tender process. The Committee is satisﬁed that the changes made and agreed for the future as a result of that process will address these points. Independence of the external auditor Both the Board and the external auditor have safeguards in place to protect the independence and objectivity of the external auditor. The Committee is responsible for the development, implementation and monitoring of the Group’s policy on the provision of non-audit services by the external auditor. The policy is reviewed annually by the Committee to ensure alignment with the latest standards on auditor objectivity and independence, and compliance with the policy. The policy covers a number of areas including: the Group’s restrictions, procedures and safeguards, relative to the engagement of the external auditor on non-audit services; ANNUAL REPORT & ACCOUNTS 2015 103 SECTION THREE – GOVERNANCE the Group’s requirements for the pre-approval and reporting of fees for non-audit services; policy on the appointment of former audit employees of the external auditor; and the requirement to keep a register of all former employees of the current external auditor employed by the Group. The Group determines non-audit services which are prohibited and those which are permitted ‘subject to safeguards’. The Group’s aim is to identify appropriate service providers and ensure that any non-audit work is carried out by the most appropriate provider in a manner that gives best value for money. The policy is shared with the external auditor of the Group. Adherence to the policy and non-audit fees incurred is regularly reviewed by the Committee. For the year ended 31 December 2015, the Group was charged £411,000 (exc VAT) by Deloitte and its associates for audit services. The fees for other assurance services required by legislation and/or regulation amounted to £92,000, making total fees from Deloitte of £503,000. None of the non-audit services provided during the year was in respect of signiﬁcant engagements. More detail can be found in note 11 to the ﬁnancial statements on page 166. Oversight of the Group’s systems of internal control including the internal audit function Assessment of internal controls The Group’s approach to internal control and risk management is set out in the Corporate Governance Report on page 86. In reviewing the effectiveness of the system of internal control and risk management during 2015 the Committee has: reviewed the ﬁndings and agreed management actions arising from both external and internal audit reports issued during the year; monitored management’s responsiveness to the ﬁndings and recommendations of the Director of GIA; met with the Director of GIA once during the year without management being present to discuss any issues arising from internal audits carried out; and considered a report prepared by the Director of GIA giving his assessment of the strength of the Group’s internal controls based on internal audits performed during the year. Internal control over ﬁnancial reporting Internal control over ﬁnancial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of management and ﬁnancial reporting in accordance with generally accepted accounting principles. Controls over ﬁnancial reporting policies and procedures include controls to ensure that: through clearly deﬁned role proﬁles and ﬁnancial mandates, there is effective delegation of authority; there is adequate segregation of duties in respect of all ﬁnancial transactions; commitments and expenditure are appropriately authorised by management; records are maintained which accurately and fairly reﬂect transactions; any unauthorised acquisition, use or disposal of the Group’s assets that could have a material effect on the ﬁnancial statements should be detected on a timely basis; transactions are recorded as required to permit the preparation of ﬁnancial statements; and the Group is able to report its ﬁnancial statements in compliance with IFRS. Due to inherent limitations, internal control over ﬁnancial reporting may not prevent or detect misstatements. Risk management and control systems provide reasonable assurance that the ﬁnancial reporting does not contain any material inaccuracies. Through its review of reports received from management, along with those from internal and external auditors, the Committee did not identify any material weaknesses in internal controls over ﬁnancial reporting during the year. The ﬁnancial systems are deemed to have functioned properly during the year under review, and there are no current indications they will not continue to do so in the forthcoming period. Group Internal Audit (GIA) GIA is monitored by the Committee and provides independent, objective assurance to the Board that the governance processes, management of risk and systems of internal control are adequate and effective to mitigate the most signiﬁcant risks to the Group. The Committee has oversight responsibility for GIA and the Director of GIA is accountable to the Committee Chairman, reports administratively to the Group Chief Executive and has access to the Chairman of the Board. 104 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE Legal and regulatory developments The Committee receives regular reports and considers the impact of legal and regulatory developments on the UK Group to control legal and regulatory risk. They monitor the application and impact of any actions required by the business or organisation through to completion. Reports are shared with relevant business areas, and with relevant subsidiary Boards and Board Committees. By order of the Board John Hylands Chairman of the Group Audit Committee 16 March 2016 GIA’s annual programme of work is risk based and designed to cover areas of higher risk or speciﬁc focus across the Group. The plan is approved annually in advance by the Committee and is regularly reviewed throughout the year to ensure that it continues to reﬂect areas of higher priority. Where necessary, changes to the agreed plan are identiﬁed as a consequence of the Group’s changing risk proﬁle. All proposed changes to the agreed internal audit plan are reviewed, challenged and approved by the Group Audit Committee during the year. Throughout the year, GIA submitted quarterly reports to the Committee summarising ﬁndings from audit activity undertaken and the responses and action plans agreed with management. During the year, the Committee monitored progress of the most signiﬁcant management action plans to ensure that these were completed in a timely manner and to a satisfactory standard. Whistleblowing The Committee is responsible for reviewing the Group’s whistleblowing procedures and receives regular updates. No concerns were raised through these channels in 2015. During the year, the Group’s approach to whistleblowing was refreshed and set out in a new Standard and Guidance Document (which is available internally on the Group’s intranet). The Chairman of the Group Audit Committee was designated the Group’s 'Whistleblowing Champion' having responsibility to ensure the independence, autonomy and effectiveness of the Group's policies and procedures on whistleblowing including the procedures for protection of staff that raise concerns from detrimental treatment. On behalf of the Whistleblowing Champion, the Director of GIA is responsible for ensuring the effectiveness of internal whistleblowing arrangements, including arrangements for protecting whistleblowers against detrimental treatment. ANNUAL REPORT & ACCOUNTS 2015 105 SECTION THREE – GOVERNANCE Group Remuneration Report Group Remuneration Committee Chairman’s statement As Chair of the Group Remuneration Committee, I am pleased to introduce the Group Remuneration Report for the year ending 31 December 2015 and to highlight some of the key aspects of the Committee’s work during the ﬁnancial year. About this report As has been the case in previous years, while our Group structure does not require us to comply with the regulations governing the disclosure of executive remuneration to which quoted companies are subject, we have chosen to largely adopt these reporting requirements in order to provide greater transparency and follow best practice. This introductory statement summarises: the business context for the executive remuneration in 2015; major decisions taken by the Committee during the year; and, changes made to directors’ remuneration. The Directors’ Remuneration Policy on pages 111 to 122 sets out the Group’s policy in relation to the structure and elements of pay for our directors, and the Annual Report on Remuneration on pages 122 to129 describes how the Group’s remuneration policies have been implemented in 2015, providing retrospective disclosures on directors’ remuneration for 2015 and setting out how the policy will be implemented in 2016. Review of performance and incentive outcomes As described in the Strategic Report starting on page 14, the Group has delivered another set of strong and consistent results in 2015, continuing the transformation in its performance over the last two years. Our proﬁt before tax (PBT) grew by 11% to Denise Wilson OBE Chair of the Group Remuneration Committee 106 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE £54m (2014: £48m), with underwriting proﬁts and investment returns performing well. During 2015, the Group once again delivered a strong underwriting proﬁt, with the Combined Operating Ratio (COR) for the Group improving to 92.0% (2014: 95.2%). Given the Group’s strong performance over the year, the Committee is satisﬁed that (i) the annual bonus awards of 88% (Group Chief Executive), 81% (Deputy Group Chief Executive) and 78% (Group Chief Financial Ofﬁcer) of the maximum potential value and (ii) the extent to which the LTIP granted in 2013 vested, were appropriate. The Committee reviews risk management across the Group as part of its deliberations on remuneration, to ensure that the ﬁnancial results achieved over the one- and three-year periods applicable to the directors’ annual bonus and long-term incentive plan (LTIP) outcomes have been achieved within the risk appetite limits set for the Group. The Committee is advised by the Group Chief Risk Ofﬁcer (CRO) in relation to the risk impact of incentive scheme design, targets, and whether the outturns have been achieved within the Group’s risk appetite. I am pleased to report that following this review for the period ending 31 December 2015, no adjustments were considered necessary to the 2015 Group annual bonus or the 2013-2015 LTIP. Key Committee activities during the year Following the strategic review of the Group’s Remuneration Policy in 2014, revised Group annual bonus and Group LTIP arrangements came into force in 2015. During the year, the Committee worked with the CRO to further reﬁne the measures underpinning the Customer and Conduct performance condition within the Group annual bonus. The remuneration package of the Deputy Group Chief Executive was reviewed during 2015. During the year, S. Jacinta Whyte continued to exercise her responsibilities as General Manager and Chief Agent for Canada and as Managing Director of UK General Insurance, alongside her responsibilities as Deputy Group Chief Executive. In recognition of the continuing requirement for S. Jacinta Whyte to lead the UK and General Insurance transformation programme and to fulﬁl the role of Managing Director of UK General Insurance, the Deputy Group Chief Executive’s incentive plan was extended in duration from two to three years with a pro-rata increase in the potential value. During the year, the Committee continued to oversee the development of remuneration policy and incentive scheme design across the wider Group. In particular, revised annual bonus and LTIP arrangements were reviewed and approved for EdenTree Investment Management Limited (EdenTree), South Essex Insurance Brokers Limited (SEIB) and Ansvar Australia, further aligning these with the Group Remuneration Policy. The regulatory and corporate governance environment for executive remuneration continues to develop apace. During the year the Committee considered, amongst other developments, the implications of the European Banking Authority (EBA) consultation on sound remuneration principles for EdenTree and the implications of Solvency II on the Group’s remuneration governance, structures and risk adjustment approaches. In line with Solvency II remuneration requirements, the deferral period for the Group annual bonus will be increased in 2016 from a period of two years to three years. The Committee additionally beneﬁted from an in-depth update provided by PricewaterhouseCoopers LLP (PwC) on developments in remuneration arrangements and regulation in asset management ﬁrms. The Committee undertook a competitive tender process during 2015 to appoint an external adviser to the Committee. As a result of the tender process, New Bridge Street were appointed as adviser to the Committee with effect from December 2015. The Board also reviewed fees for non-executive directors (NEDs) during 2015, in line with its two- year review cycle. The increases (set out on page 127) reﬂect the continuing increases in workloads in recent years and are designed to bring fees in line with those paid at similar-sized companies, ensuring that the Group will continue to be able to attract NEDs with the range of experience and skills to oversee the implementation of our Strategy. Finally, I value the continued support from our charitable owner and shareholder Allchurches Trust Limited (ATL), and remain mindful of our responsibilities to drive sustained and improved performance over the long term through our remuneration strategy, policy and principles. Denise Wilson OBE Chair of the Group Remuneration Committee 16 March 2016 ANNUAL REPORT & ACCOUNTS 2015 107 SECTION THREE – GOVERNANCE The Remuneration Committee Purpose and membership The Committee is responsible for recommending to the Board the Remuneration Policy for executive directors and for setting the remuneration packages for each executive director, members of the Group Management Board, Remuneration Code staff and heads of strategic business units. None of the executive directors were involved in discussions relating to their own remuneration. The Committee also has overarching responsibility for the Group-wide Remuneration Policy. The Committee’s roles and responsibilities are set out in full in the ToR. The Committee’s ToR is reviewed annually and there were no substantive changes in 2015. The Committee reviews its effectiveness annually. During 2015, the Committee held ﬁve meetings in total, four scheduled meetings and one additional meeting. The Group Remuneration Committee members and their attendance at meetings during the year are set out in the table below. All members are independent NEDs and have the necessary experience and expertise to meet the Committee’s responsibilities. Appointed to the Committee Meetings eligible to attend Meetings attended Committee members Denise Wilson (Chair) December 2011 David Christie Christine Wilson Caroline Taylor April 2013 April 2013 November 2014 5 5 5 5 5 5 4 5 Advisers to the Committee During the year, the Committee received external advice from FIT Remuneration Consultants LLP (FIT) in relation to the implementation of the Group Remuneration Strategy Review and the determination of appropriate remuneration packages for executive directors, members of the Group Management Board (GMB) and heads of strategic business units. The Committee received external advice from PwC in relation to remuneration arrangements and regulation in asset management ﬁrms and in relation to the Solvency II remuneration requirements. FIT has no other advisory function within the Group. PwC acted as advisors to the Group during 2015 in relation to non-remuneration aspects of Solvency II and also provided services in respect of tax compliance. Fees paid to FIT and PwC during 2015 for professional advice to the Committee were £38,658 and £29,220 respectively. The Committee is satisﬁed that the advice received during 2015 from its advisers was impartial, as both FIT and PwC are signatories to the voluntary code of conduct of the Remuneration Consultants Group. As set out earlier, in the Chairman’s statement, a competitive tender process was undertaken in 2015 to appoint an external adviser to the Committee. As a result of the tender process, New Bridge Street has been appointed with effect from December 2015. The Committee is satisﬁed that the advice that will be received from New Bridge Street will be impartial, as New Bridge Street is a signatory to the voluntary code of conduct of the Remuneration Consultants Group. The Committee also had access to benchmarking reports from Towers Watson and McLagan, each of which also provide data to support the determination of pay and conditions throughout the Group. Where appropriate, the Committee received input from the Chairman, Group Chief Executive, Group HR Director, Director of Group Finance, CRO, Director of Group Internal Audit and Group Reward Manager. Such input never relates to their own remuneration. Activities of the Remuneration Committee in 2015 The Committee discussed the following key matters during 2015: approving the new Group Remuneration Policy; setting of performance conditions and targets for 2015 annual bonuses and 2015-2017 LTIPs applicable to executive directors, members of the GMB and heads of strategic business units and employees; 108 ANNUAL REPORT & ACCOUNTS 2015 considering the CRO’s opinion on the risk impact of incentive scheme design and targets; approving the 2015 salaries and vesting outcomes of 2014 annual bonuses and 2012-2014 LTIPs for the above population; approving a revised annual and LTIP for code staff within EdenTree; approving a revised annual bonus plan for the Chief Executive Ofﬁcer and employees of Ansvar Australia, and the LTIP applicable to the Chief Executive Ofﬁcer of Ansvar Australia; approving a revised annual incentive plan for the directors of SEIB; approving, in relation to EdenTree, the code staff population, remuneration policy and Pillar 3 remuneration disclosure, together with the annual audit of compliance with the Remuneration Code; considering the change in Remuneration Code applicable to EdenTree (to SYSC 19C); approving the 2014 Directors’ Remuneration Report; reviewing external market developments and trends; evaluating the Committee’s performance in 2015 and setting the Committee’s objectives for 2016; reviewing the pension policy for executives and designated senior managers; approving changes to the discretionary incentive plan applicable to the Deputy Group Chief Executive; approving the appointment of New Bridge Street as external adviser to the Committee following a tender process; considering remuneration regulation and market best practice applicable to asset management ﬁrms; reviewing the implications of the EBA consultation on sound remuneration policies on remuneration policy for code staff; and reviewing the implications of Solvency II on remuneration policy. CORPORATE GOVERNANCE ANNUAL REPORT & ACCOUNTS 2015 109 SECTION THREE – GOVERNANCE 110 ANNUAL REPORT & ACCOUNTS 2015 r o t c o r P r a k s O y b h p a r g o t o h P CORPORATE GOVERNANCE Directors’ Remuneration Policy The Directors’ Remuneration Policy (the ‘Policy’) described in this part of the report is intended to apply for the year from January to December 2016 and describes the structure and elements of pay and how they interact. A strategic review of the Group’s Remuneration Policy was carried out in 2014 and implemented in 2015. The Policy set out below reﬂects the outcomes of this review and is largely unchanged from 2015. As outlined in the Group’s Strategic Report, starting on page 14, our ambition includes the following strategic objectives: Most Trusted Specialist Insurer Most Trusted Specialist Adviser Best Ethical Investment Provider To support the achievement of the Group’s strategic objectives, we need to attract, motivate and retain highly capable, productive and motivated employees who are aligned to the Group’s values and culture. The Group therefore needs to provide a progressive, dynamic working environment which allows its employees to fulﬁl their potential and an appropriately structured set of remuneration policies. The Group’s Remuneration Policy is aligned to delivery of the Group’s strategic objectives and establishes a set of principles which underpin the Group’s reward structures for all Group employees: Reward structures will promote the delivery of long-term sustainable returns. As such, the performance measures in the annual and LTIP will reﬂect and support the Group’s underlying strategic goals and risk appetite and may comprise both ﬁnancial and non-ﬁnancial targets. Reward will be performance-related, reﬂecting individual and business performance, including both what is delivered and the way in which results are achieved. However, the Group will adopt a prudent and considered approach when determining what portion of an employee’s package should be performance-linked and/or variable so as to ensure that irresponsible conduct and behaviours are neither encouraged nor rewarded and that customer experience is not prejudiced in any way by the operation of its pay arrangements. Reward structures will be straightforward and simple for everyone to understand. Remuneration packages will be set by reference to levels for comparable roles in comparable organisations. However, benchmark data will be only one of a number of factors that will determine remuneration packages. Reward structures will deliver an appropriate balance of ﬁxed to variable pay in order to foster a performance culture, with the proportion of ‘at risk’ pay typically increasing with seniority. However, high levels of leverage are not appropriate for the Group. Reward structures will achieve a balance between short- and long-term incentives, supporting the overall aim of the Group’s Remuneration Policy of promoting the long-term success of the Group. The balance between short- and long-term incentive pay is largely driven by role and seniority, with generally a greater role played by long-term incentives for more senior employees. The Group will strive to adhere to the highest standards of remuneration-related regulatory compliance and best practice guidelines, while ensuring that the Group’s remuneration policies are appropriately tailored to its circumstances, challenges and strategic goals. The Committee reviews the Group’s Remuneration Policy annually to ensure that it remains aligned with the needs of the Group and its longer-term strategy and that it remains appropriately aligned with the external market. Balancing short- and long-term remuneration We have established the remuneration elements set out in this report guided by the Group’s Remuneration Policy principles above. Fixed annual elements including salary, pension and beneﬁts, are to recognise the responsibility and experience of our executive directors and to ensure current and future market competitiveness. The annual and long-term incentives are to incentivise and reward our executive directors for making the Group successful on a sustainable basis. ANNUAL REPORT & ACCOUNTS 2015 111 r o t c o r P r a k s O y b h p a r g o t o h P SECTION THREE – GOVERNANCE Future policy table (executive directors) Salary Beneﬁts Pension How the element supports our strategic objectives To provide a core reward at the level needed to attract and retain the required level of talent. Operation of the element Salaries are paid in 12 equal monthly instalments during the year. Salaries are reviewed annually with changes taking effect from 1 April each year. To provide a market- competitive reward package and promote the wellbeing of employees. Beneﬁts normally comprise a car allowance, a private healthcare scheme and medical assessments. Executive directors also receive life assurance cover on the same basis as the wider employee population and in the case of the Deputy Group Chief Executive, health and dental cover, accidental death and dismemberment cover and long-term disability cover on the same basis as the wider employee population in our Canadian branch. To aid retention and provide a market competitive provision for post-retirement income. UK Deﬁned Contribution Scheme: UK-based executive directors are eligible to participate in the Group Personal Pension plan. Contributions are made by the employee and employer. Canadian EIO plc Deﬁned Contribution Pension plan: the Canadian Deﬁned Contribution plan is applicable to Ecclesiastical’s Canadian staff. The Deputy Group Chief Executive participates under this plan and does not participate in the UK Deﬁned Contribution Scheme. Contributions are made by the employer. Group annual bonus scheme To incentivise the executive directors to achieve key ﬁnancial and strategic goals and targets that have been set for the ﬁnancial year. Deferral provides further alignment with shareholder interests and promotes retention. This cash bonus is paid annually, normally three months after the end of the ﬁnancial year to which it relates. Targets are set annually and award levels are determined by the Committee based on performance against these targets. When agreeing targets, the Committee also receives advice from the CRO on the extent to which the scheme meets the Group’s risk appetite. Any bonus earned in excess of 75% of an individual’s maximum bonus opportunity is deferred over a period of three years. Bonus already paid, or deferred, is subject to malus/clawback in certain circumstances: (i) mis-statement of performance; (ii) regulatory censure, material reputational damage and/or material non-adherence to the Group’s risk tolerances; and (iii) misconduct. A three-year time limit applies. The Committee has discretion to reduce any bonus prior to award in certain circumstances, including (but not limited to): (i) there are issues regarding the Group’s underlying ﬁnancial strength and position; (ii) there is an actual or potential regulatory censure; (iii) the Group is in material breach of its risk policies (including conduct risk) and/or its values/ethics; and (iv) there is a material diminution in the regard by which the Group is held by its customer base through mismanagement. 112 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE Maximum potential value and payment at threshold Performance measures used, weighting and time period applicable Change from 2015 When the annual review is conducted various factors are taken into account, including Group and individual performance, relevant market information and levels of pay increases in the wider UK or relevant territory population. Group and individual performance None None Relevant pay data including market practice among a chosen set of comparator organisations in the ﬁnancial services sector is also considered. Beneﬁts are set at a level taking into account beneﬁt packages offered by comparable organisations for comparable roles; beneﬁts offered to the wider employee population and the objective of promoting the wellbeing of employees. The costs are those relating to providing the beneﬁt. Not applicable None The level of pension contribution takes into account the seniority of the role and pension beneﬁts offered by comparable organisations for comparable roles. Not applicable None The employer contribution rate to the UK Deﬁned Contribution Scheme will be 15% of basic salary. Any contributions to the UK Deﬁned Contribution Scheme that are above the annual or lifetime earnings limit are paid in cash, net of National Insurance (NI) contributions charge. The employer contribution rate to the Canadian EIO plc Deﬁned Contribution Pension plan will be 12% of basic salary. Any contributions to the Canadian pension plan that are above the Canadian government maximum contribution limit are paid into a Supplemental Employee Retirement Plan (SERP) and are maintained as a liability on the Canadian balance sheet and attract interest annually. Maximum opportunity of 100% of salary of which 50% is payable for a target level of performance. Deferral period increased from two to three years, for any bonus earned in excess of 75% of an individual’s maximum bonus opportunity. The Group annual bonus is subject to a range of challenging metrics linked to key strategic priorities. For 2016, the following performance metrics will apply: Ecclesiastical Insurance Group (EIG) PBT (including fair value investment gains/ losses) Group COR Strategic targets Customers and conduct and Personal performance rating. ANNUAL REPORT & ACCOUNTS 2015 113 SECTION THREE – GOVERNANCE Future policy table (executive directors) Group LTIP How the element supports our strategic objectives To focus the executives and incentivise the achievement of the Group’s long-term objectives; to align the executive directors’ interests with those of the shareholders and to promote attraction and retention of talented individuals. Operation of the element Cash awards under the Group LTIP vest dependent on the Committee’s assessment of performance against the performance conditions over the relevant three-year period. Targets are set annually for each successive three-year LTIP period. When agreeing targets, the Committee also receives advice from the CRO on the extent to which the scheme meets the Group’s risk appetite. Any LTIP already vested and any unvested LTIP is subject to malus/ clawback in certain circumstances: (i) mis-statement of performance; (ii) regulatory censure, material reputational damage and/or material non-adherence to the Group’s risk tolerances; and (iii) misconduct. A three-year time limit applies. The Committee has discretion to reduce any LTIP award in certain circumstances, including (but not limited to): (i) there are issues regarding the Group’s underlying ﬁnancial strength and position; (ii) there is an actual or potential regulatory censure; (iii) the Group is in material breach of its risk policies (including conduct risk) and/or its values/ethics; and (iv) there is a material diminution in the regard by which the Group is held by its customer base through mismanagement. Additional targeted incentive The Committee may decide, from time to time, to incentivise speciﬁc executive directors, in exceptional circumstances, on either a multi-year or single-year basis to achieve speciﬁc objectives. These arrangements will either be in place of or in addition to existing incentive arrangements. How the element supports our strategic objectives To incentivise the Group Chief Executive to achieve speciﬁc goals that have been set for the period 2014-2016. Group Chief Executive’s three-year incentive plan In addition to the arrangements set out in the table above, the following discretionary incentive arrangements are in existence for the Group Chief Executive and Deputy Group Chief Executive. Operation of the element No mandatory deferral provision. Staged payments: Year 1 up to 25% of salary. Year 2 up to 50% of salary, less payments made in the previous year. Year 3 up to 100% of salary, less payments made in Year 1 and Year 2 above. Payments under the plan are subject to clawback in respect of mis-statement and misconduct. 114 ANNUAL REPORT & ACCOUNTS 2015 Maximum potential value and payment at threshold Under the rules of the LTIP, awards of up to 100% of salary can be made. At on-target performance a target opportunity of 50% of the award applies. Threshold business performance would result in vesting of no more than 20% of the award. The Group LTIP plan granted in respect of 2014-2016 will continue to vest under the previously applicable policy. The Group LTIP plan granted in respect of 2015-2017 will continue to vest under this policy. CORPORATE GOVERNANCE Change from 2015 None Performance measures used, weighting and time period applicable The Group LTIP is subject to a range of challenging conditions linked to key strategic priorities. For 2016 awards relating to a performance period 2016-2018, the following performance conditions will apply: Group EIG PBT (excluding fair value investment gains/losses) Group EIG PBT (including fair value investment gains/losses) Group COR Strategic targets and Customers and conduct. There is a 36-month performance period from the date of grant. Maximum potential value and payment at threshold Performance measures used, weighting and time period applicable Change from 2015 Maximum opportunity of 100% of salary over the 2014-2016 performance period. There are three areas of performance conditions that apply to this award: None 50% dependent upon ﬁnancial performance 25% dependent on achievement of measurable, non-ﬁnancial results 25% dependent upon achievement of qualitative targets. ANNUAL REPORT & ACCOUNTS 2015 115 SECTION THREE – GOVERNANCE Discretionary bonus arrangements Deputy Group Chief Executive’s three-year incentive plan How the element supports our strategic objectives To incentivise the Deputy Group Chief Executive to achieve speciﬁc goals that have been set for the period 12 June 2013 to 30 June 2016. Operation of the element No mandatory deferral provision. Staged payments: Jun-Dec 2013 up to £25.6k1 Jan-Dec 2014 up to £51.2k1 Jan-Dec 2015 up to £51.2k1 Jan-Jun 2016 up to £25.6k1. 1 An average 2015 exchange rate of 1.9524 Canadian dollars to 1 GBP has been used. Notes to the policy table Performance measures and targets The Committee selected the performance conditions used for annual bonus and long-term incentives because they are central to the Group’s overall strategy and are key metrics used in measuring the performance of the Group. The performance conditions are reviewed and set annually by the Committee, following consultation with the CRO. The Committee is of the opinion that the performance targets are commercially sensitive to the Group and that disclosure at the beginning of the ﬁnancial year would be detrimental to its interests. The targets will therefore be disclosed at the end of the relevant ﬁnancial year in that year’s Remuneration Report provided they are not considered commercially sensitive at that time. Changes to the Policy from that operating in 2015 The following changes to the Group’s Remuneration Policy will be made in 2016 and are reﬂected in the Future Policy table above. Unless indicated below, the Policy remains unchanged from that implemented in 2015. The deferral period for the Group annual bonus will be increased for the ﬁnancial year 2016 from a period of two years to three years, for any bonus earned in excess of 75% of an individual’s maximum bonus opportunity, reﬂecting Solvency II remuneration requirements. The Deputy Group Chief Executive’s incentive plan has been extended in duration from two to three years with a pro-rata increase in the value attaching to this plan. This change reﬂects the continuing requirement for S. Jacinta Whyte to lead the UK and general insurance transformation programme and to fulﬁl the role of UK Managing Director. Remuneration arrangements elsewhere in the Group The Group’s approach to executive director and wider employee remuneration is based on the common set of principles set out in the Group’s Remuneration Policy starting on page 122. However, given the size of the Group and the range of its operations, the manner in which these principles are implemented varies with seniority and, where appropriate, with the nature of the business transacted by a Group entity. 116 ANNUAL REPORT & ACCOUNTS 2015 Maximum potential value and payment at threshold Maximum opportunity of £153.7k1 for the performance period from 12 June 2013 to 30 June 2016. CORPORATE GOVERNANCE Change from 2015 Duration extended to three years with pro-rata increase in the value attaching to the plan. Performance measures used, weighting and time period applicable There are three areas of performance conditions that apply to this award: 40% dependent upon ﬁnancial performance 40% dependent on achievement of measurable, non-ﬁnancial results 20% dependent upon achievement of qualitative targets. All employees of the Group are entitled to a salary, beneﬁts, pension and annual bonus. However, remuneration for executive directors is more heavily weighted towards variable remuneration, through a higher annual bonus opportunity and participation in the three year incentive plan and the Group LTIP. Such variable remuneration is conditional on the achievement of performance targets that are linked to the successful delivery of the Group Strategy. The greater weighting towards variable remuneration thereby aligns the interests of executive directors with those of the shareholders. Remuneration scenario charts The remuneration scenario charts below illustrate what each executive director could earn in respect of the policy for 2016, under different performance scenarios: Minimum: ﬁxed pay only (being basic salary, pension or cash in lieu of pension and beneﬁts) with no annual bonus and no vesting of the LTIP; On target: ﬁxed pay (being basic salary, pension or cash in lieu of pension and beneﬁts) with annual bonus of 50% of basic salary and 50% vesting of the LTIP; Maximum: ﬁxed pay (being basic salary, pension or cash in lieu of pension and beneﬁts) with maximum bonus of 100% of basic salary and 100% vesting of the LTIP. Mark Hews: Effect of the application of this policy in ﬁnancial year 2016 Minimum On-Target Maximum 100% Total £459k 54% 37% 23% 23% Total £850k 32% 31% Total £1,240k Fixed Pay Annual Variable LTIP The Group Chief Executive’s three-year incentive plan is not included in the above illustration as the three- year incentive plan is an additional multi-period bonus arrangement granted in a prior year. The amount earnable under the Group Chief Executive's three-year incentive plan in 2016 is £107k at target and £213k at maximum. On-Target Fixed Pay Annual Variable LTIP 100% Total £353k Minimum 23% Total £650k 23% 54% Maximum 37% 32% 31% Total £948k ANNUAL REPORT & ACCOUNTS 2015 117 Minimum On-Target Maximum 100% Total £329k 55% 38% 23% 22% Total £595k 31% 30% Total £861k Fixed Pay Annual Variable LTIP Minimum SECTION THREE – GOVERNANCE 100% Total £459k On-Target 54% 23% 23% Total £850k Fixed Pay Annual Variable LTIP Maximum S. Jacinta Whyte: Effect of the application of this policy in ﬁnancial year 2016 32% 37% 31% Total £1,240k Minimum Minimum On-Target On-Target Maximum Maximum 100% Total £459k 100% Total £353k 54% 23% 23% 54% 37% 37% 23% Total £850k 23% Total £650k 32% 32% Fixed Pay Annual Variable Fixed Pay LTIP Annual Variable LTIP 31% Total £1,240k 31% Total £948k Minimum The Deputy Group Chief Executive’s three-year incentive plan is not included in the above illustration as the three-year incentive plan is an additional multi-period bonus arrangement granted in a prior year. The amount earnable under the Deputy Group Chief Executive's three-year incentive plan in 2016 is £16k at target and £33k at maximum. 100% Total £353k 100% Total £329k 54% 23% Total £650k Minimum On-Target 23% Fixed Pay Annual Variable Fixed Pay LTIP Annual Variable LTIP On-Target Maximum Ian Campbell: Maximum Effect of the application of this policy in ﬁnancial year 2016 22% Total £595k 32% 55% 37% 31% 23% 38% 31% Total £948k 30% Total £861k Minimum On-Target Maximum 100% Total £329k 55% 38% 23% 22% Total £595k 31% 30% Total £861k Fixed Pay Annual Variable LTIP Notes to the charts: Fixed pay is base salary for 2016 plus the value of pension and beneﬁts. Base salary is the aggregate of the salary applicable at 1 January for January to March 2016 and the salary applicable at 1 April 2016 for April to December 2016. The value of pension is calculated as described in the future policy table. The value of pensions for the Group Chief Executive and the CFO is the sum of pension contributions to the UK Deﬁned Contribution scheme and, to the extent applicable in 2016, the pension cash allowance applicable where contributions would be above the Annual or Lifetime Allowance. The value of beneﬁts in-kind is taken from the single ﬁgure table for 2015 which can be found on page 122. On-target performance is the level of performance required to deliver an annual bonus of 50% of basic salary and 50% vesting of the LTIP. Maximum performance is the level of performance required to deliver a maximum annual bonus award and 100% vesting of the LTIP. The Group Chief Executive's and the Deputy Group Chief Executive’s three-year incentive plans are not included in the above illustrations as the three-year incentive plans are an additional multi-period bonus arrangement granted in a prior year. Approach to recruitment remuneration Ecclesiastical is a specialist ﬁnancial services group competing for talent across a variety of markets and with often much larger organisations. The Committee’s approach is to pay a fair market value to attract appropriate candidates to the role, taking into consideration their individual skills and experience and the ethos of the organisation. Where it is thought 118 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE necessary to compensate for an individual’s awards from previous employment, the Committee may, as far as practicable, seek to match the expected value of such awards through the use of the Group’s existing incentive arrangements. Where this is not possible, it may be necessary to offer some form of ‘buy-out’ award, the size of which will in the normal course reﬂect the commercial value of the award foregone (and the vesting timetable of the awards foregone) and will also (where possible) be subject to some form of clawback if the individual leaves Ecclesiastical within a set timeframe. Any new executive director’s package would include the same elements and generally be subject to the same constraints as existing executive directors. Element of remuneration Maximum percentage of salary Salary Beneﬁts Annual bonus LTIP – Dependent upon position 100% 100% Pension contribution/allowance 15% UK Deﬁned Contribution Scheme 12% Canadian EIO plc Deﬁned Contribution Pension Plan Service contracts and policy on payment for loss of ofﬁce Standard provision Policy Details Notice periods in executive directors’ service contracts Twelve months by the Group or executive director for the Group Chief Executive and six months by the Group or executive director for other executive directors. Executive directors may be required to work through their notice period, or may be paid in lieu of notice if they are not required to work the full notice period. Payment in lieu of notice The Group may decide if it wishes to make a payment in lieu of notice of an amount prescribed under the contract. This is salary (and in the case of the Group Chief Executive, beneﬁts) for the balance of the notice period, excluding bonus and accrued holiday entitlement. Payable as a lump sum within 14 days of termination date but, in the case of the Deputy Group Chief Executive and Group Chief Financial Ofﬁcer, it can be paid in monthly instalments over the balance of the notice period. Severance payment for Deputy Group Chief Executive The Deputy Group Chief Executive’s pre- existing contract of employment before her appointment to her new role contained severance provisions in line with Canadian law and practice. The policy of the Group has been to honour these commitments insofar as they relate to accrued service up to the date of her appointment to her new role, but not in respect of service after that date. The executive’s entitlement arises in the case of any termination by the Group for ‘No Cause’ as deﬁned and represents the sum of £445k and the provision of dental and health insurance cover and life assurance cover for a period of 21 months after the termination date of her employment. The sums due may be made in monthly instalments to allow for mitigation. In addition, any sums otherwise due under the rules of any bonus or cash incentive plan in respect of the bonus year in which the termination date falls or in any subsequent year are only payable to the extent that they would otherwise exceed £131k. ANNUAL REPORT & ACCOUNTS 2015 119 SECTION THREE – GOVERNANCE Standard provision Policy Details Mitigation Treatment of annual bonus on termination or change of control under plan rules The executive directors’ service contracts do not expressly provide for mitigation on termination except in the case of the Deputy Group Chief Executive’s and Group Chief Financial Ofﬁcer’s contracts which allow for payment in instalments over the balance of the notice period. No payment unless employed on date of bonus payment except for ‘good leavers’ as deﬁned in the plan rules (e.g. death, ill health, redundancy, retirement) and other circumstances at the Committee’s discretion. If there is a change of control event, then an early payment can be calculated and made. Treatment of long-term incentive awards on termination or change of control under plan rules All awards lapse except for ‘good leavers’ as deﬁned in the plan rules (e.g. death, ill health, redundancy, retirement) and other reason at the discretion of the Committee. If there is a change of control event, then an early payment can be calculated as stated in the rules of the plan. Exercise of discretion Intended to be relied upon only in certain circumstances as set out in the Future Policy table. The Committee will take account of the circumstances of the termination and the director’s performance during the period of qualifying service to determine whether the exercise of any discretion is appropriate. Good leavers are entitled to a bonus payment subject to the achievement of bonus criteria which is pro-rated down to reﬂect their service during the performance year unless the Committee determines that a higher amount is justiﬁed. A similar provision would apply if there were a change of control event. Bonus payments for good leavers are subject to deferral, malus and clawback. For good leavers, vesting is determined based on the application of the performance conditions and any award is then pro-rated down based on the proportion of the 36-month performance period that the employee has served since the grant date unless the Committee determines that a higher amount is justiﬁed. A similar provision would apply if there were a change of control event. For good leavers grants vest on the original anniversary date. The Committee’s determination will take into account the circumstances of the executive director’s departure and the recent performance of the Group when using discretion in relation to short- or long-term bonus payments. Group Chief Executive’s three-year incentive plan If the Group Chief Executive ceases to be employed in this capacity, the award will lapse unless he is a ‘good leaver’. There is an express provision for clawback in respect of mis-statement and misconduct. If the Group Chief Executive is a good leaver, the Committee may decide to make an immediate pro-rata payment based on the executive’s performance up to the termination date. Deputy Group Chief Executive’s three-year incentive plan If the Deputy Group Chief Executive ceases to be employed in this capacity, the award will be treated in accordance with her contract. Other matters The Group’s policy is to honour commitments made to contractual arrangements that may have been entered into with an employee prior to them becoming a director. There are no other provisions for termination payments or payments for loss of ofﬁce in standard directors’ service contracts. 120 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE Standard provision Policy Details Non-executive directors Each NED is appointed for an initial three year term, and is subject to re-election by shareholders at the ﬁrst annual general meeting (AGM) following their appointment and the relevant AGM every three years. In addition, the Board has agreed that all directors (including NEDs) will be subject to annual re-election by shareholders. Notwithstanding any mutual expectation, there is no right to re-nomination either annually or after any three-year period. Each NED is provided with a letter of appointment, which sets out the circumstances in which their appointment can be terminated. NEDs are entitled to receive a pro-rata proportion of their fees that they have accrued to the date of termination, together with reimbursement of properly incurred expenses prior to that date. NEDs’ fees policy How the element supports our strategic objectives Operation of the element Maximum potential value and payment at threshold Performance measures used, weighting and time period applicable Current fee levels are shown in the section on implementation of policy. NEDs are not eligible to participate in any performance-related arrangements. To attract NEDs who have a range of experience and skills to oversee the implementation of our Strategy. NEDs’ fees, including the Committee Chairman’s fees, are approved by the Board and at a general meeting, following recommendation by the Chairman and executive directors. The Committee Chair takes no part in the discussion relating to their fees. The Chairman’s fees are considered and approved by the Board in the absence of the Chairman. Fees are paid in 12 equal monthly instalments during the year. Fees are reviewed every two years against those for NEDs in companies of a similar scale and complexity. NEDs are not eligible to receive beneﬁts and do not participate in incentive or pension plans. NEDs' travel and accommodation costs for attendance at Board meetings are reimbursed by the Group and are classed as a taxable beneﬁt when they are in respect of travel to their permanent workplace. ANNUAL REPORT & ACCOUNTS 2015 121 SECTION THREE – GOVERNANCE Consideration of employment conditions elsewhere in the Group When reviewing and setting the policy for executive directors’ remuneration, the Committee takes into account the pay and employment conditions of employees elsewhere within the Group. In particular, the level of the pay review for UK Ecclesiastical employees is a key consideration in setting the level of any salary increase for executive directors. The Committee is informed about the Group’s approach on salary increases; beneﬁts arrangements including pensions and the distribution of remuneration outcomes throughout the wider organisation. When reviewing and setting the performance measures for executive directors’ annual bonuses the Committee considers the extent to which these should be cascaded to other employees. The Committee has oversight of the incentive arrangements that are in operation for all Group entities and reviews the remuneration arrangements for designated senior management below the executive directors. The Committee uses this information to work with the HR function to ensure consistency of approach throughout the Group. Although the Committee does not consult directly with employees on remuneration policy for executive directors, it reviews proposals in the context of the above understanding of the remuneration arrangements for the wider employee population. Consideration of shareholder views The Committee, through the Board, consults with the shareholders on any changes to this policy in order to understand expectations with regard to executive directors’ remuneration and any changes in shareholders' views. Any views expressed by the shareholders are then considered and taken into account at the annual review of the Policy. The above Policy reﬂects the consultation undertaken with the shareholders in 2014 on the proposed changes to the Group’s Remuneration Policy and incentive arrangements for executives. Annual Report on Remuneration This section of the Directors’ Remuneration Report sets out how the above Remuneration Policy was implemented in 2015 and the resulting payments each executive director received. The ﬁnancial information contained in this report has been audited where indicated. Single total ﬁgure of remuneration for executive directors (audited) The table below shows a single total ﬁgure of remuneration received in respect of qualifying services for the 2015 ﬁnancial year for each executive director, together with comparative ﬁgures for 2014, where applicable. Aggregate executive directors’ emoluments are shown on page 128. Details of NEDs’ fees are set out in a separate table on page 127. Executive directors Mark Hews4 S. Jacinta Whyte5 Ian Campbell Total Fixed Pay (£000) Variable Pay (£000) Pension (£000) Total Remuneration (£000) Salary Beneﬁts1 Annual bonus LTIP2 Pension beneﬁt Total 2015 2014 2015 2014 20153 2014 2015 2014 2015 2014 2015 2014 381 363 15 15 338 287 306 191 49 51 1,089 907 294 276 18 17 239 151 90 76 35 33 676 553 259 250 26 33 2356 161 0 0 38 34 558 478 934 889 59 65 812 599 396 267 122 118 2,323 1,938 1 Beneﬁts include items such as a car allowance and private medical insurance which are valued at their taxable value. It also includes travel and accommodation beneﬁts, valued at their grossed up tax and NI value. Provision of beneﬁts during 2015 was in line with the previous year and the directors’ remuneration policy, and no exceptional beneﬁts were paid. 122 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE 2 LTIP represents the amount payable in respect of the three-year LTIP performance period 2013-2015 for 2015 and 2012-2014 for 2014, together with the amounts payable in respect of the Group Chief Executive’s three-year incentive plan (2015: £98k; 2014: £85k) and the Deputy Group Chief Executive’s 3-year incentive plan (2015: £44k; 2014: £51k). All executive directors hold unvested LTIP awards in accordance with the rules of the LTIP plan. 3 In line with the deferral policy introduced in 2015, annual bonus earned in excess of 75% of the maximum bonus opportunity is deferred over a period of two years. In 2015 the value of executive directors’ annual bonuses that were deferred is: £48k (Group Chief Executive); £18k (Deputy Group Chief Executive) and £7k (CFO). 4 Mark Hews received a cash allowance in lieu of pension during 2015, in line with company policy that a cash allowance of 15% of salary (net of NI contributions) is paid to UK-based executive directors where continued company contributions would result in a breach of the HMRC annual and or lifetime allowance. 5 Contributions to the Canadian pension plan that are above the Canadian government maximum contribution limit are paid into a SERP. These contributions for S. Jacinta Whyte are included in the ﬁgures shown. An average 2015 exchange rate of 1.9524 Canadian dollars to 1 GBP have been used in respect of both 2015 and 2014. 6 Ian Campbell received a discretionary award of £32k in respect of his contribution to ﬁnancial and strategic deliverables over the period to 2015, notably his contribution towards the successful run-off of the former New Zealand subsidiary. Mark Hews is also a NED for MAPFRE RE and was appointed to their Board in December 2013. The fee of £17k that Mark earns in respect of this role is paid directly to the Group by MAPFRE RE and is not received by Mark Hews. Additional requirements in respect of the single total ﬁgure table Annual bonus outcomes for 2015 (audited) The annual bonuses payable to executive directors in respect of 2015 are assessed taking into account both Group and individual performance. Individual performance is subject to delivery of personal performance objectives and performance in line with the Group’s behavioural competency framework for strategic leaders. A personal performance percentage of between 0% and 75% may be awarded in respect of this element of the annual bonus. The personal performance percentage is reviewed and agreed by the Committee. Group performance is subject to the four performance conditions which together form the Group performance multiplier. For 2015, these were Group EIG PBT (including fair value investment gains and losses) (30%); Group COR (40%); delivery of Group strategic initiatives in line with the Group’s strategic plan (15%); Customer and Conduct performance (15%). Results in respect of each performance condition are assessed against the required performance levels set at threshold, target and maximum, in order to calculate the aggregate Group performance multiplier as shown in the second table below. The overall bonus outturn for each executive director is the product of personal performance percentage and the aggregate Group performance multiplier. The maximum opportunity under the annual bonus plan is 100% of salary. The targets relating to the Group annual bonus for the ﬁnancial year 2015 were: Threshold (0.5x) Target (1.0x) Maximum Weighting (1.5x) Performance conditions Group EIG PBT £21.0m £55.8m £79.9m Group COR 99.0% 93.9% 92.0% Strategic Targets Customer and Conduct 50% 80% 75% 90% 100% 100% 30% 40% 15% 15% ANNUAL REPORT & ACCOUNTS 2015 123 SECTION THREE – GOVERNANCE The results relating to the Group annual bonus for the ﬁnancial year 2015, and the resultant aggregate Group performance multiplier, are shown below. Performance conditions Result Multiplier Weighting multiplier Weighted Group EIG PBT Group COR Strategic Targets Customer and Conduct £56.4m 92.0% 83% 94% 1.0 1.5 1.2 1.2 Aggregate Group performance multiplier 30% 40% 15% 15% 0.3 0.6 0.2 0.2 1.25 Bonuses are earned in respect of the ﬁnancial year and are paid in March following the end of the ﬁnancial year. Any proportion of a bonus outcome above 75% of the maximum bonus outcome is deferred over two years, in cash. All annual bonus outcomes are subject to malus and clawback as set out in the Future Policy table starting on page 112. LTIP outcomes in 2015 (audited) The LTIP amount included in the single total ﬁgure of remuneration is the cash award resulting from the Group LTIP grant in 2013 for the period 2013-2015. Vesting was dependent on performance over the three ﬁnancial years ending on 31 December 2015 and continued service until March 2016. The 2013-2015 Group LTIP is subject to the two performance conditions: Group PBT (50%) and Group COR (50%). Results in respect of each performance condition are assessed against the required performance levels set at threshold, target and maximum as shown below. Threshold 20% vesting Target Maximum 50% vesting 100% vesting Actual Vesting (% of maximum for performance condition) Performance conditions Group COR 100.0% 98.0% 95.0% 97.6% 56.2% Group PBT £100m £140m £200m £169m 73.9% Total 65.0% The Group LTIP outcome that vests in respect of each executive director in respect of 2013-2015 is shown below. LTIP grant % of salary Total LTIP vesting £000 % of maximum Mark Hews1 30% / 100% S. Jacinta Whyte² 30% 208 45 65% 65% 1 Mark Hews LTIP entitlement increased from 30% to 100% of salary on appointment as Group Chief Executive on 1 May 2013. The 2013-2015 LTIP that vests is the sum of the pro-rated award in relation to the January-April 2013 period under the LTIP grant at 30% and the pro-rated award in relation to the May 2013-December 2015 period under the LTIP grant at 100%. 2 An average 2015 exchange rate of 1.9524 Canadian dollars to 1 GBP has been used in respect of 2015. Scheme interests awarded during 2015 (audited) During 2015, awards over a cash sum were granted under the 2015-2017 Group LTIP to each executive director as set out below. These awards will vest, and the cash sum will be transferred to the award holder, in March 2018, to the extent that the applicable performance targets are met. The vesting date for these awards is the date the Group’s 2017 results are announced, in March 2018. 124 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE Maximum cash sum subject to the Award (% base salary) Award Date Face value of award at grant £000s Cash award if threshold performance achieved (% base salary) End of the period over which the performance targets have to be fulﬁlled Executive directors 2015-2017 Group LTIP Mark Hews 2015 2017 17 June 100% 368 20% 31 December S. Jacinta Whyte1 2015 2017 17 June 100% 280 20% 31 December Ian Campbell 2015 2017 17 June 100% 250 20% 31 December Performance measures2 Group EIG PBT (excluding fair value investment gains /losses) (20%) Group EIG PBT (including fair value investment gains /losses) (20%) Group COR (20%) Strategic targets (20%) Customers and conduct. (20%) ¹ An average 2015 exchange rate of 1.9524 Canadian dollars to 1 GBP has been used. ² Vesting occurs on a straight line basis between pre-determined milestones set in relation to threshold, target and maximum performance. These will be disclosed on a retrospective basis in the Directors' Remuneration Report for the year for which the Group LTIP awards vest. Percentage change in remuneration of Group Chief Executive The table below shows the percentage year-on-year change in salary, beneﬁts and annual bonus (from 2014 to 2015) for the Group Chief Executive compared with UK-based employees1. The Committee has selected this comparator group as being the most appropriate because the composition and structure of remuneration for this group most closely reﬂects that of the Group Chief Executive. Group Chief Executive Average UK-based employees ¹ % change % change Salary Taxable beneﬁts² Annual bonus 5.0% 5.7% 17.5%3 4.4% 5.7% (5.5)% ¹ UK-based employees of Ecclesiastical Insurance Ofﬁce plc; excluding employees in SEIB. ² Based on contractual P11D taxable beneﬁts for the tax year ending 5 April in the relevant year. 3 As set out in the Directors' Remuneration Report for 2014, a revised Group annual bonus arrangement was introduced for executive directors in 2015. The Group annual bonus award in 2014 was made under the previous scheme. Relative importance of spend on pay The table below sets out for 2015 and 2014, the actual expenditure on employee remuneration; grants paid to ATL and dividends paid to Preference shareholders. PBT in each year is provided for context. Remuneration paid to all Group employees 62,706 62,660 0.1% Gross charitable grants to the ultimate parent company, Allchurches Trust Limited 20,000 23,500 (14.9)% Non-Cumulative Irredeemable Preference share dividend 9,181 9,181 Nil PBT 53,605 48,154 11.3% 2015 £000 2014 £000 % change ANNUAL REPORT & ACCOUNTS 2015 125 SECTION THREE – GOVERNANCE Group Chief Executive pay for performance comparison As Ecclesiastical does not have equity shares traded on a regulated market, total equity shareholders’ funds growth over time as reported each year (plus the grant to ATL) has been used in the performance graph compared with the FTSE 100. Total equity excludes Preference shareholders’ capital since this is not attributable to ATL. Ecclesiastical Insurance Ofﬁce plc 7-year to 2015 TSR performance against the FTSE 100 l i g n d o h 0 0 1 £ l a c i t e h t o p y h f o e u a V l 200 150 100 50 0 FTSE 100 Total Return Ecclesiastical Total Shareholder Return Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 The table below shows the single ﬁgure of total remuneration for the incumbent and prior Group Chief Executive for the seven years to 31 December 2015. Financial year Total remuneration (single ﬁgure) £000 Annual bonus received (% of maximum) Long-term incentive vesting (% of maximum) Group Chief Executive1 Mark Hews Michael Tripp Mark Hews Michael Tripp Mark Hews Michael Tripp3 Financial year ending 31 December 2009 2010 2011 2012 2013 2014 2015 N/A 516 N/A 88% N/A 27% N/A 430 N/A 23% N/A 27% N/A 416 N/A 0% N/A 34% N/A 390 N/A 0% N/A 0% 569 330 45% N/A² 4% 4% 907 162 78% N/A 60% 47% 1,089 N/A 88% N/A 70% N/A 1 Michael Tripp resigned from the Board on 21 May 2013 and Mark Hews was appointed Group Chief Executive on 1 May 2013, having previously held the position of Group Chief Financial Ofﬁcer. The total remuneration single ﬁgure value for both Michael Tripp and Mark Hews is shown for 2013. ² Michael Tripp received no payment under the annual bonus or the executive director’s LTIP for performance in 2013. He did, however, receive a payment (£100k) under the terms of a discretionary arrangement put in place to incentivise the delivery of a smooth transition of the management to the successor in the role of Group Chief Executive. The maximum opportunity was capped at three months' salary. ³ Michael Tripp received a 2013 LTIP payment in respect of performance in the years 2011 and 2012 (only) under the 2011-2013 LTIP. He received a 2014 LTIP payment in respect of performance in 2012 (only) under the 2012-2014 LTIP. Statement of directors’ shareholdings and share interests Directors’ shareholdings and share interests are set out in the Directors' Report on page 83. 126 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE Directors’ service agreements All directors are proposed for re-election at the next general meeting (excluding Will Samuel and David Christie as they will resign as directors on 16 March 2016). Mark Hews has a service contract which provides for a notice period of twelve months by the Company. S. Jacinta Whyte and Ian Campbell have service contracts which provide for a notice period of six months by the Company. No non-executive director has a service contract. Payments for loss of ofﬁce (audited) No termination payments were made to executive directors in 2015. Early vesting of LTIP award There is no early vesting of the executive directors’ LTIP. For good leavers, grants vest on the original anniversary date. Any payment is then pro-rated to reﬂect employment during the 36-month performance period. Payments to past directors (audited) No payments were made to past directors. Single total ﬁgure of remuneration for NEDs (audited) NEDs do not participate in any of the Group’s incentive arrangements nor do they receive any beneﬁts. NEDs' travel and accommodation costs for attendance at Board meetings are reimbursed by the Group and are classed as a taxable beneﬁt when they are in respect of travel to their permanent workplace. NED fees were reviewed in December 2015 with increased fees becoming effective from 1 January 2016. We believe that it is appropriate to reﬂect the level of fees paid by organisations of similar size and complexity and that this will enable us to attract NEDs of the calibre we require to help us to implement our future strategy. The increases (set out below) reﬂect the continuing increases in workloads in recent years and are designed to bring fees in line with those paid at similar-sized companies, ensuring that the Group will continue to be able to attract NEDs with the range of experience and skills to oversee the implementation of our Strategy. Non-executive directors Will Samuel1 David Christie John Hylands Anthony Latham Denise Wilson The Venerable Christine Wilson 2 Tim Carroll Caroline Taylor3 Total Fees (£000) Fees (£000) 2015 2014 68 60 55 55 53 45 53 45 68 60 55 55 53 45 53 16 434 405 ¹ The Chairman has waived £27k of his 2015 fee, which was increased to £95k from 1 January 2014. 2 The Venerable Christine Wilson’s fees are paid directly to charity at her request. 3 Caroline Taylor was appointed to the Board on 8 September 2014. ANNUAL REPORT & ACCOUNTS 2015 127 SECTION THREE – GOVERNANCE Total aggregate emoluments of directors The total aggregate remuneration of the directors in respect of qualifying services during 2015 was £2,257k (2014: £1,958k). After inclusion of amounts receivable under long-term incentive schemes and pension beneﬁts, the total aggregate emoluments of the directors was £2,775k (2014: £2,382k). The 2014 ﬁgures have been adjusted to reﬂect changes made to prior year ﬁgures as mentioned in the single ﬁgure table on page 122. EdenTree During 2015, EdenTree applied to the FCA for a Variation of Permission to remove its permission to hold client assets and limit the client money permission to its non-MiFID business. As a result of the approval by the FCA of the Variation of Permission on 7 October 2015, EdenTree was re-categorised as a limited licence investment management ﬁrm under BIPRU, at proportionality level 3 for reporting purposes. EdenTree has been subject to the FCA Remuneration Code since 1 January 2011. EdenTree operates a remuneration policy which is compliant with the Remuneration Code, details of which can be found in the EdenTree Pillar 3 statement on EdenTree’s website (www.edentreeim.com). Statement of implementation of Remuneration Policy in 2016 The implementation of the remuneration policy will be consistent with that outlined in the Directors’ Remuneration Policy above. Details of how this policy will apply in 2016 are set out below. Salary (executive directors) Executive directors’ salaries are reviewed annually in line with the Directors’ Remuneration Policy. The following salaries will apply from 1 April 2016. Executive directors Salary (£000) Salary (£000) Percentage 1 April 2016 1 April 2015 increase Mark Hews S. Jacinta Whyte1 Ian Campbell 396 301 269 386 294 263 2.5% 2.5% 2.5% 1 An average 2015 exchange rate of 1.9524 Canadian dollars to 1 GBP has been used. These increases are consistent with the average increases awarded across the broader employee population. Annual bonus for 2016 The annual bonus performance conditions and targets will be set in accordance with the Directors’ Remuneration Policy above, on the same basis as 2015. As in 2015, the annual bonuses payable to executive directors in respect of 2016 will be assessed based on both Group and individual performance. Individual performance is subject to delivery of personal performance objectives and performance in line with the Group’s behavioural competency framework for strategic leaders. Group performance is subject to the four performance conditions which together form the Group performance multiplier. For 2016, these will continue to be Group EIG PBT (including fair value investment gains and losses) (30%); Group COR (40%); delivery of Group strategic initiatives in line with the Group’s strategic plan (15%); and Customer and Conduct performance (15%). The overall bonus outturn for each executive director 128 ANNUAL REPORT & ACCOUNTS 2015 CORPORATE GOVERNANCE is the product of personal performance percentage and the aggregate Group performance multiplier. The maximum opportunity under the annual bonus plan in 2016 is unchanged at 100% of salary. Annual bonuses in respect of 2016 will be subject to deferral over a period of three (2014: two) years of any bonus earned in excess of 75% of an executive director’s maximum bonus opportunity. LTIP for 2016-2018 The 2016-2018 LTIP performance conditions and targets will be set in accordance with the Directors’ Remuneration Policy above, on the same basis as the 2015-2017 LTIP. The 2016-2018 Group LTIP will be subject to the following performance conditions (which are unchanged from 2015): Group EIG PBT (excluding fair value investment gains and losses) (20%); Group EIG PBT (including fair value investment gains and losses) (20%); Group COR (20%); delivery of Group strategic initiatives in line with the Group’s strategic plan (20%); and Customer and Conduct performance (20%). Awards under the 2016-2018 Group LTIP will be up to 100% of salary (unchanged from 2015). Discretionary bonus arrangements The Group Chief Executive’s three-year incentive plan and the Deputy Group Chief Executive’s three-year incentive plan will continue to operate during 2016, as set out on pages 114 to 117. Fees (non-executive directors) Non-executive directors’ fees are reviewed every two years and were reviewed during 2015. The following fees will apply from 1 January 2016. The increases shown reﬂect the increased workloads in recent years and are designed to bring fees in line with those paid at similar-sized companies. All-inclusive fee for the Group Chairman All-inclusive fee for the Deputy Chairman / SID Basic Fee for a non-executive director (including Committee Membership) Fee for chairing the Group Finance and Investment Committee Fee for chairing the Group Nominations Committee Fee for chairing the Group Audit Committee Fee for chairing the Group Remuneration Committee Fee for chairing the Group Risk Committee Fees (£000) 125 65 50 8 8 10 10 10 ANNUAL REPORT & ACCOUNTS 2015 129 SECTION THREE – GOVERNANCE Independent Auditor’s Report To the Members of Ecclesiastical Insurance Ofﬁce plc Opinion on ﬁnancial statements of Ecclesiastical Insurance Ofﬁce plc Going concern and the directors’ assessment of the principal risks that would threaten the solvency or liquidity of the Group In our opinion: the ﬁnancial statements give a true and fair view of the state of the Group’s and of the Parent company’s affairs as at 31 December 2015 and of the Group’s proﬁt for the year then ended; the Group ﬁnancial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; the Parent company ﬁnancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the ﬁnancial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group ﬁnancial statements, Article 4 of the International Accounting Standards (“IAS”) Regulation. The ﬁnancial statements comprise Consolidated Statement of Proﬁt or Loss, the Consolidated and Parent Statement of Comprehensive Income, the Consolidated and Parent Statement of Changes in Equity, the Consolidated and Parent Statement of Financial Position and the Consolidated and Parent Statement of Cash Flows and the related notes 1 to 35. The ﬁnancial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the Parent company ﬁnancial statements, as applied in accordance with the provisions of the Companies Act 2006. We have nothing material to add or draw attention to in relation to: the directors' conﬁrmation on page 84 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; the disclosures on pages 51 to 58 that describe those risks and explain how they are being managed or mitigated; the directors’ statement in note 1 to the ﬁnancial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identiﬁcation of any material uncertainties to the Group’s ability to continue to do so over a period of at least twelve months from the date of approval of the ﬁnancial statements; director's explanation on page 58 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualiﬁcations or assumptions. 130 ANNUAL REPORT & ACCOUNTS 2015 INDEPENDENT AUDITOR'S REPORT Independence We agreed with the directors’ adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern. Our assessment of risks of material misstatement We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors and we conﬁrm that we are independent of the Group and we have fulﬁlled our other ethical responsibilities in accordance with those standards. We also conﬁrm we have not provided any of the prohibited non-audit services referred to in those standards. The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. Risk How the scope of our audit responded to the risk General Insurance Technical Reserves The assessment of the calculation of the general insurance technical reserves requires management to make signiﬁcant judgements about the quantum of the reported losses and the estimated incurred but not reported (“IBNR”) losses based on past experience and current expectations of future cost levels. Gross provisions for outstanding claims total £552m (2014: £564m), with IBNR a portion of this, as set out in note 28 to the ﬁnancial statements. The more judgemental areas of reserving are considered higher risk, being the liability claims reserves and in particular the ‘PSA’ reserves, referred to by the Group Audit Committee in their report on page 100. Carrying Value of Goodwill The assessment of impairment of goodwill is a judgemental process which requires estimates concerning the estimated future cash ﬂows and associated discount rates and growth rates based on management’s view of future business prospects. The Group’s intangible assets include £24m (2014: £24m) of goodwill relating to acquisitions; material goodwill is held in respect of the brokers SEIB and Lansdown, as set out in note 17 to the ﬁnancial statements. We challenged the key judgements within the calculation of the general insurance reserves by working with our general insurance actuarial specialists to speciﬁcally assess the movements in prior year reserves, material changes in methodology and assumptions and the impact of claims experience in the year. Key assumptions and methodologies were benchmarked using our industry knowledge and speciﬁc peer benchmarking. Particular areas of focus were PSA, asbestos, employers’ and public liability and UK ﬂooding IBNR, as the most judgemental reserves. We also evaluated the design and implementation of key controls around reserving, including, with the input of our IT audit specialists, the IT controls, and the completeness and accuracy of the underlying data used in the reserving. We challenged management’s key assumptions used in the impairment model for goodwill, relating to estimated future cash ﬂows, growth rates and the discount rate applied. Our valuation experts calculated independently a discount rate range which we would consider appropriate and we compared this to management’s selected rate. We also compared the cash ﬂows used in the value in use calculation to the most recent signed off business plans and challenged the appropriateness of growth rates applied into the future. Furthermore, we tested the mathematical accuracy of management’s calculations and developed a sensitivity analysis, having evaluated the design and implementation of controls around the impairment review process. Life Insurance Reserves The assessment of the calculation of the life insurance reserves requires management to make signiﬁcant judgements about bond yields, discount rates, credit risk, mortality rates and current expectations of future expense levels. Although closed for new business, the Group’s maintains reserves for existing business of £85m (2014: £94m), as set out in note 28 to the ﬁnancial statements. We evaluated the key judgements underpinning the calculation of the life insurance reserves by working with our internal life actuarial specialists to benchmark the key assumptions to those used in the market and against the company’s experience. We also evaluated the design and implementation of key controls around the life reserving and the completeness and accuracy of underlying data used in the reserving, including whether key assumptions were used appropriately in the model. ANNUAL REPORT & ACCOUNTS 2015 131 SECTION THREE – GOVERNANCE Risk How the scope of our audit responded to the risk Assumptions Underpinning the Calculation and Recognition of Retirement Beneﬁt Obligations and recognition of surpluses The determination of the value of the surpluses and deﬁcits relating to the Group’s deﬁned beneﬁt pension schemes and liability relating to post-employment medical beneﬁts requires signiﬁcant judgement in the selection of key assumptions and is highly sensitive to such assumptions. Management makes signiﬁcant judgements in respect of mortality, medical expense inﬂation, discount rates and inﬂation rate. The Group recognises a total of £11m (2014: £21m) for pension schemes in surplus and a deﬁcit of £240k (2014: £250k) for one scheme; the post-employment medical beneﬁts scheme has a liability of £9m (2014: £13m), as set out in note 19 to the ﬁnancial statements, along with the key assumptions and a sensitivity analysis. We evaluated the appropriateness of the assumptions used in deriving the deﬁned beneﬁt pension and post-retirements medical beneﬁts balances by working with our internal pension actuarial experts to benchmark the assumptions in respect of the discount rate, inﬂation rate and mortality assumptions to those observed in the market. We evaluated the design and implementation of key controls around DB pension scheme balances and the completeness and accuracy of underlying data used in the calculation of the retirement beneﬁt obligations. Furthermore, we assessed management’s ownership and valuation of pension scheme assets, held at fair value, by comparison to observable market prices and custodian statements. Finally, we evaluated the accessibility of the surplus on the main scheme with reference to the latest interpretations of the applicable accounting standards and advice received by management from external parties. Revenue Recognition We have identiﬁed earning patterns applied to gross written premiums (“GWP”) and the risk of data from policy administration systems not being reﬂected appropriately as our revenue risks for general insurance business and we have identiﬁed the calculation of management fees as the revenue risk for investment management business. GWP totalled £308m (2014: £329m) for the year, EdenTree Investment Management’s management fee income totalled £10m (2014: £10m). We have tested the design and implementation and operating effectiveness of the key controls over revenue recognition and underwriting. We focussed our work on the automated controls and interfaces between the underlying policy administration systems and the general ledger. Furthermore, we performed tests of details on the gross and unearned premium balances, agreeing a sample to policy documents and cash receipts where appropriate. We also performed substantive analytical procedures on the writing patterns and unearned premium percentage. Our IT audit specialists were involved in the testing of systems and controls and also in performing data analytics on the premiums population to enable selection of a risk-weighted sample for detailed testing. EdenTree management fee income was tested by recalculation and we performed analytical procedures, focussing on fees earned compared to funds under management, throughout the year. The description of risks above should be read in conjunction with the signiﬁcant issues considered by the Audit Committee discussed on page 100 and 101. These matters were addressed in the context of our audit of the ﬁnancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Our application of materiality We deﬁne materiality as the magnitude of misstatement in the ﬁnancial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or inﬂuenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. We determined materiality for the Group to be £5.0m (2014: £3.1m), which is 1% of total shareholders’ equity (2014: 1%) and 1.6% (2014: 1%) of gross written premiums. We have used total shareholders’ equity as a base for our materiality, which is a change from 2014, where we used gross written premium as our base. We have used 1% of total shareholders’ equity in determining an appropriate materiality in line with size and risk proﬁle of the Group. We have changed the basis as the main focus of the Group is long-term value generation; the strategic focus of the Group has shifted in recent years away from targeting GWP growth and towards the ambition to deliver longer-term value and support charitable giving. This ensures our judgement on materiality remains in line with the focus and risk proﬁle of the Group. We agreed with the Group Audit Committee that we would report to the Committee all audit differences in excess of £96k (2014: £62k) for the Group, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identiﬁed when assessing the overall presentation of the ﬁnancial statements and smaller differences relating to small subsidiaries, in the context of their entity materialities. 132 ANNUAL REPORT & ACCOUNTS 2015 INDEPENDENT AUDITOR'S REPORT An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, we focused our Group audit scope primarily on the audit work for the insurance businesses in the UK, Ireland, Australia and Canada. All non-dormant subsidiaries, consolidated in the ﬁnancial statements, were subject to a full scope statutory audit, executed at levels of materiality applicable to each individual entity, in the range £0.1k to £4.3m. The Group audit team continued to follow a programme of planned visits that has been designed so that a senior member of the Group audit team visits each of the locations where the Group audit scope was focused at least once every three years. We include the component audit teams in our team brieﬁngs, discuss their risk assessments, and review documentation of the ﬁndings from their work. This year, the Group Audit Senior Manager visited the Canadian Branch of EIO plc, as well as usual visits to UK-based components. At the Parent entity level we also tested the consolidation process and carried out analytical procedures to conﬁrm our conclusion that there were no signiﬁcant risks of material misstatement of the aggregated ﬁnancial information of the remaining components not subject to audit or audit of speciﬁed account balances. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, the information given in the Strategic Report and the Directors’ Report for the ﬁnancial year for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements. Directors’ remuneration Other matters In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the provisions of the Companies Act 2006 that would have applied were the company a quoted company. Corporate Governance Statement Although not required to do so, the Directors have voluntarily chosen to make a corporate governance statement detailing the extent of their compliance with the UK Corporate Governance Code. We reviewed the part of the Corporate Governance Statement relating to the company’s compliance with certain provisions of the UK Corporate Governance Code. We have nothing to report arising from our review. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: we have not received all the information and explanations we require for our audit; or adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or the Parent company ﬁnancial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report if, in our opinion, certain disclosures of Directors’ remuneration have not been made. We have nothing to report arising from this matter. ANNUAL REPORT & ACCOUNTS 2015 133 SECTION THREE – GOVERNANCE Respective responsibilities of directors and auditor Scope of the audit of the ﬁnancial statements Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: materially inconsistent with the information in the audited ﬁnancial statements; or apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or otherwise misleading. In particular, we are required to consider whether we have identiﬁed any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We conﬁrm that we have not identiﬁed any such inconsistencies or misleading statements. As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the ﬁnancial statements and for being satisﬁed that they give a true and fair view. Our responsibility is to audit and express an opinion on the ﬁnancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and/or those further matters we have expressly agreed to report to them on in our engagement letter and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. An audit involves obtaining evidence about the amounts and disclosures in the ﬁnancial statements sufﬁcient to give reasonable assurance that the ﬁnancial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signiﬁcant accounting estimates made by the directors; and the overall presentation of the ﬁnancial statements. In addition, we read all the ﬁnancial and non-ﬁnancial information in the annual report to identify material inconsistencies with the audited ﬁnancial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Paul Stephenson BA FCA (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 16 March 2016 134 ANNUAL REPORT & ACCOUNTS 2015 SECTION FOUR – FINANCIAL STATEMENTS Consolidated Statement of Proﬁt or Loss Consolidated and Parent Statement of Comprehensive Income 136 137 Consolidated and Parent Statement of Changes in Equity 138 Consolidated and Parent Statement of Financial Position 139 Consolidated and Parent Statement of Cash Flows Notes to the Financial Statements 140 141 r o t c o r P r a k s O y b h p a r g o t o h P ANNUAL REPORT & ACCOUNTS 2015 ANNUAL REPORT & ACCOUNTS 2015 135 135 CONSOLIDATED STATEMENT OF PROFIT OR LOSS for the year ended 31 December 2015 Revenue Gross written premiums Outward reinsurance premiums Net change in provision for unearned premiums Net earned premiums Fee and commission income Net investment return Total revenue Expenses Claims and change in insurance liabilities Reinsurance recoveries Fees, commissions and other acquisition costs Other operating and administrative expenses Total operating expenses Operating profit Finance costs Profit before tax Tax expense Profit for the year (attributable to equity holders of the Parent) Notes 5, 6 6 6 7 8 8 9 5 13 10 2015 £000 2014 £000 308,199 (113,115) 4,677 199,761 53,009 43,228 295,998 (163,916) 66,925 (61,202) (84,099) (242,292) 53,706 (101) 53,605 (6,988) 46,617 328,797 (135,132) 31,178 224,843 62,258 46,197 333,298 (197,170) 62,306 (70,813) (79,381) (285,058) 48,240 (86) 48,154 (7,837) 40,317 136 ANNUAL REPORT & ACCOUNTS 2015 CONSOLIDATED AND PARENT STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2015 Profit for the year Other comprehensive income Items that will not be reclassified to profit or loss: Fair value gains on property Actuarial losses on retirement benefit plans Attributable tax Items that may be reclassified subsequently to profit or loss: Losses on currency translation differences Net other comprehensive income Total comprehensive income attributable to equity holders of the Parent 2015 Group £000 Parent £000 2014 Group £000 46,617 42,759 40,317 30 (5,809) 1,061 (4,718) (6,461) (11,179) 30 (5,809) 1,061 (4,718) (3,913) (8,631) 30 (13,184) 2,647 (10,507) (1,697) (12,204) Parent £000 31,359 30 (13,184) 2,647 (10,507) (405) (10,912) 35,438 34,128 28,113 20,447 ANNUAL REPORT & ACCOUNTS 2015 137 CONSOLIDATED AND PARENT STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2015 Group At 1 January 2015 Profit for the year Other net income/(expense) Total comprehensive income Dividends Gross charitable grant Tax relief on charitable grant Group tax relief in excess of standard rate Reserve transfers At 31 December 2015 At 1 January 2014 Profit for the year Other net income/(expense) Total comprehensive income Dividends Gross charitable grant Tax relief on charitable grant Group tax relief in excess of standard rate Reserve transfers At 31 December 2014 Parent At 1 January 2015 Profit for the year Other net income/(expense) Total comprehensive income Dividends Gross charitable grant Tax relief on charitable grant Group tax relief in excess of standard rate Reserve transfers At 31 December 2015 At 1 January 2014 Profit for the year Other net income/(expense) Total comprehensive income Dividends Gross charitable grant Tax relief on charitable grant Group tax relief in excess of standard rate Reserve transfers At 31 December 2014 Share capital £000 120,477 - - - - - - - - 120,477 120,477 - - - - - - - - 120,477 120,477 - - - - - - - - 120,477 120,477 - - - - - - - - 120,477 Share premium £000 Equalisation Revaluation reserve £000 reserve £000 Translation reserve £000 4,632 - - - - - - - - 4,632 4,632 - - - - - - - - 4,632 4,632 - - - - - - - - 4,632 4,632 - - - - - - - - 4,632 25,299 - - - - - - - (342) 24,957 25,837 - - - - - - - (538) 25,299 25,299 - - - - - - - (342) 24,957 25,837 - - - - - - - (538) 25,299 541 - 52 52 - - - - (97) 496 700 - 40 40 - - - - (199) 541 541 - 52 52 - - - - (97) 496 563 - 40 40 - - - - (62) 541 12,643 - (6,461) (6,461) - - - - - 6,182 14,340 - (1,697) (1,697) - - - - - 12,643 6,053 - (3,913) (3,913) - - - - - 2,140 6,458 - (405) (405) - - - - - 6,053 Retained earnings £000 331,041 46,617 (4,770) 41,847 (9,181) (20,000) 4,050 (6) 439 348,190 328,157 40,317 (10,547) 29,770 (9,181) (23,500) 5,053 5 737 331,041 263,370 42,759 (4,770) 37,989 (9,181) (20,000) 4,050 (246) 439 276,421 270,327 31,359 (10,547) 20,812 (9,181) (23,500) 5,053 (741) 600 263,370 Total £000 494,633 46,617 (11,179) 35,438 (9,181) (20,000) 4,050 (6) - 504,934 494,143 40,317 (12,204) 28,113 (9,181) (23,500) 5,053 5 - 494,633 420,372 42,759 (8,631) 34,128 (9,181) (20,000) 4,050 (246) - 429,123 428,294 31,359 (10,912) 20,447 (9,181) (23,500) 5,053 (741) - 420,372 The equalisation reserve is not distributable and must be kept in compliance with the insurance companies' reserves regulations. The revaluation reserve represents cumulative net fair value gains on owner-occupied property. The translation reserve arises on consolidation of the Group's and Parent's foreign operations. 138 ANNUAL REPORT & ACCOUNTS 2015 CONSOLIDATED AND PARENT STATEMENT OF FINANCIAL POSITION for the year ended 31 December 2015 Assets Goodwill and other intangible assets Deferred acquisition costs Deferred tax assets Pension assets Property, plant and equipment Investment property Financial investments Reinsurers' share of contract liabilities Current tax recoverable Other assets Cash and cash equivalents Current assets classified as held for sale Total assets Equity Share capital Share premium account Retained earnings and other reserves Total shareholders' equity Liabilities Insurance contract liabilities Finance lease obligations Provisions for other liabilities Pension liabilities Retirement benefit obligations Deferred tax liabilities Current tax liabilities Deferred income Other liabilities Total liabilities Notes 2015 Group £000 Parent £000 2014 Group £000 Parent £000 17 18 30 19 20 21 22 28 24 25 26 27 28 29 19 19 30 31 29,104 28,394 1,674 10,893 7,704 98,750 833,390 170,740 331 124,842 118,441 - 1,424,263 120,477 4,632 379,825 504,934 790,690 1,431 4,066 240 9,193 34,124 3,403 15,532 60,650 919,329 4,206 24,582 - 10,893 6,922 98,750 682,549 130,414 331 96,547 84,779 - 1,139,973 120,477 4,632 304,014 429,123 605,824 1,431 3,890 240 9,193 33,511 2,308 13,079 41,374 710,850 28,998 31,117 1,295 21,068 6,405 69,775 886,186 157,465 - 119,394 107,526 6,204 1,435,433 120,477 4,632 369,524 494,633 820,328 1,259 3,588 250 12,547 36,014 5,767 16,432 44,615 940,800 4,230 26,974 11 21,068 5,693 69,775 714,428 115,004 - 102,239 77,774 - 1,137,196 120,477 4,632 295,263 420,372 618,887 1,259 2,770 250 12,547 35,559 4,962 13,443 27,147 716,824 Total shareholders' equity and liabilities 1,424,263 1,139,973 1,435,433 1,137,196 The financial statements of Ecclesiastical Insurance Office plc, registered number 24869, on pages 136 to 195 were approved and authorised for issue by the Board of Directors on 16 March 2016 and signed on its behalf by: Will Samuel Chairman Mark Hews Group Chief Executive ANNUAL REPORT & ACCOUNTS 2015 139 CONSOLIDATED AND PARENT STATEMENT OF CASH FLOWS for the year ended 31 December 2015 NOTES TO THE FINANCIAL STATEMENTS Profit before tax Adjustments for: Depreciation of property, plant and equipment Revaluation of property, plant and equipment Loss/(profit) on disposal of property, plant and equipment Amortisation and impairment of intangible assets Loss on disposal of intangible assets Net fair value (gains)/losses on financial instruments and investment property Dividend and interest income Finance costs Changes in operating assets and liabilities: Net decrease in insurance contract liabilities Net (increase)/decrease in reinsurers' share of contract liabilities Net decrease in deferred acquisition costs Net (increase)/decrease in other assets Net increase in operating liabilities Net increase/(decrease) in other liabilities Cash (used)/generated by operations Purchases of financial instruments and investment property Sale of financial instruments and investment property Dividends received Interest received Interest paid Tax (paid)/recovered Net cash from operating activities Cash flows from investing activities Purchases of property, plant and equipment Proceeds from the sale of property, plant and equipment Purchases of intangible assets Acquisition of business, net of cash acquired Acquisition of shares issued by subsidiary Disposal of business Net cash from/(used by) investing activities Cash flows from financing activities Payment of finance lease liabilities Payment of group tax relief in excess of standard rate Dividends paid to Company's shareholders Donations paid to ultimate parent undertaking Net cash used by financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Exchange losses on cash and cash equivalents Cash and cash equivalents at end of year 2015 Group £000 Parent £000 2014 Group £000 53,605 47,926 48,154 1,708 (140) 16 1,397 11 (7,737) (29,934) 101 (15,193) (17,068) 1,754 (6,316) 14,884 866 (2,046) (103,333) 122,519 8,714 23,868 (101) (6,886) 42,735 (2,657) 260 (1,817) - - 5,260 1,046 (331) - (9,181) (20,000) (29,512) 14,269 107,526 (3,354) 118,441 1,555 (90) (18) 1,116 - (10,665) (25,792) 101 (5,004) (16,666) 1,670 5,825 12,935 1,484 14,377 (75,141) 81,436 11,194 16,984 (101) (5,218) 43,531 (2,437) 260 (1,392) - - - (3,569) (331) (746) (9,181) (20,000) (30,258) 9,704 77,774 (2,699) 84,779 1,638 - (32) 1,751 19 (8,918) (34,709) 86 (21,413) (26,814) 3,327 3,792 8,814 (3,498) (27,803) (152,899) 185,401 8,624 26,889 (86) 1,127 41,253 (1,369) 677 (1,548) (5,000) - - (7,240) (359) (15) (9,181) (23,500) (33,055) 958 107,241 (673) 107,526 Parent £000 35,644 1,464 - (13) 1,092 - 739 (26,150) 86 (41,066) 6,087 3,377 4,725 1,777 (4,177) (16,415) (123,780) 144,870 7,863 18,774 (86) 2,512 33,738 (1,171) 126 (1,547) - (300) - (2,892) (359) (122) (9,181) (23,500) (33,162) (2,316) 80,430 (340) 77,774 140 ANNUAL REPORT & ACCOUNTS 2015 1 Accounting policies Ecclesiastical Insurance Office plc (hereafter referred to as the ‘Company’, or ‘Parent’), a public limited company incorporated and domiciled in England, together with its subsidiaries (collectively, the ‘Group’) operates principally as a provider of general insurance and in addition offers a range of financial services, with offices in the UK & Ireland, Australia and Canada. The principal accounting policies adopted in preparing the Group's International Financial Reporting Standards (IFRS) financial statements are set out below. The Group’s consolidated financial statements have been prepared using the following accounting policies, which are in accordance with IFRS applicable at 31 December 2015 issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). The financial statements have been prepared on the historical cost basis, except for the revaluation of properties and certain financial Basis of preparation instruments. The Financial Performance and Risk Management sections of the Strategic Report provide a review of the Group’s business activities and describe the principal risks and uncertainties, including exposures to insurance, financial, operational and strategic risk. The Group has considerable financial resources: financial investments of £833.4m, 96% of which are liquid (2014: financial investments of £892.4m (including current assets classified as held for sale), 98% liquid); cash and cash equivalents of £118.4m and no borrowings (2014: cash and cash equivalents of £107.5m and no borrowings); and a regulatory enhanced capital cover of 3.0 (2014: 2.9). Liquid financial investments consist of listed equities and OEICs, government bonds and listed debt. As a consequence, the directors have a reasonable expectation that the Group is well placed to manage its business risks successfully and continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. In accordance with IFRS 4, Insurance Contracts , on adoption of IFRS the Group applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards, introducing changes only where they provide more reliable and relevant information. Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the 'functional currency'). The consolidated financial statements are stated in sterling, which is the Company’s functional and presentation currency. As permitted by Section 408 of the Companies Act 2006, a separate profit and loss account for the Company is not presented. New and revised Standards The Standards adopted in the current year are either outside the scope of Group transactions or do not materially impact the Group. The following Standards were in issue but not yet effective and have not been applied in these financial statements. Accounting Standard Key requirements Expected impact on financial statements Effective date IFRS 9, Financial Provides a new model for the It is expected that equity instruments will continue Annual periods Instruments classification and measurement to be measured at fair value through profit or loss. beginning on or of financial instruments, a single, There is a possibility that the measurement of after 1 January forward-looking ‘expected loss’ certain debt instruments will change to amortised 2018. Although impairment model and a reformed cost or fair value through other comprehensive expected to be approach to hedge accounting. income, although this is being assessed and deferred until 2020 depends on the conclusion of IFRS 4 Phase II, the or 2021 for entities IASB's ongoing insurance accounting project. that issue insurance contracts. IFRS 15, Revenue Establishes principles for Insurance contracts are outside the scope of the Annual periods from Contracts with reporting useful information to Standard. The impact on fee and commission beginning on or Customers users of financial statements income is being assessed. There is the possibility of after 1 January about the nature, amount, timing commission income being recognised earlier if a 2018 (effective and uncertainty of revenue and contract is approved and consideration is probable. date deferred by cash flows arising from an entity’s Variable consideration will be recognised earlier if one year during the contracts with customers. receipt is considered highly probable. current year). IFRS 16, Leases Provides a single lessee The Group is currently assessing the full impact of Annual periods accounting model, requiring IFRS 16. As operating leases (as disclosed in note beginning on or lessees to recognise assets and 32) are in place for the majority of the Group’s after 1 January liabilities for all leases unless the offices, these changes will significantly increase the 2019 (subject to term is 12 months or less or the value of both assets and liabilities recognised in the EU endorsement). underlying asset has a low value. financial statements. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies 1 Accounting policies Ecclesiastical Insurance Office plc (hereafter referred to as the ‘Company’, or ‘Parent’), a public limited company incorporated and domiciled in Ecclesiastical Insurance Office plc (hereafter referred to as the ‘Company’, or ‘Parent’), a public limited company incorporated and domiciled in England, together with its subsidiaries (collectively, the ‘Group’) operates principally as a provider of general insurance and in addition offers a England, together with its subsidiaries (collectively, the ‘Group’) operates principally as a provider of general insurance and in addition offers a range of financial services, with offices in the UK & Ireland, Australia and Canada. The principal accounting policies adopted in preparing the range of financial services, with offices in the UK & Ireland, Australia and Canada. The principal accounting policies adopted in preparing the Group's International Financial Reporting Standards (IFRS) financial statements are set out below. Group's International Financial Reporting Standards (IFRS) financial statements are set out below. Basis of preparation Basis of preparation The Group’s consolidated financial statements have been prepared using the following accounting policies, which are in accordance with IFRS The Group’s consolidated financial statements have been prepared using the following accounting policies, which are in accordance with IFRS applicable at 31 December 2015 issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). applicable at 31 December 2015 issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). The financial statements have been prepared on the historical cost basis, except for the revaluation of properties and certain financial The financial statements have been prepared on the historical cost basis, except for the revaluation of properties and certain financial instruments. instruments. The Financial Performance and Risk Management sections of the Strategic Report provide a review of the Group’s business activities and The Financial Performance and Risk Management sections of the Strategic Report provide a review of the Group’s business activities and including exposures to insurance, financial, operational and strategic risk. The Group has describe the principal risks and uncertainties, including exposures to insurance, financial, operational and strategic risk. The Group has describe the principal risks and uncertainties, investments of £892.4m considerable financial resources: financial considerable financial resources: financial investments of £892.4m (including current assets classified as held for sale), 98% liquid); cash and cash equivalents of £118.4m and no borrowings (2014: cash and (including current assets classified as held for sale), 98% liquid); cash and cash equivalents of £118.4m and no borrowings (2014: cash and cash equivalents of £107.5m and no borrowings); and a regulatory enhanced capital cover of 3.0 (2014: 2.9). Liquid financial investments cash equivalents of £107.5m and no borrowings); and a regulatory enhanced capital cover of 3.0 (2014: 2.9). Liquid financial investments consist of listed equities and OEICs, government bonds and listed debt. As a consequence, the directors have a reasonable expectation that the consist of listed equities and OEICs, government bonds and listed debt. As a consequence, the directors have a reasonable expectation that the Group is well placed to manage its business risks successfully and continue in operational existence for the foreseeable future. Accordingly, Group is well placed to manage its business risks successfully and continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. they continue to adopt the going concern basis in preparing the annual report and accounts. investments of £833.4m, 96% of which are liquid (2014: financial investments of £833.4m, 96% of which are liquid (2014: financial In accordance with IFRS 4, Insurance Contracts , on adoption of IFRS the Group applied existing accounting practices for insurance and In accordance with IFRS 4, Insurance Contracts , on adoption of IFRS the Group applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards, introducing changes participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards, introducing changes only where they provide more reliable and relevant information. only where they provide more reliable and relevant information. Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the 'functional currency'). The consolidated financial statements are stated in sterling, which is the Company’s which that entity operates (the 'functional currency'). The consolidated financial statements are stated in sterling, which is the Company’s functional and presentation currency. functional and presentation currency. As permitted by Section 408 of the Companies Act 2006, a separate profit and loss account for the Company is not presented. As permitted by Section 408 of the Companies Act 2006, a separate profit and loss account for the Company is not presented. New and revised Standards New and revised Standards The Standards adopted in the current year are either outside the scope of Group transactions or do not materially impact the Group. The Standards adopted in the current year are either outside the scope of Group transactions or do not materially impact the Group. The following Standards were in issue but not yet effective and have not been applied in these financial statements. The following Standards were in issue but not yet effective and have not been applied in these financial statements. Accounting Standard Key requirements Accounting Standard Key requirements IFRS 9, Financial IFRS 9, Financial Instruments Instruments Provides a new model for the Provides a new model for the classification and measurement classification and measurement of financial instruments, a single, of financial instruments, a single, forward-looking ‘expected loss’ forward-looking ‘expected loss’ impairment model and a reformed impairment model and a reformed approach to hedge accounting. approach to hedge accounting. Expected impact on financial statements Expected impact on financial statements It is expected that equity instruments will continue It is expected that equity instruments will continue to be measured at fair value through profit or loss. to be measured at fair value through profit or loss. There is a possibility that the measurement of There is a possibility that the measurement of certain debt instruments will change to amortised certain debt instruments will change to amortised cost or fair value through other comprehensive cost or fair value through other comprehensive income, although this is being assessed and income, although this is being assessed and depends on the conclusion of IFRS 4 Phase II, the depends on the conclusion of IFRS 4 Phase II, the IASB's ongoing insurance accounting project. IASB's ongoing insurance accounting project. IFRS 15, Revenue IFRS 15, Revenue from Contracts with from Contracts with Customers Customers IFRS 16, Leases IFRS 16, Leases Establishes principles for Establishes principles for reporting useful information to reporting useful information to users of financial statements users of financial statements about the nature, amount, timing about the nature, amount, timing and uncertainty of revenue and and uncertainty of revenue and cash flows arising from an entity’s cash flows arising from an entity’s contracts with customers. contracts with customers. Provides a single lessee Provides a single lessee accounting model, requiring accounting model, requiring lessees to recognise assets and lessees to recognise assets and liabilities for all leases unless the liabilities for all leases unless the term is 12 months or less or the term is 12 months or less or the underlying asset has a low value. underlying asset has a low value. Insurance contracts are outside the scope of the Insurance contracts are outside the scope of the Standard. The impact on fee and commission Standard. The impact on fee and commission income is being assessed. There is the possibility of income is being assessed. There is the possibility of commission income being recognised earlier if a commission income being recognised earlier if a contract is approved and consideration is probable. contract is approved and consideration is probable. Variable consideration will be recognised earlier if Variable consideration will be recognised earlier if receipt is considered highly probable. receipt is considered highly probable. The Group is currently assessing the full impact of The Group is currently assessing the full impact of IFRS 16. As operating leases (as disclosed in note IFRS 16. As operating leases (as disclosed in note 32) are in place for the majority of the Group’s 32) are in place for the majority of the Group’s offices, these changes will significantly increase the offices, these changes will significantly increase the value of both assets and liabilities recognised in the value of both assets and liabilities recognised in the financial statements. financial statements. Effective date Effective date Annual periods Annual periods beginning on or beginning on or after 1 January after 1 January 2018. Although 2018. Although expected to be expected to be deferred until 2020 deferred until 2020 or 2021 for entities or 2021 for entities that issue insurance that issue insurance contracts. contracts. Annual periods Annual periods beginning on or beginning on or after 1 January after 1 January 2018 (effective 2018 (effective date deferred by date deferred by one year during the one year during the current year). current year). Annual periods Annual periods beginning on or beginning on or after 1 January after 1 January 2019 (subject to 2019 (subject to EU endorsement). EU endorsement). ANNUAL REPORT & ACCOUNTS 2015 141 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies (continued) The other Standards in issue but not yet effective are not expected to materially impact the Group. Use of estimates The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates. Operating profit or loss Operating profit or loss is stated before finance costs. Basis of consolidation Subsidiaries Subsidiaries are those entities over which the Company, directly or indirectly, has control, with control being achieved when the Company has power over the investee, is exposed to variable return from its involvement with the investee and has the ability to use its power to affect its returns. The results and cash flows relating to subsidiaries acquired or disposed of in the year are included in the consolidated statement of profit or loss and the consolidated statement of cash flows from the date of acquisition or up to the date of disposal. All inter-company transactions, balances and profits are eliminated. In the Parent statement of financial position subsidiaries are accounted for within financial investments at cost, in accordance with International Accounting Standard (IAS) 27, Separate Financial Statements . The Group uses the acquisition method of accounting to account for business combinations. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the acquisition date. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Non- controlling interests are measured either at fair value or at a proportionate share of the identifiable net assets of the acquiree. Goodwill is measured as the excess of the aggregate of the consideration transferred, the fair value of contingent consideration, the non-controlling interests and, for an acquisition achieved in stages, the fair value of previously held equity interest over the fair value of the identifiable net assets acquired. If the cost of acquisition is less than the fair value of the net assets acquired, the difference is recognised directly through profit or loss. For business combinations involving entities or businesses under common control, the cost of the acquisition equals the value of net assets transferred, as recognised by the transferor at the date of the transaction. No goodwill arises on such transactions. Investment vehicles Investment vehicles such as mutual funds are consolidated when the Group has a controlling interest. Foreign currency translation The assets and liabilities of foreign operations are translated from their functional currencies into the Group's presentation currency using year end exchange rates, and their income and expenses using average exchange rates for the year. Exchange differences arising from the translation of the net investment in foreign operations are taken to the currency translation reserve within equity. On disposal of a foreign operation, such exchange differences are transferred out of this reserve and are recognised in the statement of profit or loss as part of the gain or loss on sale. Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the date of the transactions. Exchange gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised through profit or loss. Product classification Contracts under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder are classified as insurance contracts. Contracts that do not transfer significant insurance risk are classified as investment or service contracts. All of the Group's long-term business contracts are classified as insurance contracts. Both insurance and investment contracts may contain a discretionary participating feature, which is defined as a contractual right to receive additional benefits as a supplement to guaranteed benefits. The Group does not have any such participating contracts (referred to as with-profit contracts). The Company's long-term business contracts are referred to as non-profit contracts in the financial statements. Premium income General insurance business Premiums are shown gross of commission paid to intermediaries and accounted for in the period in which the risk commences. Estimates are included for premiums not notified by the year end and provision is made for the anticipated lapse of renewals not yet confirmed. Those proportions of premiums written in a year which relate to periods of risk extending beyond the end of the year are carried forward as unearned premiums. 142 ANNUAL REPORT & ACCOUNTS 2015 Premiums written include adjustments to premiums written in prior periods and estimates for pipeline premiums and are shown net of insurance premium taxes. Long-term business Insurance contract premiums are recognised as income when receivable, at which date the liabilities arising from them are also recognised. Fee and commission income Fee and commission income consists primarily of reinsurance commissions receivable in addition to income from the Group's insurance broking activities, investment fund management fees, distribution fees from mutual funds and commission revenue from the sale of mutual fund shares. Reinsurance commissions receivable and other commission income are recognised on the trade date. Income generated from insurance placements is recognised at the inception date of the cover. Fees charged for investment management services are recognised as revenue when the services are provided. Initial fees which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period in which services will be provided. Fees charged for investment management services for institutional and retail fund management are also recognised on this basis. Net investment return Net investment return consists of dividends, interest and rents receivable for the year, realised gains and losses, and unrealised gains and losses on financial instruments and investment properties. Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest and rental income is recognised as it accrues. Unrealised gains and losses are calculated as the difference between carrying value and original cost, and the movement during the year is recognised through profit or loss. The value of realised gains and losses includes an adjustment for previously recognised unrealised gains or losses on investments disposed of in the accounting period. Claims General insurance claims incurred include all losses occurring during the year, whether reported or not, related handling costs, a reduction for the value of salvage and other recoveries, and any adjustments to claims outstanding from previous years. Claims handling costs include all internal and external costs incurred in connection with the negotiation and settlement of claims. Long-term insurance business claims and death claims are accounted for when notified. Insurance contract liabilities General insurance provisions (i) Outstanding claims provisions General insurance outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the year end date, whether reported or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, the ultimate cost of which cannot be known with certainty at the year end date. An estimate is made representing the best estimate plus a risk margin within a range of possible outcomes. Designated insurance liabilities are remeasured to reflect current market interest rates. (ii) Provision for unearned premiums The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent periods is deferred as a provision for unearned premiums. The change in this provision is taken to profit or loss in order that revenue is recognised over the period of risk. (iii) Liability adequacy At each reporting date, the Group reviews its unexpired risks and carries out a liability adequacy test for any overall excess of expected claims and deferred acquisition costs over unearned premiums, using the current estimates of future cash flows under its contracts. Unexpired risks are assessed separately for each class of business. Surpluses and deficits are offset where business classes are considered to be managed together. Long-term business provisions Under current IFRS requirements, previously. insurance contract liabilities are measured using accounting policies consistent with those adopted The long-term business provision is determined using methods and assumptions approved by the directors based on advice from the Actuarial Function Holder. Initially it is calculated to comply with the reporting requirements under the Prudential Sourcebook for Insurers. This statutory solvency basis of valuation is then adjusted by eliminating or adjusting certain reserves advised under insurance companies' regulations and general contingency reserves. This adjusted basis is referred to as the modified statutory solvency basis. ANNUAL REPORT & ACCOUNTS 2015 143 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies (continued) Reinsurance The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as direct business. Outwards reinsurance premiums are accounted for in the same accounting period as the related premiums for the direct or inwards reinsurance business being reinsured. Estimates are included for premiums not notified by the year end and provision is made for the anticipated lapse of renewals not yet confirmed. The proportion of premiums ceded in a year which relates to periods of risk extending beyond the current year is carried forward as unearned. The Group does not reinsure its long-term business. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or the settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable assets and liabilities acquired at the date of acquisition. Goodwill on acquisitions prior to 1 January 2004 (the date of transition to IFRS) is carried at book value (original cost less amortisation) on that date, less any subsequent impairment. Where it is considered more relevant, the Group uses the option to measure goodwill initially at fair value, less any subsequent impairment. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Computer software Computer software is carried at historical cost less accumulated amortisation, and amortised over a useful life of between three and five years, using the straight-line method. The amortisation charge for the period is included in the statement of profit or loss within other operating and administrative expenses. Other intangible assets Other intangible assets consist of acquired brand, customer and distribution relationships, and are carried at cost at acquisition less accumulated amortisation after acquisition. Amortisation is on a straight-line basis over the weighted average estimated useful life of intangible assets acquired. The amortisation charge for the period is included in the statement of profit or loss within other operating and administrative expenses. Property, plant and equipment Owner-occupied properties are stated at open market value and movements are taken to the revaluation reserve within equity, net of deferred tax. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. Where the market value of an individual property is below original cost, any revaluation movement arising during the year is recognised within net investment return in the statement of profit or loss. Valuations are carried out at least every three years by external qualified surveyors. All other items classed as property, plant and equipment within the statement of financial position are carried at historical cost less accumulated depreciation. Land is not depreciated. No depreciation is provided on owner-occupied properties since such depreciation would be immaterial. Depreciation is calculated on the straight-line method to write down the cost of other assets to their residual values over their estimated useful lives as follows: Computer equipment Motor vehicles Fixtures, fittings and office equipment 3 - 5 years 27% reducing balance or length of lease 3 - 15 years Where the carrying amount of an item carried at historical cost less accumulated depreciation is greater than its estimated recoverable amount, it is written down to its recoverable amount by way of an impairment charge to profit or loss. Repairs and maintenance are charged to profit or loss during the financial period in which they are incurred. Investment property Investment property comprises land and buildings which are held for long-term rental yields. It is carried at fair value with changes in fair value recognised in the statement of profit or loss within net investment return. Investment property is valued annually by external qualified surveyors at open market value. 144 ANNUAL REPORT & ACCOUNTS 2015 Financial instruments IAS 39, Financial Instruments: Recognition and Measurement requires the classification of certain financial assets and liabilities into separate categories for which the accounting requirements differ. The classification depends on the nature and purpose of the financial assets and liabilities, and is determined at the time of initial recognition. Financial instruments are initially measured at fair value. Their subsequent measurement depends on their classification: - - Financial instruments designated as at fair value through profit or loss and those held for trading are subsequently carried at fair value. Changes in fair value are recognised through profit or loss in the period in which they arise. All other financial assets and liabilities are held at amortised cost, using the effective interest method (except for short-term receivables and payables when the recognition of interest would be immaterial). The directors consider that the carrying value of those financial assets and liabilities not carried at fair value in the financial statements approximates to their fair value. Offset of financial assets and financial liabilities Financial assets and liabilities are offset, and the net amount reported in the statement of financial position, when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Financial investments The Group classifies its financial trading) or loans and receivables. investments as either financial assets at fair value through profit or loss (designated as such or held for Financial assets at fair value through profit or loss Financial investments are classified into this category if they are managed, and their performance evaluated, on a fair value basis. Purchases and sales of these investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair value adjusted for transaction costs. Financial investments within this category are classified as held for trading if they are derivatives or acquired principally for the purpose of selling in the near term. The fair values of investments are based on quoted bid prices. Where there is no active market, fair value is established using a valuation technique based on observable market data where available. Loans and receivables Loans and receivables, comprising mortgages and other loans, are recognised when cash is advanced to borrowers. These are carried at amortised cost using the effective interest method. To the extent that a loan is uncollectable, it is written off as impaired. Subsequent recoveries are credited to profit or loss. instruments include financial Derivative financial instruments Derivative financial instruments that derive their value from underlying equity instruments. Group derivative transactions, while providing effective economic hedges under the Group’s risk management positions, do not qualify for hedge accounting under the specific IFRS rules and are therefore treated as derivatives held for trading. All derivatives are initially recognised in the statement of financial position at their fair value, which usually represents their cost, including any premium paid. They are subsequently remeasured at their fair value with changes in the fair value recognised immediately in net investment return. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities in the statement of financial position as they do not represent the fair value of these transactions. Collateral pledged by way of cash margins on futures contracts is recognised as an asset in the statement of financial position within cash and cash equivalents. Deferred acquisition costs General insurance business For general insurance business, a proportion of commission and other acquisition costs relating to unearned premiums is carried forward as deferred acquisition costs or, with regard to reinsurance outwards, as deferred income. Deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers’ share of deferred acquisition costs is amortised in the same manner as the underlying asset. Long-term business For insurance contracts, acquisition costs comprise direct costs such as initial commission and the indirect costs of obtaining and processing new business. Acquisition costs which are incurred during a financial year are deferred and amortised over the period during which the costs are expected to be recoverable, if applicable. ANNUAL REPORT & ACCOUNTS 2015 145 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies (continued) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Insurance broking debtors and creditors Where the Group acts as an agent in placing the insurable risks of clients with insurers, debtors arising from such transactions are not included in the Group's assets. When the Group receives cash in respect of resultant premiums or claims, a corresponding liability is established in other creditors in favour of the insurer or client. Where the Group provides premium finance facilities to clients, amounts due are included in other debtors, with the amount owing for onward transmission included in other creditors. Leases Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Payments made as lessees under operating leases are charged to profit or loss on a straight-line basis over the period of the lease. Rental income received as a lessor under operating leases is credited to profit or loss on a straight-line basis over the period of the lease. Lease incentives are recognised on a straight-line basis over the period of the lease. Leases, where a significant portion of the risks and rewards of ownership is transferred to the Group, are classified as finance leases. Assets obtained under finance lease contracts are capitalised as property, plant and equipment and are depreciated over the period of the lease. Obligations under such agreements are included within liabilities net of finance charges allocated to future periods. The interest element of the lease payments is charged to profit or loss over the period of the lease. Assets held under finance leases are not significant to these financial statements. Provisions and contingent liabilities Provisions are recognised when the Group has a present legal or constructive obligation, as a result of past events, and it is probable that an outflow of resources, embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset, but only when it is virtually certain that the reimbursement will be received. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. Contingent liabilities are disclosed if there is a possible future obligation as a result of a past event, or if there is a present obligation but either an outflow of resources is not probable or the amount cannot be reliably estimated. Employee benefits Pension obligations The Group operates a number of defined benefit and defined contribution plans, the assets of which are held in separate trustee-administered funds. For defined benefit plans, the pension costs are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to profit or loss so as to spread the regular cost over the service lives of employees, in accordance with the advice of qualified actuaries. The pension obligation is measured as the present value of the estimated future cash outflows using a discount rate based on market yields for high-quality corporate bonds. The resulting pension plan surplus or deficit appears as an asset or obligation in the statement of financial position. Any asset resulting from this calculation is limited to the present value economic benefits of available in the form of refunds from the plan or reductions in future employer contributions to the plan. In accordance with IAS 19, Employee Benefits , current and past service costs, gains and losses on curtailments and settlements and net interest expense or income (calculated by applying a discount rate to the net defined benefit liability or asset) are recognised through profit or loss. Actuarial gains or losses are recognised in full in the period in which they occur in other comprehensive income. Contributions in respect of defined contribution plans are recognised as a charge to profit or loss as incurred. Other post-employment obligations Some Group companies provide post-employment medical benefits to their retirees. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. Actuarial gains and losses are recognised immediately in other comprehensive income. Independent qualified actuaries value these obligations annually. Other benefits Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the year end date. 146 ANNUAL REPORT & ACCOUNTS 2015 Taxation Income tax comprises current and deferred tax. Income tax is recognised in the statement of profit or loss except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised in the statement of comprehensive income. Current tax is the expected tax payable on the taxable result for the period, after any adjustment in respect of prior periods. Deferred tax is provided in full on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Deferred tax is measured using tax rates expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled based on tax rates and laws which have been enacted or substantively enacted at the year end date. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are not discounted. Appropriations Dividends Dividends on Ordinary shares are recognised in equity in the period in which they are declared and, for the final dividend, approved by shareholders. Dividends on Irredeemable Preference shares are recognised in the period in which they are declared and appropriately approved. Charitable grant to ultimate parent undertaking Payments are made via Gift Aid to the ultimate parent company, Allchurches Trust Limited, a registered charity. The Group does not regard these payments as being expenses of the business and, as such, recognises them net of tax in equity in the period in which they are approved. Assets held for sale Assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and expected to qualify for recognition as a completed sale within one year from the date of classification. ANNUAL REPORT & ACCOUNTS 2015 147 NOTES TO THE FINANCIAL STATEMENTS 2 Critical accounting estimates and judgements in applying accounting policies The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements are regularly reviewed and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) The ultimate liability arising from claims made under general business insurance contracts The estimation of the ultimate liability arising from claims made under general business insurance contracts is a critical accounting estimate. There is uncertainty as to the total number of claims made on each class of business, the amounts that such claims will be settled for and the timings of any payments. There are various sources of uncertainty as to how much the Group will ultimately pay with respect to such contracts. Such uncertainty includes: - whether a claim event has occurred or not and how much it will ultimately settle for; - variability in the speed with which claims are notified and in the time taken to settle them, especially complex cases resolved through the courts; - changes in the business portfolio affecting factors such as the number of claims and their typical settlement costs, which may differ significantly from past patterns; new types of claim, including latent claims, which arise from time to time; - - changes in legislation and court attitudes to compensation, which may apply retrospectively; - the way in which certain reinsurance contracts (principally liability) will be interpreted in relation to unusual/latent claims where aggregation of claimants and exposure over time are issues; and - whether all such reinsurances will remain in force over the long term. The uncertainties surrounding the estimates of claims payments for the various classes of business are discussed further in note 3, and where discount rates have been applied these are disclosed in note 28. General business insurance liabilities include a margin for risk and uncertainty in addition to the best estimates for future claims. The sensitivity of profit or loss to changes in the ultimate settlement cost of claims reserves is presented in note 28. (b) Estimate of future benefit payments arising from long-term insurance contracts The determination of the liabilities under long-term insurance contracts is dependent on estimates made by the Group. Estimates are made as to the expected number of deaths for each of the years in which the Group is exposed to risk. The Group bases these estimates on standard industry and national mortality tables that reflect recent historical mortality experience, with allowance also being made for expected future mortality improvements where prudent. The estimated mortality rates profile provisions for forecast benefit payments net of forecast premium receipts. Estimates are also made as to future investment returns arising from the assets backing long-term insurance contracts. These estimates are based on current market returns as well as expectations about future economic and financial developments. In addition to the best estimates of future deaths, inflation, investment returns and administration expenses, margins for risk and uncertainty are added to these assumptions in calculating the liabilities of long-term insurance contracts. The sensitivity of profit or loss to changes in the key assumptions is presented in note 28. (c) Pension and other post-employment benefits The cost of these benefits and the present value of the pension and other post-employment benefit liabilities depend on factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the charge to profit or loss for these benefits include the discount rate and, in the case of the post-employment medical benefits, expected medical expense inflation. Any changes in these assumptions will impact profit or loss and may affect planned funding of the pension plans. The Group determines an appropriate discount rate at the end of each year, to be used to determine the present value of estimated future cash outflows expected to be required to settle the pension and other post-employment benefit obligations. In determining the appropriate discount rate, the Group considers interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. The expected rate of medical expense inflation is determined by comparing the historical relationship of medical expense increases over a portfolio of UK-based post-retirement medical plans with the rate of inflation, making an allowance for the size of the plan and actual medical expense experience. Other key assumptions for the pension and post-employment benefit costs and credits are based in part on current market conditions. Additional assumptions is disclosed in note 19. information including the sensitivity of pension and post-employment medical benefit scheme liabilities to changes in the key 148 ANNUAL REPORT & ACCOUNTS 2015 (d) Goodwill Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. An impairment loss is recognised to the extent that the carrying value of goodwill exceeds the recoverable amount. The recoverable amount is determined by estimating the value in use of the business units to which the goodwill has been allocated. The value in use calculation requires the Group to make an estimation of the future cash flows expected to arise from the business unit and a suitable discount rate to calculate present value. Details of the carrying value of goodwill at the balance sheet date are shown in note 17. (e) Carrying value of tax liabilities Calculating tax liabilities requires management to make judgements in respect of the tax payable for current and prior periods based on the interpretation of applicable tax legislation. In particular, the material deferred tax liability held by the Group primarily relates to future tax due on unrealised gains in respect of equities held prior to 2002. Gains on these assets are only recognised for tax purposes when sold and an estimate has to be made of the tax rate that would be applicable at the point of sale in order to determine the tax liability relating to the gain, applying tax rates substantively enacted at the balance sheet date. ANNUAL REPORT & ACCOUNTS 2015 149 NOTES TO THE FINANCIAL STATEMENTS 3 Insurance risk Through its general and life insurance operations, the Group is exposed to a number of risks, as summarised in the Risk Management section of the Strategic Report. The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount and timing of the resulting claim. Factors such as the business and product mix, the external environment including market competition and reinsurance capacity all may vary from year to year, along with the actual frequency, severity and ultimate cost of claims and benefits. This subjects the Group to underwriting and pricing risk (the risk of failing to ensure disciplined risk selection and achieve the required premium), claims reserving risk (the risk of actual claims payments exceeding the amount we are holding in reserves) and reinsurance risk (the risk of failing to access and manage reinsurance capacity at a reasonable price). (a) Risk mitigation Statistics demonstrate that the larger and more diversified the portfolio of insurance contracts, the smaller the relative variability in the expected outcome will be. The Group’s underwriting strategy is designed to ensure that the underwritten risks are well diversified in terms of type and amount of risk and geographical spread. In all operations pricing controls are in place, underpinned by sound statistical analysis, market expertise and appropriate external consultant advice. Gross and net underwriting exposure is protected through the use of a comprehensive programme of reinsurance using both proportional and non-proportional reinsurance and supported by proactive claims handling. The overall reinsurance structure is regularly reviewed and modelled to ensure that it remains optimum to the Group's needs. The optimum reinsurance structure provides the Group with sustainable, long-term capacity to support its specialist business strategy, with effective balance sheet and profit and loss protection at a reasonable cost. Catastrophe protection is purchased following an extensive annual modelling exercise of gross and net (of proportional reinsurance) exposures. In conjunction with reinsurance brokers the Group utilises the full range of proprietary catastrophe models and continues to develop bespoke modelling options that better reflect the specialist nature of the portfolio. Reinsurance is arranged to cover up to a 1/250 loss, which increases to a 1/500 loss where earthquake risk exists. (b) Concentrations of risk The core business of the Group is general insurance, with the principal classes of business written being property and liability. The Group has also underwritten a small portfolio of motor policies, but this class is in run-off following the decision in November 2012 to focus on the principal classes. The accident class of business covers injury, death or incapacity as a result of an unforeseen event. The Group's whole-of-life insurance policies support funeral planning products. Below is a table summarising written premiums for the financial year, before and after reinsurance, by territory and by class of business: 2015 Group Territory United Kingdom and Ireland Australia Canada Total Parent Territory United Kingdom and Ireland Canada Total Property £000 170,371 92,631 20,708 1,936 28,194 19,995 219,273 114,562 170,371 92,631 28,194 19,995 198,565 112,626 Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net General insurance Liability £000 Motor £000 Accident £000 Life insurance Funeral plans £000 52,316 47,183 15,062 12,993 11,713 10,880 79,091 71,056 52,316 47,183 11,713 10,880 64,029 58,063 210 209 550 545 - - 760 754 210 209 - - 210 209 7,831 7,510 1,131 1,089 - - 8,962 8,599 7,831 7,510 - - 7,831 7,510 113 113 - - - - 113 113 - - - - - - Total £000 230,841 147,646 37,451 16,563 39,907 30,875 308,199 195,084 230,728 147,533 39,907 30,875 270,635 178,408 150 ANNUAL REPORT & ACCOUNTS 2015 2014 Group Territory United Kingdom and Ireland Gross Australia Canada Total Parent Net Gross Net Gross Net Gross Net Territory United Kingdom and Ireland Gross Canada Total Net Gross Net Gross Net Property £000 179,362 94,506 22,638 (8,558) 27,918 19,691 229,918 105,639 179,362 94,506 27,918 19,691 207,280 114,197 General insurance Liability £000 Motor £000 Accident £000 Life insurance Funeral plans £000 55,895 49,787 15,532 13,300 11,447 10,562 82,874 73,649 55,895 49,787 11,447 10,562 67,342 60,349 183 (924) 763 757 - - 946 (167) 183 (924) - - 183 (924) 13,742 13,272 1,150 1,105 - - 14,892 14,377 13,742 13,272 - - 13,742 13,272 167 167 - - - - 167 167 - - - - - - Total £000 249,349 156,808 40,083 6,604 39,365 30,253 328,797 193,665 249,182 156,641 39,365 30,253 288,547 186,894 (c) General insurance risks Property classes Property cover mainly compensates the policyholder for damage suffered to their properties or for the value of property lost. Property insurance may also include cover for pecuniary loss through the inability to use damaged insured commercial properties. For property insurance contracts, there can be variability in the nature, number and size of claims made in each period. The nature of claims may include fire, business interruption, weather damage, escape of water, subsidence, accidental damage to insured vehicles and theft. Subsidence claims are particularly difficult to predict because the damage is often not apparent for some time. The ultimate settlements can be small or large with a risk of a settled claim being reopened at a later date. The number of claims made can be affected by weather events, changes in climate and crime rates. Climate change may give rise to more frequent and extreme weather events, such as river flooding, hurricanes and drought, and their consequences, for example, subsidence claims. If a weather event happens near the end of the financial year, the uncertainty about ultimate claims cost in the financial statements is much higher because there is insufficient time for adequate data to be received to assess the final cost of claims. Individual claims can vary in amount since the risks insured are diverse in both size and nature. The cost of repairing property varies according to the extent of damage, cost of materials and labour charges. Contracts are underwritten on a reinstatement basis or repair and restoration basis as appropriate. Costs of rebuilding properties, of replacement or indemnity for contents and time taken to restart operations for business interruption are the key factors that influence the level of claims. Individual large claims are more likely to arise from fire, storm or flood damage. The greatest likelihood of an aggregation of claims arises from earthquake, weather or fire events. Claims payment, on average, occurs within a year of the event that gives rise to the claim. However, there is variability around this average with larger claims typically taking longer to settle. ANNUAL REPORT & ACCOUNTS 2015 151 NOTES TO THE FINANCIAL STATEMENTS 3 Insurance risk (continued) Liability classes The main exposures are in respect of liability insurance contracts which protect policyholders from the liability to compensate injured employees (employers' liability) and third parties (public liability). Claims that may arise from the liability portfolios include damage to property, physical injury, disease and psychological trauma. The Group has a different exposure profile to most other commercial lines insurance companies as it has lower exposure to industrial risks. Therefore, claims for industrial diseases are less common for the Group than injury claims such as slips, trips and back injuries. The frequency and severity of claims arising on liability insurance contracts, including the liability element of motor contracts, can be affected by several factors. Most significant are the increasing level of awards for damages suffered, the courts’ move to periodic payments awards and the increase in the number of cases that have been latent for a long period of time. The severity of bodily injury claims is highly influenced by the value of loss of earnings and the future cost of care. The settlement value of claims arising under public and employers' liability is particularly difficult to predict. There is often uncertainty as to the extent and type of injury, whether any payments will be made and, if they are, the amount and timing of the payments. Key factors driving the high levels of uncertainty include the late notification of possible claim events and the legal process. Late notification of possible claims necessitates the holding of provisions for incurred claims that may only emerge some years into the future. In particular, the effect of inflation over such a long period can be considerable and is uncertain. A lack of comparable past experience makes it difficult to quantify the number of claims and, for certain types of claims, the amounts for which they will ultimately settle. The legal and legislative framework continues to develop, which has a consequent impact on the uncertainty as to the length of the claims settlement process and the ultimate settlement amounts. Claims payment, on average, occurs about three to four years after the event that gives rise to the claim. However, there is significant variability around this average. Provisions for latent claims The public and employers’ liability classes can give rise to very late reported claims, which are often referred to as latent claims. These can vary in nature and are difficult to predict. They typically emerge slowly over many years, during which time there can be particular uncertainty as to the number of future potential claims and their cost. The Group has reflected this uncertainty and believes that it holds adequate reserves for latent claims that may result from exposure periods up to the reporting date. Note 28 presents the development of the estimate of ultimate claim cost for public and employers' liability claims occurring in a given year. This gives an indication of the accuracy of the estimation technique for incurred claims. (d) Life insurance risks The Group provides whole-of-life insurance policies to support funeral planning products, for most of which the future benefits are linked to inflation and backed by index-linked assets. The risk that actual claims payments exceed the carrying amount of the insurance liabilities may occur if the timing of claims is different from assumed. This is not one of the Group's principal risks and the life fund is closed to new entrants, with only minimal premiums now being received each year. Uncertainty in the estimation of the timing of future claims arises from the unpredictability of long-term changes in overall levels of mortality. The Group bases these estimates on standard industry and national mortality tables. The most significant factors that could alter the expected mortality rates profile are epidemics, widespread changes in lifestyle and continued improvement in medical science and social conditions. The primary risk on these contracts is the level of future investment returns on the assets backing the liabilities over the life of the policyholders. The interest rate and inflation risk within this has been largely mitigated by holding index-linked assets of a similar term to the expected liabilities profile. The main residual risk is the spread risk attaching to corporate bonds held to match the liabilities. The small mortality risk is retained by the Group and directly impacts shareholders' equity. 152 ANNUAL REPORT & ACCOUNTS 2015 4 Financial risk and capital management The Group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance liabilities. In particular, the key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance contracts. The most important components of financial risk are interest rate risk, credit risk, currency risk and equity price risk. There has been no change from the prior period in the nature of the financial risks to which the Group is exposed. The Group's management and measurement of financial risks is informed by either stochastic modelling or stress testing techniques. (a) Categories of financial instruments Group At 31 December 2015 Financial investments Other assets Cash and cash equivalents Other liabilities Net other Total At 31 December 2014 Financial investments Other assets Cash and cash equivalents Assets classified as held for sale Other liabilities Net other Total Parent At 31 December 2015 Financial investments Other assets Cash and cash equivalents Other liabilities Net other Total At 31 December 2014 Financial investments Other assets Cash and cash equivalents Other liabilities Net other Total Designated at fair value £000 Financial assets Held for Loans and trading receivables* £000 £000 832,661 - - - - 832,661 886,170 - - - - - 886,170 631,757 - - - - 631,757 664,349 - - - - 664,349 713 - - - - 713 - - - - - - - 713 - - - - 713 - - - - - - 16 121,840 118,441 - - 240,297 16 116,485 107,526 6,204 - - 230,231 14 93,950 84,779 - - 178,743 14 99,652 77,774 - - 177,440 * Cash and cash equivalents have been presented with loans and receivables. ** Financial liabilities are held at amortised cost. Held for trading £000 Financial liabilities** £000 Other assets and liabilities £000 Total £000 - - - (1,466) - (1,466) - - - - - - - - - - (1,466) - (1,466) - - - - - - - - - (54,177) - (54,177) - - - - (40,338) - (40,338) - - - (35,547) - (35,547) - - - (23,885) - (23,885) - 3,002 - (5,007) (511,089) (513,094) 833,390 124,842 118,441 (60,650) (511,089) 504,934 - 2,909 - - (4,277) (580,062) (581,430) 886,186 119,394 107,526 6,204 (44,615) (580,062) 494,633 50,065 2,597 - (4,361) (393,378) (345,077) 682,549 96,547 84,779 (41,374) (393,378) 429,123 50,065 2,587 - (3,262) (446,922) (397,532) 714,428 102,239 77,774 (27,147) (446,922) 420,372 ANNUAL REPORT & ACCOUNTS 2015 153 NOTES TO THE FINANCIAL STATEMENTS 4 Financial risk and capital management (continued) (b) Fair value hierarchy The fair value measurement basis used to value those financial assets and financial liabilities held at fair value is categorised into a fair value hierarchy as follows: Level 1: fair values measured using quoted bid prices (unadjusted) in active markets for identical assets or liabilities. This category includes listed equities in active markets, listed debt securities in active markets and exchange-traded derivatives. Level 2: fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes listed debt or equity securities in a market that is not active and derivatives that are not exchange-traded. Level 3: fair values measured using inputs for the asset or liability that are not based on observable market data (unobservable inputs). This category includes unlisted debt and equities, including investments in venture capital, and suspended securities. Where a look-through valuation approach is applied, underlying net asset values are sourced from the investee and adjusted to reflect illiquidity where appropriate, with the fair values disclosed being directly sensitive to this input. There have been no transfers between investment categories in the current year. Analysis of fair value measurement bases Group At 31 December 2015 Financial assets at fair value through profit or loss Financial investments Equity securities Debt securities Derivatives Total financial assets at fair value through profit or loss At 31 December 2014 Financial assets at fair value through profit or loss Financial investments Equity securities Debt securities Total financial assets at fair value through profit or loss Parent At 31 December 2015 Financial assets at fair value through profit or loss Financial investments Equity securities Debt securities Derivatives Total financial assets at fair value through profit or loss At 31 December 2014 Financial assets at fair value through profit or loss Financial investments Equity securities Debt securities Total financial assets at fair value through profit or loss 154 ANNUAL REPORT & ACCOUNTS 2015 Fair value measurement at the end of the reporting period based on Level 1 £000 Level 2 £000 Level 3 £000 Total £000 274,293 524,453 - 798,746 221 2,289 713 3,223 31,218 187 - 31,405 305,732 526,929 713 833,374 269,347 591,542 860,889 209 4,485 4,694 20,349 238 20,587 289,905 596,265 886,170 242,797 355,570 - 598,367 221 1,765 713 2,699 31,217 187 - 31,404 274,235 357,522 713 632,470 239,419 403,099 642,518 209 1,036 1,245 20,348 238 20,586 259,976 404,373 664,349 Fair value measurements based on level 3 Fair value measurements in level 3 for both the Group and Parent consist of financial assets, analysed as follows: Group At 31 December 2015 Opening balance Total gains/(losses) recognised in profit or loss Purchases Closing balance Total gains/(losses) for the period included in profit or loss for assets held at the end of the reporting period At 31 December 2014 Opening balance Total gains/(losses) recognised in profit or loss Closing balance Total gains/(losses) for the period included in profit or loss for assets held at the end of the reporting period Parent At 31 December 2015 Opening balance Total gains/(losses) recognised in profit or loss Purchases Closing balance Total gains/(losses) for the period included in profit or loss for assets held at the end of the reporting period At 31 December 2014 Opening balance Total gains/(losses) recognised in profit or loss Closing balance Total gains/(losses) for the period included in profit or loss for assets held at the end of the reporting period Financial assets at fair value through profit and loss Equity securities £000 Debt securities £000 20,349 5,146 5,723 31,218 238 (51) - 187 Total £000 20,587 5,095 5,723 31,405 5,146 (51) 5,095 19,390 959 20,349 959 20,348 5,146 5,723 31,217 317 (79) 238 (79) 19,707 880 20,587 880 238 (51) - 187 20,586 5,095 5,723 31,404 5,146 (51) 5,095 19,386 962 20,348 962 317 (79) 238 (79) 19,703 883 20,586 883 All the above gains or losses included in profit or loss for the period (for both the Group and Parent) are presented in net investment return within the statement of profit or loss. ANNUAL REPORT & ACCOUNTS 2015 155 NOTES TO THE FINANCIAL STATEMENTS 4 Financial risk and capital management (continued) The valuation techniques used for instruments categorised in levels 2 and 3 are described below. Listed debt and equity securities not in active market (level 2) These financial assets are valued using third-party pricing information that management's knowledge of the markets. Where material, these valuations are reviewed by the Group Audit Committee. is regularly reviewed and internally calibrated based on Non-exchange-traded derivative contracts (level 2) The Group's derivative contracts are not traded in active markets. Foreign currency forward contracts are valued using observable forward exchange rates and interest rates corresponding to the maturity of the contract. Over-the-counter equity or index options and futures are valued by reference to observable index prices. Unlisted equity securities (level 3) These financial assets are valued using observable net asset data, adjusted for unobservable inputs including comparable price-to-book ratios based on similar listed companies, and management's consideration of constituents as to what exit price might be obtainable. Where material, these valuations are reviewed by the Group Audit Committee. The valuation is most sensitive to the level of underlying net assets, the euro exchange rate, the price-to-book ratio chosen, an illiquidity discount and a credit rating discount applied to the valuation to account for the risks associated with holding the asset. If the price-to-book ratio, illiquidity discount and credit rating discount applied changes by +/-10%, the value of unlisted equity securities could move by +/-£3m. The increase in value during the year is the result of an increase in underlying net assets and a decrease in the illiquidity margin applied to one of the stocks. The illiquidity assumption was updated based on observable market inputs. Unlisted debt (level 3) Unlisted debt is valued using an adjusted net asset method whereby management uses a look-through approach to the underlying assets supporting the loan, discounted using observable market interest rates of similar loans with similar risk, and allowing for unobservable future transaction costs. Where material, these valuations are reviewed by the Group Audit Committee. The valuation is most sensitive to the level of underlying net assets, but it is also sensitive to the interest rate used for discounting and the projected date of disposal of the asset, with the exit costs sensitive to an expected return on capital of any purchaser and estimated transaction costs. Reasonably likely changes in unobservable inputs used in the valuation would not have a significant impact on shareholders' equity or the net result. The decrease in value during the year is primarily the result of a decrease in underlying net assets. 156 ANNUAL REPORT & ACCOUNTS 2015 (c) Interest rate risk The Group’s exposure to interest rate risk arises primarily from movements on financial investments that are measured at fair value and have fixed interest rates, which represent a significant proportion of the Group’s assets, and from those insurance liabilities for which discounting is applied at a market interest rate. Investment strategy is set in order to control the impact of interest rate risk on anticipated Group cash flows and asset and liability values. The fair value of the Group's investment portfolio of fixed income securities reduces as market interest rates rise as does the present value of discounted insurance liabilities, and vice versa. Interest rate risk concentration is reduced by adopting asset-liability duration matching principles where appropriate. Excluding assets held to back the long-term business, the average duration of the Group’s fixed income portfolio is two years (2014: two years), reflecting the relatively short-term average duration of its general insurance liabilities. The mean term of discounted general insurance liabilities is disclosed in note 28 (a) part (iv). For the Group’s long-term insurance funeral plan business, benefits payable to policyholders are independent of the returns generated by interest-bearing assets. Therefore the interest rate risk on the invested assets supporting these liabilities is borne by the Group. This risk can be mitigated by purchasing fixed interest investments with durations that precisely match the profile of the liabilities. For funeral plan policies, benefits are linked to the Retail Prices Index (RPI). Assets backing these liabilities are also linked to the RPI, and include index-linked gilts and corporate bonds. For practical purposes it is not possible to exactly match the durations due to the uncertain profile of liabilities (e.g. mortality risk) and the availability of suitable assets, therefore some interest rate risk will persist. The Group monitors its exposure by comparing projected cash flows for these assets and liabilities and making appropriate adjustments to its investment portfolio. The table below summarises the maturities of long-term business assets and liabilities that are exposed to interest rate risk. Group long-term business At 31 December 2015 Assets Debt securities Cash and cash equivalents Liabilities (discounted) Long-term business provision At 31 December 2014 Assets Debt securities Cash and cash equivalents Liabilities (discounted) Long-term business provision Within 1 year £000 6,065 2,648 8,713 Maturity Between 1 & 5 years £000 23,119 - 23,119 After 5 years £000 67,572 - 67,572 Total £000 96,756 2,648 99,404 6,354 21,976 57,092 85,422 1,053 1,924 2,977 24,311 - 24,311 79,490 - 79,490 104,854 1,924 106,778 6,014 21,816 66,494 94,324 Group financial investments with variable interest rates, including cash and cash equivalents, insurance instalment receivables and mortgage loans are subject to cash flow interest rate risk. This risk is not significant to the Group. ANNUAL REPORT & ACCOUNTS 2015 157 NOTES TO THE FINANCIAL STATEMENTS 4 Financial risk and capital management (continued) (d) Credit risk The Group has exposure to credit risk, which is the risk of non-payment of their obligations by counterparties and financial markets borrowers. Areas where the Group is exposed to credit risk are: - - - - reinsurers’ share of insurance liabilities (excluding provision for unearned premiums) and amounts due from reinsurers in respect of claims already paid; deposits held with banks; amounts due from insurance intermediaries and policyholders; and counterparty default on loans and debt securities. The carrying amount of financial and reinsurance assets represents the Group's maximum exposure to credit risk. The Group structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty. Limits on the level of credit risk are regularly reviewed. Reinsurance is used to manage insurance risk. This does not, however, discharge the Group's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is considered on a regular basis through the year by reviewing their financial strength. The Group Reinsurance Security Committee assesses, monitors and approves the creditworthiness of all reinsurers, reviewing relevant credit ratings provided by the recognised credit rating agencies, as well as other publicly available data and market information. The Committee also monitors the balances outstanding from reinsurers and maintains an approved list of reinsurers. There has been no significant change in the recoverability of the Group’s reinsurance balances during the year with all reinsurers on the 2015 reinsurance programme having a minimum rating of 'A-' from Standard & Poor’s or an equivalent agency at the time of purchase. Group cash balances are regularly reviewed to identify the quality of the counterparty bank and to monitor and limit concentrations of risk. The Group's credit risk policy details prescriptive methods for the collection of premiums and control of intermediary and policyholder debtor balances. The level and age of debtor balances are regularly assessed via monthly credit management reports. These reports are scrutinised to assess exposure in more than one region in respect of aged or outstanding balances. Any such balances are likely to be major international brokers that are in turn monitored via credit reference agencies and considered to pose minimal risk of default. The Group has no material concentration of credit risk in respect of amounts due from insurance intermediaries and policyholders due to the well-diversified spread of such debtors. is held over loans secured by mortgages. The debt securities portfolio consists of a range of mainly fixed interest instruments Collateral including government securities, local authority issues, corporate loans and bonds, overseas bonds, preference shares and other interest- bearing securities. Limits are imposed on the credit ratings of the corporate bond portfolio and exposures regularly monitored. Group investments in unlisted securities represent less than 1% of this category in the current and prior year. The Group’s exposure to counterparty default on debt securities is spread across a variety of geographical and economic territories, as follows: 2015 2014 Group £000 381,087 73,429 52,350 15,876 4,187 526,929 Parent £000 284,331 778 52,350 15,876 4,187 357,522 UK Australia Canada Europe Other Total Group £000 424,480 87,037 60,162 24,586 - 596,265 Parent £000 319,625 - 60,162 24,586 - 404,373 UK Australia Canada Europe Other Total 158 ANNUAL REPORT & ACCOUNTS 2015 (e) Liquidity risk Liquidity risk is the risk that funds may not be available to pay obligations when due. The Group is exposed to daily calls on its available cash resources mainly from claims arising from insurance contracts. An estimate of the timing of the net cash outflows resulting from insurance contracts is provided in note 28. The Group has robust processes in place to manage liquidity risk and has available cash balances, other readily marketable assets and access to funding in case of exceptional need. This is not considered to be a significant risk to the Group. Non-derivative financial liabilities consist of finance leases, which are not material to the Group, and other liabilities for which a maturity analysis is included in note 31. (f) Currency risk The Group operates internationally and its main exposures to foreign exchange risk are noted below. The Group's foreign operations generally invest in assets and purchase reinsurance denominated in the same currencies as their insurance liabilities, which mitigates the foreign currency exchange rate risk for these operations. As a result, foreign exchange risk arises from recognised assets and liabilities denominated in other currencies and net investments in foreign operations. The Group mitigates this risk through the use of derivatives when considered necessary. The Group exposure to foreign currency risk within the investment portfolios arises from purchased investments that are denominated in currencies other than sterling. The Group's foreign operations create two sources of foreign currency risk: - the operating results of the Group's foreign branches and subsidiaries in the Group financial statements are translated at the average exchange rates prevailing during the period; and - the equity investment in foreign branches and subsidiaries is translated into sterling using the exchange rate at the year end date. The largest currency exposures with reference to net assets/liabilities are shown below, representing effective diversification of resources. 2015 2014 Group £000 45,431 32,544 19,598 2,598 2,125 Parent £000 6,839 32,544 19,598 2,598 2,125 Aus $ Can $ Euro USD $ NZ $ Aus $ Can $ Euro NZ $ Japanese Yen Group £000 45,571 34,757 14,625 10,969 1,047 Parent £000 2,614 34,757 14,625 10,969 1,047 (g) Equity price risk The Group is exposed to equity price risk because of financial investments held by the Group which are stated at fair value through profit or loss. The Group mitigates this risk by holding a diversified portfolio across geographical regions and market sectors, and through the use of derivative contracts from time to time which would limit losses in the event of a fall in equity markets. The concentration of equity price risk by geographical listing, before the mitigating effect of derivatives, to which the Group and Parent are exposed is as follows: 2015 2014 Group £000 269,724 31,440 2,257 2,139 172 305,732 Parent £000 238,227 31,440 2,257 2,139 172 274,235 UK Europe Canada US Other Total Group £000 264,716 20,442 2,583 1,950 214 289,905 Parent £000 234,787 20,442 2,583 1,950 214 259,976 UK Europe Canada US Other Total ANNUAL REPORT & ACCOUNTS 2015 159 NOTES TO THE FINANCIAL STATEMENTS 4 Financial risk and capital management (continued) (h) Market risk sensitivity analysis The sensitivity of profit and other equity reserves to movements on market risk variables (comprising interest rate, currency and equity price risk), each considered in isolation, is shown in the table below. This table does not include the impact of variables on retirement benefit schemes. Financial risk sensitivities for retirement benefit schemes are disclosed separately in Note 19. Group Variable Interest rate risk Currency risk Equity price risk Parent Variable Interest rate risk Currency risk Equity price risk Change in variable -100 basis points +100 basis points -10% +10% +/-10% Change in variable -100 basis points +100 basis points -10% +10% +/-10% Potential increase/ (decrease) in profit 2015 £000 (6,377) 2,154 3,627 (2,968) 24,382 2014 £000 (4,284) 1,243 2,930 (2,397) 22,758 Potential increase/ (decrease) in profit 2015 £000 (5,786) 3,524 3,628 (2,968) 21,870 2014 £000 (1,583) 299 2,930 (2,397) 20,408 Potential increase/ (decrease) in other equity reserves 2015 £000 (29) 29 7,052 (5,770) - 2014 £000 (15) 18 8,010 (6,554) - Potential increase/ (decrease) in other equity reserves 2015 £000 (33) 33 2,764 (2,262) - 2014 £000 - 5 3,237 (2,649) - The following assumptions have been made in preparing the above sensitivity analysis: - the value of fixed income investments will vary inversely with changes in interest rates, and all territories experience the same interest rate movement; - currency gains and losses will arise from a change in the value of sterling against all other currencies moving in parallel; - equity prices will move by the same percentage across all territories; and - change in profit is stated net of tax at the standard rate applicable in each of the Group's territories. (i) Capital management The Group's primary objectives when managing capital are to: - - comply with the regulators' capital requirements of the markets in which the Group operates; and safeguard the Group's ability to continue to meet stakeholders' expectations in accordance with its corporate mission, vision and values. The Group is subject to insurance solvency regulations in all the territories in which it issues insurance and investment contracts, and capital is managed and evaluated on the basis of regulatory capital. In the UK, the Group and its UK regulated entities are required to comply with rules issued by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), and submit PRA returns detailing levels of regulatory capital held. Regulatory capital should be in excess of the higher of two amounts. The first is an amount which is calculated by applying fixed percentages to premiums and claims (general insurance business) or by applying fixed percentages to insurance liabilities and applying stress testing (long-term business). The second is an economic capital assessment by the regulated entity, which the PRA reviews and may amend by issuing Individual Capital Guidance. The Group sets internal capital standards above the PRA's minimum requirement. For overseas business the relevant capital requirement is the minimum requirement under the local regulatory regime. Both the Group and the regulated entities within it have complied with all externally imposed capital requirements throughout the current and prior year. With effect from 1 January 2016 a new Europe-wide regulatory capital regime (Solvency II) has been adopted by the PRA. The Group is well placed to comply with the new Solvency II reporting requirements and has separately calculated its capital requirement under the new regime. The Group holds capital resources in excess of its expected Solvency II capital requirement and its internal capital standard will continue to be set above the PRA's minimum requirement. Regulated subsidiaries are restricted in the amount of cash dividends they transfer to the parent entity in order for them to meet their individual minimum capital requirements. The Group's total available capital resources are disclosed in note 28 (b). 160 ANNUAL REPORT & ACCOUNTS 2015 5 Segment information (a) Operating segments The Group segments its business activities on the basis of differences in the products and services offered and, for general insurance, the underwriting territory. Expenses relating to Group management activities are included within 'Corporate costs'. This reflects the management and internal Group reporting structure. Group activities that are not reportable operating segments on the basis of size are included within an 'Other activities' category. Changes have been made to segments during 2015 as follows: - The United Kingdom and Ireland segments have been combined on the basis of their similar economic characteristics, products and customer base. - Corporate costs which were previously included in 'Central operations' have been identified as a discrete segment and the definition of corporate costs has been widened during the period. - The 'Central operations' segment has been renamed 'Other insurance operations'. The prior period has been restated to the revised basis. The activities of each operating segment are described below. - General business United Kingdom and Ireland The Group's principal general insurance business operation is in the UK, where it operates under the Ecclesiastical and Ansvar brands. The Group also operates an Ecclesiastical branch in the Republic of Ireland underwriting general business across the whole of Ireland. Australia The Group has a wholly-owned subsidiary in Australia underwriting general insurance business under the Ansvar brand. Canada The Group operates a general insurance Ecclesiastical branch in Canada. Other insurance operations This includes the Group's internal reinsurance function, adverse development cover sold to ACS (NZ) Limited and operations that are in run-off or not reportable due to their immateriality. - Investment management The Group provides investment management services both internally and to third parties through EdenTree Investment Management Limited. - Broking and Advisory The Group provides insurance broking through South Essex Insurance Brokers Limited and financial advisory services through Ecclesiastical Financial Advisory Services Limited. - Life business Ecclesiastical Life Limited provides long-term insurance policies to support funeral planning products. It is closed to new business. - Corporate costs This includes costs associated with Group management activities. - Other activities This includes costs relating to acquisition of businesses. Inter-segment and inter-territory transfers or transactions are entered into under normal commercial terms and conditions that would also be available to unrelated third parties. ANNUAL REPORT & ACCOUNTS 2015 161 NOTES TO THE FINANCIAL STATEMENTS 5 Segment information (continued) Segment revenue The Group uses gross written premiums as the measure for turnover of the general and life insurance business segments. Turnover of the non- insurance segments comprises fees and commissions earned in relation to services provided by the Group to third parties. Segment revenues do not include net investment return or general business fee and commission income, which are reported within revenue in the consolidated statement of profit or loss. Gross written premiums £000 228,056 37,451 39,907 2,672 308,086 113 - - 308,199 2015 Non- insurance services £000 - - - - - - 11,394 9,586 20,980 Total £000 228,056 37,451 39,907 2,672 308,086 113 11,394 9,586 329,179 (restated) 2014 Non- insurance services £000 - - - - - - 12,045 9,865 21,910 Gross written premiums £000 245,528 40,083 39,365 3,654 328,630 167 - - 328,797 Total £000 245,528 40,083 39,365 3,654 328,630 167 12,045 9,865 350,707 General business United Kingdom and Ireland Australia Canada Other insurance operations Total Life business Investment management Broking and Advisory Group revenue Group revenues are not materially concentrated on any single external customer. Segment result General business segment results comprise the insurance underwriting profit or loss, investment activities and other expenses of each underwriting territory. The Group uses the industry standard net combined operating ratio (COR) as a measure of underwriting efficiency. The COR expresses the total of net claims costs, commission and underwriting expenses as a percentage of net earned premiums. The life business segment result comprises the profit or loss on insurance contracts (including return on assets backing liabilities in the long- term fund), shareholder investment return and other expenses. All other segment results consist of the profit or loss before tax measured in accordance with IFRS. 2015 General business United Kingdom and Ireland Australia Canada Other insurance operations Life business Investment management Broking and Advisory Corporate costs Profit before tax Combined operating ratio 90.4% 102.3% 96.5% 92.0% Insurance £000 Investments £000 14,454 (370) 1,017 792 15,893 1,001 - - - 16,894 34,683 2,468 1,090 - 38,241 2,161 1,812 - - 42,214 Other £000 4 (96) - - (92) (4) - 1,934 (7,341) (5,503) Total £000 49,141 2,002 2,107 792 54,042 3,158 1,812 1,934 (7,341) 53,605 162 ANNUAL REPORT & ACCOUNTS 2015 2014 (restated) General business United Kingdom and Ireland Australia Canada Other insurance operations Life business Investment management Broking and Advisory Corporate costs Other activities Profit before tax Combined operating ratio 94.0% 106.2% 94.2% 95.2% Insurance £000 Investments £000 10,359 (1,129) 1,662 (172) 10,720 (178) - - - - 10,542 23,648 7,619 1,598 - 32,865 1,522 3,164 - - - 37,551 Other £000 70 (139) - - (69) (4) - 2,071 (1,521) (416) 61 Total £000 34,077 6,351 3,260 (172) 43,516 1,340 3,164 2,071 (1,521) (416) 48,154 (b) Geographical information Gross written premiums from external customers and non-current assets, as attributed to individual countries in which the Group operates, are as follows: United Kingdom and Ireland Australia Canada 2015 Gross written premiums £000 230,841 37,451 39,907 308,199 Non-current assets £000 153,674 190 3,154 157,018 (restated) 2014 Gross written premiums £000 249,349 40,083 39,365 328,797 Non-current assets £000 123,971 257 2,407 126,635 Gross written premiums are allocated based on the country in which the insurance contracts are issued. Non-current assets exclude rights arising under insurance contracts, deferred tax assets, pension assets and financial instruments and are allocated based on where the assets are located. ANNUAL REPORT & ACCOUNTS 2015 163 NOTES TO THE FINANCIAL STATEMENTS 6 Net insurance premium revenue For the year ended 31 December 2015 Gross written premiums Outward reinsurance premiums Net written premiums Change in the gross provision for unearned premiums Change in the provision for unearned premiums, reinsurers' share Change in the net provision for unearned premiums General business £000 Long-term business £000 308,086 (113,115) 194,971 3,889 788 4,677 113 - 113 - - - Total £000 308,199 (113,115) 195,084 3,889 788 4,677 Earned premiums, net of reinsurance 199,648 113 199,761 For the year ended 31 December 2014 Gross written premiums Outward reinsurance premiums Net written premiums Change in the gross provision for unearned premiums Change in the provision for unearned premiums, reinsurers' share Change in the net provision for unearned premiums 328,630 (135,132) 193,498 23,651 7,527 31,178 167 - 167 - - - 328,797 (135,132) 193,665 23,651 7,527 31,178 Earned premiums, net of reinsurance 224,676 167 224,843 7 Net investment return Income from financial assets at fair value through profit or loss - equity income - debt income Income from financial assets not at fair value through profit or loss - interest income on mortgages and other loans - cash and cash equivalents income, net of exchange movements - other income received Other income - rental income Investment income Fair value movements on financial instruments at fair value through profit or loss Fair value movements on investment property Net investment return 2015 £000 8,720 20,510 26 (154) 1,412 4,977 35,491 2,892 4,845 43,228 2014 £000 8,575 22,936 327 50 1,573 3,818 37,279 6,459 2,459 46,197 Included within cash and cash equivalents income are exchange losses of £1,405,000 (2014: £1,346,000 losses). Included within fair value movements on financial losses) in respect of derivatives classified as held for trading. instruments at fair value through profit or loss are £2,133,000 gains (2014: £158,000 164 ANNUAL REPORT & ACCOUNTS 2015 8 Claims and change in insurance liabilities and reinsurance recoveries General business £000 Long-term business £000 For the year ended 31 December 2015 Gross claims paid Gross change in the provision for claims Gross change in long-term business provisions Claims and change in insurance liabilities Reinsurers' share of claims paid Reinsurers' share of change in the provision for claims Reinsurance recoveries Claims and change in insurance liabilities, net of reinsurance For the year ended 31 December 2014 Gross claims paid Gross change in the provision for claims Gross change in long-term business provisions Claims and change in insurance liabilities Reinsurers' share of claims paid Reinsurers' share of change in the provision for claims Reinsurance recoveries 167,364 (1,448) - 165,916 (50,721) (16,204) (66,925) 98,991 188,263 (13) - 188,250 (43,034) (19,272) (62,306) Total £000 174,263 (1,445) (8,902) 163,916 (50,721) (16,204) (66,925) 6,899 3 (8,902) (2,000) - - - (2,000) 96,991 7,016 26 1,878 8,920 - - - 195,279 13 1,878 197,170 (43,034) (19,272) (62,306) Claims and change in insurance liabilities, net of reinsurance 125,944 8,920 134,864 9 Fees, commissions and other acquisition costs Fees paid Commission paid Change in deferred acquisition costs Other acquisition costs Fees, commissions and other acquisition costs 2015 £000 665 45,086 1,754 13,697 61,202 2014 £000 533 51,886 3,327 15,067 70,813 ANNUAL REPORT & ACCOUNTS 2015 165 NOTES TO THE FINANCIAL STATEMENTS 10 Profit for the year Profit for the year has been arrived at after charging/(crediting) Net foreign exchange losses Depreciation of property, plant and equipment Loss/(profit) on disposal of property, plant and equipment Amortisation of intangible assets Increase in fair value of investment property Employee benefits expense including termination benefits Operating lease rentals 11 Auditor's remuneration Fees payable to the Company's auditor for the audit of the Company's annual accounts Fees payable to the Company’s auditor and its associates for other services: - The audit of the Company's subsidiaries Total audit fees - Audit-related assurance services - Other assurance services Total non-audit fees Total auditor's remuneration 2015 £000 1,405 1,708 16 1,333 (4,845) 63,606 3,391 2015 £000 292 119 411 86 6 92 503 2014 £000 1,346 1,638 (32) 1,684 (2,459) 62,683 3,576 2014 £000 247 102 349 84 6 90 439 Amounts disclosed are net of services taxes, where applicable. Audit-related assurance services include Prudential Regulatory Authority and other regulatory audit work. Fees payable to the Company's auditor in respect of the audit of the Group's associated pension plans amounted to £17,000 (2014: £15,000). 166 ANNUAL REPORT & ACCOUNTS 2015 12 Employee information The average monthly number of full-time equivalent employees of the Group, including executive directors, during the year by geographical location was: 2015 Long-term business No. 1 - - 1 General business No. 709 92 68 869 (restated) 2014 Long-term business No. 1 - - 1 General business No. 724 101 63 888 Other No. 127 - - 127 Other No. 116 - - 116 United Kingdom and Ireland Australia Canada Average numbers of full-time equivalent employees have been quoted rather than average numbers of employees to give a better reflection of the split between business areas, as some employees work is divided between more than one business area. Wages and salaries Social security costs Pension costs - defined contribution plans Pension costs - defined benefit plans Other post-employment benefits 2015 £000 52,204 4,539 2,734 2,770 459 62,706 2014 £000 53,479 4,469 2,696 1,465 551 62,660 The above figures do not include termination benefits of £900,000 (2014: £23,000). The remuneration of the directors (including non-executive directors), who are the key management personnel of the Group, is set out both individually and in aggregate within the Group Remuneration Report in the Corporate Governance section of this report. ANNUAL REPORT & ACCOUNTS 2015 167 NOTES TO THE FINANCIAL STATEMENTS 13 Tax expense Current tax Deferred tax Total tax expense - current year - prior years - temporary differences - prior years - reduction in tax rate 2015 £000 7,771 474 2,421 2 (3,680) 6,988 2014 £000 11,063 (3,716) 14 476 - 7,837 Tax on the Group’s result before tax differs from the United Kingdom standard rate of corporation tax for the reasons set out in the following reconciliation: Profit before tax Tax calculated at the UK standard rate of tax of 20.25% (2014: 21.5%) Factors affecting charge for the year: Expenses not deductible for tax purposes Non-taxable income Life insurance and other tax paid at non-standard rates Utilisation of tax losses for which no deferred tax asset has been recognised Impact of reduction in deferred tax rate Adjustments to tax charge in respect of prior periods Total tax expense 2015 £000 53,605 10,853 450 (979) 71 (203) (3,680) 476 6,988 2014 £000 48,154 10,353 (245) (1,849) 424 (116) - (730) 7,837 A deferred tax credit on fair value movements on owner-occupied property of £22,000 (2014: £10,000 credit) and tax relief on charitable grants of £4,050,000 (2014: £5,053,000) are taken directly to equity. A change in the UK standard rate of corporation tax from 21% to 20% became effective from 1 April 2015. Where appropriate, current tax has been provided at the blended rate of 20.25%. A further reduction in the rate of corporation tax to 19% will become effective from April 2017, reducing again to 18% effective from April 2020. These changes were substantively enacted on 18 November 2015. Deferred tax has been provided at an average rate of 18.2% (2014: 20%). 14 Appropriations Amounts recognised as distributions to equity holders in the period: Dividends Non-Cumulative Irredeemable Preference share dividend Charitable grants Gross charitable grants to the ultimate parent company, Allchurches Trust Limited Tax relief Net appropriation for the year 2015 £000 2014 £000 9,181 9,181 20,000 (4,050) 15,950 23,500 (5,053) 18,447 168 ANNUAL REPORT & ACCOUNTS 2015 15 Acquisition of business On 15 April 2014, South Essex Insurance Brokers Limited acquired the assets of Lansdown Insurance Brokers (hereafter referred to as Lansdown). Lansdown is an insurance broker across a variety of classes of business, with a particular specialism in blocks of flats and apartments and high net worth homes. Lansdown was acquired as part of the Group's strategy to identify new market sectors in which to grow, either organically or through acquisition, and is included within the Broking and Advisory segment in note 5. The amounts recognised in respect of the identifiable assets acquired are as set out in the table below. Property, plant and equipment Intangible assets Total identifiable assets Goodwill Total consideration Satisfied by: Cash Contingent consideration arrangement Total consideration £000 12 1,166 1,178 4,392 5,570 5,000 570 5,570 The contingent consideration arrangement required £2,100,000 of retained commission income to be received for the twelve months to 15 April 2015, with the potential amount of the future payment that the Group could be required to make being between £nil and £1,000,000. In 2014, the fair value of the contingent consideration was estimated to be £570,000 based on commission forecasts, without discounting as the payment was payable after exactly one year from the date of acquisition. The actual contingent consideration paid in 2015 was £587,000. 16 Disposal of business On 20 January 2015, Ecclesiastical Financial Advisory Services Limited entered into an agreement to transfer its mortgage business to Holmesdale Building Society. The transfer was completed on 1 February 2015. The net assets at the date of disposal were: Financial investments Consideration and costs of sale: Cash received Contingent consideration arrangement Sale costs and related net expenses Loss on disposal £000 6,084 (5,260) (824) 19 19 The net cash inflow arising on disposal was £5,260,000. The contingent consideration is deferred over the next seven years and is dependent on the development of the mortgage book. At the prior year end date, the assets were classified as held for sale (see note 26). ANNUAL REPORT & ACCOUNTS 2015 169 NOTES TO THE FINANCIAL STATEMENTS 17 Goodwill and other intangible assets Group Cost At 1 January 2015 Additions Disposals Exchange differences At 31 December 2015 Accumulated impairment losses and amortisation At 1 January 2015 Amortisation charge for the year Impairment losses for the year Disposals Exchange differences At 31 December 2015 Net book value at 31 December 2015 Cost (restated) At 1 January 2014 Additions Acquisition Disposals Exchange differences At 31 December 2014 Accumulated impairment losses and amortisation (restated) At 1 January 2014 Amortisation charge for the year Impairment losses for the year Disposals Exchange differences At 31 December 2014 Net book value at 31 December 2014 Computer software £000 Other intangible assets £000 20,698 1,817 (1,799) (428) 20,288 16,414 1,203 - (1,788) (125) 15,704 4,584 22,540 1,548 - (3,348) (42) 20,698 18,587 1,176 - (3,329) (20) 16,414 4,284 5,084 - - - 5,084 4,010 130 - - - 4,140 944 3,918 - 1,166 - - 5,084 3,502 508 - - - 4,010 1,074 Goodwill £000 23,779 - - - 23,779 139 - 64 - - 203 23,576 19,387 - 4,392 - - 23,779 72 - 67 - - 139 23,640 Total £000 49,561 1,817 (1,799) (428) 49,151 20,563 1,333 64 (1,788) (125) 20,047 29,104 45,845 1,548 5,558 (3,348) (42) 49,561 22,161 1,684 67 (3,329) (20) 20,563 28,998 £16,885,000 of the goodwill balance in the current and prior year relates to the acquisition of South Essex Insurance Holdings Limited during 2008. £4,392,000 of the balance relates to the acquisition of Lansdown Insurance Brokers Limited during the prior year (see note 15). The recoverable amounts, determined on a value in use basis, indicate no impairment has arisen. The calculation uses cash flow projections based on management-approved business plans, covering a three-year period, with forecast annual cash flows at the end of the planning period continuing thereafter in perpetuity at the UK long-term average growth rate of 2.3% (2014: 2.3%), sourced from the Office for Budget Responsibility. The discount rate of 11% reflects the way that the market would assess the specific risks associated with the estimated cash flows (2014: 12%). Assumptions used are consistent with historical experience within the business acquired and external sources of information. The headroom above the goodwill carrying value is significant and reasonably possible changes to the key assumptions do not result in impairment. Other intangible assets consist of acquired brand, customer and distribution relationships, which have an overall remaining useful life of two years on a weighted average basis. 170 ANNUAL REPORT & ACCOUNTS 2015 Parent Cost At 1 January 2015 Additions Disposals Exchange differences At 31 December 2015 Amortisation At 1 January 2015 Charge for the year Disposals Exchange differences At 31 December 2015 Net book value at 31 December 2015 Cost At 1 January 2014 Additions Disposals Exchange differences At 31 December 2014 Amortisation At 1 January 2014 Charge for the year Disposals Exchange differences At 31 December 2014 Net book value at 31 December 2014 18 Deferred acquisition costs At 1 January Increase in the period Release in the period Exchange differences At 31 December All balances are current. Computer software £000 19,629 1,392 (1,462) (418) 19,141 15,399 1,116 (1,462) (118) 14,935 4,206 19,873 1,547 (1,741) (50) 19,629 16,078 1,092 (1,741) (30) 15,399 4,230 2015 2014 Group £000 31,117 28,626 (30,380) (969) 28,394 Parent £000 26,974 24,831 (26,501) (722) 24,582 Group £000 34,757 31,267 (34,594) (313) 31,117 Parent £000 30,542 26,964 (30,341) (191) 26,974 ANNUAL REPORT & ACCOUNTS 2015 171 NOTES TO THE FINANCIAL STATEMENTS 19 Retirement benefit schemes Defined benefit pension plans The Group's main plan is a defined benefit plan operated by the Parent for UK employees, which includes two discrete sections, the EIO Section and Ansvar Section. The assets of the plan are held separately from those of the Group by the Trustee of the Ecclesiastical Insurance Office plc Staff Retirement Benefit Fund (the 'Fund'). The Fund is subject to the Statutory Funding Objective under the Pensions Act 2004. An independent qualified actuary appointed by the Trustee is responsible for undertaking triennial valuations to determine whether the Statutory Funding Objective is met. Pension costs for the plan are determined by the Trustee, having considered the advice of the actuary and having consulted with the employer. The most recent triennial valuation was at 31 December 2013. Actuarial valuations were reviewed and updated by the actuary at 31 December 2015 for IAS 19 (R) purposes. In the current year, the IAS 19 (R) surplus in the scheme has been restricted in accordance with International Financial Reporting Interpretations Committee 14 (IFRIC 14). The Parent is also the sponsoring employer for the Ecclesiastical Insurance Office plc Pension and Life Assurance Scheme (EIOPLA). This is a defined benefit scheme that has been closed to new entrants since 1 July 1998, providing benefits to pensioners of Methodist Insurance plc, a company with a similar culture and whose insurance risks, excluding terrorism, are fully reinsured by the Parent. The assets of the scheme are held separately from those of the Parent. The most recent triennial valuation was at 31 December 2013. The scheme had not previously been reported within the Group accounts, and was therefore shown as a transfer in, in the prior year. On 30 June 2015, formal notice was given to the Trustee of the Ecclesiastical Insurance Office plc Pension & Life Assurance Scheme (EIOPLA) to wind up the defined benefit pension scheme. The wind-up formally commenced on 1 July 2015. On 18 December 2015, the scheme’s defined benefit obligations were discharged, resulting in nil obligations at the year end date. The wind-up is expected to complete in the first half of 2016. In the prior year, the IAS 19 (R) surplus in the scheme was derecognised in full due to the uncertainty of its recoverability. In the current year, part of the IAS 19 (R) surplus has been recognised in line with the amount of surplus that the Parent expects to receive when the scheme wind-up is completed in 2016. The Irish defined benefit plan closed on 31 March 2014 and was accounted for as a curtailment and settlement in the prior year. The plans typically expose the Group to risks such as: - - - - Investment risk: The Fund holds some of its investments in asset classes, such as equities, which have volatile market values and, while these assets are expected to provide the best returns over the long term, any short-term volatility could cause additional funding to be required if a deficit emerges. Derivative contracts are used from time to time, which would limit losses in the event of a fall in equity markets. Interest rate risk: Scheme liabilities are assessed using market rates of interest to discount the liabilities and are therefore subject to any volatility in the movement of the market rate of interest. The net interest income or expense recognised in profit or loss is also calculated using the market rate of interest. Inflation risk: A significant proportion of scheme benefits are linked to inflation. Although scheme assets are expected to provide a good hedge against inflation over the long term, movements over the short term could lead to a deficit emerging. Mortality risk: In the event that members live longer than assumed the liabilities may be understated originally, and a deficit may emerge if funding has not adequately provided for the increased life expectancy. The Group's main defined benefit plan is now closed to new entrants but remains open to future accrual. The Group operates a number of defined contribution pension plans, for which contributions by the Group are disclosed in note 12. 172 ANNUAL REPORT & ACCOUNTS 2015 Group and Parent The amounts recognised in the statement of financial position are determined as follows: Present value of funded obligations Fair value of plan assets Restrictions on asset recognised Net asset in the statement of financial position Movements in the net asset recognised in the statement of financial position are as follows: At 1 January Exchange differences Expense charged to profit or loss* Amounts recognised in other comprehensive income Contributions paid At 31 December The amounts recognised through profit or loss are as follows: Current service cost Administration cost Interest expense on liabilities Interest income on plan assets Gains on settlements/curtailments Total, included in employee benefits expense The amounts recognised in the statement of other comprehensive income are as follows: Return on plan assets, excluding interest income Experience gains on liabilities Gains from changes in demographic assumptions Gains/(losses) from changes in financial assumptions Change in asset ceiling Total included in other comprehensive income 2015 £000 2014 £000 (276,562) 294,498 17,936 (7,283) 10,653 (277,459) 298,840 21,381 (563) 20,818 20,818 - (3,305) (9,462) 2,602 10,653 3,645 342 10,125 (10,962) 155 3,305 (8,594) 197 - 5,655 (6,720) (9,462) 32,288 22 (1,894) (12,693) 3,095 20,818 3,516 392 11,549 (13,151) (412) 1,894 2,391 5,569 5,273 (26,051) 125 (12,693) * Charge to profit or loss includes £535,000 (2014: £429,000) in respect of member salary sacrifice contributions and costs ultimately borne by related parties. The following is the analysis of the defined benefit pension balances for financial reporting purposes: Group and Parent Pension assets Pension liabilities 2015 £000 10,893 (240) 10,653 2014 £000 21,068 (250) 20,818 ANNUAL REPORT & ACCOUNTS 2015 173 NOTES TO THE FINANCIAL STATEMENTS 19 Retirement benefit schemes (continued) The principal actuarial assumptions (expressed as weighted averages) were as follows: Discount rate Inflation (RPI) Inflation (CPI) Future salary increases Future increase in pensions in deferment Future pension increases (linked to RPI) Future pension increases (linked to CPI) 2015 % 3.80 3.10 2.10 4.60 2.10 3.10 2.10 2014 % 3.70 3.10 2.10 4.60 2.10 3.11 2.10 Mortality rate 2015 2014 The average life expectancy in years of a pensioner retiring at age 65, at the year end date, is as follows: Male Female The average life expectancy in years of a pensioner retiring at age 65, 20 years after the year end date, is as follows: Male Female Plan assets are weighted as follows: Cash and cash equivalents Equity instruments UK quoted Overseas quoted Debt instruments UK public sector quoted - fixed interest UK non-public sector quoted - fixed interest UK quoted - index-linked Property The actual return on plan assets was a gain of £2,368,000 (2014: gain of £15,542,000). 24.0 25.6 26.3 27.9 23.7 25.3 26.0 27.6 2015 % 2014 % 3 24 23 47 2 20 14 36 14 5 25 25 50 2 18 15 35 10 100 100 174 ANNUAL REPORT & ACCOUNTS 2015 The movements in the fair value of plan assets and the present value of the defined benefit obligation over the year are as follows: Plan assets At 1 January Transfer in Interest income Return on plan assets, excluding interest income Pension benefits paid and payable Contributions paid Assets distributed on settlements Exchange differences At 31 December Defined benefit obligation At 1 January Transfer in Current service cost Administration cost Interest cost Pension benefits paid and payable Experience gains on liabilities Gains from changes in demographic assumptions (Gains)/losses from changes in financial assumptions Liabilities extinguished on settlements/curtailments Exchange differences At 31 December Asset ceiling At 1 January Transfer in Change in asset ceiling At 31 December History of plan assets and liabilities Present value of defined benefit obligations Fair value of plan assets Restrictions on asset recognised Surplus 2015 £000 (276,562) 294,498 17,936 (7,283) 10,653 2014 £000 (277,459) 298,840 21,381 (563) 20,818 2013 £000 (255,604) 287,892 32,288 - 32,288 2015 £000 2014 £000 298,840 - 10,962 (8,594) (7,113) 2,602 (2,199) - 294,498 277,459 - 3,645 342 10,125 (7,113) (197) - (5,655) (2,044) - 276,562 563 - 6,720 7,283 2012 £000 287,892 2,947 13,151 2,391 (6,079) 3,095 (4,416) (141) 298,840 255,604 2,259 3,516 392 11,549 (6,079) (5,569) (5,273) 26,051 (4,828) (163) 277,459 - 688 (125) 563 2011 £000 (225,164) 261,685 36,521 - 36,521 (199,087) 234,314 35,227 - 35,227 The weighted average duration of the defined benefit obligation at the end of the reporting period is 23 years (2014: 23 years). The contribution expected to be paid by the Group during the year ending 31 December 2016 is £2.5 million. Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation, expected salary increases and mortality. The sensitivity analysis below has been determined based on reasonably possible changes in the assumptions occurring at the end of the reporting period assuming that all other assumptions are held constant. Assumption Change in assumption Impact on plan liabilities 2015 2014 Discount rate Inflation Salary increase Life expectancy Increase/decrease by 0.5% Increase/decrease by 0.5% Increase/decrease by 0.5% Increase/decrease by 1 year Decrease/increase by 10%/12% Increase/decrease by 10%/9% Increase/decrease by 3% Increase/decrease by 3% Decrease/increase by 10%/12% Increase/decrease by 10%/9% Increase/decrease by 3% Increase/decrease by 3% ANNUAL REPORT & ACCOUNTS 2015 175 NOTES TO THE FINANCIAL STATEMENTS 19 Retirement benefit schemes (continued) Post-employment medical benefits The Parent operates a post-employment medical benefit plan, for which it chooses to self-insure. The method of accounting, assumptions and the frequency of valuation are similar to those used for the defined benefit pension plans. The provision of the plan leads to a number of risks as follows: - - - - Interest rate risk: The reserves are assessed using market rates of interest to discount the liabilities and are therefore subject to volatility in the movement of the market rates of interest. A reduction in the market rate of interest would lead to an increase in the reserves required to be held. Medical expense assumption: Claims experience can be volatile, exposing the Company to the risk of being required to pay over and above the assumed reserve. If future claims experience differs significantly from that experienced in previous years this will increase the risk to the Company. Spouse and widows' contributions: The self-insured benefit includes a potential liability for members who pay contributions in respect of their spouse and for widows who pay contributions. There is the possibility that the contributions charged may not be sufficient to cover the medical costs that fall due. Mortality risk: If members live longer than expected, the Company is exposed to the expense of medical claims for a longer period, with increased likelihood of needing to pay claims. The amounts recognised in the statement of financial position are determined as follows: Group and Parent Present value of unfunded obligations and net obligations in the statement of financial position Movements in the net obligations recognised in the statement of financial position are as follows: At 1 January Total expense charged to profit or loss Net actuarial (gains)/losses during the year, recognised in other comprehensive income Benefits paid At 31 December The amounts recognised through profit or loss are as follows: Current service cost Interest cost Total, included in employee benefits expense 2015 £000 9,193 12,547 459 (3,653) (160) 9,193 - 459 459 2014 £000 12,547 11,744 551 491 (239) 12,547 33 518 551 The weighted average duration of the net obligations at the end of the reporting period is 19 years (2014: 22 years). The main actuarial assumptions for the plan are a long-term increase in medical costs of 9.1% (2014: 12.0%) and a discount rate of 3.8% (2014: 3.7%). The reduction in medical cost inflation is the result of a change in the calculation methodology following actuarial advice received. The change in methodology generated an actuarial gain of £3.5m. The sensitivity analysis below has been determined based on reasonably possible changes in the assumptions occurring at the end of the accounting period assuming that all other assumptions are held constant. Assumption Change in assumption Impact on plan liabilities 2015 2014 Discount rate Medical expense inflation Life expectancy Increase/decrease by 0.5% Increase/decrease by 1.0% Increase/decrease by 1 year Decrease/increase by 8%/10% Increase/decrease by 19%/15% Increase/decrease by 9%/8% Decrease/increase by 10%/11% Increase/decrease by 23%/18% Increase/decrease by 11%/8% 176 ANNUAL REPORT & ACCOUNTS 2015 20 Property, plant and equipment Group Cost or valuation At 1 January 2015 Additions Disposals Revaluation Exchange differences At 31 December 2015 Depreciation At 1 January 2015 Charge for the year Disposals Exchange differences At 31 December 2015 2,595 - (225) 170 - 2,540 - - - - - Net book value at 31 December 2015 2,540 Cost or valuation At 1 January 2014 Additions Acquisition Disposals Revaluation Exchange differences At 31 December 2014 Depreciation At 1 January 2014 Charge for the year Disposals Exchange differences At 31 December 2014 3,065 - - (504) 30 4 2,595 - - - - - Net book value at 31 December 2014 2,595 Land and buildings £000 Motor vehicles £000 Furniture, fittings and equipment £000 Computer equipment £000 2,524 737 (742) - - 2,519 1,078 394 (508) - 964 1,555 2,840 471 - (787) - - 2,524 1,131 454 (507) - 1,078 1,446 5,414 1,868 (290) - (93) 6,899 4,373 604 (280) (72) 4,625 2,274 6,157 509 12 (1,227) - (37) 5,414 5,177 379 (1,151) (32) 4,373 1,041 5,995 772 (884) - (76) 5,807 4,672 710 (860) (50) 4,472 1,335 7,530 603 - (2,131) - (7) 5,995 5,992 805 (2,125) - 4,672 1,323 Total £000 16,528 3,377 (2,141) 170 (169) 17,765 10,123 1,708 (1,648) (122) 10,061 7,704 19,592 1,583 12 (4,649) 30 (40) 16,528 12,300 1,638 (3,783) (32) 10,123 6,405 All properties were revalued at 31 December 2015, with the exception of a certain property, which was revalued at 31 December 2014. Valuations were carried out by Cluttons LLP, an external firm of chartered surveyors, using standard industry methodology to determine a fair market value. All properties are classified as level 2 assets. The value of land and buildings on a historical cost basis is £2,723,000 (2014: £2,867,000). Depreciation expense has been charged in other operating and administrative expenses. Included within net book value of motor vehicles is £1,364,000 (2014: £1,182,000) in respect of assets held under finance leases. ANNUAL REPORT & ACCOUNTS 2015 177 NOTES TO THE FINANCIAL STATEMENTS 20 Property, plant and equipment (continued) Parent Cost or valuation At 1 January 2015 Additions Disposals Revaluation Exchange differences At 31 December 2015 Depreciation At 1 January 2015 Charge for the year Disposals Exchange differences At 31 December 2015 Net book value at 31 December 2015 2,190 Cost or valuation At 1 January 2014 Additions Disposals Revaluation Exchange differences At 31 December 2014 Depreciation At 1 January 2014 Charge for the year Disposals Exchange differences At 31 December 2014 2,360 - (95) 30 - 2,295 - - - - - Net book value at 31 December 2014 2,295 Land and buildings £000 Motor vehicles £000 Furniture, fittings and equipment £000 Computer equipment £000 2,295 - (225) 120 - 2,190 - - - - - 2,386 737 (742) - - 2,381 1,017 374 (508) - 883 1,498 2,701 370 (685) - - 2,386 1,047 417 (447) - 1,017 1,369 5,204 1,803 (278) - (89) 6,640 4,247 562 (278) (70) 4,461 2,179 5,731 505 (995) - (37) 5,204 4,922 352 (995) (32) 4,247 957 5,486 619 (775) - (59) 5,271 4,414 619 (775) (42) 4,216 1,055 5,628 510 (640) - (12) 5,486 4,367 695 (640) (8) 4,414 1,072 Total £000 15,371 3,159 (2,020) 120 (148) 16,482 9,678 1,555 (1,561) (112) 9,560 6,922 16,420 1,385 (2,415) 30 (49) 15,371 10,336 1,464 (2,082) (40) 9,678 5,693 The Company’s properties were revalued at 31 December 2015, with the exception of a certain property, which was revalued at 31 December 2014. Valuations were carried out by Cluttons LLP, an external firm of chartered surveyors, using standard industry methodology to determine a fair market value. All properties are classified as level 2 assets. The value of land and buildings on a historical cost basis is £2,323,000 (2014: £2,467,000). Depreciation expense has been charged in other operating and administrative expenses. Included within net book value of motor vehicles is £1,364,000 (2014: £1,182,000) in respect of assets held under finance leases. 178 ANNUAL REPORT & ACCOUNTS 2015 21 Investment property Group and Parent Net book value at 1 January Additions Disposals Fair value gains Net book value at 31 December 2015 £000 69,775 24,130 - 4,845 98,750 2014 £000 45,099 23,817 (1,600) 2,459 69,775 The Group’s investment properties were last revalued at 31 December 2015 by Cluttons LLP, an external firm of chartered surveyors, with the exception of one property purchased close to the year end which has been valued at its purchase price. Valuations were carried out using standard industry methodology to determine a fair market value. All properties are classified as level 2 assets. Investment properties are held for long-term capital appreciation rather than short-term sale. Rental income arising from the investment properties owned by both the Group and Parent amounted to £4,977,000 (2014: £3,818,000) and is included in net investment return. Other operating and administrative expenses include £742,000 (2014: £391,000) relating to investment property. 22 Financial investments Financial investments summarised by measurement category are as follows: Financial investments at fair value through profit or loss Equity securities - listed - unlisted Debt securities - government bonds - listed - unlisted Derivative financial instruments - options Loans and receivables Other loans Parent investments in subsidiary undertakings Shares in subsidiary undertakings 2015 Group £000 Parent £000 2014 Group £000 Parent £000 274,514 31,218 160,691 366,051 187 713 833,374 243,018 31,217 95,874 261,461 187 713 632,470 269,556 20,349 196,179 399,848 238 - 886,170 239,628 20,348 118,947 285,188 238 - 664,349 16 14 16 14 - 50,065 - 50,065 Total financial investments 833,390 682,549 886,186 714,428 Current Non-current 408,439 424,951 370,387 312,162 327,552 558,634 296,566 417,862 All investments in subsidiary undertakings are unlisted. ANNUAL REPORT & ACCOUNTS 2015 179 NOTES TO THE FINANCIAL STATEMENTS 23 Derivative financial instruments The Group utilises non-hedge derivatives to mitigate equity price risk arising from investments held at fair value. Group and Parent Equity/Index contracts Futures Options All balances are current. Contract/ notional amount £000 30,763 7,501 38,264 2015 Fair value asset £000 - 713 713 Fair value liability £000 1,466 - 1,466 Contract/ notional amount £000 - - - 2014 Fair value asset £000 - - - Fair value liability £000 - - - The notional amount above reflects the aggregate of individual derivative positions on a gross basis and so gives an indication of the overall scale of the derivative transaction. It does not reflect current market values of the open positions. Derivative fair value assets are recognised within financial investments (note 22) and derivative fair value liabilities are recognised within other liabilities (note 31). Amounts pledged as collateral in respect of derivative contracts are disclosed in note 25. 24 Other assets Receivables arising from insurance and reinsurance contracts - due from contract holders - due from agents, brokers and intermediaries - due from reinsurers Other receivables - accrued interest and rent - other prepayments and accrued income - amounts owed by related parties - other debtors Current Non-current 2015 2014 Group £000 27,310 40,095 9,481 6,109 3,173 20,673 18,001 124,842 103,384 21,458 Parent £000 27,310 28,733 4,432 4,725 2,756 26,760 1,831 96,547 70,567 25,980 Group £000 24,469 40,645 7,230 7,032 3,074 20,586 16,358 119,394 97,936 21,458 Parent £000 24,468 29,735 5,437 5,317 2,745 34,596 (59) 102,239 69,323 32,916 The Group has recognised a credit of £63,000 (2014: charge of £449,000) in other operating and administrative expenses in the statement of profit or loss for the impairment of its trade and other receivables during the year. The Parent has recognised a credit of £67,000 (2014: charge of £502,000). is held. The directors There has been no significant change in the recoverability of the Group's trade receivables, for which no collateral consider that the amounts are recoverable at their carrying values, which are stated net of an allowance for doubtful debts for those debtors that are individually determined to be impaired. Included within amounts owed by related parties of the Parent is £4,948,000 (2014: £4,808,000) pledged as collateral insurance liability. in respect of an 180 ANNUAL REPORT & ACCOUNTS 2015 Movement in the allowance for doubtful debts Balance at 1 January Movement in the year Balance at 31 December 2015 2014 Group £000 214 (63) 151 Parent £000 169 (63) 106 Group £000 323 (109) 214 Parent £000 189 (20) 169 Included within trade receivables of the Group is £3,457,000 (2014: £3,365,000) overdue but not impaired, of which £3,178,000 (2014: £3,020,000) is not more than three months overdue at the reporting date. Included within trade receivables of the Parent is £2,533,000 (2014: £2,095,000) overdue but not impaired, of which £2,255,000 (2014: £1,844,000) is not more than three months overdue at the reporting date. 25 Cash and cash equivalents Cash at bank and in hand Short-term bank deposits 2015 2014 Group £000 51,454 66,987 118,441 Parent £000 29,318 55,461 84,779 Group £000 48,167 59,359 107,526 Parent £000 29,428 48,346 77,774 Included within short-term bank deposits of the Group and Parent are cash deposits of £3,122,000 (2014: £nil) pledged as collateral by way of cash margins on open derivative contracts and cash to cover derivative liabilities. 26 Current assets held for sale Ecclesiastical Financial Advisory Services Limited ceased to offer new mortgages following a strategic review in 2007, although it continued to administer the existing book. During the prior year management decided to dispose of the mortgage book in order to more clearly focus their attention on the current elements of the business. After the end of the prior financial year the Company entered into an agreement to transfer its legacy mortgage business to Holmesdale Building Society. The transfer was completed on 1 February 2015. The current assets held for sale consisted of mortgages secured on residential property. Cost at 1 January Repayments and redemptions Market value adjustment Carrying value at 31 December 2014 £000 7,892 (1,022) (666) 6,204 The effective interest rate on the mortgages in the prior year was 4.71%. Clients have the option to redeem mortgages before the end of the mortgage term. The directors consider that the carrying value approximates to fair value. There were no debts which were past due at the prior reporting date and no amounts were impaired during the prior year. The major class of assets comprising the operations classified as held for sale is financial investments. ANNUAL REPORT & ACCOUNTS 2015 181 NOTES TO THE FINANCIAL STATEMENTS 27 Called up share capital Ordinary shares of 4p each 8.625% Non-Cumulative Irredeemable Preference shares of £1 each The number of shares in issue are as follows: Ordinary shares of 4p each At 1 January and 31 December 8.625% Non-Cumulative Irredeemable Preference shares of £1 each At 1 January and 31 December Issued, allotted and fully paid 2015 £000 14,027 106,450 120,477 2014 £000 14,027 106,450 120,477 350,678 350,678 106,450 106,450 On winding up, the assets of the Company remaining after payment of its liabilities are to be applied to holders of the Non-Cumulative Irredeemable Preference shares in repaying the nominal capital sum paid up on the shares and an amount equal to all arrears of accrued and unpaid dividends up to the date of the commencement of the winding up. The residual interest in the assets of the Company after deducting all liabilities belongs to the Ordinary shareholders. Holders of the Non-Cumulative Irredeemable Preference shares are not entitled to receive notice of, or to attend, or vote at any general meeting of the Company unless at the time of the notice convening such meeting, the dividend on such shares which is most recently payable on such shares shall not have been paid in full, or where a resolution is proposed varying any of the rights of such shares, or for the winding up of the Company. 182 ANNUAL REPORT & ACCOUNTS 2015 28 Insurance liabilities and reinsurance assets Gross Claims outstanding Unearned premiums Long-term business provision Total gross insurance liabilities Recoverable from reinsurers Claims outstanding Unearned premiums Total reinsurers’ share of insurance liabilities Net Claims outstanding Unearned premiums Long-term business provision Total net insurance liabilities Gross insurance liabilities Current Non-current Reinsurance assets Current Non-current 2015 Group £000 551,571 153,697 85,422 790,690 120,753 49,987 170,740 430,818 103,710 85,422 619,950 Parent £000 472,542 133,282 - 605,824 90,646 39,768 130,414 381,896 93,514 - 475,410 2014 Group £000 564,380 161,624 94,324 820,328 107,331 50,134 157,465 457,049 111,490 94,324 662,863 Parent £000 477,881 141,006 - 618,887 75,324 39,680 115,004 402,557 101,326 - 503,883 321,812 468,878 279,883 325,941 324,979 495,349 280,408 338,479 98,967 71,773 82,913 47,501 92,728 64,737 75,532 39,472 (a) General business insurance contracts (i) Reserving methodology Reserving for non-life insurance claims is a complex process and the Group adopts recognised actuarial methods and, where appropriate, other calculations and statistical analysis. Actuarial methods used include the chain ladder, Bornhuetter-Ferguson and average cost methods. Chain ladder methods extrapolate paid amounts, incurred amounts (paid claims plus case estimates) and the number of claims or average cost of claims, to ultimate claims based on the development of previous years. This method assumes that previous patterns are a reasonable guide to future developments. Where this assumption is felt to be unreasonable, adjustments are made or other methods such as Bornhuetter- Ferguson or average cost are used. The Bornhuetter-Ferguson method places more credibility on expected loss ratios for the most recent loss years. For smaller portfolios the materiality of the business and data available may also shape the methods used in reviewing reserve adequacy. The selection of results for each accident year and for each portfolio depends on an assessment of the most appropriate method. Sometimes a combination of techniques is used. The average weighted term to payment is calculated separately by class of business and is based on historical settlement patterns. (ii) Calculation of uncertainty margins To reflect the uncertain nature of the outcome of the ultimate settlement cost of claims an uncertainty margin is added to the best estimate. The addition for uncertainty is assessed using actuarial methods including the Mack method and Bootstrapping techniques, based on at least the 75th percentile confidence level for each portfolio. The Mack method was used in current and prior periods, while Bootstrapping techniques were intorduced in 2015. For smaller portfolios, where these methods cannot be applied, provisions are calculated at a level intended to provide an equivalent probability of sufficiency. Where the standard methods cannot allow for changing circumstances, additional uncertainty margins are added and are typically expressed as a percentage of outstanding claims. This approach generally results in a favourable release of provisions in the current financial year, arising from the settlement of claims relating to previous financial years, as shown in part (c) of the note. (iii) Calculation of provisions for latent claims The Group adopts commonly used industry methods including those based on claims frequency and severity and benchmarking. ANNUAL REPORT & ACCOUNTS 2015 183 NOTES TO THE FINANCIAL STATEMENTS 28 Insurance liabilities and reinsurance assets (continued) (iv) Discounting General insurance outstanding claims provisions are undiscounted, except for designated long-tail classes of business for which discounted provisions are held in the following territories: Discount rate Mean term of discounted liabilities (years) Geographical territory 2015 2014 2015 2014 UK and Ireland Canada Australia 1.0% to 3.5% 1.1% to 3.2% 2.0% 0.8% to 3.3% 1.3% to 3.0% 2.3% 15 14 4 14 14 4 Parent consists of UK, Ireland and Canada. Group also includes Australia. The above rates of interest are based on government bond yields of the relevant currency and term at the reporting date. Adjustments are made, where appropriate, to reflect portfolio assets held and to allow for future investment expenses. At the year end the undiscounted gross outstanding claims provision was £603,735,000 for (2014: £514,453,000). the Group (2014: £606,259,000), and £520,085,000 for the Parent At 31 December 2015, it is estimated that a fall of 1% in the discount rates used would increase the Group's net outstanding claims provisions by £14,380,000 (2014: £13,865,000). Financial investments backing these liabilities are not hypothecated across general insurance classes of business. The sensitivity of Group profit or loss and other equity reserves to interest rate risk, taking into account the mitigating effect on asset values is provided in note 4 (h). (v) Assumptions The Group follows a process of reviewing its reserves for outstanding claims on a regular basis. This involves an appraisal of each portfolio with respect to ultimate claims liability for the recent exposure period as well as for earlier periods, together with a review of the factors that have the most significant impact on the assumptions used to determine the reserving methodology. The work conducted on each portfolio is subject to an internal peer review and management sign-off process. insurance reserves are the anticipated number and ultimate The most significant assumptions in determining the undiscounted general settlement cost of claims, and the extent to which reinsurers will share in the cost. Factors which influence decisions on assumptions include legal and judicial changes, significant weather events, other catastrophes, subsidence events, exceptional claims or substantial changes in claims experience and developments in older or latent claims. Significant factors influencing assumptions about reinsurance are the terms of the reinsurance treaties, the anticipated time taken to settle a claim and the incidence of large individual and aggregated claims. (vi) Changes in assumptions There are no significant changes in assumptions. (vii) Sensitivity of results The ultimate amount of claims settlement is uncertain and the Group's aim is to reserve to at least the 75th percentile confidence level. If final settlement of insurance claims reserved for at the year end turns out to be 10% higher or lower than the reserves included in these financial statements, the following pre-tax Group loss or profit will be realised: Liability Property Motor - UK - Overseas - UK - Overseas - UK 2015 2014 Gross £000 26,000 8,400 9,300 4,900 2,200 Net £000 24,000 7,200 4,700 1,600 1,100 Gross £000 28,100 11,000 5,500 4,700 2,200 Net £000 25,600 8,500 3,100 2,000 1,100 184 ANNUAL REPORT & ACCOUNTS 2015 (viii) Claims development tables The nature of liability classes of business is that claims may take a number of years to settle and before the final liability is known. The tables below show the development of the undiscounted estimate of ultimate gross and net claims cost for these classes across all territories. Estimate of ultimate gross claims 2006 £000 2007 £000 2008 £000 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 2014 £000 2015 £000 Total £000 45,688 45,900 40,092 36,168 30,791 28,470 27,154 27,377 28,534 28,637 50,840 47,307 43,270 35,510 35,556 34,925 34,036 33,917 33,028 56,420 53,552 47,643 44,658 40,433 37,546 37,864 37,289 74,742 84,476 82,095 59,807 75,550 76,371 55,250 62,239 71,543 66,422 68,587 57,134 55,695 61,330 60,841 58,631 62,074 54,942 100,612 81,725 61,901 88,046 80,027 50,571 78,196 69,860 72,516 46,464 28,637 33,028 37,289 54,942 62,074 60,841 72,516 69,860 50,571 46,464 516,222 (30,915) (43,347) (22,954) 5,683 (27,910) 5,118 Outstanding liability Effect of discounting Present value Discounted liability in respect of earlier years Total discounted gross liability (for liability classes) included in insurance liabilities in the statement of financial position (30,248) (21,720) (266,629) (4,973) 42,268 48,140 45,598 45,638 249,593 (16,085) 233,508 119,772 353,280 (45,397) (38,339) 11,595 16,677 22,502 6,374 (826) 2006 £000 2007 £000 2008 £000 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 2014 £000 2015 £000 Total £000 38,332 41,927 46,882 60,810 69,230 66,864 37,518 38,967 43,344 46,660 60,202 63,770 33,711 33,464 37,204 43,853 50,834 62,587 30,329 28,093 37,669 49,444 53,390 60,653 24,731 28,569 34,514 47,970 50,526 52,985 24,821 28,679 33,384 47,482 51,031 24,450 29,217 33,667 45,534 24,710 29,904 33,020 25,717 29,037 25,606 84,511 71,798 52,350 34,769 77,629 60,950 69,580 54,792 63,068 40,153 25,606 29,037 33,020 45,534 51,031 52,985 63,068 54,792 40,153 34,769 429,995 (20,889) (24,663) (27,650) 5,370 4,374 (35,672) (37,349) (34,357) 9,862 13,682 18,628 (3,826) (27,090) (12,667) 35,978 42,125 36,327 4,717 Outstanding liability Effect of discounting Present value Discounted liability in respect of earlier years Total discounted gross liability (for liability classes) included in insurance liabilities in the statement of financial position (629) (224,792) 34,140 205,203 (12,872) 192,331 104,372 296,703 Group At end of year One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Current estimate of ultimate claims Cumulative payments to date Parent At end of year One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Current estimate of ultimate claims Cumulative payments to date ANNUAL REPORT & ACCOUNTS 2015 185 NOTES TO THE FINANCIAL STATEMENTS 28 Insurance liabilities and reinsurance assets (continued) Estimate of ultimate net claims 2006 £000 2007 £000 2008 £000 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 2014 £000 2015 £000 Total £000 41,007 46,235 51,795 64,476 73,218 75,302 88,247 76,729 59,633 40,976 43,107 48,432 53,700 64,796 72,336 79,272 66,475 47,690 35,783 38,979 44,498 50,805 57,758 68,057 73,735 60,075 33,145 34,180 42,524 50,168 59,353 66,822 69,837 30,283 35,004 39,321 50,062 55,975 28,230 34,688 37,208 49,879 57,012 26,926 33,702 37,606 48,960 27,150 33,718 37,089 28,016 32,819 28,237 60,314 42,739 28,237 32,819 37,089 48,960 57,012 60,314 69,837 60,075 47,690 42,739 484,772 5,429 (22,808) (27,723) (30,715) (39,551) (41,253) 6,374 Outstanding liability Effect of discounting Present value Discounted liability in respect of earlier years Total discounted net liability (for liability classes) included in insurance liabilities in the statement of financial position (809) (250,379) 9,409 15,759 22,342 40,158 45,143 42,753 41,930 234,393 (16,085) 218,308 101,878 320,186 (37,972) (29,679) (14,932) (4,937) 5,096 2006 £000 2007 £000 2008 £000 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 2014 £000 2015 £000 Total £000 59,011 74,361 67,690 50,025 33,122 69,805 57,538 38,944 29,650 33,814 40,198 48,250 59,997 65,297 51,828 33,318 36,959 41,631 51,226 57,135 32,547 34,656 38,270 39,841 49,060 59,873 29,284 27,449 26,905 34,983 43,879 51,827 59,352 61,795 24,103 28,322 34,458 44,064 49,171 52,850 24,707 28,670 33,366 43,640 24,407 29,203 33,666 41,966 24,696 29,904 33,021 25,699 29,037 25,575 49,598 25,575 29,037 33,021 41,966 49,598 52,850 61,795 51,828 38,944 33,122 417,736 (20,889) (24,663) (27,650) 5,371 4,374 4,686 (34,163) (36,795) (12,567) 7,803 12,803 18,551 34,708 39,261 (34,299) (27,087) Outstanding liability Effect of discounting Present value Discounted liability in respect of earlier years Total discounted net liability (for liability classes) included in insurance liabilities in the statement of financial position (3,825) 35,119 (629) 32,493 (222,567) 195,169 (12,872) 182,297 91,248 273,545 Group At end of year One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Current estimate of ultimate claims Cumulative payments to date Parent At end of year One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Current estimate of ultimate claims Cumulative payments to date 186 ANNUAL REPORT & ACCOUNTS 2015 (b) Long-term insurance contracts (i) Assumptions The most significant assumptions in determining long-term business reserves are as follows: Mortality An appropriate base table of standard mortality is chosen depending on the type of contract. Where prudent, an allowance is made for future mortality improvements based on trends identified in population data. Investment returns Projected investment returns are based on actual yields for each asset class less an allowance for credit risk, where appropriate. The risk adjusted yields after allowance for investment expenses for the current valuation are as follows: UK and overseas government bonds: non-linked UK and overseas government bonds: index-linked Corporate debt instruments: index-linked 2015 1.66% -0.78% -0.10% 2014 1.52% -0.98% -0.32% The investment return assumption is determined by calculating an overall yield on all cash flows projected to occur from the portfolio of financial assets which are assumed to back the relevant class of liabilities. This is in accordance with a modification to PRA Rule INSPRU 3.1.35R, which was granted in September 2011. For index-linked assets, the real yield is shown gross of tax. Funeral plans renewal expense level and inflation Numbers of policies in force and both projected and actual expenses have been considered when setting the base renewal expense level. The unit renewal expense assumption for this business is £2.70 per annum (2014: £2.70 per annum). Additionally, now the business volumes are expected to fall, a number of expenses have been reserved for in a separate exercise. A reserve for these expenses is held at £4.8 million. Expense inflation is set with reference to the index-linked UK government bond rates of return, and published figures for earnings inflation, and is assumed to be 3.54% per annum (2014: 3.68%). Tax It has been assumed that tax legislation and rates applicable at 1 January 2016 will continue to apply. All in-force business is classed as protection business and is expected to be taxed on a profits basis. (ii) Changes in assumptions Projected investment returns have been revised in line with the changes in the actual yields of the underlying assets. As a result, liabilities have decreased by £2.2 million (2014: £7.3 million increase). Changes to unit renewal expense assumptions (described in (b)(i) above), was a £0.3 million increase (2014: no effect on insurance liabilities). Mortality assumptions have been revised for funeral plan policies to be based on a more recent population mortality table and to reflect experience of the portfolio over recent years. The impact of this change was a reduction in liabilities of £0.4million. (iii) Sensitivity analysis The sensitivity of profit before tax to changes in the key assumptions used to calculate the long-term business insurance liabilities is shown in the following table. No account has been taken of any correlation between the assumptions. Variable Deterioration in annuitant mortality Improvement in annuitant mortality Increase in fixed interest/cash yields Decrease in fixed interest/cash yields Worsening of base renewal expense level Improvement in base renewal expense level Increase in expense inflation Decrease in expense inflation Change in variable Potential increase/ (decrease) in the result 2015 £000 300 (400) (100) (400) (600) 500 (800) 700 2014 £000 500 (600) 1,000 (1,700) (600) 500 (900) 700 +10% -10% +1% pa -1% pa +10% -10% +1% pa -1% pa ANNUAL REPORT & ACCOUNTS 2015 187 NOTES TO THE FINANCIAL STATEMENTS 28 Insurance liabilities and reinsurance assets (continued) (iv) Available capital resources 2015 Shareholders' equity Adjustments to assets/liabilities Total available capital resources Policyholder liabilities - life insurance business Net actuarial liabilities on statement of financial position 2014 Shareholders' equity Adjustments to assets/liabilities Total available capital resources Policyholder liabilities - life insurance business Net actuarial liabilities on statement of financial position Non-profit life fund £000 (312) 7,500 7,188 85,422 85,422 (1,314) 7,500 6,186 94,324 94,324 Share- holders' fund £000 44,833 (7,500) 37,333 - - 43,008 (7,500) 35,508 - - Total life business £000 44,521 - 44,521 85,422 85,422 41,694 - 41,694 94,324 94,324 Other activities £000 Group total £000 460,413 (133,643) 326,770 504,934 (133,643) 371,291 452,939 (115,468) 337,471 494,633 (115,468) 379,165 Shareholders' equity/(deficit) in the non-profit fund represents the net profit or loss generated by this fund not transferred, to date, to the shareholders' fund. The life shareholders' fund is the balance of shareholder equity in the life business. Other activities include the general insurance business of the Parent and its subsidiaries, and consequently all Group capital not required to meet the solvency requirements of the general business is available to meet the solvency requirements of the life business. The available capital resources in the non-profit life fund, subject to the regulatory capital requirements of the fund itself, are available to meet requirements elsewhere in the Group. The capital requirements of the life business are based on the PRA capital requirements. The Group uses both its Individual Capital Assessment and its Individual Capital Guidance as a tool for determining capital requirements and their sensitivity to various risks. The Group manages these risks by means of its underwriting strategy, reinsurance strategy, investment strategy, and management control framework. (v) Movements in life capital Non-profit life fund £000 6,186 249 670 (393) 32 444 7,188 Share- holders' fund £000 35,508 - - - - 1,825 37,333 Total life business £000 41,694 249 670 (393) 32 2,269 44,521 Published capital resources as at 31 December 2014 Variance between actual and expected experience Effect of changes to valuation interest rates Effect of change in expense assumption Effect of change in inflation assumption Other movements Capital resources as at 31 December 2015 188 ANNUAL REPORT & ACCOUNTS 2015 (c) Movements in insurance liabilities and reinsurance assets Group Claims outstanding At 1 January 2015 Cash (paid)/received for claims settled in the year Change in liabilities/reinsurance assets - arising from current year claims - arising from prior year claims Exchange differences At 31 December 2015 Provision for unearned premiums At 1 January 2015 Increase in the period Release in the period Exchange differences At 31 December 2015 Long-term business provision At 1 January 2015 Effect of claims during the year Changes in assumptions Other movements At 31 December 2015 Claims outstanding At 1 January 2014 Cash (paid)/received for claims settled in the year Change in liabilities/reinsurance assets - arising from current year claims - arising from prior year claims Exchange differences At 31 December 2014 Provision for unearned premiums At 1 January 2014 Increase in the period Release in the period Exchange differences At 31 December 2014 Long-term business provision At 1 January 2014 Effect of claims during the year Changes in assumptions Other movements At 31 December 2014 Gross £000 Reinsurance £000 Net £000 564,380 (174,263) (107,331) 50,721 457,049 (123,542) 200,148 (27,330) (11,364) 551,571 161,624 154,575 (158,464) (4,038) 153,697 94,324 (7,111) (1,988) 197 85,422 (74,035) 7,110 2,782 (120,753) (50,134) (50,038) 49,250 935 (49,987) - - - - - 126,113 (20,220) (8,582) 430,818 111,490 104,537 (109,214) (3,103) 103,710 94,324 (7,111) (1,988) 197 85,422 569,179 (195,279) (89,472) 43,034 479,707 (152,245) 183,977 11,315 (4,812) 564,380 186,642 162,393 (186,044) (1,367) 161,624 92,446 (7,176) 7,317 1,737 94,324 (44,824) (17,482) 1,413 (107,331) (43,121) (50,549) 43,022 514 (50,134) - - - - - 139,153 (6,167) (3,399) 457,049 143,521 111,844 (143,022) (853) 111,490 92,446 (7,176) 7,317 1,737 94,324 ANNUAL REPORT & ACCOUNTS 2015 189 NOTES TO THE FINANCIAL STATEMENTS 28 Insurance liabilities and reinsurance assets (continued) Parent Claims outstanding At 1 January 2015 Cash (paid)/received for claims settled in the year Change in liabilities/reinsurance assets - arising from current year claims - arising from prior year claims Exchange differences At 31 December 2015 Provision for unearned premiums At 1 January 2015 Increase in the period Release in the period Exchange differences At 31 December 2015 Claims outstanding At 1 January 2014 Cash (paid)/received for claims settled in the year Change in liabilities/reinsurance assets - arising from current year claims - arising from prior year claims Exchange differences At 31 December 2014 Provision for unearned premiums At 1 January 2014 Increase in the period Release in the period Exchange differences At 31 December 2014 Gross Reinsurance £000 £000 Net £000 477,881 (131,803) (75,324) 25,730 402,557 (106,073) 158,464 (25,801) (6,199) 472,542 141,006 134,253 (139,159) (2,818) 133,282 (50,836) 8,918 866 (90,646) (39,680) (39,865) 39,462 315 (39,768) 107,628 (16,883) (5,333) 381,896 101,326 94,388 (99,697) (2,503) 93,514 498,705 (167,475) (78,610) 34,767 420,095 (132,708) 156,631 (7,865) (2,115) 477,881 164,483 140,976 (163,680) (773) 141,006 (32,772) 1,018 273 (75,324) (42,880) (39,691) 42,779 112 (39,680) 123,859 (6,847) (1,842) 402,557 121,603 101,285 (120,901) (661) 101,326 190 ANNUAL REPORT & ACCOUNTS 2015 29 Provisions for other liabilities and contingent liabilities Group At 1 January 2015 Additional provisions Used during year Not utilised Exchange differences At 31 December 2015 Current Non-current Parent At 1 January 2015 Additional provisions Used during year Not utilised Exchange differences At 31 December 2015 Current Non-current Regulatory and legal provisions £000 Restructuring and other provisions £000 2,022 3,542 (1,106) (1,215) - 3,243 1,743 1,500 2,022 3,542 (1,106) (1,215) - 3,243 1,743 1,500 1,566 196 (651) (277) (11) 823 102 721 748 161 - (261) (1) 647 - 647 Total £000 3,588 3,738 (1,757) (1,492) (11) 4,066 1,845 2,221 2,770 3,703 (1,106) (1,476) (1) 3,890 1,743 2,147 Regulatory and legal provisions The Group operates in the financial services industry and is subject to regulatory requirements in the normal course of business, including contributing towards any levies raised on UK general and life business. The provisions reflect an assessment by the Group of its share of the total potential levies. In addition, from time to time the Group receives complaints from customers and, while the majority relate to cases where there has been no customer detriment, we recognise that we have provided, and continue to provide, advice and services across a wide spectrum of regulated activities. We therefore believe that it is prudent to hold a provision for the estimated costs of customer complaints relating to services provided. The Group continues to reassess the ultimate level of complaints expected and the appropriateness of the provision, which reflects the expected redress and associated administration costs that would be payable in relation to any complaints we may uphold. Restructuring and other provisions The provision for restructuring and other costs relates to costs in respect of redundancies, dilapidations and deferred consideration. ANNUAL REPORT & ACCOUNTS 2015 191 NOTES TO THE FINANCIAL STATEMENTS 30 Deferred tax An analysis and reconciliation of the movement of the key components of the net deferred tax liability during the current and prior reporting period is as follows: Group At 1 January 2014 (Credited)/charged to profit or loss Credited to other comprehensive income Exchange differences At 31 December 2014 Charged/(credited) to profit or loss (Credited)/charged to profit or loss - resulting from reduction in tax rate Credited to other comprehensive income Credited to other comprehensive income - resulting from reduction in tax rate Exchange differences At 31 December 2015 Parent At 1 January 2014 (Credited)/charged to profit or loss Credited to other comprehensive income Exchange differences At 31 December 2014 Charged/(credited) to profit or loss (Credited)/charged to profit or loss - resulting from reduction in tax rate Credited to other comprehensive income Credited to other comprehensive income - resulting from reduction in tax rate Exchange differences At 31 December 2015 Unrealised gains on investments £000 32,351 (517) - (28) 31,806 Net retirement benefit assets £000 4,109 182 (2,637) - 1,654 Equalisation reserve £000 Other differences £000 5,167 (108) - - 5,059 (4,772) 933 (10) 49 (3,800) Total £000 36,855 490 (2,647) 21 34,719 1,469 (183) (62) 1,199 2,423 (3,190) - - (52) 30,033 31,458 (981) - - 30,477 (166) (1,039) - - 266 4,109 182 (2,637) - 1,654 (506) - - - 4,491 5,167 (108) - - 5,059 1,930 (183) (62) (3,048) - (165) (1,038) - - 29,359 - - 268 (506) - - - 4,491 182 (10) (12) 101 (2,340) (1,223) (408) (10) (1) (1,642) 907 176 (11) (12) (25) (607) (3,680) (1,049) (12) 49 32,450 39,511 (1,315) (2,647) (1) 35,548 2,592 (3,543) (1,049) (12) (25) 33,511 Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances for financial reporting purposes: Deferred tax liabilities Deferred tax assets 2015 2014 Group £000 34,124 (1,674) 32,450 Parent £000 33,511 - 33,511 Group £000 36,014 (1,295) 34,719 Parent £000 35,559 (11) 35,548 The Group has unused tax losses of £21,135,000 (2014: £21,392,000) arising from life business and capital transactions, which are available for offset against future profits. No deferred tax asset has been recognised due to the unpredictability of future profit streams. 192 ANNUAL REPORT & ACCOUNTS 2015 31 Other liabilities Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Derivative liabilities Other creditors Amounts owed to related parties Accruals Current Non-current 2015 2014 Group £000 1,277 24,671 1,466 15,762 45 17,429 60,650 60,344 306 Parent £000 724 17,894 1,466 7,106 556 13,628 41,374 41,374 - Group £000 831 13,034 - 14,254 103 16,393 44,615 44,285 330 Parent £000 416 7,578 - 5,775 721 12,657 27,147 27,147 - Derivative liabilities are in respect of equity futures contracts and are detailed in note 23. 32 Commitments Capital commitments At the year end, the Group and Parent had capital commitments of £nil relating to computer software (2014: £63,000) and £nil relating to furniture, fittings and equipment (2014: £37,000). Operating lease commitments The Group leases premises and equipment under non-cancellable operating lease agreements. The future aggregate minimum lease rentals receivable under non-cancellable operating leases are as follows: Within 1 year Between 1 & 5 years After 5 years 2015 2014 Group £000 5,263 16,649 28,858 50,770 Parent £000 5,263 16,649 28,858 50,770 Group £000 3,749 13,239 24,724 41,712 The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Within 1 year Between 1 & 5 years After 5 years 2015 2014 Group £000 2,711 8,481 5,001 16,193 Parent £000 1,866 7,806 4,341 14,013 Group £000 2,285 8,416 6,668 17,369 Parent £000 3,749 13,239 24,724 41,712 Parent £000 1,223 7,189 5,928 14,340 Operating lease rentals charged to profit or loss during the year 3,391 2,380 3,576 2,009 ANNUAL REPORT & ACCOUNTS 2015 193 NOTES TO THE FINANCIAL STATEMENTS 33 Parent and subsidiary undertakings Ultimate parent company and controlling party The Company is a wholly-owned subsidiary of Ecclesiastical Insurance Group plc. Its ultimate parent and controlling company is Allchurches Trust Limited. Both companies are incorporated and operate in Great Britain and copies of their financial statements are available from the registered office as shown on page 197. The parent companies of the smallest and largest groups for which group financial statements are drawn up are Ecclesiastical Insurance Office plc and Allchurches Trust Limited, respectively. All the subsidiaries listed are included within the consolidated financial statements. Voting rights are in line with the holdings of Ordinary shares. The Company's interest in Group undertakings at 31 December 2015 is as follows: Subsidiary undertakings Incorporated and operating in Great Britain, engaged in investment, insurance and financial services or other insurance-related business Share capital Holding of shares by Parent Subsidiary Ecclesiastical Financial Advisory Services Limited EdenTree Investment Management Limited Ecclesiastical Life Limited South Essex Insurance Holdings Limited South Essex Insurance Brokers Limited Incorporated in Great Britain, dormant Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares 100% 100% 100% 100% - E.I.O. Trustees Limited * (Company Registration Number 00941199) Ordinary shares 100% Incorporated and operating in Australia, engaged in insurance business Ansvar Insurance Limited Incorporated in Australia, dormant Ordinary shares 100% - - - - 100% - - Ansvar Insurance Services Pty Limited * (Company Number 162612286) Ordinary shares - 100% * Not audited 194 ANNUAL REPORT & ACCOUNTS 2015 34 Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not included in the Group analysis, but are included within the Parent analysis below. The Parent related party transactions below relate to Ecclesiastical Insurance Group plc, the Group and Parent's immediate parent company. Group and Parent other related parties include the Group's pension plans, fellow subsidiary undertakings and the ultimate parent undertaking. 2015 Group Trading, investment and other income, including recharges, and amounts received Trading, investment and other expenditure, including recharges, and amounts paid Amounts owed by related parties Amounts owed to related parties Parent Trading, investment and other income, including recharges, and amounts received Trading, investment and other expenditure, including recharges, and amounts paid Amounts owed by related parties Amounts owed to related parties 2014 (restated) Group Trading, investment and other income, including recharges, and amounts received Trading, investment and other expenditure, including recharges, and amounts paid Amounts owed by related parties Amounts owed to related parties Parent Trading, investment and other income, including recharges, and amounts received Trading, investment and other expenditure, including recharges, and amounts paid Amounts owed by related parties Amounts owed to related parties Parent £000 Subsidiaries £000 249 51 19,458 45 249 51 19,458 45 8,050 12,082 19,458 64 8,050 12,082 19,458 64 - - - - 13,042 3,724 6,099 511 - - - - 4,942 7,086 14,026 618 Other related parties £000 1,565 962 1,215 - 529 962 1,203 - 2,079 1,141 1,128 39 1,095 1,141 1,112 39 During the year, the Company received premiums, commission and reinsurance recoveries via a related party insurance agency amounting to £1,093,000 (2014: £455,000) and paid reinsurance protection, commission and claims amounting to £1,979,000 (2014: £894,000). Transactions and services within the Group are made on commercial terms. Amounts outstanding between Group companies are unsecured, are not subject to guarantees, and will be settled in cash. No provisions have been made in respect of these balances. The remuneration of the directors, who are the key management personnel of the Group, is disclosed in the Group Remuneration Report in the Corporate Governance section of this report. 35 Non-adjusting events after the reporting period On 27 January 2016, Ecclesiastical Insurance Group plc purchased NAFD Services Limited from the National Association of Funeral Directors for a consideration of £1,000. New funeral plan business, which was previously administered through Ecclesiastical Financial Services Limited, has been administered through the new company from the beginning of February 2016. ANNUAL REPORT & ACCOUNTS 2015 195 Directors and Executive Management United Kingdom Regional Centres United Kingdom Business Division and International Branches Insurance Subsidiaries and Agencies Notice of Meeting 197 199 200 201 202 r o t c o r P r a k s O y b h p a r g o t o h P 196 ANNUAL REPORT & ACCOUNTS 2015 DIRECTORS AND EXECUTIVE MANAGEMENT Directors * W. M. Samuel BSc, FCA Chairman * D. Christie BA, BSc (Econ) Dip. Ed. Deputy Chairman and Senior Independent Director I. G. Campbell BSc (Econ) (Hons), ACA Group Chief Financial Ofﬁcer Group Management Board * T. J. Carroll BA, MBA, FCII * E. G. Creasy, MA, MBA, FCII M. C. J. Hews BSc (Hons), FIA Group Chief Executive J. F. Hylands FFA * * A. P. Latham ACII * C. H. Taylor BSc (Hons) Banking and International Finance S. J. Whyte MC Inst. M, ACII Deputy Group Chief Executive * The Venerable C. L. Wilson * D. P. Wilson BA (Hons), FCII M. C. J. Hews BSc (Hons), FIA Group Chief Executive S. J. Whyte MC Inst. M, ACII Deputy Group Chief Executive I. G. Campbell BSc (Econ) (Hons), ACA Group Chief Financial Ofﬁcer R. Cox FCII, DMS N. M. Louth-Davies MA J. Schoﬁeld CFIIA C. M. Taplin BSc (Hons), MSc, MBA Company Secretary Mrs R. J. Hall FCIS Registered and Head Office Beaufort House Brunswick Road Gloucester GL1 1JZ Tel: 0345 777 3322 Company Registration Number 24869 Investment Management Office Legal advisers 24 Monument Street London EC3R 8AJ Tel: 0800 358 3010 Burgess Salmon LLP Bristol Charles Russell Speechlys LLP London DAC Beachcrofts LLP Leeds Harrison Clark Rickerbys LLP Cheltenham Matheson Dublin McDowell Purcell Solicitors Dublin Pinsent Masons LLP Birmingham Wragge Lawrence Graham and Co. LLP London * Non-executive directors ANNUAL REPORT & ACCOUNTS 2015 197 DIRECTORS AND EXECUTIVE MANAGEMENT Auditor Registrar Deloitte LLP London Computershare Investor Services plc The Pavilions Bridgwater Road Bristol BS13 8AE 198 ANNUAL REPORT & ACCOUNTS 2015 UNITED KINGDOM REGIONAL CENTRES Central and South West Office: London and South East Office: Tel: North Tel: Office: Tel: 7th Floor 9 Colmore Row Birmingham B3 2BJ 0345 605 0209 24 Monument Street London EC3R 8AJ 0345 608 0069 St Ann's House St Ann's Place Manchester M2 7LP 0345 603 7554 ANNUAL REPORT & ACCOUNTS 2015 199 UNITED KINGDOM BUSINESS DIVISION AND INTERNATIONAL BRANCHES Ansvar Insurance Business Division Managing Director: Office: Canada Branch Tel: Deputy Group Chief Executive, Ecclesiastical Insurance and General Manager and Chief Agent: Chief Office: - Eastern Region: Regional Vice President: - Western Region: Regional Vice President: - Pacific Region: Regional Vice President: - Central Region and National Accounts: Vice-President: Ireland Branch Managing Director: Office: R. Lane TD, BA, FCII, MCMI, MCGI Ansvar House St. Leonards Road Eastbourne, East Sussex BN21 3UR 0345 60 20 999 S. J. Whyte MC Inst M, ACII 20 Eglinton Avenue West, Suite 2200 P.O. Box 2004 Toronto, Ontario M4R 1K8 M. Thornhill BA, CRM, FCIP 100 Eileen Stubbs Avenue Suite 201 Dartmouth, Nova Scotia B3B 1Y6 K. Webster CRM, FCIP Suite 521, 10333 Southport Road S.W. Calgary, Alberta T2W 3X6 B. Mitchell, CIP Suite 1795, Two Bentall Centre 555 Burrard Street, Box 239 Vancouver, British Columbia V7X 1M9 R. Jordan BBA, CRM, FCIP 20 Eglinton Avenue West, Suite 2200 P.O. Box 2004 Toronto, Ontario M4R 1K8 D. G. Lane B.Comm (Hons), Certified Insurance Director 1st Floor, Kilmore House Spencer Dock, North Wall Quay Dublin 1, DO1 YE64 200 ANNUAL REPORT & ACCOUNTS 2015 INSURANCE SUBSIDIARIES AND AGENCIES Ansvar Insurance Limited Chief Executive Officer: Head Office: Ecclesiastical Life Limited Head Office: Ecclesiastical Underwriting Management Limited South Essex Insurance Brokers Limited Office: Director: Office: Tel: W. R. Hutcheon MBA, GCM, Graduate AICD, Fellow ANZIIF (CIP), Associate Fellow AIM Ansvar House Level 12 432 St Kilda Road Melbourne VIC 3004 Beaufort House Brunswick Road Gloucester GL1 1JZ 24 Monument Street London EC3R 8AJ B. W. Fehler South Essex House, North Road South Ockendon Essex RM15 5BE 01708 850000 ANNUAL REPORT & ACCOUNTS 2015 201 NOTICE OF MEETING NOTICE is hereby given that the Annual General Meeting of Ecclesiastical Insurance Office plc will be held at Beaufort House, Brunswick Road, Gloucester, GL1 1JZ on Thursday, 16 June 2016 at 12.35pm for the following purposes: Ordinary business 1. To receive the Report of the Directors and Accounts for the year ended 31 December 2015 and the report of the auditor thereon. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. To re-elect Mr I. G. Campbell as a director.* To re-elect Mr T. J. Carroll as a director.* To re-elect Mr M. C. J. Hews as a director.* To re-elect Mr J. F. Hylands as a director.* To re-elect Mr A. P. Latham as a director.* To re-elect Mrs C. H. Taylor as a director.* To re-elect Mrs S. J. Whyte as a director.* To re-elect The Venerable C. L. Wilson as a director.* To re-elect Ms D. P. Wilson as a director.* To elect Mr E. Creasy as a director.* To consider the declaration of a dividend. To reappoint Deloitte LLP as auditors and authorise the directors to fix their remuneration. By order of the Board Mrs R. J. Hall, Secretary 16 March 2016 * Brief biographies of the directors seeking election or re-election are shown on pages 80 to 81 of the 2015 Annual Report. All non-executive directors seeking re- election have been subject to formal performance evaluation by the Chairman who is satisfied that the performance of each non-executive director is effective and sufficient time has been spent on the Company’s affairs. Only a member holding ordinary shares, or their duly appointed representative(s), is entitled to attend, vote and speak at the annual general meeting. A member holding ordinary shares is entitled to appoint a proxy or proxies (who need not be a member of the Company) to exercise all or any of their rights to attend, speak and vote on their behalf at the annual general meeting. Such a member may appoint more than one proxy in relation to the annual general meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. Any corporation which is a member holding ordinary shares can appoint one or more corporate representatives who may exercise, on its behalf, all of the same powers as that corporation could exercise if it were an individual member, provided that they do not do so in relation to the same share or shares and that they act within the powers of their appointment. This notice is sent purely for information to the holders of 8.625% Non-Cumulative Irredeemable Preference shares who are not entitled to attend and vote at the annual general meeting. 202 ANNUAL REPORT & ACCOUNTS 2015 Annual Report & Accounts 2015 Ecclesiastical Insurance Office plc Beaufort House, Brunswick Road, Gloucester, GL1 1JZ www.ecclesiastical.com Ecclesiastical Insurance Office plc (EIO) Reg. No. 24869. Registered in England at Beaufort House, Brunswick Road, Gloucester, GL1 1JZ, UK. EIO is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

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