FBD Holdings plc Annual Report 2017 Protection. It’s in our nature. Contents Financial Highlights Chairman's Statement Review of Operations Corporate Information Report of the Directors Corporate Governance Report on Directors’ Remuneration Directors’ Responsibilities Statement Independent Auditors’ Report Financial Statements Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Company Statement of Financial Position Company Statement of Cash Flows Company Statement of Changes in Equity Notes to the Financial Statements Other Items (Not Forming Part of the Financial Statements) Alternative Performance Measures Letter from Chairman in relation to Annual General Meeting Notice of Annual General Meeting 2 4 8 14 15 24 38 47 48 60 61 62 64 65 66 67 68 69 130 131 135 1 FBD Holdings plc Annual Report 2017 Financial Highlights Gross premium written Net premium earned Profit for the financial year Basic earnings per share Diluted earnings per share Net asset value per share Ordinary dividend per share 2017 €000s 372,459 325,932 42,696 2017 Cent 123 991 784 - 2016 €000s 361,799 308,226 10,680 2016 Cent 31 31 651 - 1Diluted earnings per share reflects the potential conversion of the convertible debt and share based payments Calendar Preliminary announcement Dividend record date Annual General Meeting Dividend payment date 27 February 2018 6 April 2018 4 May 2018 11 May 2018 2 FBD Holdings at a glance €372m GWP is up 3% 86.2% Combined Operating Ratio €50m Profit before Tax 2017: Progress in Developing our Business NEW PRODUCTS SALES & DISTRIBUTION BRAND & MARKETING PRICING & UNDERWRITING n New CarProtect n New Dublin branch n Advertising campaign product introduced in Consumer channel providing greater choice for customer n Travel and Car Hire (externally underwritten) n Professional Indemnity and Directors & Officers (externally underwritten) opened in Drumcondra – Branch on Southside planned n Enhancements to website including allowing on line claims notifications n Changes to Consumer call centre to align to customer buying patterns building on brand re-launch n Sponsorship of “Bloom” festival, Marian Finucane Show and partnership with Toyota “Face It Down” Campaign n Continuing support for agricultural associations and events including the National Ploughing Championships n More granular rating facilitated by new CarProtect product n Changes to underwriting approach to support urban growth plans n All channels and products contributing to underwriting profit 3 FBD Holdings plc Annual Report 2017 Chairman’s Statement Performance I am pleased to present to you our excellent financial results for 2017 and in particular I am very pleased to announce a proposed dividend payment to our shareholders. We achieved a Group Profit before Tax of €50m and our Net Asset Value (Book value) per share grew to 784 cents. Our Solvency Capital Ratio has improved from 126% in 2016 to 164% at the end of 2017. Board Changes The new Board and streamlined governance structure was steadily effective during the year. The group is focussed on its general insurance business, FBD Insurance plc, and our life, pensions and investment intermediary, FBD Financial Solutions. During the year there were some Board changes that warrant noting and I would like to record my own and the Board’s deep appreciation of Mr. Michael Berkery, our former Chairman, and Mr. Sean Dorgan, our former Senior Independent Director, who both stepped down at our AGM last May. The Board and I thank them for their valued contributions to the Group over many years and we wish them continued success in the future. We were also delighted to welcome Joe Healy, President of the Irish Farmers’ Association as a new non-executive Board member. Joe brings valuable insight and excellent relationships with our core customer base. He has a deep knowledge of Irish farming and the Agri-sector and we look forward to working with him over the coming years. Over the past three years we have successfully executed a significant turnaround in our business and we can now clearly see the results of the many strong and sometimes difficult actions taken in that time. We look forward with confidence to future profitability and growth. We intend to carefully grow our business while maintaining our underwriting discipline. It is in this way that FBD intends to generate sustainable growth in book value for our shareholders. From the outset, I would like to acknowledge and thank our loyal FBD staff for their immense contribution to these strong financial results. Their dedication to our customers and to great customer service continues to be a key differentiator and competitive advantage for FBD and that dedication is a source of pride and confidence for the Board. Management Changes With the help of the Board, Ms. Fiona Muldoon our Group Chief Executive added further executive talent to the FBD senior management team during 2017. We welcomed a new Chief Commercial Officer, Chief Human Resources Officer and Chief Underwriting Officer. The depth and strength of our senior management team position the Group well for the execution of our strategy and any future challenges ahead. The Board looks forward with confidence to the continued successful implementation of this strategy. 4 Chairman’s Statement Liam Herlihy CHAIRMAN 5 Chairman’s Statement (continued) Our Heritage This year, FBD celebrates its 50th year in business. We have a rich heritage and we are uniquely an Irish indigenous insurer, supporting and protecting our farm, business and consumer customers. With our nationwide branch network, we are based in and active participants in the communities we serve. We continue to be strong supporters of Irish farmers and Irish businesses down through the years. Our sponsorship of key events such as our on-going flagship sponsorship of The Ploughing Championship and many other associations and events across the length and breadth of the country continues to ensure our commitment to rural Ireland’s success and prosperity is well known and understood. We re-launched our brand in 2017 with the FBD Tree and our ‘Protection. It’s in our Nature.’ strap line. We believe this speaks to our heritage and our roots while also being relevant and modern to today’s customers. It has helped us retain our existing customers, broaden the appeal of FBD and foster relationships with new customers. During 2017 we formed new partnerships with Toyota (‘Face It Down’ Driving Safety Campaign), Chubb (Travel Insurance) and XL Catlin (Professional Indemnity and Directors & Officers Insurance). In addition, we were proud to become the first commercial sponsor of the Bord Bia-led Bloom Festival in the Phoenix Park and we became the sponsors of Ireland’s most listened to radio show: RTÉ’s Marian Finucane Show. More recently, during 2017 we also extended our branch network in Dublin with the opening of our new office in Drumcondra on Dublin’s north side. This represented the first branch office opened in many years and was a cause of some celebration for staff and customers. We hope to soon follow with a further office in South Dublin. This further extends our presence into the important Dublin commercial business market and extends our brand reach and recognition into the most important consumer urban centre in the country; our capital city. Claims Environment The claims environment continues to be uncertain and, in the absence of reform, our customers will continue to pay higher insurance premiums than those seen in other EU countries. The progress made on the actions recommended by the Government Cost of Insurance Working Group is welcome. It is important that these proposals are followed through with legislation so that we see a reduction in the cost of claims. In October, Storm Ophelia hit the country and caused widespread damage to property. Our claims staff responded superbly to help our impacted customers. Insurance is for events such as these and as always, we can be proud of our claims paying record. Unfortunately, in addition, 2017 was a very poor year for Farm safety and indeed there were a record number of deaths on Irish farms during the year. FBD will continue to work hard with its customers to change farm workplace practices. FBD supports many sponsorships and initiatives in this area and will continue to help educate and support a safety culture that would begin to change the very high level of death and injury in the farm workplace. 6 Dividend The Board believes that it is in the long-term interest of all stakeholders to maintain strong solvency and liquidity margins and it is focussed on ensuring that the Group’s capital position continues to be robust and its financial position well managed. Following the improvement in the financial performance of the business the Board proposes to pay a dividend of 24c per share for the 2017 financial year. This is equivalent to a pay-out ratio of approximately 20% in respect of 2017 profits. The Group will target a 20% to 50% annual pay-out range of full year profits when appropriate, recognising extreme weather events and inherent cyclicality are a feature of all insurance businesses. This conservative policy is designed to recognise the importance of full year earnings in determining dividends while protecting the capital position of the Group. This dividend payment is a major milestone for FBD and reflects our confidence in the profitability and future prospects of the business. Conclusion I want to extend my sincere thanks to the Board for its active leadership and support during 2017. I also want to thank Fiona, the management team and our FBD staff for their commitment in delivering this very strong result. Finally we thank our customers for their business. Their loyalty, trust and confidence in FBD has enabled this success. As we enter our 50th year of trading, FBD is strongly positioned for the future and I am confident that FBD will continue to grow and prosper over its next fifty years. Thank you. Liam Herlihy Chairman 26 February 2018 7 FBD Holdings plc Annual Report 2017 Review of Operations Overview FBD has had an excellent year and I am pleased to see our strong strategic delivery reflected in these results. In particular, I am delighted the Board has proposed a dividend of 24c per share for our shareholders. After three years of hard work and corrective action my colleagues and I have delivered a strong underwriting profit for the year. Storm Ophelia was managed to a net cost of €5.4m and our target return on equity has been exceeded a full twelve months ahead of schedule. FBD has displayed exceptional resilience and we are now well positioned to build on our loyal customer base. As we enter our 50th year of trading and as the only publicly quoted Irish insurer, FBD is here for farmers, businesses and consumers for the long-haul. The Group’s profitability and balance sheet strengthened significantly in 2017. FBD delivered a 17% return on equity due to an exceptionally strong underwriting result and some positive prior year reserve development. Gross written premium increased by 3% to €372m (2016: €362m), profit before tax increased to €50m (2016: €11m) including an underwriting profit of €45m (2016: €3m). Underwriting PREMIUM INCOME Gross written premium increased by €10.7m to €372.5m (2016: €361.8m), which is largely attributable to our farm, business and private motor products of €11.6m, offset by a €0.9m reduction in broker business. Moderate rate increases were carried across the book and the underlying performance of the business continues to improve. New business volumes grew by 12% largely in commercial, private motor and farm. We continue to see strong retention rates across our book. REINSURANCE The Group amended its reinsurance arrangements at the outset of 2017 to what it believes is a more effective programme, providing better cover in extreme events, while accepting more attritional property risk. CLAIMS Net claims incurred amounted to €203.1m (2016: €227.9m). We experienced positive prior year reserve development of €15.4m driven by the 2016 accident year which is now showing sustained frequency improvements. The MIBI levy reserve release of €5.6m is also reflected in these results following the Supreme Court ruling on the “Setanta” case. This case found that MIBI was not liable for third party motor insurer insolvency. In total the Group incurred a net charge of €1.9m (2016: €7.8m) relating to its MIBI levy and related obligation, which is calculated based on the Group’s expected share of the motor market for 2017 and includes the MIBI levy reserve release of €5.6m. CLAIMS ENVIRONMENT The claims environment has shown signs of moderation, but overall remains difficult. The average cost of claims continues to increase with higher levels of inflation observed in injury settlements, particularly for more minor injury levels. The amended Book of Quantum has increased the level of damages awarded by the Injuries Board for most categories of injury. Despite this development, the rejection rate of Injuries Board awards remains very high amongst claimants. FBD’s rejection rate has increased by 30% since 2013, with significantly fewer claimants now accepting Injuries Board awards than previously. The enactment by the Government of the proposed PIAB (Amendment) Bill to tackle the non-co-operation of claimants and their legal representatives with the Injuries Board, is necessary to reduce the claimant rejection rate and lower the cost of claims. 8 Review of Operations Fiona Muldoon GROUP CHIEF EXECUTIVE 9 Review of Operations (continued) In January 2017 the Cost of Insurance Working Group published its report on Motor Insurance, with suggested reforms including strengthening the power of the Injuries Board, establishment of a Personal Injuries Commission and improved data sharing. The report on the cost of Employer and Public Liability insurance was published recently with some additional recommendations. EXPENSES The Group’s expense ratio was 23.3% (2016: 22.6%). Other underwriting expenses were €75.9m an increase of €6.5m. €4.5m of the increase relates to changes in the reinsurance arrangements. The balance relates to the increased full year depreciation charge from the Group’s new policy administration system. Progress to date on these recommendations includes: n The establishment of the Personal Injuries Commission and its first report, with a focus on standardisation of whiplash injuries. n The publication of the “First Motor Insurance Key Information Report” aimed at greater transparency on costs and trends. n Proposed increased powers for the Injuries Board as outlined in the PIAB (Amendment) Bill (enactment awaited). n Work started to establish an integrated insurance fraud database and the uninsured drivers database which can be updated to the Garda Automatic Number Plate Recognition (ANPR) system. While acknowledging the limited progress made to date, in order for costs to reduce we believe that these projects urgently need to reach conclusion and the required legislation must be enacted to deliver meaningful reform. WEATHER, CLAIMS FREQUENCY AND LARGE CLAIMS Storm Ophelia, the strongest eastern Atlantic hurricane on record, swept through the country on 16 October 2017 causing significant wind damage. We received almost 2,200 claims with an approximate cost of €10-11m. The net cost to FBD is €5.4m net of reinsurance (inclusive of reinstatement premia). Our underwriting approach has led to a sustained positive trend in motor injury frequency. The gross cost of large claims in 2017 (greater than €0.5m) is €44m and is largely in line with the average of the past five years. On a net of reinsurance basis, our large claims cost is €5m lower than the five-year average as a result of the lower retentions in our 2017 reinsurance programme. The reclassification of claims handling expenses has reduced the reported expense ratio by 2.9 percentage points (2016: 3.4 percentage points) and increased the loss ratio by the same amount. GENERAL FBD’s Combined Operating Ratio (“COR”) was 86.2% generating an underwriting profit of €44.9m (2016: €3.2m). INVESTMENT RETURN FBD’s total investment return for 2017 was 1.2% (2016: 1.9%), with 0.9% (2016: 0.8%) recognised in the Consolidated Income Statement and 0.3% (2016: 1.1%) recognised in the Consolidated Statement of Comprehensive Income. The modest returns are a reflection of the Eurozone low interest rate environment and the Group’s conservative investment portfolio (94% of total assets are invested in cash and bonds). The Group holds a small portfolio of risk assets including equities, investment property and UCITS funds. CAPITAL POSITION Ordinary shareholders’ funds at 31 December 2017 amounted to €271.6m (2016: €225.5m). The increase in shareholders’ funds is mainly attributable to the following: n Profit after tax for the year of €42.7m n Mark to market gains on Available for Sale investments of €2.5m after tax recognised in the statement of other comprehensive income n Share based payments of €0.7m n The decrease in the defined benefit pension scheme obligation of €0.2m after tax following a 5bps increase in the discount rate to 1.75% Net assets per ordinary share are 784 cent, compared to 651 cent per share at 31 December 2016. 10 INVESTMENT ALLOCATION The allocation of the Group’s underwriting investment assets is as follows: Deposits and cash Corporate bonds Government bonds Equities Unit trusts Investment property 31 December 2017 31 December 2016 €m 230 499 259 22 24 18 % 22% 47% 25% 2% 2% 2% €m 270 493 177 24 24 16 % 27% 49% 18% 2% 2% 2% 1,052 100% 1,004 100% The Group has continued with its conservative investment policy during the period. FBD has increased its exposure to Government bonds towards a 30% target allocation. During 2018 FBD will move into the final phase of its strategic asset allocation. SOLVENCY The latest (unaudited) Solvency Capital Ratio (SCR) is 164%, increasing from 126% at the end of 2016. The improvement is driven by both the effect of the underlying profitability of the business on available capital and the impact of the paying down of older claims reserves on required capital. Outlook In 2017 FBD delivered a return on equity of 17% and a current year COR of 93%, helped by strong underwriting actions and improved rate adequacy. Storm Ophelia represented a net cost of €5.4m. In addition 2017 included positive prior year and MIBI reserve releases of €15.4m and €5.6m respectively, both of which further improve the COR to 86%. Strong progress has been made by the Group over the last three years and FBD is well positioned to deliver sustainable profitable growth and long-term shareholder value through growth in book value. The claims environment has moderated although inflation is still evident. While the proposals made by the Cost of Insurance Working Group are sensible, they must be implemented in practice in order to deliver benefit to our customers. Farm safety remains a concern and the Group intends to continue to work hard in this area with its farm customers. Brexit is likely to have a negative impact on our farm customers although Irish farming has proven resilient to setbacks in the past and has overcome all previous significant challenges. We remain confident in the sector’s ability to adapt and thrive. FBD continues to target careful growth, specifically through a measured increase in its urban business while retaining its large market share in rural Ireland. Fiona Muldoon Group Chief Executive 26 February 2018 11 FBD Holdings plc Annual Report 2017 12 Continuing to protect our customers 13 FBD Holdings plc Annual Report 2017 Corporate Information Registered Office and Head Office FBD House Bluebell Dublin 12 D12 Y0HE Ireland Independent Auditors for 2017 PricewaterhouseCoopers Chartered Accountants and Statutory Audit Firm One Spencer Dock North Wall Quay Dublin 1 Ireland Solicitors Dillon Eustace 33 Sir John Rogerson’s Quay Dublin 2 Ireland Registrar Computershare Investor Services (Ireland) Limited Heron House Corrig Road Sandyford Industrial Estate Dublin 18 Ireland Bankers Allied Irish Banks plc Bank of Ireland Barclays Bank plc BNP Paribas Close Brothers International Credit Suisse (UK) Limited Danske Bank Deutsche Bank AG Goldman Sachs Stockbrokers Goodbody Stockbrokers Ballsbridge Park Ballsbridge Dublin 4 Ireland Shore Capital The Corn Exchange Fenwick Street Liverpool L2 7RB United Kingdom 14 Report of the Directors The Directors present their report and the audited Financial Statements for the financial year 2017. Principal Activities FBD is one of Ireland’s largest property and casualty insurers looking after the insurance needs of farmers, private individuals and business owners through its principal subsidiary, FBD Insurance plc. The Group also has financial services operations including a successful life and pensions brokerage, FBD Financial Solutions. The Company is a holding company incorporated in Ireland. Business Review The review of the performance of the Group, including an analysis of financial information and the outlook for its future development, is contained in the Chairman’s Statement on pages 4 to 7 and in the Group Chief Executive’s Review of Operations on pages 8 to 11. Information in respect of events since the financial year end and a review of the key performance indicators are also included in these sections. The key performance indicators include gross premium written, earnings per share, loss ratio, expense ratio, combined operating ratio, profit for the year and net asset value per share. Results The results for the year are shown in the Consolidated Income Statement on page 60. Dividends On 23 February 2018 the Board of FBD Holdings plc proposed a preference dividend of €113,000 on the 14% preference shares, €169,000 on the 8% preference shares and €8,320,000 on the ordinary shares. The proposed dividends are subject to approval by shareholders at the Annual General Meeting on 4 May 2018. Please refer to note 35 for further details. Subsequent Events There have been no subsequent events that would have a material impact on the Financial Statements. Risk and Uncertainties Risk Management is embedded across the Group through its Risk Management Framework. The Directors consider that the principal risk factors that could materially and adversely affect the Group’s future operating profits or financial position are as follows: GENERAL INSURANCE RISK The risk attached to any general insurance policy written is the possibility that an insured event occurs and the uncertainty of the amount of the resulting claim. The frequency and severity of claims can be affected by several factors, most notably weather events, the nature of the event, the level of awards and inflation on settling claims. When estimating the cost of claims outstanding at financial year end, the principal assumption underlying the estimates is the Group’s past development pattern. This includes assumptions in respect of certain historic average claims costs, claims handling costs and claims inflation factors. Profitability of general insurance is, by its nature, cyclical and can vary because of the actions or omissions of market participants, particularly inappropriate pricing decisions. The extent of the Group’s exposure to general insurance risk is controlled within defined parameters by means of strict underwriting criteria, analysis of historical underwriting experience, formalised pricing structures and appropriate reinsurance treaties. The claims settlement environment continues to show emerging signs of greater stability, but remains difficult. Average cost of claims continues to increase with higher levels of inflation observed in injury settlements. 15 FBD Holdings plc Annual Report 2017 Report of the Directors (continued) The amended Book of Quantum has increased the level of damages awarded by the Injuries Board for most categories of injury. Despite this development, the rejection rate of Injuries Board awards remains high amongst claimants with legal representation. The rejection rate has in fact increased by 30% over the last number of years, with significantly fewer claimants now accepting Injuries Board awards than previously. These claims proceed to litigation where they incur significant legal costs. The enactment by the Government and enforcement by the judiciary of proposed PIAB (Amendment) Bill to tackle the non-co-operation with the Injuries Board by claimants and their legal representatives, is critical to reducing the claimant rejection rate and lowering the cost of claims. There are a number of other factors driving higher underlying inflation in injury claims: n Upward pressure on the average cost of soft tissue injury claims of 18 months to 24 months duration, as a result of the amended Book of Quantum n Psychological injury accompanying soft tissue injury, to a much greater extent than previously experienced. We believe awards for this type of post-traumatic stress are excessive and extraordinary in the international context n Increasing frequency of assistive care claims. Such claims were previously a feature of catastrophic injury claims but are becoming more prevalent in less serious claims n Wage inflation and higher levels of employment impacting past and future loss of earnings claims CAPITAL MANAGEMENT RISK The Group is committed to managing its capital to ensure it is adequately capitalised at all times and to maximise returns to shareholders. The capital of the Group comprises of issued capital, reserves and retained earnings as detailed in notes 24 to 27. The Board of Directors reviews the capital structure frequently to determine the appropriate level of capital required to pursue the Group’s growth plans. The Group’s principal subsidiary, FBD Insurance, must maintain an adequate regulatory solvency position and must satisfy the Central Bank of Ireland that it has done so. The capital position of FBD Insurance is reviewed frequently by its Board of Directors. To provide protection against material events or shocks, the Group ensures that its insurance subsidiary holds sufficient capital to maintain appropriate regulatory surpluses. FBD Insurance maintained its required capital position and complied with all regulatory solvency margin requirements throughout both the year under review and the prior year. The Solvency II directive introduced a requirement for undertakings to conduct an Own Risk and Solvency Assessment ”ORSA”. The ORSA is a very important process as it provides a comprehensive view and understanding of the risks to which the Group is exposed or could face in the future and how they translate into capital needs or alternatively require mitigating actions. FBD Insurance plc has an Investment Committee, a Pricing & Underwriting Committee, a Capital Management Forum, an Audit Committee, a Reserving Committee and Executive and Board Risk Committees, all of which assist the Board in the identification and management of exposures and capital. The Group uses a number of sensitivity based risk- analysis tools as part of its decision making and planning processes to understand and manage the volatility of earnings and capital requirements more efficiently. The Group measures key performance indicators, including compliance with solvency requirements, under a number of economic and operating scenarios so as to identify and quantify the risks to which the business and its capital are exposed. In preparation for the Board’s annual review of the internal control system, senior management carry out a self-assessment, in compliance with the Irish Stock Exchange Listing Rules as well as the U.K. Corporate Governance Code, of the significant risks, including capital risks, facing the organisation and the controls in place to mitigate or manage such exposures. 16 OPERATIONAL RISK CONCENTRATION RISK Operational risk could arise as a result of inadequately controlled internal processes or systems, human error or from external events. Operational risks are regularly assessed against financial, operational, regulatory and reputational criteria. LIQUIDITY RISK The Group is exposed to daily calls on its cash resources, mainly for claims payments. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and ensuring that the maturity profile of its financial assets is shorter than or equal to the maturity profile of its liabilities and maintaining a minimum amount available on term deposit at all times. MARKET RISK The Group has invested in term deposits, listed debt securities, investment property and quoted and unquoted shares. These investments are subject to market risk, whereby the value of the investments may fluctuate as a result of changes in market prices, changes in market interest rates or changes in the foreign exchange rates of the currency in which the investments are denominated. The extent of the exposure to market risk is managed by the formulation of, and adherence to, an Investment Policy incorporating clearly defined investment limits and rules, as approved annually by the Board of Directors and employment of appropriately qualified and experienced personnel and external investment management specialists to manage the Group’s investment portfolio. The overriding philosophy of the investment policy is to protect and safeguard the Group’s assets and to ensure its capacity to underwrite is not put at risk. CREDIT RISK Credit risk is the risk of loss in the value of financial assets due to counterparties failing to meet all or part of their obligations. All of the Group’s current reinsurers have a credit rating of A- or better. The Group has assessed these credit ratings as being satisfactory in diminishing the Group’s exposure to the credit risk of its reinsurance receivables. Concentration risk is the risk of loss due to overdependence on a singular entity or category of business. While all of the Group’s underwriting business is conducted in Ireland, with a significant focus on the agri sector, it is spread over a wide geographical area with no concentration in any one county or region. The Group adheres to a strict Investment Policy and actively manages its investment portfolio to ensure that there is an optimum spread and duration of investments. MACRO-ECONOMIC RISK These are the risks faced by the Group as a result of macro-economic changes including economic downturn, increasing competition, changing market trends and the risk associated with changes in the taxation laws in the jurisdiction in which the Group operates. The success of the Group depends on its ability to react appropriately to these changes. The increasing likelihood of a hard “Brexit” introduces business and trading uncertainty for all indigenous Irish businesses, including FBD and the Group’s core customers in farming and other small businesses. It appears likely that Britain departing the EU will have negative effects for business and business confidence in Ireland, particularly in the medium term and the Group believes this will continue to be a significant headwind to otherwise strong Irish economic prospects. OTHER RISKS n The risk that the strategy adopted by the Board is incorrect or not implemented appropriately resulting in sub-optimal performance. n The risk that deterioration in economic conditions globally and particularly in Ireland may lead to a reduction in revenue and profits. n The risk that the loss of key executive officers or other key employees, the adoption of inappropriate HR policies or regulatory changes affecting the work force or the limited availability of qualified personnel may disrupt operations or increase cost structures. 17 FBD Holdings plc Annual Report 2017 Report of the Directors (continued) n The risk that an interruption or failure of information systems, whether caused by security breaches, cyber-attacks or other failures or malfunctions, may result in a significant loss of business, assets, or competitive position. n The impact of climate change may result in increasingly volatile weather patterns and more frequent severe weather events. n The risk that processes and techniques to protect computer systems and information assets from unintended or unauthorised access, changes or destruction are inadequate. A detailed description of the Group’s Risk Management Process is provided in note 41. place to identify, assess, manage and monitor risk and risk is actively reported and reviewed at Executive Risk Committee meetings and quarterly Board Risk Committee meetings. Subsidiaries The Company’s principal subsidiaries, as at 31 December 2017, are listed in note 36. Directors The present Directors of the Company, together with a biography on each, are set out on pages 25 to 26. The Board has decided that all Directors continuing in office will submit themselves for re-election at each Annual General Meeting. The Group has controls embedded within its systems to limit each of these potential exposures. The Board confirms that it has 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 Directors who served at any time during 2017 were as follows: Liam Herlihy (Chairman/Appointed as Chairman 5 May 2017) Michael Berkery (Chairman/Retired 5 May 2017) FBD uses the 3 lines of defence model in the management of risk. Under the three lines of defence model: Walter Bogaerts Mary Brennan Dermot Browne n Primary responsibility for risk management lies with line management. n Line management is supported by the Risk Function, Compliance Function and Actuarial Function. n The third and final line of defence is the Internal Audit function, which provides independent assurance to the Audit Committee and the Board on risk-taking activities. FBD has developed a suite of risk policies to assist in the management of risk which include roles and responsibilities, risk management processes, risk limits and indicators and escalation processes. The risk policies including the Risk Management Framework and Risk Appetite are reviewed at least annually by the FBD Insurance Executive and Board Risk Committees and the Board or more frequently if a system, or area concerned undergoes significant change. FBD has a framework in 18 (Senior Independent Non-Executive Director/Appointed Senior Independent Non-Executive Director 5 May 2017) Sean Dorgan (Senior Independent Non-Executive Director/Retired 5 May 2017) Joe Healy (Appointed 9 August 2017) Orlagh Hunt Fiona Muldoon David O’Connor John O’Grady Padraig Walshe Annual General Meeting The notice of the Annual General Meeting of the Company which will be held at 11 a.m. on 4 May 2018 in the Irish Farm Centre, Old Naas Road, Bluebell, Dublin 12, is set out on pages 135 to 137. A letter from the Chairman detailing the business to come before the Annual General Meeting is included at pages 131 to 134. Directors’ and Company Secretary’s Interests The interests of the Directors and Company Secretary (together with their respective family interests) in the share capital of the Company, at 31 December 2017 and 1 January 2017 (or date of appointment if later) were as follows: Number of ordinary shares of €0.60 each 31 December 2017 1 January 2017* 8,000 3,000 0 0 0 0 0 4,000 1,500 0 1,100 0 0 0 0 0 0 1,500 0 1,100 Beneficial Liam Herlihy Walter Bogaerts Mary Brennan Dermot Browne Joe Healy Orlagh Hunt Fiona Muldoon David O’Connor John O’Grady Padraig Walshe Company Secretary Derek Hall 1,755 1,755 *or at date of appointment if later There has been no change in the interests of the Directors and Company Secretary (together with their respective family interests) in the share capital of the Company up to the date of this report. The interests of the Directors and the Company Secretary in conditional awards over the share capital of the Company under the shareholder approved Performance Share Plan are detailed in the Report on Directors’ Remuneration on pages 38 to 46. European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006 For the purposes of Regulation 21 of the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006, the information on the Board of Directors on pages 18 and 19, the Performance Share Plan in note 39 and the Report on Directors’ Remuneration on pages 38 to 46 are deemed to be incorporated in this part of the Report of the Directors. Substantial Shareholdings As at 26 February 2018 the Company has been notified of the following interests of 3% or more in its share capital: Ordinary shares of €0.60 each Farmer Business Developments plc No. % of Class 8,531,948 25% FBD Trust Company Limited 2,984,737 Prudential plc 2,770,253 Black Creek International 1,776,831 Fidelity Management and Research LLC Fidelity International Limited 1,730,064 1,652,642 9% 8% 5% 5% 5% Preference Share Capital 14% Non-cumulative preference shares of €0.60 each Farmer Business Developments plc 1,340,000 100% 8% Non-cumulative preference shares of €0.60 each FBD Trust Company Limited 2,062,000 58.38% Farmer Business Developments plc 1,470,292 41.62% 19 FBD Holdings plc Annual Report 2017 Report of the Directors (continued) Share Capital The Company had four classes of shares in issue at the end of the year. These classes and the percentage of the total issued share capital represented by each are as follows: Voting shares Number in issue % of Total Ordinary shares of €0.60 each 34,666,201 * 87.7 14% Non-cumulative preference shares of €0.60 each 8% Non-cumulative preference shares of €0.60 each 1,340,000 3.4 3,532,292 8.9 39,538,493 100.0 * excluding 795,005 shares held in treasury The Company’s ordinary shares of €0.60 each are listed on the Main Securities Market of the Irish Stock Exchange and have a premium listing on the UK Listing Authority. They are traded on both the Irish Stock Exchange and the London Stock Exchange. Neither class of preference share is traded on a regulated market. Each of the above classes of share enjoys the same rights to receive notice of, attend and vote at meetings of the Company. Non-voting shares Number in issue ‘A’ ordinary shares of €0.01 each 13,169,428 The rights attaching to the ‘A’ ordinary shares are clearly set out in the Articles of Association of the Company. They are not transferable except only to the Company. Other than a right to a return of paid up capital of €0.01 per ‘A’ ordinary share in the event of a winding up, the ‘A’ ordinary shares have no right to participate in the capital or the profits of the Company. Independent Auditors PricewaterhouseCoopers, Chartered Accountants and Statutory Audit Firm, were appointed by the Directors in 2016 to audit the Financial Statements for the financial year ended 31 December 2016 and subsequent financial periods. The period of total uninterrupted engagement is 2 years, covering the financial years ended 31 December 2016 to 31 December 2017. PricewaterhouseCoopers have signified their willingness to continue in office in accordance with the provisions of Section 383(2) of the Companies Act 2014. Regarding disclosure of information to the Auditors, the Directors confirm that: As far as they are aware, there is no relevant audit information of which the company’s statutory auditors are unaware; and they have 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 company’s statutory auditors are aware of that information. Accounting Records The Directors have taken appropriate measures to ensure compliance with Sections 281 to 285 of the Companies Act, 2014 – the requirement to keep proper accounting records – through the employment of suitably qualified accounting personnel and the maintenance of appropriate accounting systems. The accounting records are located at FBD House, Bluebell, Dublin 12, Ireland. Directors’ Compliance Statement The Directors of the Company acknowledge that they are responsible for securing the Company’s compliance with its relevant obligations (as defined in the Companies Act 2014 (the “2014 Act”)) and, as required by section 225 of the 2014 Act, the Directors confirm that: (i) a compliance policy statement setting out the Company’s policies with regard to complying with the relevant obligations under the 2014 Act has been prepared; (ii) arrangements and structures have been put in place that they consider sufficient to secure material compliance with the Company’s relevant obligations; and (iii) a review of arrangements and structures has been conducted during the financial year to which the Directors’ report relates. 20 Corporate Governance The Corporate Governance Report on pages 24 to 37 forms part of this report and in this the Board has set out how it has applied the principles set out in the UK Corporate Governance Code, which was adopted by both the Irish Stock Exchange and the UK Listing Authority, the Irish Corporate Governance Annex, and the Central Bank of Ireland Corporate Governance Code for Credit Institutions and Insurance Undertakings. Viability Statement The Directors have assessed the prospects of the Group and its ability to meet its liabilities as they fall due in the medium term. The Directors selected a three year timeframe as this corresponds with the Board’s strategic planning process. The objectives of the strategic planning process are to consider the key strategic choices facing the Group and to incorporate these into a financial model with various scenarios. This assessment has been made with reference to the Group’s current position and prospects, the Group’s strategy, the Board’s risk appetite and the principal risks and uncertainties facing the Group, as outlined on pages 15 to 18. The Directors review and renew the Group’s three year plan at least annually. Progress against the strategic plan is reviewed regularly by the Board and senior management. Associated risks are considered within the Board’s risk management framework. The strategic plan has been tested for a number of scenarios which assess the potential impact of some of the strategic and commercial risks facing the Group. The Group performs an ORSA at least annually which subjects FBD’s solvency capital levels to a number of extreme stress scenarios. This was last performed in December 2017. Based on the results of these tests the Directors confirm that they have performed a robust assessment of the principal risks facing the Group, including those that would threaten its business model, its future performance and solvency and that they can 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 the assessment. Going Concern The Group’s business activities, together with the factors likely to affect its future development, performance and financial position are set out in the Chairman’s Statement and the Review of Operations, as is the financial position of the Group. In addition, note 41 of the Financial Statements includes the Group’s policies and processes for risk management. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future being a period of at least twelve months from the date of this report. As a result they continue to adopt the going concern basis of accounting in preparing the Financial Statements. In forming this view, the Directors have reviewed the Group’s budget for 2018 and forecast for 2019 and 2020, which take account of reasonably foreseeable changes in trading performance, the key risks facing the business and the medium-term plans approved by the Board in its review of the Group’s corporate strategy along with the Group’s capital projections and requirements under the Solvency II regime. The Directors have concluded that there are no material uncertainties that cast significant doubt over the Group’s ability to continue as a going concern. Approval of Financial Statements The Financial Statements were approved by the Board on 26 February 2018. Signed on behalf of the Board Liam Herlihy Chairman Fiona Muldoon Group Chief Executive 26 February 2018 21 FBD Holdings plc Annual Report 2017 22 Continuing to help businesses grow 23 FBD Holdings plc Annual Report 2017 Corporate Governance Your Board of Directors is committed to the highest standards of corporate governance. Good governance stems from a positive culture and well embedded values. FBD’s core values of integrity, entrepreneurship, customer focus and ambition are central to how the Board conducts its business and discharges its responsibilities. Equally, however, these values are as relevant to every employee working throughout the Group in their interactions with each other, and with our customers, shareholders and other stakeholders. UK Corporate Governance Code and the Irish Corporate Governance Annex The UK Corporate Governance Code (“the Code”) and the Irish Corporate Governance Annex (“the Annex”) codify the governance arrangements which apply to listed companies such as FBD. Combined, these represent corporate governance standards of the highest international level. Throughout 2017 and to the date of this report, we applied the principles of the Code and except where otherwise expressly stated complied with the provisions of both the Code and the Annex. This section of the Annual Report sets out the governance arrangements in place in FBD Holdings plc. LOCATION OF INFORMATION REQUIRED PURSUANT TO ISE LISTING RULE 6.8.1.C Listing Rule Information to be included: 6.8.1 (4) Refer to Report on Director’s Remuneration on pages 38 to 46 No information is required to be disclosed in respect of Listing Rules 6.8.1 (1), (2), (3), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14). The Board of Directors and its Role The Group is managed by the Board of Directors. The primary role of the Board is to provide leadership and strategic direction while maintaining effective control over the activities of the Group. The Board has approved a Corporate Governance Framework setting out its role and responsibilities. This is reviewed annually as part of the Board’s evaluation of its performance and governance arrangements. The Framework includes a formal schedule of matters reserved to the Board for its consideration and decision, which includes: n the approval of the Group’s objectives and strategy; n approval of the annual budget including capital expenditure and the review of the Group’s systems of internal control; n maintenance of the appropriate level of capital, the allocation thereof and decisions as to the recommendation or payment of dividends; n approval of Financial Statements; and n the appointment of Directors and the Company Secretary. This schedule ensures that the skills, expertise and experience of the Directors are harnessed to best effect and ensures that any major opportunities or challenges for the Group come before the Board for consideration and decision. The schedule was last reviewed in February 2018. Other specific responsibilities of the Board are delegated to Board appointed Committees, details of which are given later in this report. Board Composition and Independence At 31 December 2017 the Board comprised two executive Directors and eight non-executive Directors, including the Chairman. This structure was deemed appropriate by the Board. The Board deemed it appropriate that it should have between 8 and 12 members and that this size is appropriate, being of sufficient breadth and diversity to ensure that there is healthy debate and input on the main business to be dealt with by it. Two Directors retired and one was appointed during 2017. Seven of the non-executive Directors in office at the end of 2017 were considered to meet all of the criteria indicating independence set out in the Code. 24 Date first elected by shareholders Years from first election to 2018 AGM Considered to be independent Mary Brennan 31 Aug 2016 Dermot Browne 31 Aug 2016 Liam Herlihy 29 Apr 2016 Orlagh Hunt 31 Aug 2016 David O’Connor 31 Aug 2016 Walter Bogaerts 29 Apr 2016 Joe Healy 1.75 1.75 2.0 1.75 1.75 2.0 0.75 Yes Yes Yes Yes Yes Yes Yes Mr. Walshe, who is chairman of the Group’s largest shareholder, Farmer Business Developments plc, is not considered to be independent. The skills and experience identified by the Board as critical to its composition and that of its Committees at this time include expertise in insurance or other financial services, actuarial, general and farming/agri industry experience, corporate finance, corporate governance, compliance, financial accounting and executive reward. Directors’ Biographies Biographical details of the Directors in office on the date of this Report are as follows: LIAM HERLIHY, CHAIRMAN Mr. Liam Herlihy (aged 66) is a farmer and was, until May of 2015, Group Chairman of Glanbia plc, a leading Irish based performance nutrition and ingredients group, having served in that role for 7 years during which he presided over a period of significant structural change and unprecedented growth for Glanbia. Mr. Herlihy joined the Board in September 2015. Mr. Herlihy completed the Institute of Directors Development Programme and holds a certificate of merit in Corporate Governance from University College Dublin. He brings to the Board a wealth of commercial experience and some deep insights into the farming and general agricultural industries in Ireland which, together, comprise the Group’s core customer base. WALTER BOGAERTS, INDEPENDENT NON-EXECUTIVE DIRECTOR Mr. Walter Bogaerts (aged 60) was General Manager of the Corporate Insurances Division of KBC Insurance based in Belgium prior to his retirement in 2013. He joined KBC Group (previously ABB Insurances) in 1979 and has gained extensive experience throughout his career with KBC in underwriting, reinsurance, audit, risk management and sales. He was general manager in charge of KBC Group’s Central-European insurance businesses until appointed to his most recent role in 2012. In that role he was member of the Supervisory Boards, Audit and Risk Committees of KBC’s insurance subsidiaries in Czech Republic, Slovakia, Hungary, Poland and Bulgaria. He holds a Commercial Engineering degree from the Economic University of Brussels. MARY BRENNAN, INDEPENDENT NON-EXECUTIVE DIRECTOR Ms. Mary Brennan (aged 52) is a Chartered Director and a Fellow of Chartered Accountants Ireland. In a career spanning over 30 years, Ms. Brennan has worked internationally in audit in KPMG and in a number of publicly listed companies, including Elan plc and Occidental Petroleum Corp. She is a highly experienced non-executive director with a portfolio of companies, previously serving as Director and Audit Committee Chair of BNP Paribas Ireland. DERMOT BROWNE, SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR Mr. Dermot Browne (aged 55) is a Fellow of Chartered Accountants Ireland. Between 2007 and 2011, Mr. Browne held a number of senior executive roles in Aviva Ireland, including the position of CEO with responsibility for all Aviva businesses in Ireland across general insurance, health insurance and life assurance. Prior to this he was a senior executive with Zurich Life over a sixteen year period with responsibility for finance, sales, marketing and information technology. Between 2012 and 2016 he rejoined Zurich Group in a Global Strategy role based in Switzerland. He is currently a Non-Executive Director in two other financial services companies in Ireland. 25 FBD Holdings plc Annual Report 2017 Corporate Governance (continued) JOE HEALY, INDEPENDENT NON-EXECUTIVE DIRECTOR DAVID O’CONNOR, INDEPENDENT NON-EXECUTIVE DIRECTOR Mr. Joe Healy (aged 50) runs a dairy and cattle farm in Athenry, Co Galway with his family. He was elected the 15th President of the Irish Farmers’ Association in April 2016. Prior to that, he represented Galway IFA on the IFA National Farm Business Committee. Previously, he was actively involved in the young farmers’ organisation Macra na Feirme and was elected President of that organisation from 1995-1997. Mr Healy represents Irish farmers at EU level on COPA, which is the official umbrella representative body for European farmers. He chairs the COPA Food Chain Working Group, which is seeking a stronger position for farmers in the food supply chain. He is a non-executive director of Bord Bia – the Irish Food Board – which is responsible for the marketing of Irish food and drink abroad. ORLAGH HUNT, INDEPENDENT NON-EXECUTIVE DIRECTOR Ms. Orlagh Hunt (aged 45) is a Fellow of the Chartered Institute of Personnel Development and is a human resources executive with extensive financial services experience in firms such as Allied Irish Banks plc, RSA Group and Axa Life Insurance, as well as with a number of FMCG and retail companies. FIONA MULDOON, GROUP CHIEF EXECUTIVE Ms. Fiona Muldoon (aged 50) joined the Group in January 2015 as Group Finance Director Designate and was appointed as an executive Director and member of its Board. In October 2015, Ms. Muldoon was appointed as Group Chief Executive. A Chartered Accountant, Ms. Muldoon was Director of Credit Institutions and Insurance Supervision at the Central Bank of Ireland from August 2011 until May 2014. Prior to this she was with XL Group for seventeen years and held a number of senior roles with this NYSE listed Property & Casualty Insurance firm in Ireland, London and Bermuda, including two years as Group Treasurer until July 2010. On 12 June 2015 Ms. Muldoon, was appointed as a non-executive Director of the Governor and Company of the Bank of Ireland. Mr. David O’Connor (aged 60) is a Fellow of the Society of Actuaries in Ireland. He commenced his career in New Ireland Assurance before joining Allianz Ireland in 1988 to set up its non-life actuarial function. He was a member of Allianz Executive Management Board and held a number of senior management positions there prior to joining Willis Towers Watson in 2003 to set up its Property and Casualty consultancy unit in Dublin, where he worked until June 2016. JOHN O’GRADY, GROUP FINANCE DIRECTOR Mr. John O’Grady (aged 56) is a Chartered Accountant and an experienced insurance executive. He joined FBD from Liberty Insurance Limited where he held the role of Finance Director. Prior to his role in Liberty, Mr. O’Grady worked for Aviva and its predecessor companies in Ireland in various roles between 1989 and 2012, including Finance Director, Claims Director and Operations Director. PADRAIG WALSHE, NON-EXECUTIVE DIRECTOR Mr. Padraig Walshe (aged 60) is Chairman of Farmer Business Developments plc, the Company’s largest shareholder, and a dairy farmer. He is a past President of COPA, the European Farmers’ Organisation and of the Irish Farmers’ Association. Mr. Walshe previously served on the Board of FBD between 2006 and 2010, and rejoined the Board in December 2011. Mr. Walshe’s extensive leadership experience at national and international level and his deep understanding of Ireland’s farming community and the Irish food sector are of immense benefit to the Board. Board Diversity The Board values the major contribution which a mix of backgrounds, skills and experience brings to the Group and sees merit in increasing diversity at Board level in achieving the Group’s strategic objectives. Differences in background, skills, experience and other qualities, including gender, will continue to be considered in determining the optimal composition of the Board, the principal aim being to achieve an appropriate balance between them. 26 While all appointments to the Board will have due regard to diversity, they will be made on merit, ensuring that the skills, experience and traits noted by the Board as being of particular relevance at any time are present on the Board and included in any planned refreshment. As at the date of this report, the Board was comprised as follows: TENURE OF DIRECTOR 0 – 2 years 3 – 6 years 7 – 9 years Over 9 years GENDER Male Female EXECUTIVE/NON-EXECUTIVE Non-executive Executive 80% 10% 10% 0% 70% 30% 80% 20% EXPERIENCE AND SKILLS The percentage of the Board having the requisite skills and experience were as follows: Key Roles and Responsibilities CHAIRMAN The role of the Chairman is set out in writing in the Corporate Governance Framework. He is responsible, inter alia, for: n the effective running of the Board, setting its agenda and ensuring that it receives accurate, timely and clear information; n ensuring that the Board as a whole plays a full and constructive part in the development and determination of the Group’s strategy and overall commercial objectives; and n ensuring that the views of shareholders are communicated to the Board. GROUP CHIEF EXECUTIVE The role of the Group Chief Executive is set out in writing in the Corporate Governance Framework. She is responsible, inter alia, for: n running the Group’s business; n proposing and developing the Group’s strategy and overall objectives in close consultation with the Chairman and the Board; and n implementing the decisions of the Board and its Committees. Insurance or financial services Actuarial General industry Agri/farming Corporate finance Accounting and Auditing Corporate Governance Compliance Executive reward 70% 10% 100% 30% 30% 40% 80% 60% 50% SENIOR INDEPENDENT DIRECTOR The Senior Independent Director is responsible for: n being available to shareholders if they have concerns which they have not been able to resolve through the normal channels of the Chairman, the Group Chief Executive or the Finance Director, or for which such contact is inappropriate; n conducting an annual review of the performance of the Chairman; n acting as a sounding board for the Chairman; and n serving as an intermediary for the other non- executive Directors as required. 27 FBD Holdings plc Annual Report 2017 Corporate Governance (continued) COMPANY SECRETARY The Company Secretary acts as Secretary to the Board and to its Committees. In so doing, he: n assists the Chairman in ensuring that the Directors have access, in a timely fashion, to the papers and information necessary to enable them to discharge their duties; n assists the Chairman by organising and delivering induction and training programmes as required; and n is responsible for ensuring that Board procedures are followed and that the Board and that the Directors are fully briefed on corporate governance matters. Board Effectiveness and Performance Evaluation Board effectiveness is reviewed annually as part of the Board’s performance evaluation process. The Chairman is responsible for ensuring that each Director receives an induction on joining the Board and that he or she receives any additional training he or she requires. The induction itself is organised and delivered by the Company Secretary and other members of the management team. BOARD EVALUATION Every year the Board evaluates its performance and that of its Committees. Directors are expected to take responsibility for identifying their own training needs and to take steps to ensure that they are adequately informed about the Group and about their responsibilities as a Director. One Director joined the Board during 2017 and received comprehensive induction training. The Board is confident that all of its members have the requisite knowledge and experience and support from within the Company to perform their role as a Director of the Group. Towards the end of 2015, the Board had its evaluation process externally facilitated by Praesta Ireland, an independent consultancy which has no other connections with the Group. The main conclusion from the evaluation process was that the Board, its Committees, the Chairman and individual Directors are performing very effectively. The Board intends to have its evaluation externally facilitated again at the end of 2018. The evaluation process for 2017 took place in January 2018. The purpose of the process was to identify areas where the Board can benefit from improvement and to affirm positively those areas where it is playing an effective role in leading the Group. This was achieved through a combination of direct discussion between the Chairman and individual Directors and confidential written evaluation submissions which were collated by the Company Secretary and the Chairman and reported back to the Board in a non-attributable manner. The Board is satisfied that the confidentiality of the evaluation process ensured that objectivity was safeguarded. The output from the evaluation process for 2017 reaffirmed that the Board is operating effectively and is fulfilling its role. RE-ELECTION OF DIRECTORS The Board has, since 2011, adopted the practice that all Directors will submit themselves for re-election at each Annual General Meeting regardless of length of service or the provisions of the Company’s Articles of Association. ACCESS TO ADVICE All members of the Board have access to the advice and the services of the Company Secretary who is responsible for ensuring that Board procedures are followed and that applicable rules, regulations and other obligations are complied with. In addition members of the Board may take independent professional advice at the Company’s expense if deemed necessary in the furtherance of their duties. 28 ATTENDANCE AT BOARD AND BOARD COMMITTEE MEETINGS DURING 2017 Board Audit Nomination Remuneration M Berkery W Bogaerts M Brennan D Browne S Dorgan Joe Healy L Herlihy O Hunt F Muldoon D O’Connor J O’Grady P Walshe 4/4 9/9 9/9 9/9 4/4 3/3 9/9 9/9 9/9 9/9 9/9 9/9 - 6/6 6/6 6/6 3/3 - - - - - - - 3/3 - - 1/1 3/3 - 4/4 - - 1/1 - - - 6/6 - - 3/3 - - 6/6 - 2/3 - - Risk 1/2 5/5 - - - 3/3 2/3 - 4/5 2/2 - If a Director is unable for any reason to attend a Board or Committee meeting, he or she will receive Board/ Committee papers in advance of the meeting and is given an opportunity to communicate any views on or input into the business to come before the Board/Committee to the Board/Committee Chairman. The Company Secretary acts as secretary to the Committees. Minutes of all of the Committees’ meetings are available to the Board. Each of these Committees has provided a report in the sections following. Board Committees The Board has established four Committees to assist it in the execution of its responsibilities. These are: n n n n the Audit Committee; the Risk Committee; the Nomination Committee; and the Remuneration Committee. Each of the Committees has written terms of reference which were approved by the Board and set out the Committees’ powers, responsibilities and obligations. These are available on the Group’s website www.fbdgroup.com. 29 FBD Holdings plc Annual Report 2017 Corporate Governance (continued) Report of the Audit Committee MEMBERSHIP DURING THE YEAR Current D Browne Committee Chairman, Senior Independent non-executive Director Length of time served on committee 1.50 years W Bogaerts Independent non-executive Director 1.83 years M Brennan Independent non-executive Director 1.33 years Previous S Dorgan Committee Chairman, Senior Independent non-executive Director, resigned 5 May 2017 The Committee members have been selected to ensure that the Committee has available to it the range of skills and experience necessary to discharge its responsibilities. The Board has resolved that all Members are considered to have recent and relevant financial experience. OBJECTIVE OF COMMITTEE To assist the Board of the Group in fulfilling its oversight responsibilities for such matters as financial reporting, the system of internal control and management of financial risks, the audit process and the Group’s process for monitoring compliance with laws and regulations. KEY RESPONSIBILITIES DELEGATED TO THE COMMITTEE n reviewing the Group’s financial results announcements and Financial Statements; n overseeing the relationship with the external auditors including reviewing their terms of engagement, independence and fees; n reviewing the scope, resources, results and effectiveness of the Group’s internal audit function; and n performing detailed reviews of specific areas of financial reporting as required by the Board or the Committee. MEETINGS The Committee met on six occasions during 2017. Meetings are attended by Committee members. The Chief Financial Officer, the Statutory Auditor and the Head of Group Internal Audit are invited to attend all scheduled meetings of the Committee. The Committee regularly meets separately with the Statutory Auditor and with the Head of Group Internal Audit, without members of management present. The minutes of Committee meetings are circulated routinely to the Board. The Committee chairman also provides a verbal report to the Board after each Committee meeting. The Committee reports formally to the Board annually on the overall work undertaken and the degree to which it discharged the responsibilities delegated to it. ACTIVITIES OF THE COMMITTEE DURING 2017 The principal activities undertaken by the Committee during 2017 include: n assessment of financial and other risks facing the Group and of the operation of internal controls; n review of all aspects of the relationship with the external auditors, including the statutory audit plan, audit findings and recommendations and consideration of the independence of the external auditors and the arrangement in place to safeguard this, including partner rotation, prohibition on share ownership and levels of fees payable to the statutory auditor for non-audit assignments; n consideration of issues of financial reporting, particularly those involving substantial judgment and the risk of material misstatement including claims estimates and provisions; 30 n review of drafts of the Annual Report and the Half Yearly Report prior to their consideration by the Board; PricewaterhouseCoopers were reappointed as Auditors of the Company in respect of the financial year ended 31 December 2017. FAIR, BALANCED AND UNDERSTANDABLE The Committee formally advises the Board on whether the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable, in accordance with section C.1.1 of the UK Corporate Governance Code. The committee must ensure that the Annual Report and Financial Statements also provide the information necessary for Shareholders to assess the performance of the Group, along with its business model and strategy and the Committee is satisfied that the above requirements have been met. EVALUATION The Committee’s activities formed part of the Board’s evaluation process which found the Committee to be operating effectively. Dermot Browne On behalf of the Audit Committee 26 February 2018 n appraisal of the Internal Audit function, plan, work, reports and issues arising and monitoring the scope and effectiveness of the function; n assessment of compliance with laws, regulations, codes and financial reporting requirements; and n reporting to the Board on its activities and confirming the degree to which the Committee’s delegated responsibilities had been discharged through verbal reports to the Board after each meeting and a formal written report presented annually. The critical judgements and estimates used in the formulation of the financial statements are set out in note 3. All are considered by the Committee, with particular focus on the following in 2017: n Insurance contract liabilities and related reinsurance assets. The Group had net claims outstanding of €674.5m and Net UPR of €186.0m at 31 December 2017. In order to satisfy itself that the balances were appropriately stated, the Committee reviewed the Actuarial Reserve analysis prepared by Management, which is also subject to the approval of the Reserving Committee of FBD Insurance plc, and subject to both internal and external actuarial peer review. The Committee also reviewed the Margin for Uncertainty proposal. The Audit Committee concluded that the carrying value of claims outstanding and UPR included in the financial statements are appropriate. n Accounting for the defined benefit pension scheme. The Group had a defined benefit pension scheme asset of €9.8m at 31 December 2017, which is closed to future accrual and closed to new members. The valuation of the pension scheme is provided by the Group’s consultant actuaries. The valuation was reviewed by the Audit Committee and it was concluded that the carrying value of the defined benefit pension scheme included in the financial statements is appropriate. 31 FBD Holdings plc Annual Report 2017 Corporate Governance (continued) Report of the Risk Committee MEMBERSHIP DURING THE YEAR Current Length of time served on committee W Bogaerts Committee Chairman, 1 year L Herlihy Independent non-executive Director Independent non-executive Director and Board Chairman 1 year KEY RESPONSIBILITIES DELEGATED TO THE COMMITTEE n Promote a risk awareness culture within the Group; n Ensure that the material risks facing the Group have been identified and that appropriate arrangements are in place to manage and mitigate those risks effectively; n Advise the Board on the effectiveness of strategies and policies with respect to maintaining, on an ongoing basis, the amounts, types and distribution of capital adequate to cover the risks of the Group; D O’Connor Independent non-executive Director 1 year n Review and challenge risk information received by the Chief Risk Officer from the business departments to ensure that the Group is not exceeding the risk limits set by the Board; n Present a profile of the Group’s key risks, risk management framework, risk appetite and tolerance and risk policies at least annually together with a summary of the Committee’s business to the Board. MEETINGS The Committee met on five occasions during 2017. Meetings are attended by Committee members. The Chief Risk Officer, the Chief Financial Officer, the Head of Actuarial Function and the Head of Internal Audit are invited to attend all scheduled meetings of the Committee. The minutes of Committee meetings are circulated routinely to the Board. The Committee chairman also provides a verbal report to the Board after each Committee meeting. The Committee reports formally to the Board annually on the overall work undertaken and the degree to which it discharged the responsibilities delegated to it. O Hunt Previous S Dorgan Independent non-executive Director 0.66 year Senior Independent non-executive Director resigned 5 May 2017 M Berkery Non-executive Director and Board Chairman, resigned 5 May 2017 J O’Grady Executive Director, resigned 5 May 2017 The Committee members have been selected to ensure that the Committee has available to it the range of skills and experience necessary to discharge its responsibilities. OBJECTIVE OF COMMITTEE The Board Risk Committee is the forum for risk governance within FBD. It is responsible for providing oversight and advice to the Board in relation to current and potential future risk exposures of the Group and future risk strategy. This advice includes recommending a risk management framework incorporating strategies, policies, risk appetites and risk indicators to the Board for approval. The Risk Committee oversees the risk management function, which is managed on a daily basis by the CRO. 32 ACTIVITIES OF THE COMMITTEE DURING 2017 Report of the Nomination Committee The principal activities undertaken by the Committee during 2017 include: n assisted the Board in the review and update of its risk policies, risk appetite, risk indicators and risk tolerance; n appraised the Risk Function plan to ensure that the plan is sufficient and appropriate to effectively identify, monitor, manage and report, on a continuous basis, the risks to which the Group could be exposed; n ensured that the material risks facing the Group have been identified and appropriately managed and mitigated; n reviewed and challenged risk information reported to the Committee to ensure that the Group is operating within the risk limits set by the Board; n reviewed the quarterly Solvency Capital Ratio; S Dorgan MEMBERSHIP DURING THE YEAR Current L Herlihy Committee Chairman, non-executive Director, Board Chairman Length of time served on committee 1.58 years D Browne Senior Independent non-executive Director 0.66 years D O’Connor Independent non-executive Director 0.66 years Previous M Berkery Committee Chairman, non-executive Director, Board chairman, resigned 5 May 2017 Senior Independent non-executive Director, resigned 5 May 2017 n considered the results of risk policy stress tests and peer reviews of the Actuarial Best Estimate that were performed by the Risk Function; n assessed the results of Control Design and Operational Effectiveness Reviews undertaken by the Risk Function; and n reviewed the 2017 ORSA report prior to its consideration by the Board. EVALUATION The Committee’s activities formed part of the Board’s evaluation process which found the Committee to be operating effectively. Walter Bogaerts On behalf of the Risk Committee 26 February 2018 OBJECTIVE OF COMMITTEE To ensure that the Board and its Committees are made up of individuals with the necessary skills, knowledge and experience to ensure that the Board is effective in discharging its responsibilities. KEY RESPONSIBILITIES DELEGATED TO THE COMMITTEE n n reviewing the structure, size and composition of the Board and making recommendations to the Board for any appointments or other changes; recommending changes to the Board’s committees; and n advising the Board in relation to succession planning both for the Board and the senior executives in the Group. 33 FBD Holdings plc Annual Report 2017 Corporate Governance (continued) MEETINGS The Committee met four times during 2017 to consider potential candidates for appointment as Chairman of the Board, to fill vacancies which arose during the year and to oversee the detailed succession planning process undertaken in the Group’s principal subsidiary, FBD Insurance plc. At its meeting in December, the Committee reviewed and approved the Board and Senior Management succession plan. The Committee reviewed and approved the composition of the Board Committees in 2017. EVALUATION The Committee’s activities formed part of the Board’s evaluation process which found the Committee to be operating effectively. The composition of the Committee at the end of 2017 fully met the requirements of the Code as a majority of Committee members were Directors considered to be independent. Liam Herlihy On behalf of the Nomination Committee 26 February 2018 Report of the Remuneration Committee MEMBERSHIP DURING YEAR Current O Hunt Length of time served on committee Committee Chairman, Independent non-executive director 1.33 years W Bogaerts Independent non-executive Director 1.66 years D O’Connor Independent non-executive Director 0.66 years Previous S Dorgan Committee Chairman, Senior independent non-executive Director, resigned 5 May 2017 OBJECTIVE OF COMMITTEE To assist the Board of the Group in ensuring that the level of remuneration in the Group and the split between fixed and variable remuneration are sufficient to attract, retain and motivate executive Directors and senior management of the quality required to run the Group in a manner which is fair and in line with market norms, while not exposing the Group to unnecessary levels of risk. KEY RESPONSIBILITIES DELEGATED TO THE COMMITTEE n determining the broad policy for the remuneration of the Group’s executive Directors, Company Secretary and other senior executives; n determining the total remuneration packages for the foregoing individuals, including salaries, variable remuneration, pension and other benefit provision and any compensation on termination of office; n ensuring that the Group operates to recognised good governance standards in relation to remuneration; 34 n making awards of shares under the Group’s approved share scheme; and n preparation of the detailed Report on Directors’ Remuneration. MEETINGS The Group Chief Executive may attend meetings of the Committee but only by invitation and not at a time when his or her individual remuneration arrangements are discussed. The Committee met six times during 2017. ACTIVITIES OF THE COMMITTEE DURING 2017 The principal activities undertaken by the Committee during 2017 include: n annual review of remuneration arrangements for executive Directors and other senior executives; n review and approval of the Report on Directors’ Remuneration for 2017; n making of a conditional award of shares under the FBD Performance Share Plan and setting the conditions attached; and n Consider the new FBD Performance Share Plan which is to be presented to the Shareholders at the Annual General Meeting to be held in 2018 Full details of Directors’ Remuneration are set in the Report on Directors Remuneration on pages 38 to 46. EVALUATION The Committee’s activities formed part of the Board’s evaluation process which found the Committee to be operating effectively. Orlagh Hunt On behalf of the Remuneration Committee 26 February 2018 Shareholder Engagement The Board is committed to ensuring that excellent lines of communication exist and are fostered between the Group and its shareholders. A planned programme of investor relations activities is undertaken throughout the year which includes: n briefing meetings with all major shareholders after the full year and half yearly results announcements; n regular meetings between institutional investors and analysts with the Group Chief Executive, Chief Financial Officer and/or Head of Investor Relations to discuss business performance and strategy and to address any issues of concern; and n responding to letters and queries received directly from shareholders and from proxy adviser firms. Should a significant proportion of votes be cast against a resolution at any general meeting, the Board will endeavour to identify the shareholders concerned and will initiate a contact with them with the view to understanding the reasons for the adverse vote. The Board receives reports from the Head of Investor Relations which includes details of all meetings held, feedback received and issues either of interest or of concern raised. Annual General Meeting The Company’s Annual General Meeting is held each year in Dublin. The 2018 meeting will be held on 4 May 2018. WHO ATTENDS? n Directors; n Senior Group executives; n Shareholders; n Company Advisers; and n Members of the media are also invited and permitted to attend. 35 FBD Holdings plc Annual Report 2017 Corporate Governance (continued) WHAT BUSINESS TAKES PLACE AT THE MEETING? The key risk management and internal control procedures which cover all material controls include: n the Group Chief Executive makes a presentation on the results and performance to the meeting prior to the Chairman dealing with the formal business of the meeting itself; n n skilled and experienced management and staff in line with fit and proper requirements: roles and responsibilities including reporting lines clearly defined with performance linked to company objectives: n an organisation structure with clearly defined lines of responsibility and authority; a comprehensive system of financial control incorporating budgeting, periodic financial reporting and variance analysis; n a Risk Committee of the Board and a Risk Management Framework comprising a risk function headed by a Chief Risk Officer, a clearly stated risk appetite and risk strategy supported by approved risk management policies and processes in the areas of underwriting, reinsurance, claims reserving, investment and treasury; n an Executive Risk Committee comprising senior management whose main role includes reviewing and challenging key risk information and to assist the Risk Committee, described earlier, in the discharge of its duties between meetings; n the risk strategy, framework and appetite are articulated in a suite of policies covering all risk types and supported by detailed procedural documents. Each of these documents is subject to annual review and approval by the Board; n performance of an Own Risk and Solvency Assessment “ORSA” linking to risk management, strategy and capital management; n an Internal Audit function; n an Audit Committee whose formal terms of reference include responsibility for assessing the significant risks facing the Group in the achievement of its objectives and the controls in place to mitigate those risks; n a disaster recovery framework is in place and is regularly tested; and n all shareholders present, either in person or by proxy can question the Chairman, the Committee Chairmen and the rest of the Board during the meeting and afterwards; and All formal resolutions are dealt with on a show of hands. Once the vote is declared by the Chairman, the votes lodged with the Company in advance of the meeting are displayed prominently in the venue for those present to see. Immediately after the meeting is concluded the results are published on the Group’s website www.fbdgroup.com and also via the Irish and London Stock Exchanges. The notice of the Annual General Meeting is issued to shareholders at least 20 working days in advance of the meeting. Internal Control The Board has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. In accordance with the revised Financial Reporting Council (FRC) guidance for directors on internal control published in September 2014, “Guidance on Risk Management, Internal Control and Related Financial and Business Reporting”, the Board confirms that there is an ongoing process for identifying, evaluating and managing any significant risks faced by the Group, that it has been in place for the year under review and up to the date of approval of the Financial Statements and that this process is regularly reviewed by the Board. 36 n a business continuity framework is in place and is regularly tested. The Annual Budget, Half-Yearly Report and Annual Report are reviewed and approved by the Board. Financial results with comparisons against budget are reported to executive Directors on a monthly basis and are reported to the Board at each Board meeting. The risk management, internal control, reporting and forecasting processes are important to the Board in the exercise of its Governance and oversight role. It constantly strives to further improve their quality. The Group has established a “Speak Up” Policy for employees the purpose of which is to reassure employees that it is safe and appropriate to raise any concern that they may have about malpractice and to enable them to raise such concerns safely and properly. This policy is reviewed by the Audit Committee annually and circulated thereafter to all Group employees. The Board has reviewed the effectiveness of the Group’s system of internal control. This review took account of the principal risks facing the Group, the controls in place to manage those risks and the procedures in place to monitor them. The Board is satisfied that the systems of internal control in place were effective throughout the period covered by this report and up to the date of its approval. 37 FBD Holdings plc Annual Report 2017 Report on Directors’ Remuneration Introductory Letter from the Remuneration Committee Chair Dear Shareholder, On behalf of the Remuneration Committee and the Board, I am pleased to set out in the section following, the details of the Directors’ Remuneration for the year ended 31 December 2017. Paying for Performance There is a clear link between the performance of the Group and the remuneration of senior Executives. Arrangements for salaries and Annual Performance Bonuses, as described later in the Report, fully reflect the strategic priorities for the Group in 2017, our success in achieving those priorities, as well as our on-going focus on attracting, retaining and rewarding strong talent. External Advice As the existing Long Term Incentive Plan (LTIP) reached the end of its ten-year lifespan during the year, the Committee undertook an assignment with Willis Towers Watson to design a new LTIP. Details of this new LTIP are explained later in the report. Shareholder Dialogue and Support Despite the fact that there is no obligation to do so under Irish law, the Board, on the recommendation of this Committee table the Report on Directors’ Remuneration at the Annual General Meeting each year for an advisory vote. At the 2017 AGM, this report received 91% support from shareholders. The Committee requests shareholders to consider and approve the annual remuneration report set out on the pages following at the 2018 AGM. Orlagh Hunt Chairperson of the Remuneration Committee 26 February 2018 38 Role of Remuneration Committee Responsibility for determining the levels of remuneration of the Executive Directors has been delegated by the Board to the Remuneration Committee whose membership is set out in the Corporate Governance Report. POLICY It is the policy of the Group to provide all members of Executive management, middle management and employees of the Group with appropriate remuneration and incentives that reward performance and ensure that they are, in a fair and responsible manner, rewarded for specific contributions which align to the financial success of the Group. This is done by ensuring that the principles of sound, prudent, risk management are fully reflected and that excessive risk taking is neither encouraged nor rewarded. It is also the policy of the Group to provide a remuneration framework that attracts, motivates and rewards Executives of the highest calibre who bring experience to the strategic direction and management of FBD and who will perform in the long term interests of the Group and its shareholders. The following table sets out the key elements of remuneration policy for Executive Directors and senior Executives, their purpose and how they link to strategy. Element and link to strategy Policy and operation Base Salary (fixed remuneration) Changes to policy To help recruit and retain senior experienced Executives Base salaries are reviewed annually with effect from 1 April taking the following factors into account: No change to policy n The individual’s role and experience n Company performance n Personal performance n Market practice and benchmarking Although salaries are reviewed annually there is no automatic right of any Executive to receive a salary increase. Benefits (fixed remuneration) To provide market competitive benefits Benefits provided take the form of a motor allowance and an agreed percentage contribution to health and other insurance costs. No change to policy Pension Provision (fixed remuneration) To provide market competitive benefits and reward performance over a long period, enabling Executives to save for retirement All employees are provided with retirement benefits under a defined contribution arrangement from 1 October 2015. No change to policy The Groups defined benefit pension scheme has been closed to future accrual since September 2015 and to new members since 2005. Mr O’Grady receives a taxable cash allowance in lieu of pension benefits. 39 FBD Holdings plc Annual Report 2017 Report on Directors’ Remuneration (continued) Element and link to strategy Policy and operation Annual Performance Bonuses (variable remuneration) To reward achievement of company targets, personal performance and contribution The performance measures for annual performance bonuses for the Executive Directors and other senior Executives are based on attainment of the Combined Operating Ratio target for 2017, which was the measure used to reflect the company’s need to build sustainable profitability. The maximum bonus potential as a percentage of base salary for the Chief Executive for 2017 was 105%. More detail on the actual operation of the Annual Performance Bonus arrangements appear later in this Report. Longer Term Incentives – the FBD Performance Share Plan (“LTIP”) (variable remuneration) To align the financial interests of Executives with those of shareholders The existing FBD Performance Share Plan (“LTIP”) was approved by shareholders in 2007 and is at the end of its ten-year lifespan. The Remuneration Committee is proposing a new plan to replace it. The new plan, whilst similar in nature to the 2007 LTIP, has been designed to ensure the plan rules are in line with current best practice and to introduce flexibility for the Committee to make awards which will be subject to post-vesting holding periods and malus and clawback provisions. As has been the case with the 2007 LTIP, the new plan will provide for the ability to make annual awards of performance shares, which will vest subject to the achievement of stretching three-year performance conditions. The Committee intends to continue its practice of making annual awards to Executive Directors as well as selected key individuals in our senior management team. Subject to approval by shareholders, the first awards under the new plan would be made shortly after the AGM. The key features of the proposed new plan are as follows: n Life of the plan: Ten years from date of shareholder approval. n Overall plan limit: In aggregate with any other employee share plan, the maximum number of shares which may be granted will be 10% of the Company’s issued ordinary share capital over a rolling ten-year period. n Individual limit: Maximum annual aggregate award level of 150% of base salary. n Post-vesting holding period: The new plan rules allow the Committee (at its sole discretion) to make awards which may be subject to an additional post-vesting holding period. Awards will vest after three years once applicable performance conditions have been achieved and the vested shares (net of tax) may be required to be held for a further two-year period to provide continued alignment with shareholders. Changes to policy There have been no changes to either the policy or the operation of annual performance bonuses. The Committee has decided to increase its flexibility to award up to an individual limit of 150% of salary (previously 100%). This aligns FBD more generally with market practice and provides the Committee with sufficient flexibility over the ten-year lifespan of the plan. The Committee has the discretion to apply a two year post- vesting holding period to awards made under the new plan. The Committee has the discretion to apply malus and clawback provisions to awards made under the new Plan. 40 Element and link to strategy Policy and operation Changes to policy n Malus and clawback provisions: The new plan includes provisions that allow the Committee to withhold, reduce or require the repayment of awards for up to two years after vesting (i.e. up to five years after grant) if there is found to have been (a) material misstatement of the company’s financial results or (b) gross misconduct on the part of the award holder. The Remuneration Committee will set performance conditions each year, selecting appropriate metrics based on key strategic priorities. The period over which the performance conditions applying to a conditional award under the LTIP are measured may not be less than three years. The extent to which a conditional award may vest in the future will be determined by the Remuneration Committee by reference to the performance conditions set at the time of the award. These conditions are designed to ensure alignment between the economic interests of the plan participants and those of shareholders. Different conditions, or the same conditions in differing proportions, can be used by the Remuneration Committee in different years under the LTIP rules, provided that the Committee is satisfied that they are challenging targets and that they are aligned with the interests of the Company’s shareholders. Conditional Awards of Shares in 2017 During 2017 one Conditional Award of Shares was made under the 2007 LTIP. This was made in March 2017 to Executive Directors and senior management. The conditions attached to the award, which reflect the Board’s strategic plans, were as follows: n 50% based on the compound annual growth rate (cagr) of Net Asset Value (NAV) per share, relative to 2016 NAV, for the three years ending 31 December 2019. NAV has been chosen because the Committee considers it is the controllable measure most closely correlated to share price and ultimately to shareholder return. n 40% based on a weighted average Combined Operating Ratio (COR) over the three years ending 31 December 2019. This is measured as simple average COR 2017 – 2019 with equal weighting to each year and to include a certain level of catastrophe weather events and all prior year reserve development. COR has been chosen as this is the most fundamental indicator of FBD’s underwriting discipline, profitability and sustainable competitive advantage. n 10% based on the compound annual growth rate (cagr) of in-force policy count, relative to 2016’s end of year “live” policy count. Policy count has been chosen as a measure of careful sustainable growth. A low weighting is afforded to the in-force policy count as growth will not be at the expense of profitability. The target ranges and thresholds for vesting are as follows: Vesting levels range between a threshold level of 25% to a maximum of 100% for outperformance. The cagr target for NAV is up to early double digit %’s and for in-force policy count is up to 5%. The COR targets range from high 90’s for 41 FBD Holdings plc Annual Report 2017 Report on Directors’ Remuneration (continued) threshold minimum vesting to low 90’s for maximum vesting. The actual percentages are not disclosed due to commercial competitor sensitivity and because to do so would also constitute forward looking guidance. The Committee will publish details regarding targets and vesting levels at the end of the performance period (2020). The Committee has decided not to include relative performance to market targets as there is no relevant comparator in the Irish market and at this stage of the Company’s turn-around it was not deemed a suitable metric. The maximum and threshold for vesting for these performance conditions are as follows: NAV cagr COR Policy Count cagr Threshold Level Proportion vesting Upper Level Proportion vesting >3% High 90’s 0.5% 25% 25% 25% Early double digits Low 90’s 5% 100% 100% 100% Outstanding Conditional Awards (2014-2016) The Committee considered the extent to which the performance conditions underpinning this award were met in the three Financial Years 2014 to 2016 (the “Performance Period”). The Committee concluded that none of the performance conditions were met and therefore the conditional awards granted in 2014 will not vest. No current Executive Director was employed at FBD in 2014 and therefore none had any outstanding Conditional Award with the potential to vest in 2017. Company Secretary Derek Hall was employed in 2014 and the conditional award granted to him will not vest. Directors’ and Company Secretary’s Conditional LTIP Awards Details of the conditional share awards made under the LTIP plan to the CEO, CFO and to the Company Secretary are given in the table below. The number of shares is the maximum possible number which could vest for the individual concerned if all of the performance conditions previously described are met at stretch target level. At 1 January 2017 Granted during year Vested during year Lapsed during year Forfeited during year At 31 Dec 2017 Performance Period Earliest vesting date Market price on award € Executive Directors Fiona Muldoon 54,545 54,961 - - - 45,283 Total 109,506 45,283 John O’Grady Total - - 22,138 22,138 Company Secretary Derek Hall 2,153 3,588 15,114 - - - - 11,006 Total 20,855 11,006 - - - - - - - - - - - - - - - - - (2,153) - - - (2,153) - - - - - - - - - - - 54,545 2016-2018 Mar-19 54,961 2016-2018 Mar-19 45,283 2017-2019 Mar-20 6.60 6.55 7.95 154,789 22,138 2017-2019 Mar-20 7.95 22,138 - 2014-2016 Mar-17 3,588 2015-2017 Mar-18 15,114 2016-2018 Mar-19 11,006 2017-2019 Mar-20 17.00 10.80 6.55 7.95 29,708 42 The total number of shares subject to conditional awards outstanding under the LTIP amounts to 511,343 being 1.5% of the Company’s ordinary share capital (excluding treasury shares) at 31 December 2017 (2016: 478,014 shares and 1.4% of ordinary share capital). The aggregate limit of the number of shares over which conditional awards are permitted under the Scheme Rules is 10% of the Company’s issued ordinary share capital. Since the establishment of the Scheme in 2007, there have been eight conditional awards with an aggregate of 1,357,010 shares or 3.9% of the Company’s ordinary share capital (excluding treasury shares). Share Ownership Policy The Group incentivises its Executive Directors and senior Executives with equity based awards under the Group’s shareholder approved share schemes. Central to the philosophy underlying awards is the goal of aligning the economic interests of those individuals with those of shareholders. Executives are expected to maintain a significant long-term equity interest in the Company. The requirement, which is set out in a policy document by the Remuneration Committee, approved and reviewed annually, is to build and retain a valuable shareholding relative to base salary, at a minimum, as noted hereunder. Executive Directors have not built up to the requirement yet due to the relatively short time in role. Until such time as this requirement has been met, those to whom the Policy applies are precluded from disposing of any shares issued to them under the Group’s share schemes. Executive Group Chief Executive Other Executive Directors Other senior Executives Share ownership requirement 2 times annual salary 1.5 times annual salary 1 times annual salary Non-Executive Director Remuneration The remuneration of the non-Executive Directors is determined by the Board, and reflects the time commitment and responsibilities of their role. In setting this level, the Board has regard to the fees payable to the non-Executive Directors of the other Irish publicly listed companies and also to the developments and policy for the remuneration of the employees in the wider Group. In July 2016 the basic non-Executive Director fee increased to €50,000. There was no increase to Director Fees in 2017. The Chairman, Mr Liam Herlihy received fees of €102,000 during the year (2016: €47,000) inclusive of the basic non-Executive Director fee. The former Chairman Mr Michael Berkery received fees of €38,000 during the year (2016: €127,000) inclusive of the basic non- Executive Director fee. The Senior Independent Director, Mr Dermot Browne, received fees of €78,000 during the year (2016: €29,000) inclusive of the basic non-Executive Director fee, and reflecting his additional responsibilities as Chairman of the Audit Committee. Non-Executive Directors are not members of the Group’s pension schemes and are not eligible for participation in the Group’s long-term incentive scheme or any share option schemes. 43 FBD Holdings plc Annual Report 2017 Report on Directors’ Remuneration (continued) Service Contracts The service contract for the Group Chief Executive and the Group Financial Officer provide for the following periods of notice of termination of employment: Executive Fiona Muldoon CEO John O’Grady CFO From Company From CEO/CFO 12 months 6 months 6 months 6 months External appointments held by the Executive Directors In recognition of the benefits to both the Group and to our Executive Directors of serving as non-Executive Directors of other companies, our Executive Directors are, subject to advance agreement in each case, permitted to take on an external non-Executive appointment and to retain any related fees paid to them. During the year, Ms Muldoon served as a non-Executive Director of the Governor and Company of Bank of Ireland, for which she received fees of €70,875 in the period. Determination of Annual Performance Bonus for the year ended 31 December 2017 As previously noted, the overall Annual Performance Bonus arrangements, the targets and their achievement are approved by the Remuneration Committee each year. Specifically the Remuneration committee approve the merit pay and bonus arrangements for the Executive Directors in line with FBDs remuneration policy. The 2017 annual performance bonus scheme was designed such that on plan Company performance for the year 2017 would deliver 100% of the target bonus. At >100% Combined Operating Ratio, no bonus is deemed payable. At <97% Combined Operating Ratio, a 100% pay out of the target is deemed payable and at <94% 130-150% is deemed payable. In 2017, a COR of 86% was achieved and in line with this excellent result which is well ahead of the target set, the Remuneration Committee has approved a maximum bonus pool of 150% for all eligible employees to be split according to performance. In the case of Ms Muldoon and Mr O’Grady for 2017, 100% of the annual performance bonus is determined by the Combined Operating Ratio of FBD Insurance plc and accordingly the Remuneration Committee has decided bonuses of €472,500 and €168,000 are payable. 44 Executive and non-Executive Directors’ Remuneration details The following table sets out in detail the remuneration payable by the Group in respect of any Director who held office for any part of the financial year: Fees1 €000s Salary2 €000s Other Payments3 €000s Benefits4 €000s Pension Contribution5 €000s Executive Directors: Fiona Muldoon John O’Grady - - 450 234 473 168 38 18 90 33 Non-Executive Directors: Liam Herlihy (Chairman)6 102 Michael Berkery7 Sean Dorgan8 Joe Healy9 Padraig Walshe Dermot Browne Orlagh Hunt David O’Connor Walter Bogaerts Mary Brennan 38 30 25 50 78 58 59 68 57 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2017 Total €000s 1,051 453 102 38 30 25 50 78 58 59 68 57 565 684 641 56 123 2,069 Fees are payable to the non-Executive Directors only. Salaries are paid to Executive Directors. NOTES (2017) 1 2 3 Bonuses of €472,500 and €168,000 were awarded to Ms Muldoon and Mr O’Grady under the bonus scheme in 2017. The bonuses for both Ms Muldoon and Mr O’Grady were calculated in accordance with the Annual Performance Arrangements described earlier and both Ms Muldoon’s and Mr O’Grady’s bonuses were approved by the Remuneration Committee on 22 February 2018. Liam Herlihy was appointed as Chairman on 5 May 2017. 4 Benefits relate exclusively to a motor allowance and contribution towards health insurance costs. 5 Pension contributions relate to contributions to a defined contribution pension scheme or a payment in lieu. 6 7 Michael Berkery resigned as Chairman on 5 May 2017. 8 Sean Dorgan resigned as a Director on 5 May 2017. 9 Joe Healy was appointed as a Director on 9 August 2017. 45 FBD Holdings plc Annual Report 2017 Report on Directors’ Remuneration (continued) The following table sets out the detail for the previous financial year (2016): Fees1 €000s Salary2 €000s Other Payments3 €000s Benefits4 €000s Pension Contribution5 €000s 2016 Total €000s Executive Directors: Fiona Muldoon John O’Grady6 Non-Executive Directors: Michael Berkery (Chairman) Emer Daly7 Sean Dorgan Eddie Downey8 Liam Herlihy9 Brid Horan10 Ruairi O’Flynn11 Padraig Walshe Dermot Browne12 Orlagh Hunt13 David O’Connor14 Walter Bogaerts15 Mary Brennan16 - - 127 16 100 14 47 15 15 45 29 18 28 66 18 450 110 315 50 43 7 90 17 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 898 184 127 16 100 14 47 15 15 45 29 18 28 66 18 538 560 365 50 107 1,620 Fees are payable to the non-Executive Directors only. Salaries are paid to Executive Directors only. NOTES (2016) 1 2 3 Bonuses of €315,000 and €50,000 were awarded to Ms Muldoon and Mr O’Grady under the bonus scheme in 2016. The bonus for Ms Muldoon was calculated in accordance with the Annual Performance Arrangements described earlier and both Ms Muldoon’s and Mr O’Grady bonuses were approved by the Remuneration committee on 23 February 2017. John O’Grady was appointed Executive Director on 1 July 2016. Liam Herlihy was appointed as a Director on 1 September 2015. 4 Benefits relate exclusively to a motor allowance and contribution towards health insurance costs. 5 Pension contributions relate to contributions to a defined contribution pension scheme or a payment in lieu. 6 7 Emer Daly resigned as Director on 29 April 2016. 8 Eddie Downey resigned as a Director on 29 April 2016. 9 10 Brid Horan resigned as a Director on 29 April 2016 11 Ruairi O’Flynn resigned as Director on 29 April 2016. 12 Dermot Browne was appointed as a Director on 5 July 2016 13 Orlagh Hunt was appointed as a Director on 31 August 2016. 14 David O’Connor was appointed as a Director on 5 July 2016. 15 Walter Bogaerts was appointed as a Director on 26 February 2016. 16 Mary Brennan was appointed as a Director on 31 August 2016. 46 Directors’ Responsibilities Statement The Directors are responsible for preparing the Annual Report and Financial Statements, in accordance with the Companies Act 2014 and the applicable regulations. Irish company law requires the Directors to prepare Financial Statements for each financial year. Under the law, the Directors have elected to prepare the Financial Statements in accordance with International Financial Reporting Standards as adopted by the European Union (“relevant financial reporting framework”). Under company law, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the assets, liabilities and financial position of the Company as at the financial year end date and of the profit or loss of the Company for the financial year and otherwise comply with the Companies Act 2014. In preparing each of the Company and Group Financial Statements, the Directors are required to: n select suitable accounting policies for the Company and the Group Financial Statements and then apply them consistently; n make judgements and estimates that are reasonable and prudent; n state whether the Financial Statements have been prepared in accordance with the applicable accounting standards, identify those standards, and note the effect and the reasons for any material departure from those standards; and n prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for ensuring that the Company and the Group keeps or causes to be kept adequate accounting records which correctly explain and record the transactions of the Company and the Group, enable at any time the assets, liabilities, financial position and profit or loss of the Company and the Group to be determined with reasonable accuracy, enable them to ensure that the Annual Report and Financial Statements comply with the Companies Act 2014 and the Listing Rules of the Irish Stock Exchange and enable the Financial Statements to be audited. 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 also required by the Transparency (Directive 2004/109/EC) Regulations 2007 (Transparency (Directive 2004/109/EC) (Amendment) (No. 2) Regulations 2015) to include a management report containing a fair review of the business and a description of the principal risks and uncertainties facing the Group. Under applicable law and the requirements of the Listing Rules issued by the Irish Stock Exchange, the Directors are also responsible for preparing a Directors’ Report and reports relating to Directors’ remuneration and corporate governance that comply with that law and those Rules. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in Ireland governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions. The Directors confirm that, to the best of their knowledge and belief: n n n the Financial Statements, prepared in accordance with IFRSs, give a true and fair view of the assets, liabilities and financial position for the Group as at 31 December 2017 and of the result for the financial year then ended; the Report of the Directors, the Chairman’s Statement and the Review of Operations include a fair review of the development and performance of the Group’s business and the state of affairs of the Group at 31 December 2017, together with a description of the principal risks and uncertainties facing the Group; and the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to access the performance, strategy and business model of the Company. On behalf of the Board Liam Herihy Chairman Fiona Muldoon Group Chief Executive 26 February 2018 47 FBD Holdings plc Annual Report 2017 Independent Auditors’ Report to the members of FBD Holdings plc Report on the audit of the financial statements OPINION In our opinion, FBD Holdings plc’s group financial statements and company financial statements (the “financial statements”): n give a true and fair view of the group’s and the company’s assets, liabilities and financial position as at 31 December 2017 and of the group’s profit and the group’s and the company’s cash flows for the year then ended; n have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and, as regards the company’s financial statements, as applied in accordance with the provisions of the Companies Act 2014; and n have been properly prepared in accordance with the requirements of the Companies Act 2014 and, as regards the group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements, included within the Annual Report, which comprise: n n n n n the Consolidated and Company Statements of Financial Position as at 31 December 2017; the Consolidated Income Statement and Consolidated Statement of Comprehensive Income for the year then ended; the Consolidated and Company Statements of Cash Flows for the year then ended; the Consolidated and Company Statements of Changes in Equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. Our opinion is consistent with our reporting to the Audit Committee. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (Ireland) (“ISAs (Ireland)”) and applicable law. Our responsibilities under ISAs (Ireland) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in Ireland, which includes IAASA’s Ethical Standard as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, we declare that non-audit services prohibited by IAASA’s Ethical Standard were not provided to the group or the company. Other than those disclosed in note 9 to the financial statements, we have provided no non-audit services to the group and its subsidiaries in the period from 1 January 2017 to 31 December 2017. 48 Our audit approach OVERVIEW Materiality n Overall group materiality: €4.0 million (2016: €4.0 million). Materiality n Based on 1% of revenue. n Overall company materiality: €1.1 million (2016: €1.1 million). n Based on 1% of equity attributable to equity holders of the company. Audit scope Key audit matters Audit scope n We performed a full scope audit of the complete financial information of the group’s principal operating entities, FBD Insurance plc and FBD Life & Pensions Limited. n Taken together, the entities where we performed our audit work accounted for 100% of group revenues and 100% of group profit before tax. Key audit matters n Valuation of claims outstanding. n Valuation of defined benefit pension obligation. The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, 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. This is not a complete list of all risks identified by our audit. 49 FBD Holdings plc Annual Report 2017 Independent Auditors’ Report (continued) Key audit matter How our audit addressed the key audit matter Valuation of claims outstanding Refer to page 31 (Corporate Governance Statement), page 73 (group accounting policies), page 80 (critical accounting estimates and judgements) and pages 107 to 109 (note 29 (a) to (c) to the group financial statements). The provision for claims outstanding is the group’s largest liability and its valuation involves considerable judgement. The actuarial best estimate is determined using complex actuarial calculations and requires the consideration of detailed methodologies, multiple assumptions and significant judgements, particularly for the longer tails classes of business such as motor bodily injury and liability. The key assumptions underlying the calculations are past development patterns, loss ratios and assumptions regarding frequency, severity and duration of claims. The valuation is also dependent on the completeness and accuracy of the data used in the actuarial modelling, in particular data relating to amounts of claims paid and incurred in prior years. The provision includes a margin over actuarial best estimate to provide for the risk of adverse claims development and to cater for known events not in the underlying data. As a result, the valuation of claims outstanding was a key area of focus. We evaluated the actuarial methodologies and key assumptions with the assistance of our actuarial specialists. This involved: n n testing the design and operating effectiveness of the controls over claims processing and payment; reconciliation of the data used in the actuarial models to the underlying systems; n assessing the assumptions and methodologies underpinning management’s actuarial valuation; n carrying out our own independent valuations for the main classes of business; and n reconciliation of the actuarial valuation outputs to the financial statements. Our work included an assessment of management’s analysis of the output of the calculations from the actuarial model including consideration of the development of prior accident years’ estimates and analysis of the current accident year estimate. In making this assessment we considered the group’s historic claims experience, development in the Irish claims environment and our broader knowledge of developments in the insurance industry. We tested the calculation of the margin over actuarial best estimate and discussed the rationale for the level of this element of the provision with management with particular focus on the consideration of the appropriateness of changes in the amount since the prior year. We concluded that the methodologies and assumptions adopted were appropriate and that the claims outstanding figure was calculated in accordance with these. 50 Key audit matter How our audit addressed the key audit matter Valuation of defined benefit pension obligation Refer to page 31 (Corporate Governance Statement), page 77 (group accounting policies), page 81 (critical accounting estimates and judgements), and pages 111 to 115 (note 32 to the group financial statements). The group operates a defined benefit pension scheme which is closed to future accrual and closed to new members. The scheme has an IAS 19 surplus of EUR9.8 million at 31 December 2017. The surplus is the excess of the fair value of the scheme assets over the present value of the defined benefit obligation. We focused on the defined benefit obligation as its valuation is complex and requires judgement in choosing appropriate actuarial assumptions, especially the discount rate used and the inflation assumption. These assumptions can have a material impact on the calculation of the defined benefit obligation. The valuation is also dependent on the completeness and accuracy of the data used in the model, in particular membership data and payroll details. We considered the reasonableness of the key actuarial assumptions used to determine the defined benefit obligation with the assistance of our pension specialists. We challenged management in relation to the assumptions and methodology applied including benchmarking to external data as appropriate. Because the setting of the assumptions and the calculations relied to a significant extent on the advice of the group’s external actuarial experts, we considered their independence, and the reports prepared by them for management. We considered the appropriateness of the methodologies and assumptions underlying the pension surplus valuation with the assistance of our pension specialists with particular focus on the discount rate used and the inflation assumptions. We also reconciled the underlying membership and payroll data used in the model to the group’s records. We concluded that the methodologies and assumptions adopted were appropriate and that the defined benefit obligation was calculated in accordance with these. 51 FBD Holdings plc Annual Report 2017 Independent Auditors’ Report (continued) How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group, the accounting processes and controls, and the industry in which the group operates. The group has two operating segments, underwriting and financial services. The group financial statements are a consolidation of individual reporting entities within these segments, primarily its two principal subsidiaries, FBD Insurance plc (underwriting) and FBD Life & Pensions Limited (financial services). In establishing the overall approach to the group audit, we determined the type of work that needed to be performed at each reporting entity by us. The group engagement team performed all the required audit work in relation to the individual reporting entities. We performed a full scope audit of the complete financial information of FBD Insurance plc, FBD Life & Pensions Limited and the holding company. We also tested the consolidation process. This gave us the desired level of audit evidence on each account balance and for our opinion on the financial statements as a whole. This gave us coverage of 100% of the group’s revenue, 100% of the group’s profit and 100% of the group’s total assets. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall materiality €4.0 million (2016: €4.0 million) €1.1 million (2016: €1.1 million) Group financial statements Company financial statements How we determined it 1% of revenue Rationale for benchmark applied We have applied this benchmark as the group’s result has fluctuated significantly in recent years and revenue is considered an appropriate benchmark given the circumstances and size of the group 1% of equity attributable to equity holders of the company We have applied this benchmark as it is considered appropriate given the company’s activity as a holding company We agreed with the Audit Committee that we would report to them misstatements identified during our audit above €200,000 (group audit) (2016: €200,000) and €55,000 (company audit) (2016: €55,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. 52 Going concern In accordance with ISAs (Ireland) we report as follows: Reporting obligation Outcome We are required to report if we have anything material to add or draw attention to in respect of the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the group’s or the company’s ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements. We are required to report if the directors’ statement relating to going concern in accordance with Rule 6.8.3(3) of the Listing Rules for the Main Securities Market of the Irish Stock Exchange is materially inconsistent with our knowledge obtained in the audit. We have nothing material to add or to draw attention to. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s or the company’s ability to continue as a going concern. We have nothing to report. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Report of the Directors, we also considered whether the disclosures required by the Companies Act 2014 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (Ireland), the Companies Act 2014 (CA14) and the Listing Rules applicable to the company (Listing Rules) require us to also report certain opinions and matters as described below (required by ISAs (Ireland) unless otherwise stated). 53 FBD Holdings plc Annual Report 2017 Independent Auditors’ Report (continued) REPORT OF THE DIRECTORS n In our opinion, based on the work undertaken in the course of the audit, the information given in the Report of the Directors for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with the applicable legal requirements (CA14). n Based on our knowledge and understanding of the group and parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Report of the Directors (CA14). CORPORATE GOVERNANCE STATEMENT n In our opinion, based on the work undertaken in the course of the audit of the financial statements: — the description of the main features of the internal control and risk management systems in relation to the financial reporting process; and — the information required by Section 1373(2)(d) of the Companies Act 2014; included in the Corporate Governance Statement, is consistent with the financial statements and has been prepared in accordance with section 1373(2) of the Companies Act 2014 (CA14). n Based on our knowledge and understanding of the company and its environment obtained in the course of the audit of the financial statements, we have not identified material misstatements in the description of the main features of the internal control and risk management systems in relation to the financial reporting process and the information required by section 1373(2)(d) of the Companies Act 2014 included in the Corporate Governance Statement (CA14). n In our opinion, based on the work undertaken during the course of the audit of the financial statements, the information required by section 1373(2)(a),(b),(e) and (f) is contained in the Corporate Governance Statement (CA14). 54 THE DIRECTORS’ ASSESSMENT OF THE PROSPECTS OF THE GROUP AND OF THE PRINCIPAL RISKS THAT WOULD THREATEN THE SOLVENCY OR LIQUIDITY OF THE GROUP We have nothing material to add or to draw attention to regarding: n The directors’ confirmation on page 21 of the Annual Report 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. n The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. n The directors’ explanation on page 21 of the Annual Report 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. We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the principal risks facing the group and the directors’ statement in relation to the longer-term viability of the group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the “Code”); and considering whether the statements are consistent with the knowledge and understanding of the group and the company and their environment obtained in the course of the audit (Listing Rules). OTHER CODE PROVISIONS We have nothing to report in respect of our responsibility to report when: n The statement given by the directors on page 31 that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for the members to assess the group’s and company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the group and company obtained in the course of performing our audit. n The section of the Annual Report on pages 30 and 31 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. n The directors’ statement relating to the company’s compliance with the Code and the Irish Corporate Governance Annex does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors. 55 FBD Holdings plc Annual Report 2017 Independent Auditors’ Report (continued) Responsibilities for the financial statements and the audit RESPONSIBILITIES OF THE DIRECTORS FOR THE FINANCIAL STATEMENTS As explained more fully in the Directors’ Responsibilities Statement set out on page 47, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so. AUDITORS’ RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (Ireland) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. A further description of our responsibilities for the audit of the financial statements is located on the IAASA website at: https://www.iaasa.ie/getmedia/b2389013-1cf6-458b- 9b8f-a98202dc9c3a/Description_of_auditors_ responsibilities_for_audit.pdf This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with section 391 of the Companies Act 2014 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting COMPANIES ACT 2014 OPINIONS ON OTHER MATTERS n We have obtained all the information and explanations which we consider necessary for the purposes of our audit. n In our opinion the accounting records of the company were sufficient to permit the company financial statements to be readily and properly audited. n The Company Statement of Financial Position is in agreement with the accounting records. COMPANIES ACT 2014 EXCEPTION REPORTING Directors’ remuneration and transactions Under the Companies Act 2014 we are required to report to you if, in our opinion, the disclosures of directors’ remuneration and transactions specified by sections 305 to 312 of that Act have not been made. We have no exceptions to report arising from this responsibility. 56 Appointment We were appointed by the directors on 10 August 2016 to audit the financial statements for the year ended 31 December 2016 and subsequent financial periods. The period of total uninterrupted engagement is 2 years, covering the years ended 31 December 2016 to 31 December 2017. Paraic Joyce for and on behalf of PricewaterhouseCoopers Chartered Accountants and Statutory Audit Firm Dublin 26 February 2018 n The maintenance and integrity of the FBD Holdings plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. n Legislation in the Republic of Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 57 FBD Holdings plc Annual Report 2017 58 Continuing to look ahead 59 FBD Holdings plc Annual Report 2017 Consolidated Income Statement For the financial year ended 31 December 2017 Continuing Operations Revenue Income Gross premium written Reinsurance premiums Net premium written Change in provision for unearned premiums Net premium earned Net investment return Financial services income Total income Expenses Net claims and benefits Other underwriting expenses Movement in other provisions Financial services expenses Revaluation of property, plant and equipment Restructuring and other costs Finance costs Pension curtailment Profit before taxation from continuing operations Income taxation charge Profit for the financial year from continuing operations Discontinued operations Profit for the financial year from discontinued operations, including profit from sale Profit for the financial year Attributable to: Equity holders of the parent Non-controlling interests Earnings per share From continuing operations Basic Diluted From continuing and discontinued operations Basic Diluted 2017 €000s 397,741 372,459 (27,267) 345,192 (19,260) 325,932 9,361 8,733 344,026 (203,144) (75,908) (1,945) (4,200) (1,080) (1,715) (6,298) - 49,736 (7,040) 42,696 - 42,696 42,696 - 42,696 2017 Cent 123 991 123 991 Restated 2016 €000s 397,003 361,799 (50,086) 311,713 (3,487) 308,226 8,338 8,542 325,106 (227,853) (69,406) (7,747) (6,592) (330) (2,794) (6,156) 7,214 11,442 (2,415) 9,027 1,653 10,680 10,759 (79) 10,680 2016 Cent 26 26 31 31 Note 4(a) 4(c) 4(c) 4(c) 4(c) 4(c) 5 4(a) 4(c) 4(c) 30 4(e) 15 6 31 32(c) 8 12 7 28 Note 14 14 14 14 1Diluted earnings per share reflects the potential conversion of the convertible debt and share based payments The accompanying notes form an integral part of the Financial Statements. The above results derive from continuing operations and discontinued operations. The Financial Statements were approved by the Board and authorised for issue on 26 February 2018. 60 Consolidated Statement of Comprehensive Income For the financial year ended 31 December 2017 Profit for the financial year Items that will or may be reclassified to profit or loss in subsequent periods: Note 2017 €000s 42,696 2016 €000s 10,680 Net gain on available for sale financial assets during the year 2,807 10,371 Taxation charge relating to items that will or may be reclassified to profit or loss in subsequent periods (351) (1,296) Items that will not be reclassified to profit or loss in subsequent periods: Actuarial gain/(loss) on retirement benefit obligations Taxation (charge)/credit relating to items not to be reclassified in subsequent periods Other comprehensive income/(expense) after taxation Total comprehensive income for the financial year Attributable to: Equity holders of the parent Non-controlling interests 32(d) 32(d) 28 275 (34) 2,697 45,393 45,393 - 45,393 (12,233) 1,529 (1,629) 9,051 9,130 (79) 9,051 61 FBD Holdings plc Annual Report 2017 Consolidated Statement of Financial Position At 31 December 2017 Note 15 16 17 18 19(a) 19(a) 19(a) 29(e) 29(e) 32(f) 20 21 22 23 2017 €000s 68,251 18,000 681 5,467 758,687 45,347 195,985 1,000,019 4 90,561 90,565 9,774 3,934 31,366 64,020 27,176 2016 €000s 72,994 16,400 732 12,234 629,498 90,302 236,897 956,697 13,954 69,260 83,214 8,715 4,162 25,004 62,770 26,561 1,319,253 1,269,483 ASSETS Property, plant and equipment Investment property Loans Deferred taxation asset Financial assets Available for sale investments Investments held for trading Deposits with banks Reinsurance assets Provision for unearned premiums Claims outstanding Retirement benefit asset Current taxation asset Deferred acquisition costs Other receivables Cash and cash equivalents Total assets 62 Consolidated Statement of Financial Position (continued) At 31 December 2017 EQUITY AND LIABILITIES Equity Called up share capital presented as equity Capital reserves Retained earnings Other reserves Equity attributable to ordinary equity holders of the parent Preference share capital Total equity Liabilities Insurance contract liabilities Provision for unearned premiums Claims outstanding Other provisions Convertible debt Deferred taxation liability Payables Total liabilities Total equity and liabilities Note 24 25(a) 26 31 27 29(d) 29(c) 30 31 33 34(a) 2017 €000s 21,409 19,726 212,259 18,232 271,626 2,923 274,549 186,008 765,012 951,020 6,647 52,525 3,845 30,667 2016 €000s 21,409 19,041 166,866 18,232 225,548 2,923 228,471 180,692 745,490 926,182 11,247 51,136 3,347 49,100 1,044,704 1,319,253 1,041,012 1,269,483 The accompanying notes form an integral part of the Financial Statements. The Financial Statements were approved by the Board and authorised for issue on 26 February 2018. They were signed on its behalf by: Liam Herlihy Chairman Fiona Muldoon Group Chief Executive 63 FBD Holdings plc Annual Report 2017 Consolidated Statement of Cash Flows For the financial year ended 31 December 2017 Cash flows from operating activities Profit before taxation Adjustments for: (Profit)/Loss on investments held for trading Loss on investments available for sale Interest and dividend income Depreciation of property, plant and equipment Share-based payment expense Revaluation of investment property Revaluation of property, plant and equipment Increase/(decrease) in insurance contract liabilities (Decrease)/increase in other provisions Profit on disposal of discontinued operation Operating cash flows before movement in working capital (Increase)/decrease in receivables and deferred acquisition costs Decrease in payables Interest payments on convertible debt Purchase of investments held for trading Sale of investments held for trading Cash generated from /(used in) operations Interest and dividend income received Income taxes refunded Net cash generated from operating activities Cash flows from investing activities Purchase of available for sale investments Sale of available for sale investments Purchase of property, plant and equipment Sale of property, plant and equipment Decrease in loans and advances Decrease in deposits invested with banks Net cash inflow from sale of subsidiary undertaking Net cash used in investing activities Cash flows from financing activities Dividends paid to non-controlling interests Proceeds of re-issue of ordinary shares Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the financial year The accompanying notes form an integral part of the Financial Statements. 64 Note 2017 €000s 2016 €000s 49,736 13,095 (1,685) 5,981 (12,735) 11,426 685 (1,600) 1,080 17,486 (4,600) - 65,774 (8,094) (13,084) (4,900) (958) 47,597 86,335 13,218 228 99,781 (258,355) 125,989 (7,869) 106 51 40,912 - (99,166) - - - 615 26,561 27,176 2,596 4,467 (14,233) 10,795 488 (1,850) 330 (3,677) 309 (1,916) 10,404 64 (12,352) (4,900) (13,996) 15,473 (5,307) 13,441 5,561 13,695 (322,503) 188,746 (12,113) 80 100 134,436 1,930 (9,324) (120) 66 (54) 4,317 22,244 26,561 15 39 16 15 30 7 15 17 19(a) 28 23 23 Consolidated Statement of Changes in Equity For the financial year ended 31 December 2017 l a t i p a c e r a h s p u d e l l a C y t i u q e s a d e t n e s e r p s e v r e s e r l a t i p a C i s g n n r a e d e n i a t e R s e v r e s e r r e h t O i y r a n d r o o t e l b a t u b i r t t A s r e d l o h e r a h s e r a h s e c n e r e f e r P l a t i p a c g n i l l o r t n o c - n o N s t s e r e t n i y t i u q e l a t o T €000s €000s €000s €000s €000s €000s €000s €000s Balance at 1 January 2016 21,409 18,553 157,670 18,232 215,864 2,923 451 219,238 Profit after taxation Other comprehensive expense - - - - 10,759 (1,629) - - 10,759 (1,629) - - (79) 10,680 - (1,629) 21,409 18,553 166,800 18,232 224,994 2,923 372 228,289 Reissue of ordinary shares Recognition of share based payments Dividend paid to non-controlling interests Disposal of subsidiary undertaking - - - - - 488 - - 66 - - - - - - - 66 488 - - - - - - - - (120) (252) 66 488 (120) (252) Balance at 31 December 2016 21,409 19,041 166,866 18,232 225,548 2,923 Profit after taxation Other comprehensive income - - - - 42,696 2,697 - - 42,696 2,697 - - Recognition of share based payments - 685 - - 685 - Balance at 31 December 2017 21,409 19,726 212,259 18,232 271,626 2,923 21,409 19,041 212,259 18,232 270,941 2,923 - - - - - - 228,471 42,696 2,697 273,864 685 274,549 65 FBD Holdings plc Annual Report 2017 Company Statement of Financial Position At 31 December 2017 ASSETS Investments Investment in subsidiaries Financial assets Deposits with banks Cash and cash equivalents Retirement benefit asset Other receivables Total assets EQUITY AND LIABILITIES Equity Called up share capital presented as equity Capital reserves Retained earnings Other reserves Shareholders’ funds – equity interests Preference share capital Equity attributable to equity holders of the parent Deferred tax liability Payables Total equity and liabilities Note 2017 €000s 2016 €000s 36(b) 110,063 110,063 1 850 1,498 2,346 110,914 113,907 221 2,333 1,601 55 2,109 1,141 115,069 117,212 21,409 19,726 47,752 18,232 107,119 2,923 110,042 292 4,735 21,409 19,041 49,020 18,232 107,702 2,923 110,625 264 6,323 115,069 117,212 24 25(b) 31 27 34(b) The Company’s movement in retained earnings is a loss for the financial year of €1,268,000 (2016: loss €5,501,000). The accompanying notes form an integral part of the Financial Statements. The Financial Statements were approved by the Board and authorised for issue on 26 February 2018. They were signed on its behalf by: Liam Herlihy Chairman Fiona Muldoon Group Chief Executive 66 Company Statement of Cash Flows For the financial year ended 31 December 2017 Cash flows from operating activities Loss before taxation Adjustments for: Profit on investments held for trading Profit on disposal of subsidiary undertaking Share-based payment expense Operating cash flows before movement in working capital (Increase)/decrease in receivables Decrease in payables Purchase of investments held for trading Sale of investments held for trading Cash used in operations Income taxes refunded Net cash used in operating activities Cash flows from investing activities Increase in investment in subsidiaries Decrease in deposits invested with banks Net cash inflow from disposal of subsidiary undertaking Net cash generated from investing activities Cash flows from financing activities Ordinary and preference dividends paid Proceeds of re-issue of ordinary shares Net cash generated from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year The accompanying notes form an integral part of the Financial Statements. 2017 €000s 2016 €000s (1,274) (1,892) (80) - 685 (669) (439) (1,799) - 1,577 (1,330) - (222) (1,517) 488 (3,143) 2,829 (3,296) (27) - (3,637) - (1,330) (3,637) - 1,496 - 1,496 - - - 166 55 221 (4,592) 5,849 2,305 3,562 - 66 66 (9) 64 55 67 FBD Holdings plc Annual Report 2017 Company Statement of Changes in Equity For the financial year ended 31 December 2017 l a t i p a c e r a h s p u d e l l a C y t i u q e s a d e t n e s e r p s e v r e s e r l a t i p a C e v r e s e r n o i t p o e r a h S i s g n n r a e d e n i a t e R s e v r e s e r r e h t O i y r a n d r o o t e l b a t u b i r t t A s r e d l o h e r a h s e r a h s e c n e r e f e r P l a t i p a c y t i u q e l a t o T €000s €000s €000s €000s €000s €000s €000s €000s Balance at 1 January 2016 21,409 11,593 6,960 54,521 18,232 112,715 2,923 115,638 Loss after taxation Other comprehensive expense - - - - - - (1,725) (3,842) - - (1,725) (3,842) - - (1,725) (3,842) 21,409 11,593 6,960 48,954 18,232 107,148 2,923 110,071 Reissue of ordinary shares Recognition of share based payments - - - - - 488 66 - - - 66 488 - - 66 488 Balance at 31 December 2016 21,409 11,593 7,448 49,020 18,232 107,702 2,923 110,625 Loss after taxation Other comprehensive expense - - - - - - (1,257) (11) - - (1,257) (11) - - (1,257) (11) Recognition of share based payments - - 685 - - 685 - 685 Balance at 31 December 2017 21,409 11,593 8,133 47,752 18,232 107,119 2,923 110,042 21,409 11,593 7,448 47,752 18,232 106,434 2,923 109,357 68 Notes to the Financial Statements For the financial year ended 31 December 2017 1 GENERAL INFORMATION FBD Holdings plc is an Irish registered public limited company. The registration number of the company is 135882. The address of the registered office is given on page 14. The nature of the Group’s operations and its principal activities are set out in the Review of Operations on pages 8 to 11 and in the Report of the Directors on pages 15 to 21. 2 GOING CONCERN The Directors have, at the time of approving the Financial Statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the Financial Statements. Further detail is contained in the Report of the Directors on page 21. 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PREPARATION The Group and Company Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) adopted by the European Union and therefore the Group Financial Statements comply with Article 4 of the EU IAS Regulation. The Group and Company Financial Statements are prepared in compliance with the Companies Acts 2014. During the year, the Group changed its accounting policy with respect to the treatment of claims handling expenses. The Group now includes claims handling expenses within net claims and benefits. Prior to this change in policy, the Group included these expenses within other underwriting expenses. Refer to note 42 for details on the change in the accounting policy. During the year the Group also changed the presentation of interest payments on convertible debt within cash flows from operating activities in the Consolidated Statement of Cash Flows by presenting these cash flows as a separate line item. The Group believes this new policy improves disclosure of cash flows from operating activities. This change has no impact on previously reported cash flows of the Group. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”) Standards adopted during the period In the current year, the Group has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January 2017. n Amendments to IAS 7 Statement of cash flows on disclosure initiative n Amendments to IAS 12 Income taxes on recognition of deferred tax assets for unrealised losses n Annual improvements to IFRSs 2014 – 2016 cycle The adoption of these standards has not had a material impact on the Financial Statements of the Group. Standards and Interpretations not yet effective IFRS 9 IFRS 15 IFRS 16 IFRS 17 Financial Instruments1 Revenue from Contracts with Customers1 Leases2 Insurance Contracts3 1 Effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. 2 Effective for annual periods beginning on or after 1 January 2019, with earlier application permitted. 3 Effective for annual periods beginning on or after 1 January 2021, with earlier application permitted. 69 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IFRS 15 Revenue from Contracts with Customers IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. The adoption of IFRS 15 is not expected to have a material impact on the Financial Statements of the Group in future periods. IFRS 16 Leases IFRS 16 is effective for annual periods beginning on or after 1 January 2019, with earlier application permitted. IFRS 16 will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability (to pay rentals) are recognised. The standard will affect primarily the accounting for the group’s operating leases. As at the reporting date, the group has non-cancellable operating lease commitments of €11,787,000, see note 11. The Directors are currently assessing the impact of the adoption of the standard. At this stage, the Directors do not intend to adopt the standard before its effective date. The Directors intend to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. IFRS 9 Financial Instruments and IFRS 17 Insurance Contracts IFRS 9 Financial Instruments is effective from 1 January 2018. The standard sets out the requirements for classification and measurement, impairment and general hedge accounting. The IASB published IFRS 17 Insurance Contracts on 18 May 2017 which supersedes IFRS 4 Insurance Contracts. This standard is effective from 1 January 2021. The Directors are currently assessing the implications of the adoption of IFRS 17 Insurance Contracts. The standard is expected to have a considerable impact on the Financial Statements of the Group. The IASB amended IFRS 4 Insurance Contracts in September 2016 by issuing “Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4)” which provides the option to apply a temporary exemption from the adoption of IFRS 9 Financial Instruments for periods beginning before 1 January 2021 should the insurer meet defined eligibility criteria. The Group is eligible and intends to apply the temporary exemption from 1 January 2018 per the amended IFRS 4 Insurance Contracts standard. Reassessment of qualification for the application of the temporary exemption will be carried out on an annual basis during the temporary exemption period. In line with amended IFRS 4 Insurance Contracts, additional disclosures will be included in the Financial Statements of the Group during the temporary exemption period. These disclosures include: (a) How the Group qualifies for the temporary exemption; (b) The fair value of financial assets at the end of the reporting period and the amount of change in the fair value of financial assets during that period; and (c) Information about the credit risk exposure of financial assets. The adoption of IFRS 9 Financial Instruments is not expected to have a material impact on the Financial Statements of the Group. 70 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING POLICIES The principal accounting policies adopted by the Board are: A) ACCOUNTING CONVENTION The Group and Company Financial Statements are prepared under the historical cost convention as modified by the revaluation of property, investments held for trading, available for sale investments and investment property, which are measured at fair value. B) BASIS OF CONSOLIDATION The Consolidated Financial Statements include the Financial Statements of the Company and its subsidiary undertakings, made up to 31 December. Control is achieved when the Company: n has power over the investee; n is exposed, or has rights, to variable returns from its involvement with the investee; and n has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over an investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all the relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including: n the size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; n potential voting rights held by the Company, other vote holders or other parties; n rights arising from other contractual arrangements; and n any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. All intra Group transactions, balances, income and expenses are eliminated on consolidation. Changes in the Group’s ownership interests in subsidiaries that do not result in a loss of control over the subsidiaries are accounted for as equity transactions. The carrying amount of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the Company. 71 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The acquisition of subsidiaries is accounted for using the acquisition method. The cost of the acquisition is measured as the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Any transaction costs incurred are expensed in the period in which they occur. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups), that are classified as held for sale in accordance with IFRS 5, Non Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs of sale. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the Consolidated Income Statement. When the Group loses control of a subsidiary, the profit or loss on the sale is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary and any non-controlling interests. Amounts previously recognised in the Consolidated Statement of Comprehensive Income in relation to the subsidiary are accounted for (i.e. reclassified to profit or loss or transferred directly to retained earnings) in the same manner as would be required if the relevant assets or liabilities are disposed of. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, costs on initial recognition of an investment in an associate or jointly controlled entity. C) REVENUE RECOGNITION Revenue is measured at the fair value of the consideration received or receivable and represents gross premiums written, broking commissions, fees, other commissions, interest and dividends receivable, rents receivable, net of discounts, levies, VAT and other sales related taxes. Revenue from insurance contracts is accounted for in accordance with Accounting Policy (D). Interest income is accrued on a time basis with reference to the principal outstanding at the effective interest rate applicable. Insurance agency commissions that do not require any further services are recognised as revenue on the effective commencement or renewal date of the related policies. If further services are to be rendered, the commission, or part of it, is deferred and recognised over the period during which the policy is in force. Fees for liability claims handling are recognised in the year to which they relate. Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. Rental income is recognised on a straight-line basis over the period of the lease. D) INSURANCE CONTRACTS (i) Premiums written Premiums written relate to business incepted during the year, together with any difference between booked premiums for prior years and those previously accrued, and include estimates of premiums due. Premiums written exclude taxes and duties levied on premiums and directly related expenses e.g. commissions. 72 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (ii) Unearned premiums Unearned premiums are those portions of premium income written in the year that relate to insurance cover after the year end. Unearned premiums are computed on a 365th of premium written. At 31 December each year, an assessment is made of whether the provision for unearned premiums is adequate as set out in accounting policy D (iv) below. (iii) Deferred acquisition costs Deferred acquisition costs represent the proportion of acquisition costs, net of reinsurance, that are attributable to the unearned premiums. Acquisition costs comprise the direct and indirect costs of obtaining and processing new insurance business. These costs are recognised as a deferred acquisition cost asset and amortised on the same basis as the related premiums are earned, and are tested for impairment at 31 December each year. (iv) Unexpired risks At 31 December each year, an assessment is made of whether the provision for unearned premiums is adequate. Provision for unexpired risks is made where the expected claims, related expenses and deferred acquisition costs are expected to exceed unearned premiums, after taking account of future investment income. 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 after taking account of the investment return expected to arise on assets. If these estimates show that the carrying amount of its insurance liabilities (less related deferred acquisition costs) is insufficient in light of the estimated future cash flows, the deficiency is recognised in the Consolidated Income Statement by setting up a provision in the Consolidated Statement of Financial Position. (v) Claims incurred Claims incurred comprise the cost of all insurance claims occurring during the year, whether reported or not, and any adjustments to claims outstanding from previous years. Full provision, net of reinsurance recoveries, is made at the reporting date for the estimated cost of claims incurred but not settled, including claims incurred but not yet reported and expenses to be incurred after the reporting date in settling those claims. The Group takes all reasonable steps to ensure that it has appropriate information regarding notified claims and uses this information when estimating the cost of those claims. Claims reserves are not discounted. The Group uses estimation techniques, based on statistical analysis of past experience, to calculate the estimated cost of claims outstanding at the year end. It is assumed that the development pattern of the current claims will be consistent with previous experience. Allowance is made, however, for any changes or uncertainties that may cause the cost of unsettled claims to increase or reduce. These changes or uncertainties may arise from issues such as the effects of inflation, changes in the mix of business or the legal environment. Receivables arising out of direct insurance operations are measured at initial recognition at fair value and are subsequently measured at amortised cost, after recognising any impairment loss to reflect estimated irrecoverable amounts. (vi) Reinsurance Premiums payable in respect of reinsurance ceded, are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not determined at the reporting date. Premiums are expensed over the period of the reinsurance contract, calculated principally on a daily pro rata basis. 73 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (vi) Reinsurance (continued) A reinsurance asset (reinsurers’ share of claims outstanding and provision for unearned premium) is recognised to reflect the amount estimated to be recoverable under the reinsurance contracts in respect of the outstanding claims reported under insurance liabilities. The amount recoverable from reinsurers is initially valued on the same basis as the underlying claims provision. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the contract and the event has a reliably measurable impact on the expected amount that will be recoverable from the reinsurer. The reinsurers’ share of each unexpired risk provision is recognised on the same basis. (vii) Funds withheld from Reinsurers Some of the Company’s reinsurance contracts are on a funds withheld basis. Under the agreements, the Company retains an agreed percentage of the premiums that would have been otherwise paid to the reinsurer. E) OTHER PROVISIONS The Group’s share of Motor Insurers’ Bureau of Ireland “MIBI” levy and related payments is based on its estimated market share in the current year at the balance sheet date, and an estimate of the levy to be called by MIBI in the following 12 months. F) PROPERTY, PLANT AND EQUIPMENT (i) Property Property held for own use in the supply of services or for administrative purposes is stated at revalued amounts, being the fair value at the date of revaluation which is determined by professional valuers. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the reporting date. Any revaluation increase arising on the revaluation of such property is credited to the revaluation reserve except to the extent that it reverses a revaluation decrease for the same asset previously recognised. A decrease on revaluation is charged as an expense to the extent that it exceeds the balance, if any, held in the revaluation reserve relating to previous revaluation of that asset. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the Consolidated Income Statement. (ii) Plant and equipment Plant and equipment is stated at cost less accumulated depreciation and accumulated revaluation losses. (iii) Depreciation Depreciation is provided in respect of all plant and equipment, and is calculated in order to write off the cost or valuation of the assets over their expected useful lives on a straight line basis over a three to ten year period. Depreciation on assets in development commences when the assets are ready for their intended use. 74 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G) INVESTMENT PROPERTY Investment property, which is property held to earn rentals and/or for capital appreciation, is recognised initially at cost and stated at fair value at the reporting date being the value determined by qualified independent professional valuers. Gains or losses arising from changes in the fair value are included in the Consolidated Income Statement for the period in which they arise. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the Consolidated Income Statement for the period in which the property is derecognised. H) FINANCIAL INSTRUMENTS Financial assets and financial liabilities are recognised in the Consolidated Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset only when the contractual rights to the cash flows of the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of the ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risk and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset. The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. (i) Investments held for trading at fair value Investments held for trading are stated at fair value and include quoted shares, quoted debt securities and UCITS. They are recognised on a trade date basis at fair value and are revalued at subsequent reporting dates at fair value, using the closing bid price, with gains and losses being included in the Consolidated Income Statement in the period in which they arise. Investments are held for trading if: n they have been acquired principally for the purpose of selling in the near future; or n they are part of an identified portfolio of financial instruments that the Group manages together and have a recent actual pattern of short-term profit-making; or n they are derivatives that are not designated and effective as hedging instruments. Investments other than investments held for trading may be designated at FVTPL (fair value through profit or loss) upon initial recognition if: n such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or n the investment forms part of a group of investments or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented investment policy. Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in the Consolidated Income Statement. The net gain or loss recognised in the Consolidated Income Statement incorporates any dividend or interest earned on the financial asset and is included in the ‘net investment return’ line item in the Consolidated Income Statement. 75 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (ii) Available for sale investments Available for sale investments include quoted debt securities and unquoted investments, and are stated at fair value where fair value can be reliably measured. Fair value is calculated using closing bid prices. They are recognised on a trade date basis at fair value, and are subsequently revalued at each reporting date to fair value, with gains and losses being included directly in the Consolidated Statement of Comprehensive Income until the investment is disposed of or determined to be impaired, at which time the cumulative gain or loss previously recognised in the Consolidated Statement of Comprehensive Income, is included in the Consolidated Income Statement for the year. (iii) Loans and other receivables Loans Loans are recognised on a trade date basis at fair value plus transaction costs and are subsequently measured at amortised cost using the effective interest rate method. When it is not possible to estimate reliably the cash flows or the expected life of a loan, the projected cash flows over the full term of the loan are used to determine fair value. The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount at initial recognition. Other receivables Amounts arising out of direct insurance operations and other debtors are measured at initial recognition at fair value and are subsequently measured at amortised cost, after recognising any revaluation loss to reflect estimated irrecoverable amounts. (iv) Deposits with banks Term deposits with banks comprise cash held for the purpose of investment. Demand deposits with banks are held for operating purposes and included in cash and cash equivalents. I) LEASES All of the Group’s leases are classified as operating leases. (i) The Group as Lessor Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the operating lease term. (ii) The Group as Lessee Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the operating lease term. J) CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash on hand and demand deposits with maturities of 3 months or less held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. 76 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) K) TAXATION Income tax expense or credit represents the sum of income tax currently payable and deferred income tax. Income tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the Consolidated Income Statement because it excludes items of income or expense that are taxable or deductible in other years and further excludes items that are not taxable or deductible. The Group’s liability for income tax is calculated using rates that have been enacted or substantively enacted at the reporting date. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity. Deferred income tax is provided, using the liability method, on all differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is expected to be realised or the liability to be settled. Deferred tax assets are recognised for all deductible differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit would be available to allow all or part of the deferred income tax asset to be utilised. Deferred taxation liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred taxation assets and liabilities are offset when there is a legally enforceable right to set off current taxation assets against current taxation liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle on a net basis. L) RETIREMENT BENEFITS The Group provides either defined benefit or defined contribution retirement benefit schemes for the majority of its employees. (i) Defined benefit scheme A full actuarial valuation of the scheme is undertaken every three years and is updated annually to reflect current conditions in the intervening periods for the purposes of preparing the Financial Statements. Scheme assets are valued at fair value. Scheme liabilities are measured on an actuarial basis and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. The projected unit credit method is used to calculate scheme liabilities. The surplus or deficit on the scheme is carried in the Consolidated Statement of Financial Position as an asset or liability. Any asset resulting from this calculation is limited to the future economic benefits available in the form of a reduction in future contributions or a cash refund. Actuarial gains and losses are recognised immediately in equity through the Consolidated Statement of Comprehensive Income. The current service cost and past service cost of the scheme are charged to the Consolidated Income Statement. Past service cost is recognised as an expense when plan amendments or curtailments occur. (ii) Defined Contribution Schemes Costs arising in respect of the Group’s defined contribution retirement benefit schemes are charged to the Consolidated Income Statement in line with the service received. 77 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) M) CURRENCY For the purpose of the Consolidated Financial Statements, the results and financial position of each Group company are expressed in euro, which is the functional currency of the Company, and the presentation currency for the Consolidated Financial Statements. In preparing the Financial Statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognised at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. On consolidation, the assets and liabilities of the Group’s non Euro-zone operations are translated at exchange rates prevailing on the reporting date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly, in which case the exchange rates at the date of transactions are used. Exchange differences that are classified as equity are transferred to the translation reserve. Such translation differences are recognised as income or expense in the period in which the operation is disposed. N) SHARE-BASED PAYMENTS AND LONG TERM INCENTIVE PLANS The Group operates a long-term incentive plan based on market and non-market vesting conditions. The fair value of the market based awarded shares is determined at the date of grant using either the Black Scholes or Monte Carlo Simulation models. The fair value of the non-market based awarded shares is determined with reference to the share price of the Group at the date of grant. The cost is expensed in the Consolidated Income Statement over the vesting period at the conclusion of which the employees become unconditionally entitled to the options. The corresponding amount to the expense is credited to a separate reserve in the Consolidated Statement of Financial position. At each period end, the Group reviews its estimate of the number of options that it expects to vest and any adjustment relating to current and past vesting periods is brought to the Consolidated Income Statement. The share awards are all equity settled. O) TREASURY SHARES Where any Group company purchases the Company’s equity share capital, the consideration paid is shown as a deduction from ordinary shareholders’ equity. Consideration received on the subsequent sale or issue of treasury shares is credited to ordinary shareholders’ equity. Treasury shares are excluded when calculating earnings per share. P) IMPAIRMENT OF ASSETS (i) Impairment of tangible and intangible assets At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of the revaluation loss, if any. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. The recoverable amount is the higher of the fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-taxation discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. A revaluation loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. 78 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) P) IMPAIRMENT OF ASSETS (CONTINUED) Where a revaluation loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no revaluation loss been recognised for the asset (or cash- generating unit) in prior years. A reversal of a revaluation loss, other than in relation to goodwill, is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the revaluation loss is treated as a revaluation increase. (ii) Impairment of financial assets Financial assets, other than those at FVTPL (fair value through profit or loss), are assessed for indicators of revaluation at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the investment have been impacted. For listed and unlisted equity investments classified as Available for Sale (“AFS”), a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment. For all other financial assets, objective evidence of impairment could include: n significant financial difficulty of the issuer or counterparty; or n default or delinquency in interest or principal payments; or n it becoming probable that the borrower will enter bankruptcy or financial re-organisation. For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. The carrying amount of a financial asset is directly reduced by the impairment loss for all financial assets. When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognised in the Consolidated Statement of Comprehensive Income are reclassified to the Consolidated Income Statement in the period. With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the Consolidated Income Statement, to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. In respect of AFS equity securities, impairment losses previously recognised in the Consolidated Income Statement are not reversed through the Consolidated Income Statement. Any increase in fair value subsequent to an impairment loss is recognised in the Consolidated Statement of Comprehensive Income. Q ) RESTRUCTURING AND OTHER COSTS The costs of the restructuring of the Group’s operations, such as redundancy costs, provision for lease termination costs or other rationalisation costs, are charged to the Consolidated Income Statement when the decision to restructure is irrevocable and has been communicated to the parties involved. 79 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R) FINANCIAL SERVICES INCOME Financial services income comprises income earned from premium installment services and life, pension and investment broking. S) COMPOUND FINANCIAL INSTRUMENTS Compound financial instruments issued by the Group comprise convertible notes that can be converted to share capital at the option of the holder, when the number of shares to be issued is fixed. The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortised cost using the effective interest rate method. The equity component of a compound financial instrument is not remeasured subsequent to initial recognition. Interest relating to the financial liability is recognised in the income statement. On conversion, the financial liability is reclassified to equity and no gain or loss is recognised. T) CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The principal accounting policies adopted by the Group are set out on pages 69 to 80. In the application of these accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The following are the key critical judgments and estimates that the Directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the Financial Statements. Claims provisions Claims provisions represent the estimation of the cost of claims outstanding under insurance contracts written. Actuarial techniques, based on statistical analysis of past experience, are used to calculate the estimated cost of claims outstanding at year end. Allowance is made for any changes or uncertainties that may cause the cost of unsettled claims to increase or reduce. At each reporting date liability adequacy tests are performed to ensure the adequacy of the liabilities. Any deficiency is recognised in the Consolidated Income Statement. Further details are set out in note 29 to the Financial Statements. Motor Insurers’ Bureau of Ireland (“MIBI”) The Group estimates its obligation to pay its share of the MIBI levy call for the following financial year based on its share of the Irish Motor market in the previous year, and the Groups estimate of the likely levy call to be made by MIBI and related payments in the following twelve months. The Directors have reviewed the assumptions used in arriving at the provision and are satisfied that the assumptions used were appropriate. 80 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred taxation Deferred taxation is the taxation expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding taxation bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred taxation liabilities are generally recognised for all taxable temporary differences and deferred taxation assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred taxation assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred taxation is measured at the taxation rates that are expected to apply in the periods in which the temporary differences are expected to reverse based on taxation rates and laws enacted or substantially enacted at the reporting date. The Directors have reviewed financial projections for the Group and are satisfied that there is sufficient evidence that there will be sufficient future taxable profits to utilise the losses forward. Recoverability of pension asset The Directors have concluded that when all members have left the scheme, any surplus remaining would be returned to the Employers in accordance with the trust deed. As such the full economic benefit of the surplus under IAS19 is deemed available to the employer and is recognised in the Consolidated Statement of Financial Position. Other critical judgements and estimates applied by the Directors include: Property, plant & equipment Property held for own use in the supply of services or for administrative purposes is included in the Statement of Financial Position at fair value. Property valuations are affected by general economic and market conditions. The fair value of property held for own use is determined by valuations conducted at the reporting date by independent professional valuers, CB Richard Ellis, Valuation Surveyors. A decrease in the valuation of the property is charged as an expense to the Consolidated Income Statement to the extent that it exceeds the balance, if any, held in the revaluation reserve relating to previous revaluation of that asset. Properties are held at fair value less any subsequent depreciation in line with the accounting standard. Depreciation is provided in respect of all plant and equipment and is calculated to write off the cost or valuation of the assets over their expected useful lives. The useful life of plant and equipment is estimated to be three to ten years dependent on the asset. Depreciation on assets in development commences when the assets are ready for their intended use. The Directors have carried out an impairment review of the investment in a new policy administration system which was put into use in the current year. They have concluded that the asset will deliver economic benefits into the future and the present value of future cash flows from the asset will be sufficient to recover the carrying value of the asset. Investment property Investment property, which is property held to earn rentals and/or for capital appreciation, is recognised initially at cost and stated in the Consolidated Statement of Financial Position at fair value at the reporting date. The fair value of investment property in Ireland is determined by valuations conducted at the reporting date by qualified independent professional valuers, CB Richard Ellis, Valuation Surveyors. Gains or losses arising from changes in the fair value are included in the Consolidated Income Statement for the period in which they arise. 81 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Reinsurance recoveries The Group spends substantial sums to purchase reinsurance protection from third parties and substantial claims recoveries from these reinsurers are included in the Consolidated Statement of Financial Position at the reporting date. A reinsurance asset (reinsurers’ share of claims outstanding and provision for unearned premium) is recognised to reflect the amount estimated to be recoverable under the reinsurance contracts in respect of the outstanding claims reported under insurance liabilities. The amount recoverable from reinsurers is initially valued on the same basis as the underlying claims provision. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the contract and the event has a reliably measurable impact on the expected amount that will be recoverable from the reinsurer. To minimise default exposure, the Group’s policy is that all reinsurers should have a credit rating of A- or better or have provided alternative satisfactory security. Valuation of financial instruments As described in note 19, the Group uses valuation techniques that include inputs that are not based on observable market data to estimate the fair value of certain types of financial instruments. Note 19 provides detailed information about the key assumptions used in the determination of the fair value of financial instruments. The Directors believe that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments. As described in note 31, the Group has determined fair value of the liability component of its convertible bond with reference to the fair value of a similar liability without an equity conversion option. The equity component has been calculated as the difference between the fair value of the financial instrument as a whole and the value of the liability component. The Directors believe that the valuation technique used and the classification of the components of the convertible bond between liability and equity are appropriate. Deferred acquisition costs Deferred acquisition costs represent the proportion of net acquisition costs which are attributable to the unearned premiums. Acquisition costs comprise the direct and indirect costs of obtaining and processing new insurance business. These costs are recognised as a deferred acquisition cost asset and amortised on the same basis as the related premiums are earned, and are tested for impairment at 31 December each year. Note 41, Risk Management identifies the Group’s key sensitivity factors and tests the impact of a change in each one of these factors has on pre-taxation profit and shareholders’ equity. 82 4 SEGMENTAL INFORMATION (a) Operating segments The principal activities of the Group are underwriting of general insurance business and financial services. For management purposes, the Group is organised in two operating segments - underwriting and financial services. These two segments are the basis upon which information is reported to the chief operating decision maker, the Group Chief Executive, for the purpose of resource allocation and assessment of segmental performance. Discrete financial information is prepared and reviewed on a regular basis for these two segments. The following is an analysis of the Group’s revenue and results from continuing operations by reportable segments. 2017 Revenue Profit before taxation Income taxation charge Profit after taxation Other information Capital additions Revaluation of other assets Depreciation Statement of Financial Position Segment assets Segment liabilities Underwriting €000s 389,008 45,206 (6,379) 38,827 Financial services €000s 8,733 4,530 (661) 3,869 8,270 520 11,418 3 - 8 Total €000s 397,741 49,736 (7,040) 42,696 8,273 520 11,426 1,313,739 1,040,604 5,514 4,100 1,319,253 1,044,704 83 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 4 SEGMENTAL INFORMATION (CONTINUED) (a) Operating segments (continued) 2016 Revenue Profit before taxation Income taxation charge Profit after taxation Other information Capital additions Revaluation of other assets Depreciation Statement of Financial Position Segment assets Segment liabilities Underwriting €000s Financial services €000s Total €000s 388,461 8,542 397,003 9,102 (2,188) 6,914 12,104 1,520 10,769 2,340 (227) 2,113 9 - 26 11,442 (2,415) 9,027 12,113 1,520 10,795 1,256,614 1,029,471 12,869 11,541 1,269,483 1,041,012 Included above in the current period is a net non-cash revaluation charge relating to investment property and property held for own use of €520,000 (2016: €1,520,000), all of which relates to the underwriting segment. The accounting policies of the reportable segments are the same as the Group accounting policies. Segment profit represents the profit earned by each segment. Central administration costs and Directors’ salaries are allocated based on actual activity. Restructuring costs and income taxation are direct costs of each segment. Segment profit is the measure reported to the chief operating decision maker, the Group Chief Executive, for the purposes of resource allocation and assessment of segmental reporting. In monitoring segment performance and allocating resources between segments: n All assets are allocated to reportable segments. Assets used jointly by reportable segments are allocated on the basis of activity by each reportable segment; and n All liabilities are allocated to reportable segments. Liabilities for which reportable segments are jointly liable are allocated in proportion to segment assets. 84 4 SEGMENTAL INFORMATION (CONTINUED) (a) Operating segments (continued) An analysis of the Group’s revenue by product is as follows: Direct insurance – motor Direct insurance – fire and other damage to property Direct insurance – liability Direct insurance – interest and other revenue Direct insurance – other Financial services revenue Total revenue 2017 €000s 181,141 113,333 72,239 16,549 5,746 8,733 2016 €000s 171,857 115,637 68,662 26,487 5,818 8,542 397,741 397,003 The Group’s customer base is diverse and it has no reliance on any major customer. Insurance risk is not concentrated on any one area or on any one line of business. (b) Geographical segments The Group’s operations are located in Ireland. 85 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 4 SEGMENTAL INFORMATION (CONTINUED) (c) Underwriting result 2017 €000s 2017 €000s Restated 2016 Restated 2016 €000s €000s Earned premiums, net of reinsurance Gross premium written Outward reinsurance premiums Net premium written Change in provision for unearned premium Gross amount Reinsurers’ share Change in net provision for unearned premium 372,459 (27,267) 345,192 (5,311) (13,949) (19,260) 361,799 (50,086) 311,713 (2,108) (1,379) (3,487) Premium earned, net of reinsurance 325,932 308,226 Claims paid, net of recoveries from reinsurers Claims paid: Gross amount Reinsurers’ share (217,136) 9,749 Claims paid, net of recoveries from reinsurers (207,387) Change in provision for claims Gross amount Reinsurers’ share Change in insurance liabilities, net of reinsurance Claims handling expenses Claims incurred net of reinsurance Motor insurers bureau of Ireland levy and related payments Management expenses Deferred acquisition costs Gross management expenses Reinsurers share of expenses Broker commissions payable Net operating expenses Underwriting result (240,634) 15,962 (224,672) 2,652 4,510 7,162 (10,343) (75,399) (2,541) (77,940) 11,660 (3,126) (227,853) (7,747) (19,522) 33,362 13,840 (9,597) (81,751) 6,363 (75,388) 2,528 (3,048) (203,144) (1,945) (75,908) 44,935 (69,406) 3,220 Net claims incurred in 2017 were €203,144,000, down 11% on the net claims incurred of €227,853,000 in 2016. The improvement is mainly as a result of positive prior year development in 2017. 86 4 SEGMENTAL INFORMATION (CONTINUED) The Group’s reinsurance policy dictates that all of the Group’s reinsurers must have a credit rating of A- or better, or provide appropriate security. The impact of buying reinsurance was a credit to the Consolidated Income Statement of €4,423,000 (2016: charge of €19,332,000). (d) Underwriting management expenses Employee benefit expense Rent, rates, insurance and maintenance Depreciation Other Total underwriting management expenses (e) Financial services expenses Employee benefit expense Rent, rates, insurance and maintenance Depreciation Other Total financial services expenses 2017 €000s 43,987 6,118 11,824 19,822 81,751 2017 €000s 2,622 313 8 1,257 4,200 Restated 2016 €000s 40,732 6,175 10,769 17,723 75,399 2016 €000s 3,938 658 12 1,984 6,592 87 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 5 NET INVESTMENT RETURN Actual return Interest and similar income Income from investment properties Realised profits on investments Dividend income Revaluation of investment properties Unrealised loss on financial investments Total investment income By Classification of investment Deposits with banks Investments held for trading Investment properties Available for sale investments Total investment income 2017 €000s 12,650 547 (363) 568 1,600 (5,641) 9,361 (129) 2,296 2,147 5,047 9,361 2016 €000s 13,760 585 (1,746) 657 1,850 (6,768) 8,338 121 105 2,435 5,677 8,338 Interest and similar income received by the Group’s underwriting segment during the period was €13,474,000 (2016: €14,223,000). 6 RESTRUCTURING AND OTHER COSTS Restructuring costs 2017 €000s 1,715 2016 €000s 2,794 88 7 DISCONTINUED OPERATIONS Disposal of Subsidiary, including result/profit to date of disposal 2017 €000s - 2016 €000s 1,653 Disposal of Subsidiary On 23 May 2016 the Group disposed of its 70% shareholding in the Passage East Ferry Company Limited. In line with the Group’s strategic objective to focus resources on its insurance underwriting business, Passage East Ferry Company Limited was considered a non-core asset and was therefore disposed, with the proceeds of sale being reinvested within the business. Result/Profit on Sale: Consideration received Less carrying value of the investment Less share of costs associated with the sale Result/Profit on the sale of subsidiary Result/Profit for the Period: Financial services income Financial services expenses Result/(Loss) before taxation Income taxation charge Result/(Loss) for the period to date of disposal/year Result/Profit for financial year including profit on the sale Attributable to: Equity holders of the parent Non-controlling interests Result/Profit for financial year including profit on the sale 8 PROFIT BEFORE TAXATION FROM CONTINUING OPERATIONS Profit before taxation has been stated after charging: Depreciation 2017 €000s - - - - - - - - - - - - - 2016 €000s 2,662 (583) (163) 1,916 420 (501) (81) (182) (263) 1,653 1,732 (79) 1,653 2017 €000s 2016 €000s 11,426 10,795 The remuneration of the Directors is set out in detail in the Report on Directors’ Remuneration on pages 38 to 46. 89 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 9 INFORMATION RELATING TO AUDITOR’S REMUNERATION An analysis of fees payable to the statutory audit firm is as follows: Description of service Audit of statutory financial statements Other assurance services Total auditors remuneration 2017 Company €000s 2016 Group €000s Company €000s 60 - 60 260 176 436 60 - 60 Fees payable by the Company are included with the fees payable by the Group in each category. Other assurance services relate to Solvency II audit and CBI cyber security review, both of which are prescribed under legislation or regulation. 10 STAFF COSTS AND NUMBERS The average number of full time equivalent persons employed by the Group by reportable segment was as follows: Underwriting Financial services Total The aggregate employee benefit expense was as follows: Wages and salaries Social welfare costs Pension costs Share based payments Total employee benefit expense 2017 846 25 871 2017 €000s 44,163 4,945 4,245 685 54,038 Group €000s 320 100 420 2016 859 38 897 2016 €000s 42,536 4,855 4,453 488 52,332 90 11 OPERATING LEASE RENTALS The total of future minimum lease payments under non-cancellable operating leases is set out in the following table: Not later than 1 year Later than 1 year but not later than 5 years Later than 5 years 2017 €000s 1,176 5,206 5,405 2016 €000s 1,153 5,392 6,541 11,787 13,086 FBD Insurance plc holds a number of significant operating lease arrangements in respect of branches. The minimum lease terms remaining on the most significant leases vary from 1 year to 18 years. There are no contingent rents payable and all lease payments are at market rates. Operating lease payments recognised as an expense for the period were €1,472,000 (2016: €1,516,000). 12 INCOME TAXATION CHARGE Irish corporation taxation credit / (charge) Adjustments in respect of prior financial years Current taxation charge Deferred taxation charge Income taxation charge 2017 €000s 94 (254) (160) (6,880) (7,040) 2016 €000s (10) (910) (920) (1,495) (2,415) 91 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 12 INCOME TAXATION CHARGE (CONTINUED) The taxation charge in the Consolidated Income Statement is higher than the standard rate of corporation taxation in Ireland. The differences are explained below: Profit before taxation Corporation taxation charge at standard rate of 12.5% (2016: 12.5%) Effects of: Differences between capital allowances for period and depreciation Non-taxable income/unrealised gains/losses not chargeable/deductible for taxation purposes Higher rates of taxation on other income Adjustments in respect of prior years Income taxation charge Taxation as a percentage of profit before taxation 2017 €000s 49,736 6,217 - 554 15 254 7,040 14.2% In addition to the amount charged to the Consolidated Income Statement, the following taxation amounts have been recognised directly in the Consolidated Statement of Comprehensive Income: Deferred taxation on: Actuarial (gain)/loss on retirement benefit obligations Gain on available for sale investments Total income taxation (charge)/credit recognised directly in the Consolidated Statement of Comprehensive Income 2017 €000s (34) (351) (385) 2016 €000s 11,442 1,430 - 65 10 910 2,415 21.1% 2016 €000s 1,529 (1,296) 233 13 LOSS FOR THE YEAR The Company’s loss for the financial year determined in accordance with IFRS, as adopted by the European Union, is €1,257,000 (2016: €1,725,000). In accordance with section 304 of the Companies Act 2014 the Company is availing of the exemption from presenting its individual Income Statement to the Annual General Meeting and from filing it with the Registrar of Companies. 92 14 EARNINGS PER €0.60 ORDINARY SHARE The calculation of the basic and diluted earnings per share attributable to the ordinary shareholders is based on the following data: Earnings Profit for the year Non-controlling interests loss Profit for the purpose of basic and diluted earnings per share Adjustments to exclude profit for the year from discontinued operations 2017 €000s 42,696 - 42,696 - 2016 €000s 10,680 79 10,759 (1,653) Profit from continued operations for the purpose of basic and diluted earnings per share excluding discontinued operations 42,696 9,106 Number of shares Weighted average number of ordinary shares for the purpose of basic earnings per share (excludes treasury shares) Weighted average number of ordinary shares for the purpose of diluted earnings per share (excludes treasury shares) 2017 No. 2016 No. 34,666,201 34,654,611 43,329,630 34,782,247 From continuing operations Basic earnings per share Diluted earnings per share From discontinued operations Basic earnings per share Diluted earnings per share Cent 123 991 Cent - - 1 Diluted earnings per share reflects the potential conversion of the convertible debt and share based payments. Cent 26 26 Cent 5 5 93 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 15 PROPERTY, PLANT AND EQUIPMENT Cost or valuation At 1 January 2016 Additions Disposals Disposal of subsidiary At 1 January 2017 Additions Disposals At 31 December 2017 Comprising: At cost At valuation At 31 December 2017 Accumulated depreciation and revaluation At 1 January 2016 Depreciation charge for the year Elimination on disposal Revaluations Disposal of subsidiary At 1 January 2017 Depreciation charge for the year Elimination on disposal Revaluations At 31 December 2017 Carrying amount At 31 December 2017 At 31 December 2016 94 Property held for own use Plant and equipment Total property, plant and equipment €000s €000s €000s 21,075 - (80) - 145,274 12,113 (1,863) (1,732) 166,349 12,113 (1,943) (1,732) 20,995 153,792 174,787 - (106) 7,869 (62) 7,869 (168) 20,889 161,599 182,488 - 161,599 20,889 20,889 - 161,599 161,599 20,889 182,488 Property held for own use Plant and equipment Total property, plant and equipment €000s 4,725 - - 330 - 5,055 - - 1,080 6,135 14,754 15,940 €000s 89,007 10,795 (1,861) - (1,203) 96,738 11,426 (62) - €000s 93,732 10,795 (1,861) 330 (1,203) 101,793 11,426 (62) 1,080 108,102 114,237 53,497 57,054 68,251 72,994 15 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Property held for own use Property held for own use at 31 December 2017 and 2016 were valued at fair value which is determined by independent external professional valuers CB Richard Ellis, Valuation Surveyors. The valuers confirm that the properties have been valued by a valuer who is qualified for the purpose of the valuation in accordance with RICS Valuation – Professional Standards global January 2014 (Red Book). The valuation report states that the valuations have been prepared on the basis of “Market Value” which is defined in the report as “the estimated amount for which an asset or liability should exchange on valuation date between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion”. The report also states that the market value “has been primarily derived using comparable recent market transactions on arm’s length terms”. It also states that the properties have been valued individually and no account taken of any discount or premium that may be negotiated in the market if all or part of the portfolio was to be marketed simultaneously either as lots or as a whole. The valuers state that they made various assumptions as to tenure, letting and town planning, condition and repair of buildings and sites, including ground and groundwater contamination. They have determined market value using a range of capital values per square metre based on appropriate local evidence. The valuer states that they have not viewed any tenancy agreements and have assumed for the purposes of valuation that the properties (with the exception of FBD House, Naas Road, Dublin 12) are subject to vacant possession. The Directors believe that the market value, determined by independent professional valuers is not materially different to fair value. Had the property been carried at historical cost less accumulated depreciation and accumulated revaluation losses, their carrying amount would have been as follows: Property held for own use 2017 €000s 14,780 2016 €000s 14,886 The most significant investment in plant and equipment over the past two years was in the underwriting policy administration system. Fair value hierarchy disclosures required by IFRS13 Fair Value Measurement have been included in Note 19, Financial Instruments and Fair Value Measurement. 95 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 16 INVESTMENT PROPERTY Fair value of investment property At 1 January Fair value movement during the year At 31 December 2017 €000s 16,400 1,600 18,000 2016 €000s 14,550 1,850 16,400 The investment property held for rental in Ireland was valued at fair value at 31 December 2017 and at 31 December 2016 by independent external professional valuers, CB Richard Ellis, Valuation Surveyors. The valuation was prepared in accordance with the RICS Valuation – Professional Standards global January 2014 (Red Book). The valuers confirm that they have sufficient current local and national knowledge of the particular property market involved and have skills and understanding to undertake the valuations competently. The valuation statement received from the external professional valuers state that the valuations have been prepared on the basis of “Market Value” which they define as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”. The valuer also states that landlord’s fixtures such as central heating and other normal service installations have been treated as an integral part of the building and are included within the valuation while process plant and machinery, tenants’ fixtures and specialist trade fittings have been excluded. Assumptions have been made that the property is not contaminated and is not adversely affected by any existing or proposed environmental law. In the absence of any information to the contrary, it has been assumed that there are no abnormal ground conditions nor archaeological remains, the property is free from rot, infestation, structural or latent defect, no hazardous materials or suspect techniques have been used in the construction or alteration and the services are in working order and free from defects. The Directors believe that market value, determined by independent external professional valuers, is not materially different to the fair value. There was an increase in the fair value in 2017 of €1,600,000 (2016: €1,850,000). The rental income earned by the Group from its investment properties amounted to €797,000 (2016: €815,000). Direct operating costs associated with investment properties amounted to €240,000 (2016: €240,000). The historical cost of investment property is as follows: Historical cost at 1 January Disposals Historical cost at 31 December Non-cancellable operating lease receivables Not longer than 1 year Longer than 1 year and not longer than 5 years Total non-cancellable operating lease receivables 2017 €000s 20,080 - 20,080 2017 €000s 1,027 4,107 5,134 2016 €000s 20,080 - 20,080 2016 €000s 797 4,107 4,904 Fair value hierarchy disclosures require by IFRS13 Fair Value Measurement have been included in Note 19, Financial Instruments and Fair Value Measurement. 96 17 LOANS Other loans Total loans 2017 €000s 681 681 Fair value hierarchy disclosures required by IFRS13 Fair Value Measurement have been included in Note 19, Financial Instruments and Fair Value Measurement. 18 DEFERRED TAXATION ASSET Unrealised losses on investments & loans Accelerated capital allowances Insurance Contracts Losses carried forward 2016 €000s 732 732 Total €000s At 1 January 2016 Debited to the Consolidated Statement of Comprehensive Income (Debited)/Credited to Consolidated Income Statement Reclassified to deferred taxation liability At 31 December 2016 Debited to the Consolidated Statement of Comprehensive Income (Debited)/Credited to Consolidated Income Statement At 31 December 2017 €000s 697 - (1,743) 1,046 - - - - €000s 1,191 - 23 - €000s €000s (4,575) 15,826 13,139 - - - 1,830 (2,061) (1,951) - - 1,046 1,214 (2,745) 13,765 12,234 - - - - (546) 668 915 (7,136) (6,767) (1,830) 6,629 5,467 A deferred taxation asset of €6,629,000 (2016: €13,765,000) has been recognised in respect of losses carried forward. The Directors have considered and are satisfied that the deferred taxation asset will be fully recoverable against future taxable profits. 97 FBD Holdings plc Annual Report 2017 2017 €000s 2016 €000s 195,985 236,897 45,347 758,687 681 64,020 27,176 90,302 629,498 732 62,770 26,561 52,525 51,136 30,667 49,100 Notes to the Financial Statements (continued) 19 FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT (a) Financial Instruments Financial Assets At Amortised Cost: Deposits with banks At fair value: Investments held for trading Available for sale investments At Cost: Loans Other receivables Cash and cash equivalents Financial Liabilities At Amortised Cost: Convertible debt (note 31) At Cost: Payables 98 19 FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT (CONTINUED) (b) Fair value measurement The following table compares the fair value of financial assets and financial liabilities with their carrying values: Assets Loans Investment property Property held for own use Financial Assets Investments held for trading Available for sale investments Deposits with banks Cash & cash equivalents Liabilities Convertible debt Assets Loans Investment property Property held for own use Financial Assets Investments held for trading Available for sale investments Deposits with banks Cash & cash equivalents Liabilities Convertible debt The exemption from disclosing the fair value of short term receivables has been availed of. 2017 Fair value €000s 817 18,000 14,754 45,347 758,687 195,985 27,176 2017 Carrying value €000s 681 18,000 14,754 45,347 758,687 195,985 27,176 66,406 52,525 2016 Fair value €000s 878 16,400 15,940 90,302 629,498 236,897 26,561 2016 Carrying value €000s 732 16,400 15,940 90,302 629,498 236,897 26,561 54,880 51,136 99 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 19 FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT (CONTINUED) Certain financial instruments are measured in the statement of financial position at fair value using a fair value hierarchy of valuation inputs. The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. Fair value measurements derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair value measurements derived from 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). Fair value measurements derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Among the valuation techniques used are cost, net asset or net book value or the net present value of future cash flows based on conservative operating projections. Level 1 Level 2 Level 3 2017 Assets Loans Level 1 €000s - - - 20,935 24,412 757,843 - 195,985 27,176 Level 2 €000s 817 18,000 14,754 - - - - - - Level 3 €000s - - - - - - 844 - - Total €000s 817 18,000 14,754 20,935 24,412 757,843 844 195,985 27,176 1,026,351 33,571 844 1,060,766 - - 66,406 66,406 - - 66,406 66,406 Investment property Property held for own use Financial assets Investments held for trading - quoted shares Investments held for trading - UCITS AFS investments - quoted debt securities AFS investments - unquoted investments Deposits with banks Cash and cash equivalents Total assets Liabilities Convertible debt Total liabilities 100 19 FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT (CONTINUED) 2016 Assets Loans Investment property Property held for own use Financial assets Level 1 €000s - - - Investments held for trading - quoted shares 24,188 Investments held for trading - quoted debt securities Investments held for trading - UCITS AFS investments - quoted debt securities AFS investments - unquoted investments Deposits with banks Cash and cash equivalents Total assets Liabilities Convertible debt Total liabilities 41,956 24,158 628,654 - 236,897 26,561 982,414 Level 2 €000s 878 16,400 15,940 - - - - - - - Level 3 €000s - - - - - - - 844 - - Total €000s 878 16,400 15,940 24,188 41,956 24,158 628,654 844 236,897 26,561 33,218 844 1,016,476 - - 54,880 54,880 - - 54,880 54,880 A reconciliation of Level 3 fair value measurement of financial assets is shown in the table below: At 1 January Additions Disposals Unrealised (losses)/gains recognised in the Consolidated Income Statement 2017 €000s 844 - - - 2016 €000s 844 - - - At 31 December 844 844 Available for sale investments grouped into Level 3 comprise unquoted securities and consist of a number of small investments. The values attributable to these investments are derived from a number of valuation techniques including the net present value of future cash flows based on conservative operating projections. A change in one or more of these inputs could have an impact on valuations. The maximum exposure the Group has in relation to Level 3 valued financial assets is €844,000 (2016: €844,000). The Directors’ do not consider it necessary to provide a sensitivity analysis on financial investments grouped into Level 3 as they do not consider them material. 101 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 20 CURRENT TAXATION ASSET Income taxation receivable This balance relates to corporation taxation refunds due. 21 DEFERRED ACQUISITION COSTS The movements in deferred acquisition costs during the financial year were: At 1 January Net acquisition costs released during the year At 31 December All deferred acquisition costs are expected to be recovered within one year from 31 December 2017. 22 OTHER RECEIVABLES Policyholders Intermediaries Other debtors Accrued interest and rent Prepayments and accrued income Total other receivables 2017 €000s 3,934 2016 €000s 4,162 2017 €000s 25,004 6,362 31,366 2017 €000s 42,828 6,813 7,119 183 7,077 2016 €000s 27,545 (2,541) 25,004 2016 €000s 42,283 4,093 8,570 379 7,445 64,020 62,770 Receivables arising out of direct insurance operations are considered by the Directors to have low credit risk and therefore no provision for bad or doubtful debts has been made. There is no significant concentration of risk in receivables arising out of direct insurance operations or any other activities. The Directors consider that the carrying amount of receivables is approximate to their fair value. All receivables are due within one year and none are past due. 102 23 CASH AND CASH EQUIVALENTS Demand deposits* Cash in hand Total cash and cash equivalents *There are no restrictions on the use of demand deposits. 24 CALLED UP SHARE CAPITAL PRESENTED AS EQUITY 2017 €000s 26,508 668 27,176 2016 €000s 24,938 1,623 26,561 Number 2017 €000s 2016 €000s (i) Ordinary shares of €0.60 each Authorised: At the beginning and the end of the year 51,326,000 30,796 30,796 Issued and fully paid: At the beginning and the end of the year 35,461,206 21,277 21,277 (ii) ‘A’ Ordinary shares of €0.01 each Authorised: At the beginning and the end of the year 120,000,000 1,200 1,200 Issued and fully paid: At the beginning and the end of the year 13,169,428 132 132 Total – issued and fully paid 21,409 21,409 The ‘A’ ordinary shares of €0.01 each are non-voting. They are non-transferable except only to the Company. Other than a right to a return of paid up capital of €0.01 per ‘A’ ordinary share in the event of a winding up, the ‘A’ ordinary shares have no right to participate in the capital or the profits of the Company. The holders of the two classes of non-cumulative preference shares rank ahead of the two classes of ordinary shares in the event of a winding up (see note 27). Before any dividend can be declared on the ordinary shares of €0.60 each, the dividend on the non-cumulative preference shares must firstly be declared or paid. The number of ordinary shares of €0.60 each held as treasury shares at the beginning (and the maximum number held during the year) was 795,005 (2016: 813,084). The number of ordinary shares of €0.60 each held as treasury shares at the end of the year was 795,005 (2016: 795,005). This represented 2.2% (2016: 2.2%) of the shares of this class in issue and had a nominal value of €477,003 (2016: €477,003). There were no ordinary shares of €0.60 each purchased by the Company during the year. The weighted average number of ordinary shares of €0.60 each in the earnings per share calculation has been reduced by the number of such shares held in treasury. All issued shares have been fully paid. 103 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 25 CAPITAL RESERVES (a) GROUP Balance at 1 January 2016 Recognition of share-based payments Balance at 31 December 2016 Recognition of share-based payments Balance at 31 December 2017 (b) COMPANY Balance at 1 January 2016 Recognition of share-based payments Balance at 31 December 2016 Recognition of share-based payments Balance at 31 December 2017 Share premium Capital conversion reserve Capital redemption reserve €000s 5,540 - 5,540 - 5,540 €000s 1,627 - 1,627 - 1,627 €000s 4,426 - 4,426 - 4,426 Share premium Capital conversion reserve Capital redemption reserve €000s 5,540 - 5,540 - 5,540 €000s 1,627 - 1,627 - 1,627 €000s 4,426 - 4,426 - 4,426 Share option reserve €000s 6,960 488 7,448 685 8,133 Share option reserve €000s 6,960 488 7,448 685 8,133 Total Group €000s 18,553 488 19,041 685 19,726 Total Group €000s 18,553 488 19,041 685 19,726 The capital conversion reserve arose on the redenomination of Company’s ordinary shares, 14% non-cumulative preference shares and 8% non-cumulative preference shares of IR£0.50 each into ordinary shares, 14% non-cumulative preference shares and 8% non-cumulative preference shares of 63.4869 cent. Each such share was then renominalised to an ordinary or a non-cumulative preference share of €0.60, an amount equal to the reduction in the issued share capital being transferred to the capital conversion reserve fund. Capital redemption reserve arose on the buyback and cancellation of issued share capital. Share option reserve arose on the recognition of share-based payments. 104 26 RETAINED EARNINGS Balance at 1 January 2016 Net profit for the financial year Reissue of ordinary shares Balance at 31 December 2016 Net profit for the financial year Balance at 31 December 2017 27 PREFERENCE SHARE CAPITAL Authorised: At the beginning and the end of the year 14% Non-cumulative preference shares of €0.60 each 8% Non-cumulative preference shares of €0.60 each 1,340,000 12,750,000 Number Issued and fully paid: At the beginning and the end of the year 14% Non-cumulative preference shares of €0.60 each 8% Non-cumulative preference shares of €0.60 each 1,340,000 3,532,292 €000s 157,670 9,130 66 166,866 45,393 212,259 2016 €000s 804 7,650 8,454 804 2,119 2,923 2017 €000s 804 7,650 8,454 804 2,119 2,923 The rights attaching to each class of share capital are set out in the Company’s Articles of Association. In the event of the Company being wound up, the holders of the 14% non-cumulative preference shares rank ahead of the holders of the 8% non-cumulative preference shares, who in turn, rank ahead of the holders of both the ‘A’ ordinary shares of €0.01 each and the holders of the ordinary shares of €0.60 each. 105 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 28 NON-CONTROLLING INTERESTS At 1 January Share of result for the financial year Dividends paid to non-controlling interests Disposal of subsidiary undertaking At 31 December 2017 €000s - - - - - 2016 €000s 451 (79) (120) (252) - On 23 May 2016 the Group disposed of its 70% shareholding in the Passage East Ferry Company Limited. In line with the Group’s strategic objective to focus resources on its insurance underwriting business, the Passage East Ferry Company was considered a non-core asset and was therefore disposed, with the proceeds of sale being reinvested within the business (see note 7). 106 l a t o T s 0 0 0 € 7 1 0 2 s 0 0 0 € 6 1 0 2 s 0 0 0 € 5 1 0 2 s 0 0 0 € 4 1 0 2 s 0 0 0 € 3 1 0 2 s 0 0 0 € 2 1 0 2 s 0 0 0 € 1 1 0 2 s 0 0 0 € 0 1 0 2 s 0 0 0 € 9 0 0 2 s 0 0 0 € 8 0 0 2 s 0 0 0 € s r a e y s 0 0 0 € r o i r 7 P 1 0 2 g n i d n a t s t u O s m i a l C s s o r G e v i t a l u m u c f o e t a m i t s E : s m i a l c 5 4 1 , 7 4 2 2 6 9 , 3 5 2 1 8 5 , 2 0 3 7 1 5 , 7 0 3 7 0 0 , 5 4 2 1 1 3 , 2 3 2 8 5 1 , 3 4 2 7 6 3 , 2 3 3 6 0 4 , 8 5 3 0 5 1 , 1 6 3 r a e y g n i t i r w r e d n u f o d n e t A - - - - - - - - - 2 7 9 , 5 3 2 8 0 1 , 4 0 3 2 2 4 , 2 4 3 9 3 8 , 6 3 2 5 4 4 , 5 1 2 8 0 3 , 6 1 2 4 1 4 , 6 1 3 7 5 7 , 5 2 3 4 5 1 , 4 5 3 - - - - - - - - 2 5 0 , 6 2 3 3 2 1 , 4 4 3 3 8 1 , 6 6 2 0 2 7 , 4 2 2 0 0 3 , 5 2 2 6 2 5 , 4 1 3 9 4 5 , 4 2 3 6 2 5 , 6 5 3 - - - - - - - 4 4 5 , 3 3 3 0 8 5 , 0 6 2 5 6 9 , 5 3 2 1 0 0 , 0 3 2 3 8 5 , 0 1 3 0 3 5 , 6 2 3 5 4 9 , 5 5 3 - - - - - - 9 5 8 , 7 5 2 4 3 4 , 3 3 2 4 0 2 , 4 3 2 0 6 3 , 8 0 3 2 1 0 , 8 1 3 6 7 8 , 4 5 3 - - - - - 9 5 1 , 1 3 2 5 5 7 , 7 2 2 2 4 4 , 6 0 3 1 7 4 , 7 1 3 0 6 5 , 8 4 3 - - - - 8 4 3 , 6 2 2 3 6 9 , 5 0 3 3 3 1 , 8 1 3 0 2 6 , 6 4 3 - - - 1 8 5 , 5 0 3 8 2 5 , 6 1 3 5 6 1 , 6 4 3 - - 6 3 9 , 4 1 3 9 1 5 , 4 4 3 - 9 2 8 , 4 4 3 5 4 1 , 7 4 2 2 7 9 , 5 3 2 2 5 0 , 6 2 3 4 4 5 , 3 3 3 9 5 8 , 7 5 2 9 5 1 , 1 3 2 8 4 3 , 6 2 2 1 8 5 , 5 0 3 6 3 9 , 4 1 3 9 2 8 , 4 4 3 r e t a l r a e y e n O r e t a l s r a e y o w T r e t a l s r a e y e e r h T r e t a l s r a e y r u o F r e t a l s r a e y e v i F r e t a l s r a e y x i S r e t a l s r a e y n e v e S r e t a l s r a e y t h g E i r e t a l s r a e y e n N i e v i t a l u m u c f o e t a m i t s E s i m a l c 2 1 0 , 5 6 7 5 9 7 , 6 8 1 3 8 4 , 6 3 1 8 3 2 , 5 7 1 7 6 9 , 1 0 1 3 6 9 , 0 7 5 0 6 , 4 3 3 4 8 , 7 1 0 4 6 , 5 1 7 4 6 , 5 6 0 7 , 6 5 2 1 , 3 1 0 9 4 , 5 4 7 - 9 3 1 , 9 8 1 5 9 3 , 0 8 1 3 2 7 , 7 4 1 2 1 2 , 4 9 9 2 2 , 3 5 8 6 2 , 4 2 4 1 8 , 1 2 2 7 7 , 0 1 3 6 5 , 7 5 7 3 , 6 1 i t a g n d n a t s t u o s i m a l C : 7 1 0 2 r e b m e c e D 1 3 i t a g n d n a t s t u o s i m a l C : 6 1 0 2 r e b m e c e D 1 3 2 2 5 , 9 1 5 9 7 , 6 8 1 ) 6 5 6 , 2 5 ( ) 7 5 1 , 5 ( ) 6 5 7 , 5 4 ( ) 9 4 2 , 3 2 ( ) 4 2 6 , 8 1 ( ) 5 2 4 , 6 ( ) 4 7 1 , 6 ( ) 5 2 1 , 5 ( ) 7 5 8 ( ) 0 5 2 , 3 ( : 7 1 0 2 g n i r u d t n e m e v o M ) 0 5 3 , 0 6 ( ) 9 8 4 , 9 9 ( ) 4 1 8 , 0 5 1 ( ) 7 7 5 , 1 3 2 ( ) 6 9 8 , 6 8 1 ( ) 4 5 5 , 6 9 1 ( ) 5 0 5 , 8 0 2 ( ) 1 4 9 , 9 8 2 ( ) 9 8 2 , 9 0 3 ( ) 3 2 1 , 8 3 3 ( s t n e m y a p e v i t a l u m u C I G N D N A T S T U O S M A L C I 9 2 ) a ( 107 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) l a t o T s 0 0 0 € 7 1 0 2 s 0 0 0 € 6 1 0 2 s 0 0 0 € 5 1 0 2 s 0 0 0 € 4 1 0 2 s 0 0 0 € 3 1 0 2 s 0 0 0 € 2 1 0 2 s 0 0 0 € 1 1 0 2 s 0 0 0 € 0 1 0 2 s 0 0 0 € 9 0 0 2 s 0 0 0 € 8 0 0 2 s 0 0 0 € r o i r P s r a e y s 0 0 0 € 7 1 0 2 g n i d n a t s t u O s m i a l C t e N 0 5 7 , 2 1 2 7 0 1 , 8 2 2 9 7 2 , 0 7 2 3 6 6 , 6 5 2 9 1 8 , 8 2 2 3 9 7 , 4 1 2 3 2 9 , 4 1 2 2 6 5 , 2 6 2 1 6 0 , 8 8 2 4 9 3 , 5 1 3 r a e y g n i t i r w r e d n u f o d n e t A - - - - - - - - - 5 0 9 , 9 1 2 0 0 0 , 4 7 2 3 2 2 , 2 9 2 8 9 0 , 7 1 2 1 7 1 , 1 0 2 4 0 9 , 2 9 1 5 3 7 , 7 4 2 4 2 3 , 9 6 2 4 8 7 , 9 9 2 - - - - - - - - 6 3 6 , 4 8 2 3 2 2 , 5 9 2 3 7 3 , 3 4 2 2 2 4 , 0 1 2 1 8 1 , 1 0 2 1 3 9 , 8 4 2 6 9 6 , 9 6 2 7 4 4 , 1 0 3 - - - - - - - 3 4 2 , 0 9 2 3 3 7 , 7 3 2 8 3 4 , 1 2 2 4 3 4 , 5 0 2 7 1 6 , 5 4 2 3 7 0 , 0 7 2 1 8 6 , 1 0 3 - - - - - - 0 5 7 , 3 3 2 9 7 9 , 8 1 2 3 3 5 , 9 0 2 8 6 6 , 3 4 2 3 0 3 , 3 6 2 9 0 1 , 1 0 3 - - - - - 4 0 1 , 7 1 2 1 3 1 , 5 0 2 4 3 1 , 1 4 2 2 0 4 , 2 6 2 2 4 1 , 5 9 2 - - - - 0 4 1 , 4 0 2 6 8 0 , 9 3 2 7 3 7 , 1 6 2 9 4 2 , 3 9 2 - - - 7 6 6 , 8 3 2 7 9 5 , 0 6 2 6 0 6 , 1 9 2 - - 6 9 4 , 0 6 2 3 3 8 , 0 9 2 - 2 2 6 , 1 9 2 0 5 7 , 2 1 2 5 0 9 , 9 1 2 6 3 6 , 4 8 2 3 4 2 , 0 9 2 0 5 7 , 3 3 2 4 0 1 , 7 1 2 0 4 1 , 4 0 2 7 6 6 , 8 3 2 6 9 4 , 0 6 2 2 2 6 , 1 9 2 r e t a l r a e y e n O r e t a l s r a e y o w T r e t a l s r a e y e e r h T r e t a l s r a e y r u o F r e t a l s r a e y e v i F r e t a l s r a e y x i S r e t a l s r a e y n e v e S r e t a l s r a e y t h g E i r e t a l s r a e y e n N i e v i t a l u m u c f o e t a m i t s E s i m a l c 1 5 4 , 4 7 6 6 4 9 , 3 5 1 4 8 9 , 7 2 1 1 6 8 , 6 4 1 3 6 1 , 0 0 1 3 8 3 , 7 5 9 2 7 , 4 3 2 5 9 , 7 1 0 2 7 , 2 1 5 7 3 , 5 2 2 5 , 6 6 1 8 , 0 1 0 3 2 , 6 7 6 - 7 7 7 , 0 7 1 6 2 2 , 2 6 1 1 8 2 , 6 3 1 0 0 9 , 1 8 2 5 9 , 2 5 1 4 9 , 3 2 8 2 9 , 8 1 9 4 9 , 8 0 0 9 , 6 6 7 3 , 3 1 i t a g n d n a t s t u o s i m a l C : 7 1 0 2 r e b m e c e D 1 3 i t a g n d n a t s t u o s i m a l C : 6 1 0 2 r e b m e c e D 1 3 ) 9 7 7 , 1 ( 6 4 9 , 3 5 1 ) 3 9 7 , 2 4 ( ) 5 6 3 , 5 1 ( ) 8 1 1 , 6 3 ( ) 7 1 5 , 4 2 ( ) 3 2 2 , 8 1 ( ) 9 8 9 , 5 ( ) 8 0 2 , 6 ( ) 4 7 5 , 3 ( ) 8 7 3 ( ) 0 6 5 , 2 ( : 7 1 0 2 g n i r u d t n e m e v o M ) 4 0 8 , 8 5 ( ) 1 2 9 , 1 9 ( ) 5 7 7 , 7 3 1 ( ) 0 8 0 , 0 9 1 ( ) 7 6 3 , 6 7 1 ( ) 5 7 3 , 2 8 1 ( ) 8 8 1 , 6 8 1 ( ) 7 4 9 , 5 2 2 ( ) 1 2 1 , 5 5 2 ( ) 0 0 1 , 5 8 2 ( s t n e m y a p e v i t a l u m u C e v i t a l u m u c f o e t a m i t s E : s m i a l c ) D E U N I T N O C ( I G N D N A T S T U O S M A L C I 9 2 ) b ( 108 i e h t o t g n w o e v o b a d e t o n r a e y e h t g n i r u d t n e m e v o m e h t o t e e r g a t o n s e o d t n e m e t a t S e m o c n I d e t a d i l o s n o C e h t n i s i m a l c r o f n o i s i v o r p t e n e h t n i e g n a h c e h T 1 7 1 0 2 y r a u n a J 1 n o d e n e p p a h t a h t y t a e r T s u p r u S y t r e p o r P e h t l f o e r u s o l c 29 CLAIMS OUTSTANDING (CONTINUED) (b) Net Claims Outstanding 2017 (continued) Full provision, net of reinsurance recoveries, is made at the reporting date for the estimated cost of claims incurred but not settled, including claims incurred but not yet reported and expenses to be incurred after the reporting date in settling those claims. The Group takes all reasonable steps to ensure that it has appropriate information regarding notified claims and uses this information when estimating the cost of those claims. The Group uses estimation techniques, based on statistical analysis of past experience, to calculate the estimated cost of claims outstanding at the year end. It is assumed that the development pattern of the current claims will be consistent with previous experience. Allowance is made, however, for any changes or uncertainties that may cause the cost of unsettled claims to increase or reduce. These changes or uncertainties may arise from issues such as the effects of inflation, changes in the mix of business or the legal environment. At each reporting date, liability adequacy tests are performed to ensure the adequacy of the insurance liabilities. In performing these tests, current best estimates of future cash flows and claims handling and administration expenses are used. Any deficiency is immediately recognised in the Consolidated Income Statement. (c) Reconciliation of claims outstanding Balance at 1 January 2016 Change in provision for claims Balance at 31 December 2016 Change in provision for claims Balance at 31 December 2017 (d) Reconciliation of provision for unearned premium The following changes have occurred in the provision for unearned premium during the year: Balance at 1 January Net premium written Net premium earned Changes in provision for unearned premium – reinsurers’ share Provision for unearned premium at 31 December Gross €000s 748,144 (2,654) 745,490 19,522 765,012 2017 €000s 180,692 345,192 Net €000s 683,393 (7,163) 676,230 (1,779) 674,451 2016 €000s 178,584 311,713 (325,932) (308,226) (13,944) 186,008 (1,379) 180,692 109 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 29 CLAIMS OUTSTANDING (CONTINUED) (e) Reconciliation of reinsurance assets Balance at 1 January 2016 Movement during year Balance at 31 December 2016 Movement during year1 Balance at 31 December 2017 Claims outstanding €000s 64,751 4,509 69,260 21,301 90,561 Unearned premium reserve €000s 15,332 (1,378) 13,954 (13,950) 4 1 The change in the net provision for claims in the Consolidated Income Statement does not agree to the movement during the year noted above owing to the closure of the Property Surplus Treaty that happened on 1 January 2017 30 OTHER PROVISIONS Balance at 1 January MIBI levy reserve release Provision for MIBI levy and related payments Levy paid Balance at 31 December 2017 €000s 11,247 (5,624) 7,569 (6,545) 6,647 2016 €000s 10,938 - 7,747 (7,438) 11,247 The share of the Group’s Motor Insurers’ Bureau of Ireland “MIBI” levy is based on its estimated market share in the current year at the Consolidated Statement of Financial Position date. 110 31 CONVERTIBLE DEBT Financial liabilities carried at amortised cost comprise convertible notes. Balance at 1 January Amortised during the year Balance at 31 December 2017 €000s 51,136 1,389 52,525 2016 €000s 50,036 1,100 51,136 On 23 September 2015, FBD Insurance plc issued a non-convertible bond of €70,000,000 carrying an interest rate of 11.66%. On 30 December 2015, following shareholder approval, this non-convertible bond was replaced with convertible notes. The convertible notes carry an interest rate of 7% and are convertible into equity of FBD Holdings plc at a conversion price of €8.50 per share. They are convertible at any time between 23 September 2018 and 23 September 2025 at the option of the holder. A mandatory conversion of the notes occurs if the 30 day volume weighted average price of FBD holdings plc exceeds €8.50 for 180 days after 23 September 2018. On conversion, 8,235,294 new shares will be issued to the holder. Unconverted notes will become repayable on 23 September 2025. The carrying value of the notes has been determined with reference to the fair value of a similar liability without an equity conversion option. The equity component is recognised initially at the difference between the fair value of the convertible note as a whole and the fair value of the liability component. Interest costs associated with the Convertible Bond totalling €6,298,000 (2016: €6,156,000) were incurred during the financial year. On initial recognition, €18,232,000 was recognised in equity and included in other reserves. 32 RETIREMENT BENEFIT ASSET Defined Contribution Pension The Group operates defined contribution retirement benefit plans for qualifying employees who opt to join. The assets of the plans are held separately from those of the Group in funds under the control of Trustees. The Group recognised an expense of €3,832,569 (2016: €4,132,626) relating to these pension schemes during the year ended 31 December 2017. Defined Benefit Pension The Group also operates a legacy funded defined benefit retirement pension scheme for certain qualifying employees. This scheme was closed to new members in 2005 and closed to future accrual during 2015. The defined benefit pension scheme is administered by a separate Trustee Company that is legally separated from the entity. The Trustee Company, who is responsible for ensuring compliance with the Pensions Act 1990 and other relevant legislation, is composed of representatives from both the employers and current and former employees. The Trustees are required by law and by its Articles of Association to act in the interest of the fund and of all relevant stakeholders in the scheme, i.e. deferred members, retirees and employers. They are responsible for the investment policy with regard to the assets of the scheme. During 2015 the Group completed a review of the defined benefit pension scheme with the primary goal to reduce the IAS19 deficit and the inherent volatility of the scheme. The outcome of the review was as follows: n The defined benefit pension scheme ceased for future accrual of benefits n The link to future salary increases was replaced with deferred pension increases n FBD will no longer fund for future discretionary pension increases n Current employees within the Scheme were offered membership in a new defined contribution arrangement for future service. 111 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 32 RETIREMENT BENEFIT ASSET (CONTINUED) n Current Employees within the Scheme were provided with the option to take an enhanced transfer value (“ETV”) of their past benefits into the new defined contribution scheme. A significant majority took up this option. n The investments in the scheme were significantly de-risked to reduce the volatility of the scheme and the IAS19 balance sheet position in the future. During 2016, the Group made an enhanced transfer value offer to deferred members of the scheme. Under the defined benefit pension scheme, qualifying members are entitled to retirement benefits of 1/60th of final salary for each year of service on attainment of a retirement age of 65. A full actuarial valuation of the defined benefit pension scheme was carried out on 1 July 2016, using the projected unit credit method, and the minimum funding standard was updated to 31 December 2017 by the schemes’ independent and qualified actuary and confirms that the Scheme continues to satisfy the minimum funding standard. The next full actuarial valuation of the scheme is expected to be completed by 31 March 2020 with a valuation date of 1 July 2019. The long-term investment objective of the Trustees and the Group is to limit the risk of the assets failing to meet the liabilities of the scheme over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of the scheme. To meet these objectives, the scheme’s assets are primarily invested in bonds with a smaller level of investment in diversified growth funds and property. These reflect the current long-term asset allocation ranges, having regard to the structure of liabilities within the scheme. The scheme typically exposes the Group to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary inflation risk. (a) Assumptions used to calculate scheme liabilities Inflation rate increase Salary rate increase Pension payment increase Discount rate 2017 % 1.75 N/A* 0.00 1.75 * No longer applicable as the scheme closed to future accrual with removal of salary link at 30 September 2015. (b) Mortality Assumptions The average life expectancy of current and future retirees used in the scheme at age 65 is as follows: Male Female 2017 Years 21.4 23.8 2016 % 1.70 N/A* 0.00 1.70 2016 Years 21.2 23.7 The weighted average duration of the expected benefit payments from the scheme is circa 16 years. The basis used to calculate the discount rate was reviewed in 2012. The basis used to determine the expected return on plan assets is the money weighted rate of return achieved on the asset values used for the purpose of calculating the long-term funding rate. The actual return on the scheme assets for the year was a gain of €1,357,000 (2016: €5,156,000). 112 32 RETIREMENT BENEFIT ASSET (CONTINUED) (c) Consolidated Income Statement Charged/(Credited) to Consolidated Income Statement: Service cost: employer’s part of current service cost Gain on curtailments and settlement Net interest credit Costs associated with curtailment Charge/(Credit) to Consolidated Income Statement 2017 €000s 353 - (160) - 193 2016 €000s 493 (7,571) (173) 357 (6,894) Charges to the Consolidated Income Statement have been included in other underwriting and financial services expenses while the credit of €nil (2016: €7,214,000) for the curtailment has been reflected separately. (d) Analysis of amount recognised in Group Statement of Comprehensive Income Net actuarial (gains)/losses in the year due to: – Changes in financial and demographic assumptions – Experience adjustments on benefit obligations Actual return less interest on scheme assets Actuarial (gain)/loss Deferred taxation debit/(credit) Actuarial (gain)/loss net of deferred taxation (e) History of experience gains and losses 2017 €000s (444) (150) 319 (275) 34 (241) 2016 €000s 14,394 266 (2,427) 12,233 (1,529) 10,704 Present value of defined benefit obligations Fair value of plan assets Net pension (asset)/liability Experience gains and losses on scheme liabilities Actuarial gain/(loss) 2017 €000s 88,103 97,877 2016 €000s 2015 €000s 2014 €000s 2013 €000s 90,887 106,490 195,669 158,769 99,602 115,600 141,415 130,231 (9,774) (8,715) (9,110) 54,254 28,538 150 275 (266) (401) 1,786 (12,233) 15,914 (25,058) 3,406 2,851 The cumulative charge to the Consolidated Statement of Comprehensive Income is €77,807,000 (2016: €77,614,000). 113 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 32 RETIREMENT BENEFIT ASSET (CONTINUED) (f ) Assets in scheme at market value Bonds Property Managed funds Cash deposits and other Scheme assets Actuarial value of liabilities Net pension asset 2017 €000s 79,189 8,773 7,865 2,050 97,877 (88,103) 9,774 2016 €000s 71,508 8,334 19,139 621 99,602 (90,887) 8,715 The assets are part of unitised funds which have a broad geographical and industry type spread with no significant concentration in any one geographical or industry type. These unitised funds are managed by six investment managers. (g) Movement in net surplus during the year Net surplus/(deficit) in scheme at 1 January Current service cost Employer contributions Interest on scheme liabilities Interest on scheme assets Gains on curtailments and settlement Actuarial gain/(loss) Net surplus at 31 December 2017 €000s 8,715 (353) 977 (1,516) 1,676 - 275 9,774 2016 €000s 9,110 (493) 4,577 (2,546) 2,729 7,571 (12,233) 8,715 114 32 RETIREMENT BENEFIT ASSET (CONTINUED) (h) Movement on assets and liabilities Assets Assets in scheme at 1 January Actual return less interest on scheme assets Employer contributions Interest on scheme assets Assets paid as part of ETV exercise Benefits paid Assets in scheme at 31 December Liabilities Liabilities in scheme at 1 January Experience gains and losses on scheme liabilities Changes in financial and demographic assumptions Current service cost Interest on scheme liabilities Liabilities extinguished as part of ETV exercise Gain on curtailments Benefits paid Liabilities in scheme at 31 December 2017 €000s 2016 €000s 99,602 115,600 (319) 977 1,676 - (4,059) 97,877 2,427 4,577 2,729 (20,807) (4,924) 99,602 90,887 106,490 (150) (444) 353 1,516 - - (4,059) 88,103 266 14,394 493 2,546 (27,847) (531) (4,924) 90,887 The sensitivities regarding the principal assumptions used to measure the scheme liabilities are as follows: n A 1% increase in the discount rate would reduce the value of the scheme liabilities by €12.3 million. A 1% reduction in the discount rate would increase the value of the scheme liabilities by €15.9 million. n A 1% increase in inflation would increase the value of the scheme liabilities by €4.4 million. A 1% reduction in inflation would reduce the value of the scheme liabilities by €3.7 million. n The effect of assuming all members of the scheme will live one year longer would increase the scheme’s liabilities by €3.2 million. n The current best estimate of 2017 contributions to be made by the Group to the pension fund is €nil (2016: €nil). 115 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 33 DEFERRED TAXATION LIABILITY Retirement benefit asset Unrealised losses on investments & loans Revaluation surplus on investment properties At 1 January 2016 (Credited)/Debited to the Consolidated Statement of Comprehensive Income Debited/(Credited) to the Consolidated Income Statement Reclassified from deferred taxation asset At 31 December 2016 Debited to the Consolidated Statement of Comprehensive Income Debited/(Credited) to the Consolidated Income Statement At 31 December 2017 €000s 1,139 (1,529) 1,479 - 1,089 34 99 1,222 Other timing differences €000s 696 Total €000s 2,990 - (233) €000s 1,155 1,296 (1,239) (696) (456) €000s - - - 1,046 1,046 - 1,212 - 351 306 1,352 (292) 1,271 - - - - - 1,046 3,347 385 113 3,845 A deferred taxation liability of €1,221,750 has been recognised in 2017 in respect of the retirement benefit obligation of €9,774,000. In 2016 a deferred taxation liability of €1,089,375 was recognised on the retirement benefit asset of €8,715,000. 34 PAYABLES (a) GROUP Amounts falling due within one year: Payables and accruals Employer contributions as part of ETV exercise Restructuring accrual PAYE/PRSI Payables arising out of direct insurance operations Total payables 116 2017 €000s 25,740 - 204 1,426 3,297 30,667 2016 €000s 27,014 4,577 1,011 1,511 14,987 49,100 34 PAYABLES (b) COMPANY Amounts falling due within one year: Payables and accruals Employer contributions as part of ETV exercise Total payables 35 DIVIDENDS Proposed: Dividend of 8.4 cent (2016: nil cent) per share on 14% non-cumulative preference shares of €0.60 each Dividend of 4.8 cent (2016: nil cent) per share on 8% non-cumulative preference shares of €0.60 each Final dividend of 24.0 cent (2016: nil cent) per share on ordinary shares of €0.60 each Total dividends proposed 2017 €000s 4,735 - 4,735 2017 €000s 113 169 8,320 8,602 2016 €000s 4,759 1,564 6,323 2016 €000s - - - - The proposed dividend is subject to approval by shareholders at the Annual General Meeting on 4 May 2018 and has not been included as a liability in the Consolidated Statement of Financial Position. 36 PRINCIPAL SUBSIDIARIES (a) Subsidiaries FBD Insurance plc Nature of Operations General insurance underwriter FBD Life & Pensions Limited Investment services, pensions and life brokers % Owned 100% 100% The Registered Office of each of the above subsidiaries is at FBD House, Bluebell, Dublin 12. All shareholdings are in the form of ordinary shares. The financial year end for the Group’s principal subsidiaries is 31 December. FBD Holdings plc is an Irish registered public limited company. The Company’s ordinary shares of €0.60 each are listed on the Irish Stock Exchange and the UK Listing Authority and are traded on both the Irish Stock Exchange and London Stock Exchange. (b) In the Company Statement of Financial Position on page 66, there was no change in investment in subsidiaries during the year. 117 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 37 CAPITAL COMMITMENTS There were no capital commitments authorised by the Directors but not provided for in the financial statements at either 31 December 2017 or 31 December 2016. 38 CONTINGENT LIABILITIES AND CONTINGENT ASSETS There were no contingent liabilities or contingent assets at either 31 December 2017 or 31 December 2016. 39 SHARE BASED PAYMENTS FBD Group Performance Share Plan The FBD Group Performance Share Plan (the “LTIP”) was approved by shareholders of FBD Holdings plc (Group), in May 2007. Conditional awards of ordinary shares under the LTIP are dependent on the Group meeting onerous performance targets in terms of, total shareholder returns, stretching combined operating ratio targets and other stretching business scorecard metrics. The extent to which these conditions have been met and any award (or part of an award) has therefore vested will be determined in due course by the Remuneration committee of the Board of FBD Holdings plc. Fair value calculations Conditional awards were made in March 2013 over 140,940 shares, in April 2014 over 108,631 shares, in March 2015 over 167,706 shares, in October 2015 over 54,545 shares, in March 2016 over 296,669 shares, and in March 2017 over 238,293 shares. The fair values of these conditional share awards have been calculated as follows using the assumptions noted in a Monte Carlo simulation model for all conditional awards except the March 2017 awards. The March 2017 awards are based on Group performance targets. There are no market based conditions attaching to these awards. LTIP award March 2013 LTIP award April 2014 LTIP award March 2015 LTIP award October 2015 LTIP award March 2016 Share price at grant Initial option/award price Expected volatility Expected life in years Risk free interest rate Expected dividend yield % €12.70 €12.70 30% 3 0.5% n/a €17.00 €17.00 25% 3 0.3% n/a Fair value €11.54 €14.25 €10.80 €10.80 30% 3 0.0% n/a €8.49 €6.65 €6.65 35% 3 0.0% n/a €5.39 €6.55 €6.55 35% 3 0.0% n/a €5.25 Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous two to three years preceding the date of grant. 118 39 SHARE BASED PAYMENTS Accounting charge for share based payments Vesting period (years) Number of share awards granted Number vested during year Number outstanding at 31 December 2017 % of options expected to vest Share price at grant date Fair value of share award at grant date 2017 2016 Grant date 04.03.2013 LTIP 3.00 140,940 14.04.2014 LTIP 3.00 108,631 02.03.2015 LTIP 3.00 167,706 09.10.2015 LTIP 3.00 54,545 23.03.2016 LTIP 3.00 296,669 28.03.2017 LTIP 3.00 238,293 Total - - - - - - - - 63,922 54,545 200,019 192,857 511,343 % n/a 0% 0% 100% 100% 100% € 12.70 17.00 10.80 6.65 6.55 7.95 € €000s €000s 11.54 14.25 8.49 5.39 5.25 7.95 - 4 9 76 225 371 685 (80) 18 66 92 392 - 488 Given the performance of the Group over the vesting period, the Directors estimate that 0% of the 2014 award will vest. For the March 2015 award, 0% of the award is expected to vest. Therefore only the charge relating to the market based conditions for the outstanding shares granted in these years have been charged to the consolidated income statement for the years ended 31 December 2017 and 31 December 2016. 40 TRANSACTIONS WITH RELATED PARTIES Farmer Business Developments plc has a substantial shareholding in the Group at 31 December 2017. Details of their shareholding and related party transactions are set out in the Report of the Directors on page 19. There were no transactions with Farmer Business Developments plc during the year. For the purposes of the disclosure requirements of IAS 24, the term “key management personnel” (i.e. those persons having authority and responsibility for planning, directing and controlling the activities of the Group) comprises the Board of Directors and Company Secretary of FBD Holdings plc and the Group’s primary subsidiary, FBD Insurance plc and the members of the Executive Management Team. The remuneration of key management personnel (“KMP”) during the year was as follows: Short term employee benefits1 Post-employment benefits Share based payments Charge to the Consolidated Income Statement 2017 €000s 3,590 269 440 4,299 2016 €000s 3,005 222 183 3,410 1 Short term benefits include fees to non-executive Directors, salaries and other short-term benefits to all key management personnel. 119 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 40 TRANSACTIONS WITH RELATED PARTIES (CONTINUED) Full disclosure in relation to the 2017 and 2016 compensation entitlements and share options of the Board of Directors is provided in the Report on Directors’ Remuneration. In common with all shareholders, Directors received payments/distributions related to their holdings of shares in the Company during the year, amounting in total to €Nil (2016: €Nil). 41 RISK MANAGEMENT Risk taking is inherent in the provision of financial services and FBD assumes a variety of risks in undertaking its business activities. FBD defines risk as any event that could impact the core earnings capacity of the Group; increase earnings or cash-flow volatility; reduce capital; threaten business reputation or viability; and/or breach regulatory or legal obligations. The Group has adopted an Enterprise Risk Management approach to identifying, assessing and managing risks. This approach is incorporated in the Risk Management Framework which is approved by the Board and subject to annual update and review. The key components of the Risk Management Framework include Risk Appetite; Risk Governance; Risk Process and People. Risk Appetite Risk appetite is a measure of the amount and type of risks the Group is willing to accept or not accept over a defined period of time in pursuit of its objectives. The Group’s risk appetite seeks to encourage measured and appropriate risk-taking to ensure that risks are aligned to business strategy and objectives. The risk appetite in the Group’s underwriting subsidiary is driven by an over-arching desire to protect its solvency at all times. Through the proactive management of risk, it ensures that it does not take on an individual risk or combination of risks that could threaten its solvency. This ensures that it has and will have in the future sufficient capital to pay its policyholders and all other creditors in full as liabilities fall due. Risk Governance The Board has ultimate responsibility for the governance of all risk taking activity in FBD. Risk is governed through business standards, risk policies and Oversight Committees with clear roles, responsibilities and delegated authorities. FBD uses a ‘three lines of defence’ framework in the delineation of accountabilities for risk governance. n 1st Line – Accountable for the management of all risks relevant to the business n 2nd Line – Provide objective challenge and oversight of 1st line management of risks n 3rd Line – Internal Audit provides independent assurance to the Audit Committee and the Board on risk- taking activities. Risk Process Identify and Measure Risk is identified and assessed through a combination of top-down and bottom-up risk assessment processes. Top-down processes focus on broad risk types and common risk drivers rather than specific individual risk events, and adopt a forward- looking view of perceived threats over the planning horizon. Bottom-up risk assessment processes are more granular, focusing on risk events that have been identified through specific qualitative or quantitative measurement tools. Top-down and bottom-up views of risk come together through a process of upward reporting of, and management response to, identified and emerging risks. This ensures that the view of risk remains sensitive to emerging trends and common themes. FBD measures risk on the basis of economic capital and other bases (where appropriate) to determine materiality, potential impact and appropriate management. Risks are recorded on the Group Risk Register. 120 41 RISK MANAGEMENT (CONTINUED) Monitor and Report We regularly monitor our risk exposures against risk appetite, risk tolerances and limits and monitor the effectiveness of controls in place to manage risk. Reporting to the Risk Committees is dynamic and includes material risks, risk appetite monitoring, changes in risk profile, risk mitigation programmes, reportable errors, breaches of risk policies (if any), results of independent assessments performed by the Risk Function and emerging risks. People Risk Management is embedded in the Group through leadership, governance and transparency. The Risk Management Framework establishes the roles and responsibilities of risk resources. A risk training programme is in place to ensure all risk resources have the knowledge and competency to perform their roles effectively. In accordance with Group policy, business unit management has primary responsibility for the effective identification, management, monitoring and reporting of risks. There is an annual review by the Risk Committees of all major risks to ensure all risks are identified and evaluated. Each risk is assessed by considering the potential impact and the probability of the event occurring. Impact assessments are made against financial, operational, regulatory, reputational and customer impact criteria. (a) General Insurance risk The risk attached to any general insurance policy written is the possibility that an insured event occurs and the uncertainty of the amount of the resulting claim. The frequency and severity of claims can be affected by several factors, most notably weather events, the level of awards and inflation on settling claims. The history of claims development is set out, both gross and net of reinsurance in note 29, Claims Outstanding. Underwriting The Group has developed its insurance underwriting strategy to diversify the type of insurance risks written and, within each of the types of cover, to achieve a sufficiently large population of risks to reduce the variability of the expected outcome. The principal insurance cover provided by the Group includes motor, employers’ and public liability and property. The Group manages these risks through its underwriting strategy, proactive claims handling and its reinsurance arrangements. The Group has developed its insurance underwriting strategy to diversify the type of insurance risks written and to reduce the variability of the expected outcome by each risk category. The only significant concentration of insurance risk is that all of the Group’s underwriting business is conducted in Ireland. Within Ireland there is no significant concentration risk in any one area. The Group’s underwriting strategy is incorporated in the overall corporate strategy which is approved by the Board of Directors and includes the employment of appropriately qualified underwriting personnel; the targeting of certain types of business that conform with the Group’s risk appetite and reinsurance treaties; constant review of the Group’s pricing policy using up-to-date statistical analysis and claims experience; and the surveying of risks carried out by experienced personnel. All risks underwritten are within FBD Insurance plc underwriting policies and within the terms of the FBD Insurance’s reinsurance treaties. Reserving While the Group’s risk appetite is constantly reviewed and managed, there is no certainty that the cost of claims will not rise due to abnormal weather events, increased claims frequency, increased severity, changes in regulatory environment, changes in economic activity or any other reason. Such an increase could have a material impact on the results and financial condition of the Group. 121 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 41 RISK MANAGEMENT (CONTINUED) The Group establishes provisions for unpaid claims, legal costs and related expenses to cover its ultimate liability in respect of both reported claims and incurred but not reported (IBNR) claims. These provisions take into account both the Group’s and the industry’s experience of similar business, historical trends in reserving patterns, loss payments and pending levels of unpaid claims and awards, as well as any potential changes in historic rates arising from market or economic conditions. The provision estimates are subject to rigorous review and challenge by senior management, the reserving committee and the Board. The provision includes a risk margin to minimise the risk that actual claims exceed the amount provided. The estimation and measurement of claims provisions is a major determining factor in the Group’s results and financial position. The Group uses modern statistical and actuarial methods to calculate the quantum of claims provisions and uses independent actuaries to review its liabilities to ensure that the carrying amount of the liabilities is adequate. Where the liabilities, net of any related deferred acquisition costs, are deemed to be inadequate, the deficiency is recognised immediately in the Consolidated Income Statement. There is no certainty that the amount provided is sufficient – further claims could arise or settlement costs could increase as a result, for example of claims inflation, periodic payments or the size of court awards. Such an increase could have a material impact on the results and financial condition of the Group. Reinsurance The Group purchases reinsurance protection to limit its exposure to single claims and the aggregation of claims from catastrophic events. The Group’s reinsurance is approved by the Board of Directors on an annual basis. The Group only places reinsurance with companies that it believes are strong financially and operationally. Credit exposures to these companies are closely managed by senior management. All of the Group’s current reinsurers have either a credit rating of A- or better. The Group has assessed these credit ratings and security as being satisfactory in diminishing the Group’s exposure to the credit risk of its reinsurance receivables. (b) Capital Management risk The Group is committed to managing its capital to ensure it is adequately capitalised at all times and to maximise returns to shareholders. The capital of the Group comprises of issued capital, reserves and retained earnings as detailed in notes 24 to 27. The Board of Directors reviews the capital structure frequently to determine the appropriate level of capital required to pursue the Group’s growth plans. The Group’s principal subsidiary, FBD Insurance plc, must maintain an adequate regulatory solvency position and must satisfy the Central Bank of Ireland that it has done so. The capital position of FBD Insurance plc is reviewed frequently by its Board of Directors. To provide protection against material events or shocks, the Group ensures that its insurance subsidiary holds sufficient capital to maintain appropriate regulatory surpluses. FBD Insurance plc maintained its robust capital position and complied with all regulatory solvency margin requirements throughout both the year under review and the prior year. FBD Insurance plc maintained its Solvency Capital Requirement (SCR) coverage within or above its target range of 110-130% of SCR. The Solvency II directive introduced a requirement for undertakings to conduct an Own Risk and Solvency Assessment “ORSA” on an annual basis. The ORSA is a very important process as it provides a comprehensive view and understanding of the risks to which the Company is exposed or could face in the future and how they translate into capital needs or alternatively require mitigation actions. FBD Insurance plc has an Investment Committee, a Pricing & Underwriting Committee, a Capital Management Forum, an Audit Committee, a Reserving Committee and Board and Executive Risk Committees, all of which assist the Board in the identification and management of exposures and capital. 122 41 RISK MANAGEMENT (CONTINUED) The Group uses a number of sensitivity based risk-analysis tools as part of its decision making and planning processes to understand and manage the volatility of earnings and capital requirements more efficiently. The Group measures key performance indicators, including compliance with solvency requirements, under a number of economic and operating scenarios so as to identify and quantify the risks to which the business and its capital are exposed. In preparation for the Board’s annual review of the internal control system, senior management carry out a self-assessment, in compliance with the Irish Stock Exchange Listing Rules as well as the U.K. Corporate Governance Code, of the significant risks, including capital risks, facing the organisation and the controls in place to mitigate or manage such exposures. The Group regularly benchmarks each of its operating businesses relative to its peers. In this process the Group focuses on its capital requirement and efficiency as well as profitability, cost structures and market position. The Group also devotes considerable resources to managing its relationships with the providers of capital within the capital markets, for example, existing and potential shareholders, financial institutions, stockbrokers, corporate finance houses, etc. (c) Operational risk Operational risk could arise as a result of inadequately controlled internal processes or systems, human error or from external events. Operational risks are regularly assessed against financial, operational, regulatory and reputational criteria. This definition is intended to include all risks to which the Group is exposed and that are not considered elsewhere. Hence, operational risks include for example, information technology, information security, human resources, project management, outsourcing, taxation, legal, fraud and regulatory risks. Business Unit Management has primary responsibility for the effective identification, management, monitoring and reporting of operational risks which are overseen by the second and third line functions. FBD Insurance plc is regulated by the Central Bank of Ireland and must ensure that it conducts its business in accordance with regulatory requirements at all times. FBD Insurance plc has no appetite for confirmed and quantified breaches of compliance with regulatory requirements and has established a compliance control group who provide assurance to the Board that compliance controls are operating effectively in the Company. The Group is dependent upon the quality, ability and commitment of key personnel in order to sustain, develop and grow its business. There can be no assurance that the Group will be able to retain all of its key employees. The success of the Group will depend upon its ability to retain, attract, motivate and develop key personnel. The Group relies significantly on information technology to support the business and as such may be susceptible to risks associated with information security, be that through security breaches, cyber-attacks or other failures or malfunctions. Rigorous information technology controls are in place across the group, including a dedicated IT security team with overall responsibility for managing information technology security standards, which together with on-going employee training and regular cyber-risk reviews are used to mitigate such information technology risks. In addition, the Group has taken significant steps to minimise the impact of business interruption that could result from a major external event. A formal disaster recovery plan is in place for both workspace recovery and retrieval of communications, IT systems and data. If a major event occurs, these procedures will enable the Group to move the affected operations to alternative facilities within very short periods of time. The disaster recovery plan is tested regularly and includes disaster simulation tests. 123 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 41 RISK MANAGEMENT (CONTINUED) (d) Liquidity risk The Group is exposed to daily calls on its cash resources, mainly for claims payments. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and ensuring that the maturity profile of its financial assets is shorter than or equal to the maturity profile of its liabilities and maintaining a minimum amount available on term deposit at all times. The following tables provide an analysis of assets and liabilities into their relevant maturity groups based on the remaining period to contractual maturity. The contracted value below is the undiscounted cash flow. Assets – 2017 Financial assets Reinsurance assets Loans and receivables Cash and cash equivalents Carrying value total €000s 953,830 90,565 66,314 27,176 Contracted Value €000s 1,001,725 90,565 66,314 27,176 Cashflow within 1 year €000s 220,630 25,331 66,314 27,176 Cashflow 1-5 years €000s 631,242 45,856 - - Cashflow after 5 years €000s 149,853 19,378 - - Total 1,137,885 1,185,780 339,451 677,098 169,231 Liabilities - 2017 Insurance contract liabilities Payables Other provision Convertible debt* Total *See note 31 Assets – 2016 Financial assets Reinsurance assets Loans and receivables Cash and cash equivalents 951,020 32,279 6,647 52,525 951,020 32,279 6,647 109,200 298,575 32,279 6,647 4,900 1,042,471 1,099,146 342,401 512,850 139,595 - - 19,600 532,450 - - 84,700 224,295 Carrying value total €000s 907,506 83,214 63,502 26,651 Contracted Value €000s 935,105 83,214 63,502 26,651 Cashflow within 1 year €000s 330,489 29,926 63,502 26,651 Cashflow 1-5 years €000s 434,751 41,866 - - Cashflow after 5 years €000s 169,865 11,422 - - Total 1,080,873 1,108,472 450,568 476,617 181,287 Liabilities – 2016 Insurance contract liabilities 926,182 49,100 11,247 51,136 926,182 49,100 11,247 114,100 286,362 518,396 121,424 49,100 11,247 4,900 - - 19,600 537,996 - - 89,600 211,024 1,037,665 1,100,629 351,609 Payables Other provision Convertible debt* Total *See note 31 124 41 RISK MANAGEMENT (CONTINUED) (e) Market risk The Group has invested in term deposits, listed debt securities, investment property and quoted and unquoted shares. These investments are subject to market risk, whereby the value of the investments may fluctuate as a result of changes in market prices, changes in market interest rates or changes in the foreign exchange rates of the currency in which the investments are denominated. The extent of the exposure to market risk is managed by the formulation of, and adherence to, an Investment Policy incorporating clearly defined investment limits and rules, as approved annually by the Board of Directors and employment of appropriately qualified and experienced personnel and external investment management specialists to manage the Group’s investment portfolio. The overriding philosophy of the investment policy is to protect and safeguard the Group’s assets and to ensure its capacity to underwrite is not put at risk. Interest rate & spread risk Interest rate & spread risk arises primarily from the Group’s investments in listed debt securities and deposits. The level of exposure to interest rate risk from trading is reviewed regularly to ensure it is appropriate. Factors taken into consideration are yield, volatility and historical returns. At 31 December 2017, the Group held the following deposits and listed debt securities: 2017 2016 Weighted average interest rate % 0.41 1.26 2.09 1.01 1.19 1.54 Market Value €000s 221,975 100,813 190,386 142,723 164,798 133,135 953,830 Weighted average interest rate % 1.52 1.18 1.12 2.51 1.42 1.38 Market Value €000s 333,922 61,995 102,063 150,728 87,259 171,539 907,506 Time to maturity In one year or less In more than one year, but not more than two years In more than two years, but not more than three years In more than three years, but not more than four years In more than four years, but not more than five years More than five years Total Equity price risk The Group is subject to equity price risk due to daily changes in the market values of its holdings of quoted shares. Equity price risk is actively managed using the framework set out in the Group’s Investment Policy which is approved annually by the Board of Directors. The Group places limits on the type of shares held, liquidity of shares, size of share-holding and exposure to any one sector. The amounts exposed to equity price risk are set out in note 19(b). Foreign currency risk The Group holds investment assets in foreign currencies and therefore is exposed to exchange rate fluctuations. The impact of exchange rate fluctuations is monitored regularly. The Group is primarily exposed to Sterling and US dollars. 125 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 41 RISK MANAGEMENT (CONTINUED) The Group did not hold any derivative instruments at 31 December 2017 or 31 December 2016. The carrying amount of the Group’s foreign currency denominated monetary assets at the reporting date is as follows: GBP USD Other (f ) Credit risk 2017 €000s 3,980 2,721 1,419 2016 €000s 4,792 3,547 1,419 Credit risk is the risk of loss in the value of financial assets due to counterparties failing to meet all or part of their obligations. Financial assets are graded according to current credit ratings issued. Investment grade financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside this range are classified as speculative grade. All of the Group’s bank deposits are with financial institutions which have a minimum A- rating. The Group holds the following listed Government bonds and listed corporate bonds, with the following credit profile: 2017 2016 Government bonds AAA AA A+ A BB+ BBB+ BBB Total Corporate Bonds AAA AA AA- A+ A A- BBB+ BBB BBB- Total Market Value €000s 55,217 14,634 44,098 - 69,347 29,532 45,978 258,806 2,331 9,574 35,667 71,267 77,041 93,902 119,250 73,888 16,118 499,038 Weighted average interest rate 2.9 1.3 4.1 - 3.5 7.6 6.1 4.1 2.7 3.0 2.7 2.6 3.1 2.9 3.2 3.1 4.2 3.0 Market Value €000s 10,132 10,236 - 101,133 55,791 - - 177,292 2,414 7,895 55,648 55,927 83,500 96,051 116,511 58,545 16,827 493,318 Weighted average interest rate 1.7 1.4 - 1.5 3.5 - - 2.1 3.4 3.8 2.6 3.2 2.9 3.6 3.6 3.4 3.9 3.3 All of the Group’s current reinsurers either have a credit rating of A- or better. The Group has assessed these credit ratings and security as being satisfactory in diminishing the Group’s exposure to the credit risk of its reinsurance receivables. At 31 December 2017, the maximum balance owed to the Group by an individual reinsurer, including reinsurers’ share of insurance contract liabilities not yet called, was €21,313,000 (2016: €6,755,000). 126 41 RISK MANAGEMENT (CONTINUED) The carrying amount of financial assets recorded in the Financial Statements, net of any allowances for losses, represents the Group’s most significant exposure to credit risk. There are no financial assets past due but not impaired. Receivables arising out of direct insurance operations are considered by the Directors to have low credit risk and therefore no provision for bad or doubtful debts has been made. All other receivables are due within one year and none are past due. (g) Concentration risk Concentration risk is the risk of loss due to overdependence on a singular investment or category of business. The main concentration risks to which the Group is exposed are as follows: n Listed corporate bonds carry an average credit rating of A-. The average duration of the portfolio is 3.0 years. The sovereign bond portfolio carries an average credit rating of A and the average duration of the portfolio is 4.1 years. n Given the ratings, spread of investments and the duration of the listed corporate bond and sovereign bond portfolios, the Group deems any concentration risk to be acceptable. n While all of the Group’s underwriting business is conducted in Ireland, with a significant focus on the agri sector, it is spread over a wide geographical area with no concentration in any one county or region. The resultant concentration risk from adverse weather events, i.e. floods, storms or freezes in Ireland, are mitigated by a flood mapping solution and an appropriate reinsurance strategy. Receivables arising out of direct insurance operations and other receivables have no significant concentration of risk. (h) Macro-economic risk Economic downturn Fluctuations in demand or supply of insurance and any downturn in any of the markets in which the Group operates may have an adverse effect on the demand for its products and therefore could affect its overall financial condition. A deterioration or delay in economic recovery represents a material risk to the operating performance and financial position of the Group. Increasing competition The Group faces significant competition. Actions by existing competitors or new entrants may place pressure on the Group’s margins and profitability. In response to a changing competitive environment or the actions of competitors, the Group may from time to time make certain pricing, service or marketing decisions that could have a material effect on the revenues and results of the operations. Changing market trends The Group is exposed to changes in consumer trends. Although demand for insurance cover is expected to remain broadly stable, consumers’ purchasing patterns tend to change over time and especially when the economy is weak. To the extent that there is a negative shift in consumption, such changes in consumer demand may have materially adverse effects on the Group’s financial position. The Group operates in competitive markets. Success is dependent on anticipating changes in consumer preferences and on successful new product development and product launches in response to such changes in consumer behaviour. The Group’s future results will depend on its ability to successfully identify, develop, market and sell new or improved products in these changing markets. The success of the Group depends on its ability to react to changing trends with appropriate innovation to drive growth and performance. Failure to do so may result in material adverse effects on the operational performance and financial position of the Group. 127 FBD Holdings plc Annual Report 2017 Notes to the Financial Statements (continued) 41 RISK MANAGEMENT (CONTINUED) The increasing likelihood of a hard “Brexit” introduces business and trading uncertainty for all indigenous Irish businesses, including FBD and the Group’s core customers in farming and other small businesses. It appears likely that Britain departing the EU will have negative effects for business and business confidence in Ireland, particularly in the medium term and the Group believes this will continue to be a significant headwind to otherwise strong Irish economic prospects. Taxation risk If taxation laws were to be amended in the jurisdiction in which the Group operates this could have an adverse effect on its results. The Group continually takes the advice of external experts to help minimise this risk. Changes in taxation could decrease the post-taxation returns to shareholders. (i) Sensitivity analysis The table below identifies the Group’s key sensitivity factors. For each sensitivity test the impact of a change in a single factor is shown, with other assumptions left unchanged. Sensitivity factor Description of sensitivity factor applied Interest rate and investment return The impact of a change in the market interest rate by an increase of 1% or a decrease of 0.25%. For example if a current interest rate is 2%, the impact of an immediate change to 3% and 1.75%. Exchange rates movement The impact of a change in foreign exchange rates by ± 10%. Equity market values The impact of a change in equity market values by ±10%. Available for sale investments The impact of a change in corporate bond market values by ±5%. Property market values The impact of a change in property market values by ±10%. Net loss ratios The impact of an increase in underwriting net loss ratios by 5%. The pre-taxation impacts on profit and shareholders’ equity at 31 December 2017 and at 31 December 2016 of each of the sensitivity factors outlined above are as follows: Interest rates Interest rates FX rates FX rates Equity Equity Available for sale investments Available for sale investments Investment property Investment property Net loss ratio 128 2017 €000s (12,759) 3,190 812 (812) 2,177 (2,177) 37,934 (37,934) 1,800 (1,800) 16,297 2016 €000s (10,159) 2,539 901 (901) 2,353 (2,353) 31,475 (31,475) 1,640 (1,640) 15,411 1.0% (0.25%) 10% (10%) 10% (10%) 5% (5%) 10% (10%) 5% 41 RISK MANAGEMENT (CONTINUED) The sensitivity of changes in the assumptions used to calculate general insurance liabilities are set out in the table below: Change in assumptions +10% +10% Increase in gross technical reserves €000s 7,230 317 6,599 Increase in net technical reserves €000s 5,166 352 5,939 +10% +10% 6,111 (173) 8,811 5,293 (65) 7,930 Impact on profit before taxation €000s Reduction in shareholders’ equity €000s (5,166) (352) (5,939) (5,293) 65 (7,930) 4,520 308 5,197 4,632 (57) 6,939 31 December 2017 Injury claims IBNR and IBNER Other claims IBNR and IBNER Legal fees revert to pre PIAB levels 31 December 2016 Injury claims IBNR and IBNER Other claims IBNR and IBNER Legal fees revert to pre PIAB levels Limitations of sensitivity analysis The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The sensitivity analysis does not take into consideration that the Group’s assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. Other limitations in the above sensitivity analysis include the use of hypothetical market movements to demonstrate potential risk. They represent the Group’s view of possible near-term market changes that cannot be predicted with any certainty and assume that all interest rates move in an identical fashion. 42 CHANGE IN ACCOUNTING POLICY During the year, the Group changed its accounting policy with respect to the treatment of claims handling expenses. The Group now includes claims handling expenses within net claims and benefits. Prior to this change in policy, the Group included these expenses within other underwriting expenses. The Group believes the new policy is preferable as it aligns the Group to the industry standard by including claims handling expenses within net claim expenses. The impact of this voluntary change in accounting policy is a reclassification of €9,597,000 (2016: €10,343,000) from other underwriting expenses to net claims and benefits. There is no change in the prior year profit of the Group, or in the opening shareholders’ funds of the Group as a result of this change. This accounting policy is in place for 2017. There is no impact on the Consolidated Statement of Financial Position for these changes. During the year the Group also changed the presentation of interest payments on convertible debt within cash flows from operating activities in the Consolidated Statement of Cash Flows by presenting these cash flows as a separate line item. The Group believes this new policy improves disclosure of cash flows from operating activities. This change has no impact on previously reported cash flows of the Group. 43 SUBSEQUENT EVENTS There have been no subsequent events which would have a material impact on the Financial Statements. 129 FBD Holdings plc Annual Report 2017 Alternative performance measures (APMs) For the financial year ended 31 December 2017 The Group uses the following alternative performance measures: Loss ratio, expense ratio, combined operating ratio, investment return and net asset value per share. Loss ratio (LR), expense ratio (ER) and combined operating ratio (COR) are widely used as a performance measure by insurers, and give users of the financial statements an understanding of the underwriting performance of the entity. Investment return is used widely as a performance measure to give users of financial statements an understanding of the performance of an entities investment portfolio. Net asset value per share (NAV) is a widely used performance measure which provides the users of the financial statements the book value per share. The calculation of the APM’s is based on the following data: Loss ratio Net claims and benefits Movement in other provisions Total claims incurred Net premium earned Loss ratio (Total claims/Net premium earned) Expense ratio Other underwriting expenses Net premium earned Expense ratio (Underwriting expenses/Net premium earned) Combined operating ratio Loss ratio Expense ratio Combined operating ratio (Loss ratio + Expense ratio) Investment return Investment return recognised in Consolidated Income Statement Investment return recognised in Statement of Comprehensive Income Total investment return Average underwriting investment assets Investment return % (Total investment return/Average underwriting investment assets) Net asset value per share Shareholders’ funds – equity interests Number of Shares Number of ordinary shares in issue (excluding treasury) Net asset value per share (NAV) (Shareholders funds / Closing number of ordinary shares) 130 2017 €000s 203,144 1,945 205,089 325,932 62.9% 75,908 325,932 23.3% % 62.9% 23.3% 86.2% 9,361 2,807 12,168 1,027,637 1.2% Restated 2016 €000s 227,853 7,747 235,600 308,226 76.4% 69,406 308,226 22.6% % 76.4% 22.6% 99.0% 8,338 10,371 18,709 991,152 1.9% 271,626 225,548 34,666,201 34,666,201 Cent 784 Cent 651 FBD Holdings plc FBD House Bluebell Dublin 12 Ireland T: +353 1 409 3200 F: +353 1 455 4303 www.fbdgroup.com Letter from the Chairman in relation to the Annual General Meeting 29 March 2018 Dear Shareholder, The Notice of the Annual General Meeting of the Company, which will be held at 11.00 a.m. on 4 May 2018 in the Irish Farm Centre, Old Naas Road, Bluebell, Dublin 12, follows this letter. I want to set out in this letter details of the business to come before the meeting. Resolution 1 deals with the consideration of the Financial Statements of the Company for the year ended 31 December 2017. Resolution 2 deals with the declaration of a dividend on the 14% non-cumulative preference shares for the year ended 31 December 2017. A dividend cannot be declared on the ordinary shares unless and until the dividend on the 14% preference shares has been declared. Resolution 3 deals with the declaration of a dividend on the 8% non-cumulative preference shares for the year ended 31 December 2017. A dividend cannot be declared on the ordinary shares unless and until the dividend on the 8% preference shares has been declared. Resolution 4 deals with the declaration of a final dividend of 24 cent per ordinary share for the year ended 31 December 2017. Resolution 5 deals with the approval of the Report on Directors’ Remuneration. This Report is set out on pages 38 to 46 of the Annual Report and it has been the practice of the Board since 2010 to put the Report on Directors’ Remuneration to a shareholder vote. Shareholders should note that there is no legal obligation on the Company to put such a resolution to Shareholders. While it is therefore an “advisory” resolution and not binding on the Company, the Board recognises that the tabling of such a resolution is best practice in this area and is an acknowledgement of Shareholders’ rights to have a “say on pay”. Resolution 6 deals with the proposed re-election of all of the Directors who are proposed for re-election. The Board has adopted the practice that all Directors continuing in office will submit themselves for re-election at each Annual General Meeting. This was done for the first time in 2011. Biographies of all the Directors proposed for re-election are set out on pages 25 to 26 of the Annual Report in the Corporate Governance Section. A formal evaluation of the performance of each of the Directors has been undertaken. I can confirm that each of the Directors continues to perform effectively and demonstrates commitment to the role. Resolution 7 is a standard resolution which authorises the Directors to fix the remuneration of the Auditors. Under Irish Company law, the Auditors, PricewaterhouseCoopers, are deemed to be re-appointed in accordance with S.383 of the Companies Act 2014. The Audit Committee last put the provision of audit services to the Company out to tender in 2015. Resolution 8 will be proposed as an Ordinary Resolution and seeks the approval of shareholders for a new incentive plan, the FBD Performance Share Plan (the “Plan”), for employees and executive directors of the Company or any of its subsidiaries. The Board has decided, based on recommendations of the Remuneration Committee and subject to shareholder approval, to introduce the Plan to reward, retain and incentivise key employees. The principal features of the Plan are set out in the Appendix to this letter. The rules of the FBD Performance Share Plan will be available for inspection at the Company’s Registered Office at FBD House, Bluebell, Dublin 12 from the date of this notice on any weekday (Saturdays, Sundays and public holidays excluded) until the close of the Annual General Meeting, and will also be available at the place of the Annual General Meeting for at least 15 minutes prior to and during the meeting. Resolution 9 will be proposed as an Ordinary Resolution to renew the Directors’ authority under Section 1021 of the Companies Act 2014 to allot shares up to an aggregate nominal value of €6,863,907 (representing approximately 33% of the issued ordinary share capital (excluding treasury shares) as at 29 March 2018 (the latest practicable date prior to the publication of this letter)). The Board currently has no intention to issue shares pursuant to this authority except for issues of ordinary shares under the Company’s share option plans and the Board will only exercise this authority if it considers it to be in the best interests of Shareholders generally at that time. This authority, if renewed, will expire on the earlier of the date of the next Annual General Meeting of the Company or 4 August 2019. 131 FBD Holdings plc Annual Report 2017 Letter from the Chairman in relation to the Annual General Meeting (continued) Resolution 10 will be proposed as a Special Resolution to renew the Directors’ authority to issue shares for cash other than strictly pro-rata to existing shareholdings in certain circumstances being, (a) in the event of a rights issue or any other issue of shares for cash and is limited to an aggregate nominal value of €1,039,986 (representing approximately 5% of the Company’s issued ordinary share capital (excluding treasury shares) as at 29 March 2018 being the latest practicable date prior to the publication of this letter) and/or (b) the allotment of equity securities pursuant to the Company’s share option schemes for the time being in force. The Board currently has no intention to issue shares pursuant to this authority except for issues of ordinary shares under the Company’s share option plans and the Board will only exercise this authority if it considers it to be in the best interests of Shareholders generally at that time. This authority, if renewed, will expire on the earlier of the date of the next Annual General Meeting of the Company or 4 August 2019. Resolution 11 will be proposed as a Special Resolution to renew the authority, the renewal of which is usually sought every year, for the Company, or any subsidiary of the Company, to make market purchases of the Company’s ordinary shares up to 10% of the aggregate nominal value of the Company’s total issued share capital. The text of the resolution sets out the minimum and maximum prices which may be paid for ordinary shares purchased in this manner. The total number of conditional awards over ordinary shares in the Company outstanding on 29 March 2018 is 511,343 representing 1.5% of the total issued share capital. If the Directors were to exercise the authority being renewed by this resolution up to the maximum allowed and to cancel such shares and all other shares held in treasury, these conditional awards would represent 3.8% of the total issued share capital. The Board will only exercise this authority if it considers it to be in the best interests of Shareholders generally at that time. This authority, if renewed, will expire on the earlier of the date of the next Annual General Meeting of the Company or 4 August 2019. Resolution 12 will be proposed as a Special Resolution to set the price ranges at which the Company may re-issue treasury shares off-market. The Board will only exercise this authority if it considers it to be in the best interests of Shareholders generally at that time. This authority, if renewed, will expire on the earlier of the date of the next Annual General Meeting of the Company or 4 August 2019. Resolution 13 will be proposed as a Special Resolution to maintain the existing authority in the Company’s Articles of Association which permits the convening of an Extraordinary General Meeting of the Company on 14 days’ notice where the purpose of the meeting is to consider an Ordinary Resolution only. Form of Proxy Those shareholders unable to attend the Meeting may appoint a proxy. The appointment may be submitted by post by completing the enclosed Form of Proxy and returning it to the Company’s Registrar, Computershare Investor Services (Ireland) Limited, PO Box 954, Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18, Ireland. Your Form of Proxy may also be submitted through the internet. Instructions on how to do this are set out on the Form of Proxy. CREST members who wish to appoint a proxy or proxies via the CREST electronic proxy appointment service should refer to note 6 on the form of proxy. All Proxy votes must be received by the Company’s Registrar not less than 48 hours before the time appointed for the Meeting. The submission of a Form of Proxy will not prevent you attending and voting at the Meeting should you wish to do so. Recommendation The Directors are satisfied that the resolutions set out in the Notice of the Annual General Meeting are in the best interests of the Company and its Shareholders. Accordingly the Directors unanimously recommend that you vote in favour of each of the resolutions set out in the Notice of Annual General Meeting, as they intend to do in respect of all of the ordinary shares which they own or control in the capital of the Company. Yours faithfully, Liam Herlihy Chairman 132 Appendix Summary of the principal terms of the FBD Performance Share Plan (the “Plan”) The existing FBD Performance Share Plan was approved by shareholders in 2007 and is at the end of its ten-year lifespan. The Remuneration Committee (the “Committee”) is proposing the new Plan to replace it. The Plan has been designed to ensure the Plan rules are in line with current best practice and to introduce flexibility for the Committee to make awards which will be subject to post-vesting holding periods and malus and clawback provisions. The Plan will provide for the ability to make annual awards of performance shares, which will vest subject to the achievement of stretching three-year performance conditions. The key features of the proposed Plan are set out below. ELIGIBILITY All employees (including Executive Directors) of the Company or any of its subsidiaries are eligible for selection to participate at the discretion of the Board however it is the Company’s current intention to continue its practice of making annual awards to Executive Directors as well as selected key individuals in our senior management team who are capable of maximizing value for shareholders. TIMING OF AWARDS & LIFE OF THE PLAN The Committee may grant an award: (a) during the period of 42 days after the date of adoption of the Plan; (b) during the period of 42 days immediately following the end of a closed period (as defined in market abuse legislation); and/or (c) at any time which the Committee considers that exceptional circumstances exist which justify the granting of an award. Subject to approval by shareholders, the first awards under the new plan would be made shortly after the AGM. No award will be granted under the Plan more than ten years after the date on which the shareholders approve the Plan. LIMITS Overall plan limit: In aggregate with any other employee share plan, the maximum number of shares which may be issued in any rolling ten-year period will be 10% of the Company’s issued ordinary share capital. Individual limit: An award may not be granted to an eligible employee if, as a result, the aggregate market value of the shares granted to that employee pursuant to the Plan during the relevant financial year would exceed 150% of his or her annual base salary. PERFORMANCE CONDITIONS The Committee will set performance conditions each year, selecting appropriate metrics based on key strategic priorities. The period over which the performance conditions applying to a conditional award under the Plan are measured may not be less than three years. The extent to which a conditional award may vest in the future will be determined by the Committee by reference to the performance conditions set at the time of the award. These conditions are designed to ensure alignment between the economic interests of the Plan participants and those of shareholders. Different conditions, or the same conditions in differing proportions, can be used by the Committee in different years under the Plan rules, provided that the Committee is satisfied that they are challenging targets and that they are aligned with the interests of the Company’s shareholders. POST-VESTING HOLDING PERIOD The Plan rules allow the Committee (at its sole discretion) to make awards which may be subject to an additional post-vesting holding period. Awards will vest after three years once applicable performance conditions have been achieved and the vested shares may be required to be held for a further two-year period to provide continued alignment with shareholders. MALUS AND CLAWBACK PROVISIONS The Plan includes provisions that allow the Committee to withhold, reduce or require the repayment of awards for up to two years after vesting (i.e. up to five years after grant) if there is found to have been (a) material misstatement of the company’s financial results; (b) a material error in the assessment of any performance condition applicable to the award or in the information or assumptions on which the award was granted, vests or is released; or (c) gross misconduct on the part of the award holder. CESSATION OF EMPLOYMENT Except in certain circumstances referenced below, an unvested award will lapse immediately when a participant ceases to be employed by or to hold office with the Company’s group. 133 FBD Holdings plc Annual Report 2017 Appendix (continued) If a participant has ceased to be employed because of injury, ill health or disability, retirement or the sale of the participant’s employing company or business out of the Company’s group, or in other exceptional circumstances at the discretion of the Committee, his award shall vest on a date determined by the Committee. The extent to which the awards will vest in such circumstances shall be determined by the Committee taking into account any performance conditions measured up to that point and, unless determined otherwise by the Committee, the proportion of the performance period which has elapsed at the date of cessation of employment. CORPORATE EVENTS In the event of a change of control of the Company, all awards shall vest. The extent to which any unvested awards vest will be determined by the Committee having regard to performance conditions and any other conditions imposed and, unless the Committee determines otherwise, the proportion of the performance period which has elapsed. In the event of a reorganisation or other variation of share capital of the Company, the Committee may determine that the awards shall not vest but shall lapse in exchange for the grant of equivalent awards in the relevant acquiring entity controlling the Group. RIGHTS ATTACHING TO SHARES Shares issued under the Plan shall, unless specified by the Committee as being subject to a holding period, rank equally with shares then in issue of the same class of shares. AMENDMENTS The Board, acting on the recommendation of the Committee, may from time to time amend the rules of the Plan. The prior approval of the shareholders will be required in the case of any amendment to the advantage of existing or future participants which relate to the basis for determining eligible employee’s entitlements to awards, the persons to whom an award may be granted, individual or overall limits, the adjustment of awards in the event of any variation of the share capital of the Company. There are exceptions from this requirement to obtain shareholder approval in the case of minor amendments which benefit the administration of the Plan, to take account of a change in legislation or to obtain or maintain favourable tax, exchange control, securities law or regulatory treatment for participants. BENEFITS NOT PENSIONABLE The benefits received under the Plan shall not form any part of a participant’s remuneration or count as his/her remuneration for the purpose of any employer’s contribution to any pension or other benefit scheme operated by a member of the Group. 134 Notice of Annual General Meeting NOTICE IS HEREBY GIVEN that the Annual General Meeting of the Company will be held in the Irish Farm Centre, Old Naas Road, Bluebell, Dublin 12, Ireland on Friday 4 May 2018, at 11 a.m. for the following purposes: To consider and, if thought fit, pass the following resolutions as Ordinary Resolutions: 1 To receive and consider the Report of the Directors and the Financial Statements for the year ended 31 December 2017. 2 To declare a dividend on the 14% non-cumulative preference shares. 3 To declare a dividend on the 8% non-cumulative preference shares. 4 To declare a final dividend of 24 cent per ordinary share. 5 To approve the Report on Directors’ Remuneration 9 That the Directors be and they are hereby generally and unconditionally authorised pursuant to section 1021 of the Companies Act 2014 , in substitution for all existing such authorities, to exercise all powers of the Company to allot relevant securities (within the meaning of section 1021 of the said Act) up to an aggregate nominal amount of €6,863,907 during the period commencing on the date of the passing of this Resolution and expiring at the earlier of the conclusion of the Annual General Meeting of the Company in 2019 and close of business on the date 15 months from the date of the passing of this Resolution, provided that the Company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offer or agreement as if the authority hereby conferred had not expired. appearing in the Financial Statements for the year ended 31 December 2017 (Advisory Resolution). To consider and, if thought fit, pass the following resolutions as Special Resolutions: 6 To re-elect the following persons as Directors of the 10 That the Directors be and they are hereby empowered Company: (a) Walter Bogaerts (b) Mary Brennan (c) Dermot Browne (d) Joe Healy (e) Liam Herlihy (f) Orlagh Hunt (g) Fiona Muldoon (h) David O’Connor (i) (j) John O’Grady Padraig Walshe 7 To authorise the Directors to fix the remuneration of the Auditors. 8 That the FBD Performance Share Plan (the “Plan”), the principal terms of which are summarised in the Appendix to the Chairman’s Letter attached to this Notice and as shown in the Rules of the Plan produced to the meeting and signed by the Chairman for purposes of identification, be approved and that the Directors be and are hereby authorised to do all such acts and things that they consider necessary or expedient to operate and implement the Plan. pursuant to Section 1023 of the Companies Act 2014 to allot equity securities (within the meaning of Section 1023 of the said Act) for cash pursuant to the authority conferred on them by Resolution 9 above as if sub-section (1) of Section 1022 of the said Act did not apply to any such allotment, provided that this power shall be limited to: (a) (b) the allotment of equity securities up to but not exceeding an aggregate nominal amount of €1,039,986; and/or the allotment of equity securities pursuant to any employee share schemes or share incentive plans of the Company for the time being in force, such power to be effective from the time of passing this Resolution and shall expire at the earlier of the conclusion of the Annual General Meeting of the Company in 2019 and close of business on the date 15 months from the date of the passing of this Resolution, and provided that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such offer or agreement as if the power hereby conferred had not expired. 135 FBD Holdings plc Annual Report 2017 Notice of Annual General Meeting (continued) 11 That the Company and/or any of its subsidiaries (as defined by Section 7 of the Companies Act 2014) be and are hereby generally authorised to make market purchases (as defined in Section 1072 of the Companies Act 2014) of shares of any class of the Company (“the Shares”) on such terms and conditions and in such manner as the Directors may from time to time determine but subject, however, to the provisions of the Companies Act 2014, the Articles of Association of the Company and to the following restrictions and provisions: (a) (b) (c) the aggregate nominal value of the Shares authorised to be acquired pursuant to the terms of this Resolution shall not exceed 10 per cent of the aggregate nominal value of the issued share capital of the Company as at the close of business on the date of the passing of this Resolution; the minimum price which may be paid for any Share shall be the nominal value of the Share; the maximum price which may be paid for any Share (a “Relevant Share”) shall be the higher of: (i) (ii) an amount equal to 105 per cent of the average market value of a Relevant Share as determined in accordance with this paragraph (c); and the price stipulated by the Commission Delegated Regulation (EU) 2016/1052, being the higher of the price of the last independent trade of any number of Relevant Shares and the highest current independent bid for any number of Relevant Share on the trading venue where the purchase pursuant to the authority conferred by this Resolution will be carried out, where the average market value of a Relevant Share for the purpose of sub-paragraph (i) shall be an amount equal to the average of the five amounts resulting from determining whichever of the following ((1), (2) or (3) specified below) in relation to the Shares of the same class as the Relevant Share shall be appropriate for each of the five consecutive business days immediately preceding the day on which the Relevant Share is purchased, as determined from the information published in the Irish Stock Exchange Daily Official List reporting the business done on each of those five business days; (1) if there shall be more than one dealing reported for the day, the average of the prices at which such dealings took place; or 136 (2) (3) if there shall be only one dealing reported for the day, the price at which such dealing took place; or if there shall not be any dealing reported for the day, the average of the closing bid and offer prices for the day, and if there shall be only a bid (but not an offer) or an offer (but not a bid) price reported, or if there shall not be any bid or offer price reported, for any particular day then that day shall not count as one of the said business days for the purposes of determining the maximum price. If the means of providing the foregoing information as to dealings and prices by reference to which the maximum price is to be determined is altered or is replaced by some other means, then a maximum price shall be determined on the basis of the equivalent information published by the relevant authority in relation to dealings on the Irish Stock Exchange or its equivalent. The authority hereby conferred will expire at the close of business on the date of the next Annual General Meeting of the Company or the date which is fifteen months after the date on which this Resolution is passed or deemed to have been passed whichever is the earlier, unless previously varied, revoked or renewed in accordance with the provisions of Section 1074 of the Companies Act 2014. The Company or any such subsidiary may before such expiry enter into a contract for the purchase of Shares which would or might be wholly or partly executed after such expiry and may complete any such contract as if the authority conferred hereby had not expired. 12 That for the purposes of Section 1078 of the Companies Act 2014 the re-issue price range at which any treasury shares (as defined by the said Companies Act 2014) for the time being held by the Company may be re-issued off-market shall be as follows: (a) the maximum price shall be an amount equal to 120 per cent of the Appropriate Price as defined in paragraph (c); and (b) subject to paragraph (c) hereof, the minimum price shall be: (i) in the case of an Option Scheme (as defined in paragraph (d) below), an amount equal to the price payable in respect of the option or conditional award as provided for in such Option Scheme; or The authority hereby conferred shall expire at the close of business on the date of the next Annual General Meeting of the Company, or the date which is fifteen months after the date on which this Resolution is passed or deemed to have been passed whichever is the earlier, unless previously varied or renewed in accordance with the provisions of Section 1078 of the Companies Act 2014. 13 That it is hereby resolved, in accordance with Section 1102 of the Companies Act 2014, the Directors be and they are hereby authorised to call a General Meeting, other than an Annual General Meeting or a meeting for the passing of a special resolution, on not less than 14 days’ notice and accordingly that the provision in Article 50(a) of the Company’s Articles of Association shall continue to be effective. By order of the Board Derek Hall Company Secretary FBD House, Bluebell, Dublin 12, Ireland 29 March 2018 (c) (ii) in all other cases and circumstances where treasury shares are re-issued off-market, an amount equal to 95% of the Appropriate Price (as defined in paragraph (c)); and “Appropriate Price” means the average of the five amounts resulting from determining whichever of the following ((i), (ii) or (iii) specified below) in relation to shares of the class of which such treasury shares to be re-issued shall be appropriate in respect of each of the five business days immediately preceding the day on which the treasury share is re-issued, as determined from information published in the Irish Stock Exchange Daily Official List reporting the business done on each of those five business days; (i) (ii) (iii) if there shall be more than one dealing reported for the day, the average of the prices at which such dealings took place; or if there shall be only one dealing reported for the day, the price at which such dealing took place; or if there shall not be any dealing reported for the day, the average of the closing bid and offer prices for the day; and if there shall be only a bid (but not an offer) or an offer (but not a bid) price reported, or if there shall not be any bid or offer price reported for any particular day, then that day shall not count as one of the said business days for the purposes of determining the Appropriate Price. If the means of providing the foregoing information as to dealings and prices by reference to which the Appropriate Price is to be determined is altered or is replaced by some other means, then the Appropriate Price shall be determined on the basis of the equivalent information published by the relevant authority in relation to dealings on the Irish Stock Exchange or its equivalent; and (d) “Option Scheme” means any scheme or plan which involves either the issue of options to acquire ordinary shares in the Company or the conditional award of ordinary shares in the Company which has been approved by the Company’s shareholders in a General Meeting. 137 FBD Holdings plc Annual Report 2017 Information for Shareholders 1. Conditions for Participating in the Annual General 3. Record Date for AGM Meeting (“AGM”) Every shareholder registered at the record date for the meeting (the “Record Date”), irrespective of how many FBD Holdings plc shares he/she holds, has the right to attend, speak, ask questions and vote at the AGM. Completion of a form of proxy will not affect your right to attend, speak, ask questions and/or vote at the meeting in person. 2. Appointment of Proxy If you cannot attend the AGM in person, you may appoint a proxy (or proxies) to attend, speak, ask questions and vote on your behalf. For this purpose a Form of Proxy has been sent to all registered shareholders. A proxy need not be a member of the Company. You may appoint the Chairman of the Company or another individual as your proxy. You may appoint a proxy by completing the Form of Proxy, making sure to sign and date the form at the bottom and return it in the pre-paid envelope provided to the Company’s Registrar, Computershare Investor Services (Ireland) Limited, P.O. Box 954, Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18, Ireland to be received no later than 11 a.m. on 2 May 2018. If you are appointing someone other than the Chairman as your proxy, then you must fill in the details of that person in the box located underneath the wording “I/We hereby appoint the Chairman of the Meeting OR the following person” on the Form of Proxy. Alternatively, you may appoint a proxy via CREST, if you hold your shares in CREST, or you may do so electronically, by visiting the website of the Company’s Registrar at www. eproxyappointment.com. You will need your shareholder reference number, control number and your PIN number, which can be found on the Form of Proxy. If you appoint the Chairman or another person as a proxy to vote on your behalf, please make sure to indicate how you wish your votes to be cast by ticking the relevant boxes on the Form of Proxy. Completing and returning a Form of Proxy will not preclude you from attending and voting at the meeting should you so wish. Pursuant to Section 1095 of the Companies Act, 2014 and pursuant to Regulation 14 of the Companies Act, 1990 (Uncertificated Securities) Regulations, 1996, the Company hereby specifies that only those Shareholders registered in the Register of Members of the Company as at 6 p.m. on the day which is two days before the date of the meeting shall be entitled to attend or vote at the Annual General Meeting in respect of the number of shares registered in their name at that time. Changes in the Register after that time will be disregarded in determining the right of any person to attend and/or vote at the meeting or the number of votes any Shareholder may have in the case of a poll vote. 4. How to exercise your voting rights As a Shareholder, you have several ways to exercise your right to vote: n n n By attending the AGM in person; By appointing the Chairman or some other person as a proxy to vote on your behalf; By appointing a proxy via the CREST System if you hold your shares in CREST. In the case of joint holders, the vote of the senior who tenders a vote, whether in person or by proxy, will be accepted to the exclusion of the votes of the other registered holder(s) and, for this purpose, seniority will be determined by the order in which the names stand in the register of members. 5. Tabling Agenda Items If you or a group of Shareholders hold 1,186,155 or more ordinary or preference shares of €0.60 each in FBD Holdings plc (i.e. at least 3% of the issued share capital of the Company carrying voting rights), you or the group of Shareholders acting together have the right to put an item on the agenda for the AGM. In order to exercise this right, written details of the item you wish to have included on the agenda for the AGM together with a written explanation setting out why you wish to have the item included on the agenda, and evidence of the shareholding, must have been received by the Company Secretary at FBD Holdings plc, FBD House, Bluebell, Dublin 12, Ireland or by e-mail to company.secretary@fbd.ie no later than 11 a.m. on Friday 23 March 2018 (i.e. 42 days before the time scheduled for the holding of the AGM). An item cannot be included on the agenda for the AGM unless the foregoing conditions are satisfied and it is received by the stated deadline. 138 The Memorandum and Articles of Association of the Company are available on the Company’s website www. fbdgroup.com and may also be inspected during usual business hours on any weekday (Saturdays, Sundays and public holidays excepted) at the Company’s Registered Office at FBD House, Bluebell, Dublin 12, Ireland up to and including the date of the Annual General Meeting and at the Annual General Meeting itself. 9. Further Information This AGM notice, details of the total number of shares and voting rights at the date of giving this notice, the documents to be submitted to the meeting, copies of any draft resolutions and a copy of the Form of Proxy are available on the Company’s website at www.fbdgroup.com. 6. Tabling Draft Resolutions If you or a group of Shareholders hold 1,186,155 or more ordinary and/or preference shares of €0.60 each in FBD Holdings plc (i.e. at least 3% of the issued share capital of the Company carrying voting rights), you or the group of Shareholders acting together have the right to table a draft resolution for inclusion on the agenda for the AGM subject to any contrary provision in company law. In order to exercise this right, the text of the draft resolution and evidence of shareholding must have been received by post by the Company Secretary at FBD Holdings plc, FBD House, Bluebell, Dublin 12, Ireland or by email to company. secretary@fbd.ie no later than 11 a.m. on Friday 23 March 2018 (i.e. 42 days before the time scheduled for the holding of the AGM). A resolution cannot be included on the agenda for the AGM unless it is received in either of the foregoing manners by the stated deadline. Furthermore, Shareholders are reminded that there are provisions in company law, and otherwise, which impose other conditions on the right of shareholders to propose resolutions at a General Meeting of a company. 7. Right to ask questions Pursuant to Section 1107 of the Companies Act 2014, Shareholders have a right to ask questions related to items on the AGM agenda and to have such questions answered by the Company subject to any reasonable measures the Company may take to ensure the identification of Shareholders. 8. How to request/inspect documentation relating to the meeting The annual Financial Statements, reports of the Directors and the Auditors and the Report of the Remuneration Committee are contained in the Company’s Annual Report which was dispatched to Shareholders on 29 March 2018. The Annual Report is also available on the Company’s website www.fbdgroup.com. Should you not receive a Form of Proxy, or should you wish to be sent copies of any documents relating to the meeting, you may request these by telephoning the Company’s Registrar on +353 1 4475 101 or by writing to the Company Secretary either by post at FBD House, Bluebell, Dublin 12, Ireland or by e-mail to company.secretary@fbd.ie. 139 FBD Holdings plc Annual Report 2017 140 Printed on paper sourced from sustainably managed forests. FBD House, Bluebell, Dublin 12 fbd.ie