P S C I N S U R A N C E G R O U P A n n u a l R e p o r t 2 0 1 8 PSC Insurance Group Limited ANNUAL REPORT 2018 CONTENTS Chairman’s Letter Managing Director’s Report PSC Foundation Corporate Governance Statement Directors’ Report Auditor’s Independence Declaration Financial Statements Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Corporate Information 1 2 7 9 13 30 31 35 90 91 97 99 1 PSC INSURANCE GROUP CHAIRMAN’S LETTER My fellow Shareholders, I am once again pleased to report that the financial year 2018 has been another successful year for PSC Insurance Group, with statutory revenue up 40% to $118.7 million, statutory EBITDA up 49% to $45.4 million and statutory NPAT attributable to members up 40% to $27.6 million. Our Managing Director’s Report will further expand on the financial results for 2018. I discussed last year that our Customers and Clients are paramount in all we do. Over the year we have continued to evolve and strengthen the Client experience. Our worker’s compensation consulting practice is increasingly adding value to our Clients, we have further invested in our online delivery platforms, we continue to invest in our claims services and have increased our compliance resources across the Group. The existing businesses have continued to perform well, with strong organic growth evident. This is a key focus of the Board and management, and ultimate driver of long term value for all shareholders. The diversity of our operations is also a Board focus. The Group now operates over 40 businesses. The businesses and investments acquired over the last 12-18 months are all performing solidly and to expectations. All acquisitions and investments are in our core area of insurance distribution businesses. Of particular highlight, we are excited about the future prospects of our medical and healthcare specialist broking and underwriting businesses. We also recently announced a majority investment in a UK retail broker; this is core business in Australia and we see this as a natural strategic progression. I should also note our investment after balance date in B P Marsh & Partners plc. We are very pleased to have had the opportunity to partner with and invest in a very highly regarded and successful insurance intermediary investor. We see many potential mutual benefits and see that the investment will naturally increase the Group’s international horizons over time. The key Group stakeholders remain highly invested and motivated to ensure the sustained strong performance of the Group over the medium and long term. I have mentioned previously that there are few investments on the ASX with better alignment between its owners and management. This position continues today as the Board, Senior Management and Staff account for the majority of the equity of the group and clearly interests are well aligned to deliver results for all shareholders. Following a successful year I am pleased to announce an increase in the fully franked final dividend to 4.5 cents per share. Total dividends for the period were up 20% to 7.2 cents per share and up 95% over a 2 year period. Thanks to my fellow Directors for their continued commitment and support. Importantly, on behalf of the Board, we thank all the PSC staff for their continued and passionate support allowing our company to make 2018 such a success. Unquestionably, they continue to be the greatest asset of the Group. We as a Board also welcome our new staff members gained throughout the year by way of acquisitions and organic growth in our various businesses. To my fellow shareholders, thank you for your continued support and confidence you have placed in your Board. The Board, Senior Management and Staff assure you of our intention to strongly grow our business in a measured and disciplined manner as we have in the past. Yours sincerely, Brian Austin Non-Executive Chairman 2 MANAGING DIRECTOR’S REPORT Key financial highlights in 2018 for PSC were: • Underlying revenue was up 24% on the prior corresponding period (pcp) to $101.1 million. • Underlying1 earnings before interest, tax, depreciation and amortisation (EBITDA) up 30% on the pcp to $37.0 million. • Underlying EBITDA margin up from 35.0% to 36.6%. • Underlying net profit after tax and before amortisation (NPATA) up 31% on the pcp to $24.2 million. • Statutory net profit after tax up 39% on the pcp to $27.8 million. It has been another active and successful year for the Group. The underlying earnings growth has again been due to a healthy balance between organic improvements and acquisition based initiatives. Key operational highlights have included: • Organic growth in underlying EBITDA of 18%, • Continued enhancement in our client proposition. In particular: – Our workers compensation consulting business has expanded and continues to add value to our clients, – We have expanded our digital platforms, – We have a nationwide 24/7 emergency assistance service, – Continue to invest in our claims service and – have increased our compliance resources. • Completing and integrating 3 broking businesses into our existing operations in Canberra, Melbourne (Moorabbin) and Gold Coast respectively. These are all performing to expectation. • Completing the acquisition of the medical and healthcare specialist broker and underwriting agency IMGA and Medisure. This was predominantly a Qld based business and we see good growth opportunities to develop this expertise into a national presence. This process has commenced. • We announced the acquisition of 70% of Turner Insurance Services, a Leicester, UK based retail commercial insurance broking business. This style of business is core to our operations in Australia and we see as a natural strategic progression for the Group. This completed post balance date. • We commenced operations in the UK to expand our successful Chase Underwriting business in Australia. • Rohan Stewart was formally appointed as the Group CEO. This appointment recognised the principal operational role Mr Stewart has been fulfilling for a number of years. Additionally, six divisional CEO roles have been formalised reporting to Mr Stewart across key areas of the businesses including Broking, Agency, Network, Franchise, UK and Compliance/Governance. Outside of the core operational businesses, the Group now has a meaningful collection of investments: • The Johns Lyng Group had a successful IPO during the period and this resulted in a fair value gain in excess of $17 million. This was a fabulous result for the shareholders. • We announced an investment in BP Marsh & Partners plc (BPM). This completed after balance date and the Group holds a 19.6% ownership position. BPM has been a very successful investor in insurance intermediation businesses for over 25 years and has been listed for over 13 years. We expect to collaborate where appropriate and expect over time the investment will expand the Group’s international horizons and opportunities. • We will complete a fit-out of the East Melbourne headquarters in the coming months and anticipate that the value of the asset has increased solidly since purchase approximately 2 years ago. Post balance date, the collective book equity value of these investments is approximately $60 million. Whilst we do not expect this to grow materially, we do expect that the results with these assets will over time be for the benefit of the core operating businesses. Any fair value revaluation of these investments will not be included in our core underlying EBITDA. 1 Underlying EBITDA adjusts for one off fair value gains of $17.3m, largely relating to Johns Lyng Group increase post their IPO in the period, one-off receivable write-downs of $6.6m relating to APG and miscellaneous one off costs of $2.3m relating to a combination of deferred consideration adjustments ($1.4m) and transaction related costs. ANNUAL REPORT 2018 3 PSC INSURANCE GROUP We have undertaken a strategic review of Alsford Page & Gems (APG) in the UK. As a result, management has changed and we have sold the renewal rights to our clients in specific areas of Africa (refer to Note 32: Subsequent Events) and re-oriented the business towards U.S. clients. A provision of $3.9 million has been taken on predominantly African receivables and an unfavourable foreign exchange revaluation of $3.0 million recognised relating to predominantly African receivables (both non-cash items). We believe these changes place APG on a sound footing to recover and be a solid contributor for the Group over the medium term. Financial Performance The underlying financial performance of the Group over the last 5 years is summarised below: UNDERLYING REVENUE UNDERLYING REVENUE 110.0 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 UNDERLYING EBITDA UNDERLYING EBITDA 2013 2014 2015 2016 2017 2018 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2013 2014 2015 2016 2017 2018 4 MANAGING DIRECTOR’S REPORT (continued) UNDERLYING NPATA UNDERLYING NPAT 25.0 20.0 15.0 10.0 5.0 0.0 The underlying compound annual growth rates over this period have been: 2013 2014 2015 2016 2017 2018 • Revenue: 26%. • EBITDA: 35%. • NPATA: 39%. We are pleased with the financial year 2018 results, which are outlined more closely below: UNDERLYING EBITDA MARGIN UNDERLYING EBITDA 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 FY17 Aust Org Aust Acq UK Org UK Acq FX FY18 Underlying EBITDA has increased from $28.5 million to $37.0 million. This represents 30% growth, categorised as follows: • Organic growth: 18.0%. • Acquisition led growth: 11.3%. • FX movements: 0.7%. ANNUAL REPORT 2018 5 PSC INSURANCE GROUP The components of these results are: • Organic EBITDA growth in the Australian operations was $4.2 million. The Network (PSC Connect) and Agency businesses (particularly Chase Underwriting) have performed particularly strongly. The Broking operations have produced solid organic results for the year, with growth in the second half evident. • Incremental acquired EBITDA growth in the Australian operations was $3.2 million. This reflects a full annualised contribution of the acquisitions completed in financial year 2017 and part contribution for the businesses purchased in the current period. In particular, the contributions have been from Insurance Solutions (bolt in to SE Melbourne Broking and 5 months contribution), RP Hoxton Park (bolt in to Newcastle Broking and incremental 10 months contribution), Riley & Associates (bolt in to Gold Coast Broking and 9 months contribution), Capital (bolt in to Canberra Broking and 5 months contribution), IMGA (10 months contribution), OIB (incremental 11 months contribution) and MIA (10 months contribution). Collectively these businesses are performing slightly ahead of expectations. • Organic EBITDA growth in the UK was $1.0 million. The Breeze Underwriting UK and Carroll Holman Lloyd’s broking businesses had strong results, and the Chase UK business contributed a profitable result in its first 3 months of trading. Excluding the non-recurring charges outlined, the underlying contribution of APG was down by approximately $0.4 million. • FX impact on the underlying EBITDA was largely immaterial, making a positive contribution of approximately $0.2 million, given a 3% strengthening in the average sterling rate over the period. Underlying NPATA and Statutory NPAT: A reconciliation between underlying NPATA and statutory NPAT is as follows: ($m) Statutory NPAT, incl NCI Amortisation Tax Adjusted Impact of Revenue and Expense Adjustments IPO Interest Adjustment Underlying NPATA 2014 6.7 0.2 (0.9) 0.0 6.0 2015 8.7 0.2 (0.5) 0.0 8.4 2016 10.8 0.5 2.4 0.7 14.4 2017 20.0 0.7 (2.3) 0.0 18.4 2018 27.8 1.1 (4.7) 0.0 24.2 Underlying NPATA of $24.2 million adjusts the statutory NPAT of $27.8 million to reflect: • The non-cash amortisation charge. • The after tax adjusted fair value gain on Johns Lyng of approximately $12.0 million. • The after tax adjusted cost of the charges taken with APG of approximately $5.6m million. • The after tax adjusted cost of the deferred consideration accounting charges ($1.1 million) and transaction costs ($0.6 million) of approximately $1.7 million. The majority of the deferred consideration accounting charge has been the good performance of the online travel insurance business. Balance Sheet: The balance sheet is in a sound position. The Group raised gross equity capital of $55 million in November. At balance date the Group had deployed approximately $10 million of these funds, and post balance date deployed a further $33 million on the BP Marsh investment. During the period, the Group extended its Australian debt facility limits from $55 million to $80 million, with $38 million is unused capacity at balance date. We extended our UK debt facility post balance date to complete the Turner acquisition. The liquidity position of the Group is sound and the cash conversion for the period has been good. 6 MANAGING DIRECTOR’S REPORT (continued) Dividends: The Chairman announced an increased final, fully franked dividend to 4.5 cents per share, bringing total dividends for the financial period to 7.2 cents per share. This is an increase from 6.0 cents per share for the financial period 2017 (increase 20%) and from 3.7 cents per share for the financial period 2016 (increase 95% over 2 years). This represents a payout ratio of approximately 73%, based on underlying NPATA. Summary and Outlook: 2018 was a good year. The Group’s organic growth in the operating businesses has been very good and we have completed on a number of acquisitions that have performed well. During the year and post balance date, we now have a material amount of capital in various non-operating investments. We expect that these will serve the operations well over time. We are well placed for financial year 2019 and are confident we can continue to grow the Group for all stakeholders. Beyond this, the Board and Senior Management remain highly invested in the future of the Group and are focused on continuing to grow the business in an efficient manner and are confident the business will continue to improve over the medium term. ANNUAL REPORT 2018 7 PSC INSURANCE GROUP PSC FOUNDATION PSC Foundation About the PSC Foundation The PSC Foundation continues to support the endeavours of the people in the PSC group of companies in their charitable and community endeavours Australia wide. Our primary purpose is to build upon the amazing contributions our people make in the different communities where they live, work and support. Our people continue to contribute their own time volunteering for community organisations. The PSC Foundation has been established to consolidate and actively support their community involvement so that our team’s passions for the community can be fully realised. This provides benefits for both our team and community organisations and encourages individual involvement at a grassroots level. It is our purpose to help anyone from within our group to be able to give back to the community and to society. We are fortunate enough to have passionate and committed individuals making significant contributions to their community in order to benefit others. The PSC Foundation enables them to contribute even more than on their own. Our Objectives Our activities are driven by the endeavours of our people and as such our key objectives are: • To support and encourage our people to support the communities they live and work within; • To contribute in skilled and sustainable ways to help community organisations succeed or overcome problems; • To raise the profile of the organisations and causes we support; and • To encourage good corporate citizenship by highlighting the depth and breadth of our community involvement across the group. We seek to achieve these objectives by: • providing grants to a charity or charitable cause where our people are involved. • supporting team-led community activities and matching PSC team fundraising efforts; and • recognising leadership and community commitment through internal and external communications. Our Funding Approach There are two ways the PSC Foundation can contribute to a charity or community endeavour: • Major donation grant – providing grants to a charity or charitable cause sponsored by a PSC Group team member. • PSC team matching program – gives our team the ability to direct funding towards the issues and commitments that are important to them. A total of $20,000 (in six monthly lots of $10,000) will be available to match team fundraising efforts dollar for dollar for fundraising activities in your community. 8 PSC FOUNDATION (continued) Our Beneficiaries this Year ANNUAL REPORT 2018 9 PSC INSURANCE GROUP CORPORATE GOVERNANCE STATEMENT The Board is responsible for the corporate governance of the Group. Outlined are policies and practices adopted by the Group. We are committed to high standards in accordance with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations unless stated otherwise. Principle 1 – Lay solid foundations for management and oversight The Board’s role includes guiding the Group’s strategic direction, driving its performance and overseeing the activities of management and the operation of the Group. The respective roles and responsibilities of the Board and executives are defined in the Board Charter, a copy of which is available on the Group’s website at www.pscinsurancegroup.com.au. There is a clear delineation between the Board’s responsibility for the Group’s strategy and activities, and the day-to-day management of operations conferred upon the Group’s officers. More specifically, the Board is responsible for: Strategy and financial performance These include: • develop, approve and monitor the Group’s corporate strategy, investment and financial performance objectives; • determine the Group’s dividend policy; • evaluate, approve and monitor all aspects of capital management, including material acquisitions, divestitures and other corporate transactions, including the issue of securities of the Group and undertaking of new debt facilities or issue of debt securities; • approve all financial reports and material reporting and external communications by the Group; • appoint the Chair of the Board and, where appropriate, any deputy chair or senior independent director. Executive and Board management These include: • appoint, monitor and manage the performance of the Group’s directors; • manage succession planning for the Group’s executive directors and any other key management positions as identified from time to time; • ratify the appointment and, where appropriate, the removal of senior management of the Group and any subsidiaries; • review and approve the remuneration of individual Board members and senior executives, having regard to their performance. Audit and risk management These include: • appoint the external auditor and determine its remuneration and terms of appointment; • ensure effective audit, risk management and regulatory compliance programs are in place; • approve and monitor the Group’s risk and audit framework and its Risk Management Policy; • monitor the Group’s operations in relation to, and in compliance with, relevant regulatory and legal requirements; • approve and oversee the integrity of the accounting, financial and other corporate reporting systems and monitor the operation of these systems. 10 CORPORATE GOVERNANCE STATEMENT (continued) Corporate governance and disclosure These include: • evaluate the overall effectiveness of the Board, its committees and its corporate governance practices and policies; • supervise the public disclosure of all matters that the law and the ASX Listing Rules require to be publicly disclosed in a manner consistent with the Continuous Disclosure Policy; • approve the appointment of directors to committees established by the Board and oversee the conduct of each committee; The Group Secretary, Stephen Abbott, reports directly to the Chairman of the Board. The role of the Group Secretary is outlined in the Board Charter. The responsibility for the operation of the Group is delegated by the Board to the Managing Director. The Board and senior management monitor the performance of the Group through monthly reporting of the operating performance of each business, with reference to Board approved budgets and prior corresponding periods. The Remuneration and Nomination Committee monitors the performance of Key Management Personnel. All Directors have a written agreement setting out the terms of their employment. Principle 2 – Structure the Board to add value The Board currently comprises three Non-Executive Directors and two Executive Directors. Of these five Directors, two are independent Non-Executive Directors; Mr Antony Robinson and Mr Melvyn Sims. Whilst the Chairman is not independent, the Board are highly invested in the Group and believe this is in the best interests of all shareholders to drive the performance and add value. Mr Brian Austin, Mr Paul Dwyer and Mr John Dwyer are all substantial shareholders in the Group, directly and indirectly controlling approximately 58% of the shares on issue. The experience and expertise relevant to the position of Director held by each director at the date of this report is included in the Directors’ Report. The term in office held by each director at the date of this report is as follows: Name Mr Brian Austin – Chairman, Non-Executive Mr Paul Dwyer – Managing Director Mr John Dwyer – Executive Director Mr Antony Robinson – Independent Mr Melvyn Sims – Independent Term in office 8 years 8 years 8 years 3 years 2 years Principal 2.4 and 2.5 of the ASX Corporate Governance Principals and Recommendations recommends that the Board comprise a majority of Directors who are independent, and an independent Chairperson. The Board as currently composed does not comply with those recommendations. The Board has established two committees to assist it in its endeavours: • Audit & Risk Committee. • Remuneration & Nomination Committee. The charter of each of these committees can be reviewed at www.pscinsurancegroup.com.au. In considering the skills required by members of the Board, consideration is given to the following: • Insurance industry experience. • Executive management experience. • Financial acumen. • Legal knowledge. • UK business experience. • Operational and acquisition experience. ANNUAL REPORT 2018 11 PSC INSURANCE GROUP The Board has considered these requirements and is satisfied with the current composition. To enable performance of their duties, all directors: • are provided with appropriate information in a timely manner and can request additional information at any time, • have access to the Company Secretary, • are able to seek independent professional advice at the Company’s expense, • are able to undertake professional development opportunities to further develop their knowledge and skill needed to perform their role as director, and • have undergone an induction process to enable them to be effective Directors and gain substantial knowledge of the company. Principle 3 – Promote ethical and responsible decision making The Group is committed to operating honestly and ethically in all its business dealings and to embody this commitment has adopted a Code of Conduct which applies to all Directors, officers, employees, contractors or consultants of the Group as well as a Securities Trading Policy. Each of these has been prepared having regard to the ASX Corporate Governance Principles and Recommendations and is available on the Group’s website at www.pscinsurancegroup.com.au. The Group has adopted a Diversity Policy, a copy of which is available on the Group’s website at www.pscinsurancegroup. com.au. Where candidates for Board and Executive positions have commensurate experience and expertise, the Group will have a preference for appointments that enhance our diversity. Presently, the proportion of females employees across the Group is 46%. Principle 4 – Safeguard integrity in financial reporting The Group has established an Audit & Risk Management Committee to oversee the management of financial and internal risks. The Committee is chaired by Independent Non-Executive Director, Mr Robinson. Mr Paul Dwyer is the other member of this Committee. Principal 4.1 of the ASX Corporate Governance Principals and Recommendations recommends that the audit committee have at least three members all of whom are Non-executive Directors. The Audit & Risk Management Committee is governed by an Audit & Risk Management Committee Charter, a copy of which is available on the Group’s website at www.pscinsurancegroup.com.au. Key roles of the Committee include: • Review of the half year and full year statutory financial statements. • Consideration of the performance of the external audit and the periodic rotation of that role. • Review of risk management assessment and the Group’s Risk Management Policy and internal financial controls. • The Audit and Risk Management Committee met three times during the year and each member attended all meetings. Prior to the approval of the financial statements, the Board received a declaration from the Managing Director and Chief Financial Officer that, in their opinion, the financial records have been properly maintained, are in accordance with Australian Accounting Standards and give a true and fair view of the financial performance and financial position of the Group. The company’s auditor, Pitcher Partners, has indicated their representatives will be attending the Annual General Meeting. Principle 5 – Make timely and balanced disclosure The Group is committed to providing timely and balanced disclosure to the market in accordance with its Continuous Disclosure Policy, a copy of which is available on the Group’s website at www.pscinsurancegroup.com.au. The Continuous Disclosure Policy is designed to ensure compliance with ASX Listing Rules and the Corporations Act 2001. All disclosures are subject to Board ratification. 12 CORPORATE GOVERNANCE STATEMENT (continued) Principle 6 – Respect the rights of Shareholders The Group has adopted a Shareholder Communications Policy for Shareholders wishing to communicate with the Board, a copy of which is available on the Group’s website at www.pscinsurancegroup.com.au. The Group seeks to recognise numerous modes of communication, including electronic communication, to ensure that its communication with Shareholders is timely, frequent, clear and accessible. The Group provides investors with comprehensive and timely access to information about it, and its governance on its website at www.pscinsurancegroup.com.au. All Shareholders are invited to attend the Group’s annual meeting, either in person or by representative. The Board regards the annual meeting as an excellent forum in which to discuss issues relevant to the Group and accordingly encourages full participation by Shareholders. Shareholders have an opportunity to submit questions to the Board and to the Group’s auditor. Principle 7 – Recognise and manage risk In conjunction with the Group’s other corporate governance policies, the Group has adopted a Risk Management Policy, which is designed to assist the Group to identify, evaluate and mitigate risks affecting the Group. The Audit & Risk Management Committee is responsible for reviewing whether the Group has any material exposure to any economic and commercial risks, and if so, to develop strategies to manage such risks, and present such strategies to the Board. The Audit & Risk Management Committee is supported by the Group Manager Governance and Compliance who has a direct line of report into this committee. The Group has identified certain key risks that could materially impact its performance, and implemented measures to manage these risks. These include, however are not limited to: • Regulatory risk – as a Group of regulated financial services businesses, changes in regulation or actions by regulators could impact the Group; • Personnel risk – competent employees and management are very important to the ongoing success of the Group; • Financial risk – sound risk management of the financial controls around client monies and financial reporting are very important; • Underwriter risk – the Group’s underwriting agency businesses require the ongoing support of their underwriters. If this support is withdrawn it could impact the Group. • Risk management within the Group is further enhanced by a separate Compliance and Risk Management Committee that meets quarterly to assess operational compliance risks across the Group and is comprised of the Group’s compliance managers, finance staff, Company Secretary and chaired by the Group Manager, Governance and Compliance. This Committee provides a written report to each full Board Meeting. The Group Manager, Governance and Compliance attends each full Board Meeting. Compliance managers are responsible for monitoring and auditing insurance related operational functions to ensure continuing compliance with respective jurisdictional licensing requirements. Regular internal communication between the Group’s Management and Board supplements the Group’s Risk Management Policy. The Group at least annually evaluates the effectiveness of its risk management framework to ensure that its internal control systems and processes are monitored and updated on an ongoing basis. Under the Audit & Risk Management Committee Charter, the Audit & Risk Management Committee is responsible for providing an independent and objective assessment to the Board regarding the adequacy, effectiveness and efficiency of the Group’s risk management and internal control process. A copy of the Group’s Risk Management policy is available on the Group’s website at www.pscinsurancegroup.com.au. Principle 8 – Remunerate fairly and responsibly The Group has a Remuneration & Nomination Committee to oversee the level and composition of remuneration of the Group’s Directors and executives. The Group’s Remuneration & Nomination Committee is governed by a Remuneration & Nomination Committee Charter, a copy of which is available on the Group’s website at www.pscinsurancegroup.com.au. The committee comprises two Non-Executive Directors: • Mr Antony Robinson – Independent (Chairman) • Mr Brian Austin Principal 8.1 of the ASX Corporate Governance Principals and Recommendations recommends that the Remuneration and Nomination Committee have at least three members all of whom are Non-Executive Directors. ANNUAL REPORT 2018 13 PSC INSURANCE GROUP DIRECTORS’ REPORT The directors present their report together with the financial report of the consolidated entity consisting of PSC Insurance Group Limited and the entities it controlled, for the financial year ended 30 June 2018 and auditor’s report thereon. This financial report has been prepared in accordance with Australian Accounting Standards. Directors The names of directors in office at any time during or since the end of the year are: Brian Austin (appointed 10 December 2010) John Dwyer (appointed 10 December 2010) Paul Dwyer (appointed 10 December 2010) Antony Robinson (appointed 13 July 2015) Melvyn Sims (appointed 8 August 2016) The directors have been in office since the start of the year to the date of this report unless otherwise stated. Company Secretary Mr Stephen Abbott holds the office of Company Secretary (appointed 18 May 2015). Principal activities The principal activity of the consolidated entity during the course of the financial year remained unchanged, namely operating a diverse range of insurance services businesses across Australia, the UK and New Zealand, the results of which are disclosed in the attached financial statements. Results The consolidated profit after income tax and eliminating non-controlling interest attributable to the members of PSC Insurance Group Limited was $27,573,000 (2017: $19,724,000). Review of operations A review of the operations of the consolidated entity during the financial year and the results of those operations are as follows: Statutory revenue increased from $84.5m to $118.7m and statutory net profit after tax attributable to owners of PSC Insurance Group Limited increased from $19.7m to $27.6m. Underlying operating revenue from core operations increased 24% from $81.2m to $101.1m, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased 30% from $28.5m to $37.0m and underlying net profit after tax before amortisation (NPATA), increased 31% from $18.4m to $24.2m. Underlying EBITDA margin has improved from 35.0% to 36.6%. Gearing1 as measured on a book value basis has decreased from 36% to 27%. The Group remains well capitalised. Underlying return on equity was 22%. The Board maintains a positive view and outlook on the prospects of the business. Significant changes in the state of affairs There were no significant changes in the state of affairs of the consolidated entity during the financial year. 1 Gross borrowings/(Gross borrowings+Equity). 14 DIRECTORS’ REPORT (continued) After balance date events The consolidated entity acquired 70% of Turner Insurance Services Ltd on 2 July 2018. The consolidated entity acquired a shareholding of 19.6% in B P Marsh & Partners plc (BPM) on 5 July 2018. Refer to Note 32: Subsequent Events. Likely developments The consolidated entity will continue to focus on creating, acquiring and enhancing its operations to create shareholder value over the medium term to ensure our Clients get the best possible service and value. Environmental regulation The consolidated entity’s operations are not subject to any significant environmental Commonwealth or State regulations or laws. Dividend paid, recommended and declared Details of dividends paid, declared or recommended are as follows: 2018 $ 2017 $ (a) Dividends paid or declared by PSC Insurance Group Limited Dividends paid fully franked 15,639,646 10,148,015 (b) Dividends paid to non-controlling interests Dividends paid partially franked 300,000 – (c) Dividend declared after the reporting period and not recognised Since the end of the reporting period the directors have recommended/declared dividends in PSC Insurance Group Limited at 4.5 cents per share fully franked (2017: 4.0 cents) 11,000,408 9,039,957 Since the end of the reporting period the directors have recommended/declared dividends to non-controlling interests – – Shares under option Unissued ordinary shares of PSC Insurance Group Limited under option at the date of this report as follows: Date option granted 14 December 2015 8 August 2016 Number of unissued ordinary shares under option Issue price of shares Expiry date of the options 300,000 600,000 $1.00 per share 14 December 2020 $1.66 per share 8 July 2021 The options granted on 14 December 2015 were to Antony Robinson. Options granted on 8 August 2016 were to Melvyn Sims. No option has any right to participate in any other share issue of the company. ANNUAL REPORT 2018 15 PSC INSURANCE GROUP Shares issued on exercise of options No shares were issued during the reporting period or up to the date of this report on exercise of options. Information on Directors and Company Secretary The qualifications, experience and special responsibilities of each person who has been a director of PSC Insurance Group Limited at any time during or since 1 July 2017 is provided below, together with details of the company secretary as at the year end. Director Expertise, experience and qualifications Brian Austin Non-Executive Chairman Member of Remuneration and Nomination Committee Paul Dwyer Managing Director Dip Fin Serv (Ins) Member of Audit and Risk Management Committee John Dwyer Executive Director Dip Fin Serv (Ins) Brian Austin was appointed to the Board on 10 December 2010. With over 35 years industry experience, Mr Austin has held senior executive positions in the insurance industry, including CEO of OAMPS Insurance Brokers Limited. Over that time Mr Austin has been instrumental in setting the strategy of capital raising and acquisitions. The executive positions Mr Austin has held has enabled him to develop a global network of key relationships that allow the future growth strategies of the entity to be pursued with much confidence. Mr Austin is a Director of the ASX listed AMA Group Limited. Paul Dwyer was appointed to the Board on 10 December 2010. Prior to being the Founder of PSC Insurance Group, Mr Dwyer held a senior executive position with OAMPS Insurance Brokers Limited and previous to that role was a Regional Underwriter with CGU. As Group Managing Director and Founder of the PSC Insurance Group, Mr Dwyer’s focus remains the strategic direction of the entity, exploring acquisition and organic growth opportunities and to manage and work with the executive and staff within the entity to continually improve business operations. Mr Dwyer continues to drive the business ensuring that the finances and decision-making are robust, in order to deliver the financial outcomes of the Company. Mr Dwyer is a Director of the ASX listed Johns Lyng Group Limited. John Dwyer was appointed to the Board on 10 December 2010. Mr Dwyer has over 30 years experience in the insurance industry, spending time with QBE as a Regional Underwriting Manager, commencing a joint venture with OAMPS Insurance Brokers Limited and eventually becoming Eastern Region Manager (NSW & ACT). As Director of Broking across the PSC Insurance Group, Mr Dwyer brings specialist business integration and practical operational skills pivotal to a growing business. Mr Dwyer has not held directorships of other listed companies in the last three years. Antony Robinson Non-Executive Director B Com (Melb), ASA, MBA (Melb) Chair of Audit and Risk Management Committee and Remuneration and Nomination Committee Antony Robinson was appointed to the Board on 13 July 2015. Mr Robinson has significant experience in wealth management and insurance, including Managing Director of Centrepoint Alliance Limited, Chief Executive Officer and Executive Director of IOOF Holdings Ltd and OAMPS Limited, joint Managing Director of Falkiners Stockbroking, Managing Director of WealthPoint, and senior executive positions at Link Telecommunications and Mayne Nickless. Mr Robinson is a Director of three ASX listed entities being Bendigo and Adelaide Bank Limited, Pacific Current Group Limited and Longtable Group Limited and holds a number of directorships of private companies, including River Capital Pty Limited. 16 DIRECTORS’ REPORT (continued) Director Expertise, experience and qualifications Melvyn Sims Non-Executive Director LLB (Hons) Nottm. Stephen Abbott BBus, CA, CTA Directors’ meetings Melvyn Sims was appointed to the Board on 8 August 2016. Mr Sims is a highly regarded London based corporate lawyer with extensive experience in the insurance industry gained during his 27 years as a partner in the international law firm DLA Piper and currently DWF Law. Over the course of Mr Sims’ career he has held senior management roles and advised businesses in commercial and transactional matters often with an international perspective and in diverse markets ranging from general retail, aviation, sport and leisure through to regulated financial services businesses. Mr Sims has extensive board experience, having served as a board member of the UK listed Towergate Insurance Limited for over 15 years. Mr Sims has not held directorships of other listed companies in the last three years. Stephen Abbott was appointed Company Secretary on 18 May 2015, having joined the PSC Insurance Group in March 2012. Mr Abbott has over 35 years experience in accounting and finance both within industry and commerce and professional services firms with the last 11 years in insurance broking. The number of meetings of the Board of Directors and of each Board Committee held during the financial year and the numbers of meetings attended by each Director were: Paul Dwyer John Dwyer Brian Austin Antony Robinson Melvyn Sims Board of Directors Audit & Risk Committee Remuneration Committee Eligible to attend Attended Eligible to attend Attended Eligible to attend Attended 6 6 6 6 6 6 6 6 6 6 3 3 3 3 1 1 1 1 In addition to the scheduled Board Meetings, the Board has informal discussions on a regular basis to consider relevant issues. It also discusses strategic, operational and risk matters with senior management on an ongoing basis. Director’s interests in contracts Directors’ interests in contracts are disclosed in the Remuneration Report. ANNUAL REPORT 2018 17 PSC INSURANCE GROUP Directors’ interests in shares or options Directors’ relevant interests in shares of PSC Insurance Group Limited or options over shares in the company are detailed below. Directors’ relevant interests in: Paul Dwyer John Dwyer Brian Austin Antony Robinson Melvyn Sims Ordinary shares of PSC Insurance Group Limited Options over shares in PSC Insurance Group Limited 70,223,000 35,280,522 35,410,600 – – – 418,000 300,000 – 600,000 Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 in relation to the audit for the financial year is provided with this report. Non-Audit Services Non-audit services are approved by resolution of the Audit Committee to the Board. Non-audit services provided by the auditors of the consolidated entity, Pitcher Partners (Melbourne), network firms of Pitcher Partners, and other non-related audit firms, are detailed below. The Directors are satisfied that the provision of the non-audit services during the year by the auditor is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 for the following reasons: • all non-audit services were subject to the corporate governance procedures adopted by PSC Insurance Group Limited and have been reviewed and approved by the Audit Committee to ensure they do not impact on the integrity and objectivity of the auditor; and • the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for PSC Insurance Group Limited or any of its related entities, acting as an advocate for PSC Insurance Group Limited or any of its related entities, or jointly sharing risks and rewards in relation to the operations or activities of PSC Insurance Group Limited or any of its related entities. Amounts paid/payable to Pitcher Partners (Melbourne) for non-audit services: Taxation Services Other Services Amounts paid/payable to non-related auditors of group entities for non-audit services: Taxation services Other services Total Amount Paid/Payable 2018 $ 2017 $ 18,715 – 18,715 32,086 19,522 51,609 63,530 29,550 4,743 34,293 14,115 8,402 22,517 56,810 18 DIRECTORS’ REPORT (continued) Indemnification and insurance of directors, officers and auditors During or since the end of the year, the consolidated entity has given indemnity or entered into an agreement to indemnify, or paid or agreed to pay insurance premiums in order to indemnify the Directors of the consolidated entity. Further disclosure required under section 300(9) of the Corporations Act 2001 is prohibited under the terms of the contract. No indemnities have been given or insurance premiums paid, during or since the end of the year, for any person who is or has been an auditor of the consolidated entity. Proceedings on behalf of the consolidated entity No person has applied for leave of Court to bring proceedings on behalf of PSC Insurance Group Limited or any of its subsidiaries. Rounding Amounts In accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, the amounts in the Directors’ Report and in the Consolidated Financial Statements have been rounded to the nearest one thousand dollars, unless otherwise indicated. Remuneration Report (Audited) The Directors present the consolidated entity’s 2018 Remuneration Report which details the remuneration information for PSC Insurance Group Limited’s Executive Directors, Non-Executive Directors and other Key Management Personnel. A. Details of the Key Management Personnel Directors Brian Austin Antony Robinson Melvyn Sims Paul Dwyer John Dwyer Period of Responsibility Position Full Year Full Year Full Year Full Year Full Year Chairman, Non-Executive Director Independent, Non-Executive Director Independent, Non-Executive Director Managing Director Executive Director Other Key Management Personnel Period of Responsibility Position Rohan Stewart Joshua Reid Full Year Full Year Chief Executive Officer Chief Financial Officer ANNUAL REPORT 2018 19 PSC INSURANCE GROUP B. Remuneration and Nomination Committee Remuneration Policies The Remuneration and Nomination Committee of the Board of Directors was established on 1 June 2015 and is responsible for making recommendations to the Board on the remuneration arrangements for all key management personnel. The current members of the Remuneration and Nomination Committee are: Brian Austin and Antony Robinson. The Remuneration and Nomination Committee assesses the appropriateness of the nature and amount of remuneration of executives on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum shareholder benefit from the retention of high quality, high performing directors and executive team. In determining the level and composition of executive remuneration, the Remuneration and Nomination Committee may also engage external consultants to provide independent advice. The primary responsibility of the Remuneration and Nomination Committee is to review and recommend to the Board: • Executive remuneration and incentive policies and practices; • The Executive Directors’ total remuneration having regard to remuneration and incentive policies; • The design and total proposed payments from any incentive plan and reviewing the performance hurdles for any equity based plan; • The remuneration and related policies of Non-Executive Directors for serving on the board and any committee (both individually and in total); and • Any other responsibilities as determined by the Remuneration and Nomination Committee or the Board from time to time. Remuneration Strategy The remuneration strategy of the consolidated entity is designed to attract, motivate and retain employees, Executives and Non-Executive Directors by identifying and rewarding high performers and recognising the contribution of executives and employees to the continued growth and success of the consolidated entity. To this end, the key objectives of the consolidated entity’s reward framework are to: • Align remuneration with the consolidated entity’s business strategy; • Offer an attractive mix of remuneration benchmarked against the applicable market’s region; • Provide strong linkage between individual and the consolidated entity’s performance and rewards; and • Support the corporate mission statement, values and policies through the approach to recruiting, organizing and managing people. Remuneration Structure In accordance with best practice corporate governance, the structure of the Non-Executive Directors and executive remuneration is separate and distinct. 20 DIRECTORS’ REPORT (continued) Non-Executive Director Remuneration Structure The ASX Listing Rules specify that an entity must not increase the total aggregate amount of remuneration of Non-Executive Directors without the approval of holders of its ordinary securities. The Board and the Remuneration and Nomination Committee, considers the level of remuneration required to attract and retain directors with the necessary skills and experience for the consolidated entity’s Board. This remuneration is reviewed with regard to market practice and directors’ duties and accountability. The consolidated entity set the following annual Non-Executive Directors’ fees: • Chairman: $300,000 per annum inclusive of superannuation; • Non-Executive Directors (Australia based): $60,000 per annum inclusive of superannuation; and • Non-Executive Directors (United Kingdom based): £50,000 per annum. The consolidated entity determines the maximum amount for remuneration, including thresholds for share-based remuneration for executives, by resolution. The remuneration received by the Non-Executive Directors for the year ended 30 June 2018 is detailed in Table 1 of this section of the report. Executive Remuneration Structure The contracts for service between the consolidated entity and executives are on a continuing basis, the terms of which are not expected to change in the immediate future. Remuneration may consist of the following elements: • Fixed remuneration (base salary and superannuation); • Variable remuneration – short term incentives (STI) in the form of performance based incentives; and • Long term incentive (LTI) (shares, options, performance rights and/or loan funded shares). Fixed Remuneration Fixed remuneration is reviewed annually by the Board/Remuneration and Nomination Committee. The process consists of a review of the consolidated entity and individual performance, relevant comparative remuneration from external and internal sources. Variable Remuneration – Short-Term Incentive (STI) Objective The key objective of the STI program is to link the achievement of the consolidated entity’s operational targets with the remuneration received by the Managing Director charged with meeting those targets. Structure Any STI payments granted depends on the extent to which specific targets set at the beginning of the financial year or on appointment are met. The Key Milestones or Key Performance Indicators (KPIs) cover individual and organisational financial measures of performance. The consolidated entity has predetermined benchmarks that must be met in order to trigger bonus payments. On a financial year basis, after consideration of performance against the Key Milestones or KPIs, the Remuneration and Nomination Committee, in line with its responsibilities determine the amount, if any, of the STI to be paid to the Managing Director. There have been no STI payments to the Managing Director in the 2018 year. (2017: $200,000) See Table 3 ANNUAL REPORT 2018 21 PSC INSURANCE GROUP Variable Remuneration – Long-Term Incentive (LTI) Objective The objectives of providing LTI’s are: to attract, motivate and retain key PSC Directors and staff through the acquisition of, or entitlements to, shares and options. Structure The Board offers LTI’s to reward the performance of Directors and staff, which is in alignment with shareholders’ interests and the long-term benefit of the consolidated entity. LTI awards are made under the PSC Insurance Group Limited Long Term Incentive Plan (Plan). Rewards under the LTI Plan will only vest and be exercisable if the applicable performance hurdles to vesting conditions have been satisfied, waived by the Board or are deemed to have been satisfied under the Plan Rules. Service Agreements The consolidated entity has entered into Agreements with all Executives, including the Managing Director. The consolidated entity may terminate the Executive Director’s Agreements by providing at least six month’s written notice or providing payment in lieu of the notice period (based on the fixed component of the Executive’s remuneration). The consolidated entity may terminate the contract at any time without notice if serious misconduct has occurred. Managing Director’s Remuneration Under Paul Dwyer’s Agreement his fixed remuneration is $25,000 per month inclusive of superannuation giving a total of $300,000 inclusive of superannuation per annum. Mr Dwyer may also be eligible to participate in the Long Term Incentive arrangements operated by the consolidated entity in accordance with the terms and conditions governing those arrangements and as agreed to by the Board. 22 DIRECTORS’ REPORT (continued) C. (a) Table 1 Details of key management personnel remuneration Directors’ remuneration: Short-Term Post employment Long-term payments TOTAL related % of total Share-based perform ance Options as Total 2018 Executive Directors Paul Dwyer (i) John Dwyer (ii) Non-Executive Directors Brian Austin (iii) Antony Robinson Melvyn Sims Salary fees $ Cash bonus $ Non- monetary $ Other $ 300,000 300,000 300,000 54,795 86,775 1,041,570 – – – – – – – – – – – – – – – – – – (i): Paul Dwyer provides his services via Paul Dwyer Holdings Pty Ltd. (ii): John Dwyer provides his services via Glendale Dwyer Pty Ltd (ATF Dwyer Family Trust). (iii): Brian Austin provides his services via Melimar Estate Pty Ltd. Short-Term Post employment Long-term payments TOTAL related % of total Share-based perform ance Options as Total 2017 Executive Directors Paul Dwyer John Dwyer Non-Executive Directors Brian Austin Antony Robinson Melvyn Sims Salary fees $ Cash bonus $ Non- monetary $ Other $ 300,000 200,000 300,000 300,000 54,795 75,272 – – – – 1,030,067 200,000 – – – – – – – – – – 58,814 58,814 Super annu- Retire ment Termin ation benefits benefits Incent ive plans Options ation $ – – – – 5,205 5,205 ation $ – – – – 5,205 5,205 $ – – – – – – $ – – – – – – $ – – – – – – $ – – – – – – $ – – – – – – $ – – – – – – $ – – – – – – $ – – – – 300,000 300,000 300,000 60,000 86,775 1,046,775 $ $ 500,000 300,000 300,000 60,000 286,871 1,446,871 152,785 152,785 % – – – – – – % – – – – – – % – – – – – – % – – – – – – Super annu- Retire ment Termin ation benefits benefits Incent ive plans Options ANNUAL REPORT 2018 23 PSC INSURANCE GROUP C. (a) Table 1 Details of key management personnel remuneration Directors’ remuneration: (i): Paul Dwyer provides his services via Paul Dwyer Holdings Pty Ltd. (ii): John Dwyer provides his services via Glendale Dwyer Pty Ltd (ATF Dwyer Family Trust). (iii): Brian Austin provides his services via Melimar Estate Pty Ltd. 2018 Executive Directors Paul Dwyer (i) John Dwyer (ii) Non-Executive Directors Brian Austin (iii) Antony Robinson Melvyn Sims 2017 Executive Directors Paul Dwyer John Dwyer Non-Executive Directors Brian Austin Antony Robinson Melvyn Sims Short-Term Non- Salary fees Cash bonus monetary 300,000 300,000 300,000 54,795 86,775 1,041,570 $ $ $ – – – – – – $ – – – – $ – – – – – – $ – – – – – – Other $ – – – – – – – – – – Other $ 58,814 58,814 Short-Term Non- Salary fees Cash bonus monetary 300,000 200,000 300,000 300,000 54,795 75,272 1,030,067 200,000 Post employment Super annu- ation $ Retire ment benefits $ Termin ation benefits $ Long-term Incent ive plans $ Share-based payments Options $ – – – 5,205 – 5,205 – – – – – – – – – – – – – – – – – – – – – – – – Post employment Super annu- ation $ Retire ment benefits $ Termin ation benefits $ Long-term Incent ive plans $ Share-based payments Options $ – – – 5,205 – 5,205 – – – – – – – – – – – – – – – – – – – – – – 152,785 152,785 Total perform ance related Options as % of total % – – – – – – % – – – – – – Total perform ance related Options as % of total % – – – – – – % – – – – – – TOTAL $ 300,000 300,000 300,000 60,000 86,775 1,046,775 TOTAL $ 500,000 300,000 300,000 60,000 286,871 1,446,871 24 DIRECTORS’ REPORT (continued) (b) Table 2 Other Key Management Personnel’s remuneration: 2018 Other Key Management Personnel Rohan Stewart (i) Joshua Reid (i): Rohan Stewart provides his services via H&S Nominee Holdings Pty Ltd. (ii): These individuals were not Key Management Personnel in 2017. Short-Term Salary fees $ Cash bonus $ Non- monetary $ 350,000 273,973 623,973 – – – – – – Other $ – – – Post employment Long-term payments TOTAL related % of total Share-based perform ance Options as Super annu- Retire ment Termin ation benefits benefits Incent ive plans Options ation $ – 26,027 26,027 $ – – – $ – – – $ – – – $ – – – $ 350,000 300,000 650,000 Total % – – – % – – – ANNUAL REPORT 2018 25 PSC INSURANCE GROUP (b) Table 2 Other Key Management Personnel’s remuneration: 2018 Other Key Management Personnel Rohan Stewart (i) Joshua Reid (i): Rohan Stewart provides his services via H&S Nominee Holdings Pty Ltd. (ii): These individuals were not Key Management Personnel in 2017. Salary fees Cash bonus monetary Short-Term $ – – – Non- $ – – – Other $ – – – $ 350,000 273,973 623,973 Post employment Super annu- ation $ Retire ment benefits $ Termin ation benefits $ Long-term Incent ive plans $ Share-based payments Options $ TOTAL $ – 26,027 26,027 – – – – – – – – – – – – 350,000 300,000 650,000 Total perform ance related Options as % of total % – – – % – – – 26 DIRECTORS’ REPORT (continued) D. (a) Relationship between remuneration and consolidated entity performance Remuneration not dependent on satisfaction of performance condition The non-executives remuneration policy is not directly related to the consolidated entity’s performance. The Board considers a remuneration policy based on short-term returns may not be beneficial to the long-term creation of wealth by the consolidated entity for shareholders. (b) Remuneration dependent on satisfaction of performance condition A portion of the Managing Director’s Remuneration in 2017 was based on attainment of IPO prospectus forecasts. This performance-based remuneration was granted to the Managing Director. Table 3 Year 2018 2017 Executive Director Paul Dwyer Paul Dwyer Amount included in Remun eration $ Awarded/ Guaranteed % Forfeited % Estimated Maximum total value of Bonus 0 200,000 0% 100% 0% 0% – 200,000 (c) Consequences of the consolidated entity’s performance on shareholder wealth The following table summarises the consolidated entity’s performance and key performance indicators: Table 4 Revenue and other income 118,685,706 84,475,859 67,766,163 52,071,674 % increase in revenue and other income 40% 25% 30% 28% 2018 2017 2016 2015 Profit before tax % increase in profit before tax Change in share price Dividend paid to shareholders Return on capital Total remuneration of KMP 40,327,294 27,114,780 15,973,533 11,778,678 49% $0.60 70% $0.55 36% N/a 24% N/a 15,639,646 10,148,015 6,505,295 1,550,000 11% 12% 16% 35% 1,696,775 1,446,871 1,051,346 900,000 Total performance based remuneration – 200,000 – – ANNUAL REPORT 2018 27 PSC INSURANCE GROUP E. (a) Key Management Personnel’s share-based compensation Details of compensation Options In 2018 no options were granted to Key Management Personnel. (b) Shares issued on exercise of compensation options In 2018 no options were exercised by Key Management Personnel. F. (a) Key Management Personnel’s equity holdings Number of options held by key management personnel As at 30 June 2018, Key Management Personnel hold options under PSC’s Long Term Incentive Plan to purchase 900,000 ordinary shares of the consolidated entity. Table 5 2018 Directors Antony Robinson Melvyn Sims Balance 1/07/17 Granted as remuneration Exercise of options Net change Other Balance 30/06/18 300,000 600,000 900,000 – – – – – – – – – 300,000 600,000 900,000 (b) Number of shares held by Key Management Personnel (consolidated) The relevant interest of each Key Management Personnel in the share capital of the consolidated entity as notified the ASX as at 30 June 2018 is as follows: Table 6 2018 Directors Brian Austin Antony Robinson Melvyn Sims Paul Dwyer John Dwyer Executives Rohan Stewart Joshua Reid Balance 1/07/17 LTIP Allocation Received as Remuneration Exercise of options Net change Other Balance 30/06/18 35,310,600 418,000 – 70,223,000 35,150,522 3,142,479 1,000,000 145,244,601 – – – – – – – – – – – – – – – – – – – – – – – – 100,000 35,410,600 – – – 418,000 – 70,223,000 130,000 35,280,522 – – 3,142,479 1,000,000 230,000 145,474,601 28 DIRECTORS’ REPORT (continued) G. (a) Loans to and from Key Management Personnel Aggregate of loans made In the financial year, a loan of $563,000 canadian dollars was made to, and repaid by Rohan Stewart, at an interest rate of 5.65%. There has been no other loans made, guaranteed or secured, directly or indirectly, by the consolidated entity and any of its subsidiaries, in the financial year to any other key management personnel, their close family members and entities related to them. (b) Aggregate of loans made is greater than $100,000 With the exception of the disclosure in G (a) above, there have been no loans made, guaranteed or secured, directly or indirectly, by the consolidated entity and any of its subsidiaries, in the financial year to a particular key management person, close members of the family of the key management person and entities related to them greater than $100,000. (c) Aggregate of loans received There have been no loans received, guaranteed or secured, directly or indirectly, by the consolidated entity and any of its subsidiaries, in the financial year to a particular key management person, close members of the family of the key management person and entities related to them. Other transactions with Key Management Personnel H. The Lead Agency Pty Ltd, Fuse Recruitment Pty Ltd and ADD Aviation Services Pty Ltd are related parties as they are entities where John Dwyer, Paul Dwyer and Brian Austin or their closely related entities are shareholders. Johns Lyng Group, JLG Investments Unit Trust and Retail Sports Unit Trust are related parties where Paul Dwyer holds Directorships. During the year ended 30 June 2018 the following related entities provided or received services to/from the consolidated entity: • The Lead Agency were paid for marketing services provided. Total value of these goods and services was $353,422 (2017: $338,073). • Fuse Recruitment were paid for the provision of recruitment services and the provision of temporary staff. Total value of these goods and services was $166,373 (2017: $106,575). • ADD Aviation were paid for the provision of transport services. Total value of these goods and services was $266,390 (2017: $66,368). All the above services supplied were in the normal course of business and on normal terms and conditions. Additionally, during the year the PSC Insurance Group Limited provided insurance services to related parties of a Director totalling $334,320 (2017: $258,262). The services supplied were in the normal course of business and on normal commercial terms and conditions. Additionally, during the year the PSC Insurance Group Limited received trust distributions from a related party of a Director totalling $2,186,386 (2017: 1,466,966). No other transactions occurred between key management personnel of the entity, their personally related entities or other related parties. ANNUAL REPORT 2018 29 PSC INSURANCE GROUP I. No remuneration consultants were engaged during the course of the 2018 financial year. Use of remuneration consultants Signed in accordance with a resolution of the directors Brian Austin Chairman Melbourne Date: 20 August 2018 Paul Dwyer Managing Director Melbourne Date: 20 August 2018 30 AUDITOR’S INDEPENDENCE DECLARATION PSC INSURANCE GROUP LIMITED AND CONTROLLED ENTITIES AUDITOR’S INDEPENDENCE DECLARATION TO THE DIRECTORS OF PSC INSURANCE GROUP LIMITED In relation to the independent audit for the year ended 30 June 2018, to the best of my knowledge and belief there have been: (i) (ii) No contraventions of the auditor independence requirements of the Corporations Act 2001; and No contraventions of APES 110 Code of Ethics for Professional Accountants. This declaration is in respect of PSC Insurance Group Limited and the entities it controlled during the year. S SCHONBERG Partner 22 August 2018 PITCHER PARTNERS Melbourne An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane | Newcastle An independent member of Baker Tilly International ANNUAL REPORT 2018 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME for the Year ended 30 June 2018 31 PSC INSURANCE GROUP Revenue and other income Fee and commission income Other revenue Other income Less: expenses Administration and other expenses Depreciation and amortisation expense Employee benefits expense Occupancy expense Finance costs Employee contractors Information technology costs Professional fees Profit before income tax expense Income tax expense Net profit from continuing operations Other comprehensive income Items that may be reclassified subsequently to profit and loss Exchange differences on translation of foreign operations Other comprehensive income for the year Total comprehensive income Profit is attributable to: – Owners of PSC Insurance Group Limited – Non-controlling interests Total comprehensive income is attributable to: – Owners of PSC Insurance Group Limited – Non-controlling interests Notes 30 June 2018 $’000 30 June 2017 $’000 3 3 3 3 4 4 4 4 5 95,158 5,046 18,482 118,686 (18,493) (2,307) (43,116) (3,222) (2,789) (2,866) (3,966) (1,600) (78,359) 40,327 (12,505) 27,822 77,554 3,674 3,247 84,475 (7,443) (1,515) (36,717) (2,902) (1,761) (2,282) (3,287) (1,453) (57,360) 27,115 (7,144) 19,971 826 826 (622) (622) 28,648 19,349 27,573 249 27,822 28,399 249 28,648 19,724 247 19,971 19,102 247 19,349 Earnings per share for profit attributable to the equity holders of the parent entity: Diluted earnings per share Basic earnings per share 25 25 11.6 cents 8.8 cents 11.6 cents 8.7 cents The above statement should be read in conjunction with the accompanying notes. 32 CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 30 June 2018 Current assets Cash and cash equivalents Receivables Other current assets Total current assets Non-current assets Receivables Other financial assets Equity accounted investments Property, plant and equipment Deferred tax asset Intangible assets Total non-current assets Total assets Current liabilities Payables Borrowings Provisions Current tax liabilities Other liabilities Total current liabilities Non-current liabilities Borrowings Provisions Deferred tax liabilities Other liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Equity attributable to owners of PSC Insurance Group Limited Non-controlling interests Total equity The above statement should be read in conjunction with the accompanying notes. Notes June 2018 $’000 June 2017 $’000 7 8 9 8 10 11 13 5 14 15 16 17 5 18 16 17 5 18 19 20 20 21 160,972 80,124 359,938 328,805 3,098 2,167 524,008 411,096 3,189 24,036 8,151 12,967 3,543 95,672 147,558 671,566 3,747 5,863 8,123 11,963 1,893 73,078 104,667 515,763 443,420 375,437 935 2,930 3,279 6,945 635 2,031 3,239 6,755 457,509 388,097 53,410 43,748 398 13,482 1,347 68,637 526,146 145,420 140,395 (37,368) 40,429 143,456 1,964 145,420 337 4,835 774 49,694 437,791 77,972 85,994 (38,194) 28,496 76,296 1,676 77,972 ANNUAL REPORT 2018 33 PSC INSURANCE GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2018 Consolidated Balance as at 1 July 2016 Profit for the year Exchange differences on translation of foreign operations, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares in lieu of cash for acquisition of subsidiary undertaking Converted Share Options Employee share issues Dividends paid Total transactions with owners Balance as at 30 June 2017 Consolidated Entity Balance as at 1 July 2017 Profit for the year Exchange differences on translation of foreign operations, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Increase in non-controlling interests Capital Raising issue Capital Raising issue costs Shares in lieu of cash for acquisition of subsidiary undertaking Dividends paid Total transactions with owners Balance as at 30 June 2018 Share capital $’000 Reserves $’000 85,194 (37,740) – – – 500 300 – – 800 85,994 – (622) (622) – – 168 – 168 (38,194) Share capital $’000 Reserves $’000 85,994 (38,194) – – – – 55,002 (1,155) 554 – 54,401 140,395 – 826 826 – – – – – – (37,368) The above statement should be read in conjunction with the accompanying notes. Retained Earnings $’000 18,920 19,724 – 19,724 – – – (10,148) (10,148) 28,496 Retained Earnings $’000 28,496 27,573 – 27,573 – – – – (15,640) (15,640) 40,429 Non- controlling Interest $’000 Total Equity $’000 1,429 247 – 247 – – – – – 1,676 Non- controlling Interest $’000 1,676 249 – 249 339 – – – (300) 39 1,964 67,803 19,971 (622) 19,349 500 300 168 (10,148) (9,180) 77,972 Total Equity $’000 77,972 27,822 826 28,648 339 55,002 (1,155) 554 (15,940) 38,800 145,420 34 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 30 June 2018 Cash flow from Operating activities Receipts from customers Payments to suppliers and employees Trust distributions received Interest received Interest paid Income tax paid Operating cash before movement in customer trust accounts Net movement in customer trust accounts Net cash provided by operating activities Cash flow from investing activities Payment for property, plant and equipment Proceeds from sale of financial assets Proceeds from sale of equity investments Payment for deferred consideration/business acquisitions Proceeds from loan Payment for other investments Payment for other financial assets Proceeds from sale of shares held for resale Notes 2018 $’000 2017 $’000 22(b) 98,062 (71,973) 2,086 1,678 (2,789) (6,608) 20,456 35,344 55,800 80,472 (61,191) 1,100 1,110 (1,761) (3,676) 16,054 (8,608) 7,446 (1,815) (10,030) 578 505 – – (21,821) (8,785) – (851) – – – (2,854) (1,400) – Net cash flow provided by (used in) investing activities (23,404) (23,069) Cash flow from financing activities Proceeds from borrowings Repayments of borrowings Share Issues : Market Capital raising costs Dividends paid Increase/(Decrease) in loans to related entities Net cash provided by (used in) financing activities Reconciliation of cash Cash at beginning of the financial year Net increase in cash Effect of exchange rate fluctuation on cash held 14,352 (4,660) 55,002 (1,650) (15,940) 237 47,341 80,124 79,737 1,111 36,445 (18,782) 300 – (10,148) 2,618 10,433 87,252 (5,190) (1,938) Cash at end of financial year 22(a) 160,972 80,124 The above statement should be read in conjunction with the accompanying notes. ANNUAL REPORT 2018 35 PSC INSURANCE GROUP NOTES TO THE FINANCIAL STATEMENTS year ended 30 June 2018 Note 1: Statement of Significant Accounting Policies The following is a summary of significant accounting policies adopted by the consolidated entity in the preparation and presentation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. Basis of preparation of the financial report (a) This financial report is a general purpose financial report that has been prepared in accordance with the Corporations Act 2001 and Australian Accounting Standards, Interpretations and other applicable authoritative pronouncements of the Australian Accounting Standards Board (AASB). The financial report covers PSC Insurance Group Limited and controlled entities as a consolidated entity. PSC Insurance Group Limited is a company limited by shares, incorporated and domiciled in Australia. The address of PSC Insurance Group Limited’s registered office and principal place of business is 96 Wellington Parade, East Melbourne, Victoria, 3002. PSC Insurance Group Limited is a for-profit entity for the purpose of preparing the financial statements. Compliance with IFRS The consolidated financial statements of the consolidated entity also comply with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Historical cost convention The financial report has been prepared under the historical cost convention, as modified by revaluations to fair value for certain classes of assets as described in the accounting policies. Fair value measurement For financial reporting purposes, ‘fair value’ is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants (under current market conditions) at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. When estimating the fair value of an asset or liability, the consolidated entity uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Inputs to valuation techniques used to measure fair value are categorised into three levels according to the extent to which the inputs are observable: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. • Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. • Level 3 inputs are unobservable inputs for the asset or liability. Significant accounting estimates The preparation of the financial report requires the use of certain estimates and judgements in applying the consolidated entity’s accounting policies. Those estimates and judgements significant to the financial report are disclosed in Note 2 to the consolidated financial statements. (b) The financial report has been prepared on a going concern basis. Going concern 36 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Principles of consolidation Note 1: Statement of Significant Accounting Policies (continued) (c) The consolidated financial statements are those of the consolidated entity, comprising the financial statements of the parent entity and of all entities which the parent entity controls. The consolidated entity controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies, which may exist. All inter-company balances and transactions, including any unrealised profits or losses have been eliminated on consolidation. Subsidiaries are consolidated from the date on which control is established and are de-recognised from the date that control ceases. Equity interests in a subsidiary not attributable directly or indirectly to the consolidated entity are presented as non-controlling interests. Non-controlling interests are initially recognised either at fair value or at the non-controlling interests’ proportionate share of the acquired entity’s net identifiable assets. This decision is made on an acquisition-by-acquisition basis. Non-controlling interests in the results of subsidiaries are shown separately in the consolidated Statement of Profit or Loss and other Comprehensive Income and consolidated Statement of Financial Position respectively. Details of the consolidated entity’s controlling and non-controlling interests are detailed in Note 21. Revenue (d) Commission, brokerage and fees are recognised when the related service has been provided and it is probable that the consolidated entity will be compensated for services rendered and the amount of consideration for such services can be reliably measured. An allowance is made for anticipated lapses and cancellations. Interest income is recognised when it becomes receivable on a proportional basis taking into account the interest rates applicable to the financial assets. Dividend income is recognised when the right to receive a dividend has been established. Dividends received from associates and joint ventures are accounted for in accordance with the equity method. Profit on sale of financial assets is determined as the difference between the carrying amount of the asset at the time of disposal and the proceeds of disposal, net of disposal costs. This is recognised as an item of revenue in the year in which the significant risks and rewards of ownership transfer to the buyer. Other revenue is recognised when it is received or the right to receive payment is established. All revenue is stated net of the amount of goods and services tax (GST). Cash and cash equivalents (e) Cash and cash equivalents, and cash held on trust, in the Consolidated Statement of Financial Position comprise cash at bank, in hand and short-term deposits with an original maturity of three months or less. Cash held on trust is held for insurance premiums received from policyholders which will ultimately be paid to underwriters. Cash held on trust cannot be used to meet business obligations/operating expenses other than payments to underwriters and/or refunds to policyholders. For the purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents as defined above are shown net of outstanding bank overdrafts. ANNUAL REPORT 2018 37 PSC INSURANCE GROUP Receivables from broking, reinsurance and underwriting agency operations (f) Receivables from broking, reinsurance and underwriting agency operations are initially recognised based on the invoiced amount to customers. After initial recognition, provision is made for lapses or cancellations of insurance policies or other matters that may lead to cancellation. Receivables from reinsurance are initially recognised based on contract value. Following fulfilment of the contract, amounts are then invoiced to customers. Invoices are generally due for settlement within 14 to 60 days. Collectability of trade receivables is reviewed on an ongoing basis. Property, plant and equipment (g) Each class of property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation The depreciable amounts of all property, plant and equipment are depreciated over their estimated useful lives commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The useful lives for each class of assets are: Depreciation rate Depreciation Basis Leasehold improvements at cost 2.5% – 30% Straight line and diminishing Value Buildings at cost Office equipment at cost Computer equipment at cost Motor Vehicles at cost 2.5% 2%-67% 10% – 67% 12.50% Straight line Straight line and diminishing value Straight line and diminishing value Straight line Leases (h) Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Operating leases Lease payments for operating leases are recognised as an expense on a straight-line basis over the term of the lease. Lease incentives received under operating leases are recognised as a liability and amortised on a straight-line basis over the life of the lease term. 38 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Business combinations Note 1: Statement of Significant Accounting Policies (continued) (i) A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses and results in the consolidation of the assets and liabilities acquired. Business combinations are accounted for by applying the acquisition method. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquire. Deferred consideration payable is measured at its acquisition date fair value. Contingent consideration to be transferred by the acquirer is recognised at the acquisition- date fair value. At each reporting date subsequent to the acquisition, contingent consideration payable is measured at its fair value with any changes in the fair value recognised in profit or loss unless the contingent consideration is classified as equity, in which case the contingent consideration is carried at its acquisition-date fair value. Goodwill is recognised initially at the excess over the aggregate of the consideration transferred, the fair value of the non-controlling interest, and the acquisition date fair value of the acquirer’s previously held equity interest (in case of step acquisition), less the fair value of the identifiable assets acquired and liabilities assumed. If the net fair value of the acquirer’s interest in the identifiable assets acquired and liabilities assumed is greater than the aggregate of the consideration transferred, the fair value of the non-controlling interest, and the acquisition date fair value of the acquirer’s previously held equity interest (in case of step acquisition), the gain is immediately recognised in the profit or loss. Acquisition related costs are expensed as incurred. (j) Goodwill Intangibles Goodwill represents the future economic benefits arising from other assets acquired in a business combination that are not individually identifiable or separately recognised. Refer to Note 1(i) for a description of how goodwill arising from a business combination is initially measured. Goodwill on consolidation represents the excess of the cost of an acquisition over the fair value of the consolidated entity’s share of net identifiable assets of the acquired entities at the date of acquisition. Goodwill is not amortised but is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired. Goodwill is carried at cost less accumulated impairment losses. Identifiable intangible assets Identifiable intangible assets acquired separately or in a business combination (mainly customer lists) are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. The useful lives of these intangible assets are assessed on acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and impairment losses. Intangible assets with finite lives are amortised over the useful lives, currently estimated to be up to 10 years, and their useful lives are reviewed annually. Impairment of non-financial assets (k) Goodwill, intangible assets not yet ready for use and intangible assets with indefinite useful lives are not subject to amortisation and are therefore tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. For impairment assessment purposes, assets are generally grouped at the lowest levels for which there are largely independent cash flows (‘cash generating units’). Accordingly, most assets are tested for impairment at the cash-generating unit level. Because it does not generate cash flows independently of other assets or groups of assets, goodwill is allocated to the cash generating unit or units that are expected to benefit from the synergies arising from the business combination that gave rise to the goodwill. ANNUAL REPORT 2018 39 PSC INSURANCE GROUP Assets other than goodwill, intangible assets not yet ready for use and intangible assets with indefinite useful lives are assessed for impairment whenever events or circumstances arise that indicate the asset may be impaired. An impairment loss is recognised when the carrying amount of an asset or cash generating unit exceeds the asset’s or cash generating unit’s recoverable amount. The recoverable amount of an asset or cash generating unit is defined as the higher of its fair value less costs to sell and value in use. Refer to Note 2 for a description of how management determines value in use. Impairment losses in respect of individual assets are recognised immediately in profit or loss unless the asset is carried at a revalued amount such as property, plant and equipment, in which case the impairment loss is treated as a revaluation decrease in accordance with the applicable Standard. Impairment losses in respect of cash generating units are allocated first against the carrying amount of any goodwill attributed to the cash generating unit with any remaining impairment loss allocated on a pro rata basis to the other assets comprising the relevant cash generating unit. Income tax (l) Current income tax expense or revenue is the tax payable on the current period’s taxable income based on the applicable income tax rate adjusted by changes in deferred tax assets and liabilities. Deferred tax balances Deferred tax assets and liabilities are recognised for temporary differences at the applicable tax rates when the assets are expected to be recovered or liabilities are settled. Deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Deferred tax assets and liabilities are shown on a net basis in the Consolidated Statement of Financial Position. Tax consolidation The parent entity and its 100% Australian controlled entities formed an income tax consolidated group under the tax consolidation legislation on 8 December 2015. This replaced the three pre-existing tax consolidated groups on that date. Within the consolidated group there is an additional tax consolidated group with AR (WA) Pty Ltd as the head entity. The parent entity in each tax consolidated group is responsible for recognising the current tax liabilities and deferred tax assets arising in respect of tax losses for the tax consolidated group. The tax consolidated groups have also entered into a tax funding agreement with their members whereby each company in the group contributes to the income tax payable in proportion to their contribution to the net profit before tax of the tax consolidated group. Each tax consolidated group also has a tax sharing agreement in place to limit the liability of subsidiaries in the tax consolidated group arising under the joint and several liability requirements of the tax consolidation system in the event of default by the parent entity to meet its payment obligations. Payables on broking, reinsurance and underwriting agency operations (m) These amounts represent insurance premium payable to the insurance companies for broking, reinsurance and underwriting agency operations on invoiced amounts to customers and liabilities for goods and services provided to the consolidated entity prior to the end of the financial period and which are unpaid. The amounts are unsecured and are usually paid within 30 to 90 days of recognition. Provisions (n) Provisions are recognised when the consolidated entity has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. 40 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 1: Statement of Significant Accounting Policies (continued) (o) (i) Employee benefits Short-term employee benefit obligations Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits (other than termination benefits) expected to be settled wholly before twelve months after the end of the annual reporting period are measured at the (undiscounted) amounts based on remuneration rates which are expected to be paid when the liability is settled. The expected cost of short-term employee benefits in the form of compensated absences such as annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables in the Consolidated Statement of Financial Position. (ii) Other Long-term employee benefit obligation The provision for employee benefits in respect of long service leave and annual leave which, are not expected to be settled within twelve months of the reporting date, are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. Expected future payments incorporate anticipated future wage and salary levels, durations of service and employee turnover, and are discounted at rates determined by reference to market yields at the end of the reporting period on high quality corporate bonds that have maturity dates that approximate the terms of the obligations. Any remeasurements for changes in assumptions of obligations for other long-term employee benefits are recognised in profit or loss in the periods in which the change occurs. Employee benefit obligations are presented as current liabilities in the Consolidated Statement of Financial Position if the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. (iii) Retirement benefit obligations Defined contribution superannuation plan The consolidated entity makes contributions to defined contribution to the employee’s defined contribution superannuation plans of choice in respect of employee services rendered during the year. These superannuation contributions are recognised as an expense in the same period when the employee services are received. The consolidated entity’s obligation with respect to employee’s defined contributions entitlements is limited to its obligation for any unpaid superannuation guarantee contributions at the end of the reporting period. All obligations for unpaid superannuation guarantee contributions are measured at the (undiscounted) amounts expected to be paid when the obligation is settled and are presented as current liabilities in the Consolidated Statement of Financial Position. (iv) Share-based payments The consolidated entity operates share-based payment employee share and option schemes. The fair value of the equity to which employees become entitled is measured at grant date and recognised as an expense over the vesting period, with a corresponding increase to an equity account. The fair value of shares is measured at the market bid price at grant date. In respect of share-based payments that are dependent on the satisfaction of performance conditions, the number of shares and options expected to vest is reviewed and adjusted at each reporting date. The amount recognised for services received as consideration for these equity instruments granted is adjusted to reflect the best estimate of the number of equity instruments that eventually vest. (v) Bonus plan The consolidated entity recognises a provision when a bonus is payable in accordance with the employee’s contract of employment, and the amount can be reliably measured. (vi) Termination benefits Termination benefits are payable when employment of an employee or group of employees is terminated before the normal retirement date, or when the entity provides termination benefits as a result of an offer made and accepted in order to encourage voluntary redundancy. The consolidated entity recognises a provision for termination benefits when the entity can no longer withdraw the offer of those benefits, or if earlier, when the termination benefits are included in a formal restructuring plan that has been announced to those affected by it. ANNUAL REPORT 2018 41 PSC INSURANCE GROUP Borrowing costs (p) Borrowing costs can include interest expense calculated using the effective interest method, finance charges in respect of finance leases, and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred. (q) Classification Financial instruments The consolidated entity classifies its financial instruments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the instruments were acquired. Management determines the classification of its financial instruments at initial recognition. Non-derivative financial instruments Non-derivative financial instruments consist of investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are initially recognised at fair value, plus directly attributable transaction costs (if any), except for instruments recorded at fair value through profit or loss. After initial recognition, non-derivative financial instruments are measured as described below. Financial assets at fair value through profit or loss Investments in listed securities are carried at fair value through profit or loss. They are measured at their fair value at each reporting date and any increment or decrement in fair value from the prior period is recognised in the profit or loss of the current period. Fair values of listed investments are based on closing bid prices at the reporting date. Non-listed investments for which the fair value cannot be reliably measured, are carried at cost and tested for impairment. Loans and receivables Loans and receivables are measured at fair value at inception and subsequently at amortised cost using the effective interest rate method. Financial liabilities Financial liabilities include trade payables, other creditors, loans from third parties and loans or other amounts due to director-related entities. Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation. Financial liabilities are classified as current liabilities unless the consolidated entity has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Impairment of financial assets Financial assets are tested for impairment at each financial year end to establish whether there is any objective evidence for impairment. For loans and receivables or held-to-maturity investments carried at amortised cost, impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The amount of the loss reduces the carrying amount of the asset and is recognised in profit or loss. The impairment loss is reversed through profit or loss if the amount of the impairment loss decreases in a subsequent period and the decrease can be related objectively to an event occurring after the impairment was recognised. 42 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Investments in associates Note 1: Statement of Significant Accounting Policies (continued) (r) An associate is an entity over which the consolidated entity is able to exercise significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. The consolidated entity’s interests in associates are brought to account using the equity method after initially being recognised at cost. Under the equity method, the profits and losses of the associate are recognised in consolidated entity’s profit or loss and the consolidated entity’s share of the associate’s other comprehensive income items are recognised in the consolidated entity’s other comprehensive income. Details relating to associates are set out in Note 12. Unrealised gains and losses on transactions between the consolidated entity and an associate are eliminated to the extent of the consolidated entity’s share in an associate. (s) Joint venture entities Interests in joint ventures The consolidated entity’s interest in joint venture entities are brought to account using the equity method after initially being recognised at cost. Under the equity method, the profits or losses of the joint venture entity is recognised in profit or loss and the share of other comprehensive income items is recognised in other comprehensive income. Details relating to the joint venture entity are set out in Note 12. (t) Functional and presentation currency Foreign currency translations and balances The financial statements of each entity within the consolidated entity are measured using the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are presented in Australian dollars which is the consolidated entity’s functional and presentation currency. Transactions and Balances Transactions in foreign currencies of entities within the consolidated entity are translated into functional currency at the rate of exchange ruling at the date of the transaction. Foreign currency monetary items that are outstanding at the reporting date (other than monetary items arising under foreign currency contracts where the exchange rate for that monetary item is fixed in the contract) are translated using the spot rate at the end of the financial year. All resulting exchange differences arising on settlement or re-statement are recognised as revenues and expenses for the financial year. Foreign subsidiaries Subsidiaries that have a functional currency different from the presentation currency of the consolidated entity are translated as follows: a) Assets and liabilities are translated at the closing rate on reporting date. b) Items of revenue and expense translated at average rate. c) All resulting exchange differences are recognised in other comprehensive income. ANNUAL REPORT 2018 43 PSC INSURANCE GROUP (u) Determination and presentation of operating segments Segment reporting The consolidated entity determines and presents operating segments based on information that is internally provided to the consolidated entity’s Chief Financial decision maker. An operating segment is a component of the consolidated entity that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the consolidated entity’s components. All operating segment results are regularly reviewed by the consolidated entity’s Chief Financial Officer to make decisions about resources to be allocated to the segment and to assess its performance. Refer to note 33 for details on how management determine the operating segments. Segment results that are reported to the consolidated entity’s Chief Financial decision maker include items directly attributable to a segment, as well as these that can be allocated on a reasonable basis. Goods and services tax (GST) (v) Revenues, expenses and purchased assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the Consolidated Statement of Financial Position are shown inclusive of GST. Cash flows are presented in the Consolidated Statement of Cash Flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. (w) Where necessary, comparative information has been reclassified and repositioned for consistency with current year disclosures. Comparatives Rounding of amounts (x) The parent entity and the consolidated entity have applied the relief available under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and accordingly, the amounts in the consolidated financial statements and in the directors’ report have been rounded to the nearest thousand dollars, or in certain cases, to the nearest dollar (where indicated). Accounting standards issued but not yet effective at 30 June 2018 (y) The AASB has issued a number of new and amended Accounting Standards and Interpretations that have mandatory application dates for future reporting periods, some of which are relevant to the consolidated entity. The consolidated entity has decided not to early adopt any of these new and amended pronouncements. The consolidated entity’s assessment of the new and amended pronouncements that are relevant to the consolidated entity but applicable in future reporting periods is set out below. AASB 9: Financial Instruments (December 2014), AASB 2014-7: Amendments to Australian Accounting Standards arising from AASB 9 (December 2014), AASB 2014-8: Amendments to Australian Accounting Standards arising from AASB 9 (December 2014) – Application of AASB 9 (December 2009) and AASB 9 (December 2010) (applicable for annual reporting periods commencing on or after 1 January 2018). Summary These Standards will replace AASB 139: Financial Instruments: Recognition and Measurement. The key changes that may affect the consolidated entity on initial application of AASB 9 and associated amending Standards include: • simplifying the general classifications of financial assets into those carried at amortised cost and those carried at fair value • permitting entities to irrevocably elect on initial recognition to present gains and losses on an equity instrument that is not held for trading in other comprehensive income (OCI); • simplifying the requirements for embedded derivatives, including removing the requirements to separate and fair value embedded derivatives for financial assets carried at amortised cost; 44 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 1: Statement of Significant Accounting Policies (continued) (y) Accounting standards issued but not yet effective at 30 June 2018 (continued) • requiring an entity that chooses to measure a financial liability at fair value to present the portion of the change in its fair value due to changes in the entity’s own credit risk in OCI, except when it would create an ‘accounting mismatch’; • introducing a new model for hedge accounting that permits greater flexibility in the ability to hedge risk, particularly with respect to non-financial items; and • requiring impairment of financial assets carried at amortised cost to be based on an expected loss approach. Impact of financial report Although the assessment is still being undertaken, the consolidated entity does not expect material changes arising from this new standard. AASB 15: Revenue from Contracts with Customers, AASB 2014-5: Amendments to Australian Accounting Standards arising from AASB 15, AASB 2015-8: Amendments to Australian Accounting Standards – Effective Date of AASB 15 and AASB 2016-3: Amendments to Australian Accounting Standards – Clarifications to AASB 15 (applicable for annual reporting periods commencing on or after 1 January 2018). Summary AASB 15 will provide (except in relation to some specific exceptions, such as lease contracts and insurance contracts) a single source of accounting requirements for all contracts with customers, thereby replacing all current accounting pronouncements on revenue. These Standards provide a revised principle for recognising and measuring revenue. Under AASB 15, revenue is recognised in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the provider of the goods or services expects to be entitled. To give effect to this principle, AASB 15 requires the adoption of the following 5-step model: • identify the contract(s) with a customer; • identify the performance obligations under the contract(s); • determine the transaction price; • allocate the transaction price to the performance obligations under the contract(s); and • recognise revenue when (or as) the entity satisfies the performance obligations. AASB 15 also provides additional guidance to assist entities in applying the revised principle to licences of intellectual property, warranties, rights of return, principal/agent considerations and options for additional goods and services. AASB 15 : First effective operating year, 30 June 2019. First comparative year, 30 June 2019. Impact of financial report The Directors have completed a preliminary review of the contracts with insurers and customers and identified that claims handling services are more likely than not to be effected by this standard. The consolidated entity provides after sales claims services. Whereas not explicit in the terms of trade, the customary business practise implies performance obligation to fulfil these services. As such a portion of insurance broking revenue shall be deemed prepaid revenue in respect of future claims servicing obligations. PSC Insurance Group Limited intends to adopt paragraph C3(b) on transition, which does not require comparative information to be restated. Under this transition approach, the cumulative effect of initially applying this new standard is recognised as an adjustment to opening retained earnings of the first annual reporting report, i.e. opening period of financial year ending 30 June 2019. ANNUAL REPORT 2018 45 PSC INSURANCE GROUP The consolidated entity shall apply a group wide methodology to determine best estimate of the transaction price of provision of claims services. The methodology shall be incorporated on a cost-plus basis. ie. Claims cost, plus recuperation of directly related costs. The consolidated entity has assessed that the direct cost that can most reliably be obtained, is through assessment of wages and salaries of staff engaged for a portion of their time handling claims. Assessment is underway to ascertain the most reliable apportionment basis for percentage of time spent handling claims. In line with C3(b) the first entry made shall be to the opening retained earnings in financial year 30 June 2019, as a debit to retained earnings, with a credit to claims revenue in advance. The consolidated entity shall make more detailed assessments over the coming 6 months, and explored further in the first half year reporting period of financial year 2019. AASB 16: Leases (applicable for annual reporting periods commencing on or after 1 January 2019). Summary AASB 16 will replace AASB 117: Leases and introduces a single lessee accounting model that will require a lessee to recognise right-of-use assets and lease liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Right-of-use assets are initially measured at their cost and lease liabilities are initially measured on a present value basis. Subsequent to initial recognition: • right-of-use assets are accounted for on a similar basis to non-financial assets, whereby the right-of-use asset is accounted for in accordance with a cost model unless the underlying asset is accounted for on a revaluation basis, in which case if the underlying asset is: • investment property, the lessee applies the fair value model in AASB 140: Investment Property to the right-of-use asset; or • property, plant or equipment, the lessee can elect to apply the revaluation model in AASB 116: Property, Plant and Equipment to all of the right-of-use assets that relate to that class of property, plant and equipment; and • lease liabilities are accounted for on a similar basis as other financial liabilities, whereby interest expense is recognised in respect of the liability and the carrying amount of the liability is reduced to reflect lease payments made. AASB 16 substantially carries forward the lessor accounting requirements in AASB 117. Accordingly, under AASB 16 a lessor would continue to classify its leases as operating leases or finance leases subject to whether the lease transfers to the lessee substantially all of the risks and rewards incidental to ownership of the underlying asset, and would account for each type of lease in a manner consistent with the current approach under AASB 117. AASB 16 : First effective operating year, 30 June 2020. First comparative year, 30 June 2019. Impact on financial report The Directors have made a preliminary assessment of the new leases standard, and find that the consolidated entity’s operating leases will be impacted. Although the directors anticipate that the adoption of AASB 16 may have an impact on the consolidated entity’s accounting for its operating leases, it is impracticable at this stage to provide a reasonable estimate of such impact. The standard shall be adopted in financial year ended 30 June 2020. It is not possible to reliably foresee the new leases into which the consolidated entity shall have entered in Financial year 2020. Having reviewed the available methodologies, the consolidated entity finds it most appropriate to adopt paragraph C8(b)(i) modified retrospective approach on transition. This approach does not require comparative financial information to be restated. The consolidated entity does not intend to adopt the standard before its effective date of 1 January 2019, and shall make more detailed assessments over the coming 12 months. AASB 2014-10: Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture and AASB 2015-10: Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 (applicable for annual reporting periods commencing on or after 1 January 2018). AASB 2014-10 amends AASB 10: Consolidated Financial Statements and AASB 128: Investments in Associates and Joint Ventures to clarify the accounting for the sale or contribution of assets between an investor and its associate or joint venture by requiring: • a full gain or loss to be recognised when a transaction involves a business, whether it is housed in a subsidiary or not; and • a partial gain or loss to be recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. These Standards are not expected to significantly impact the consolidated entity’s financial statements. 46 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 1: Statement of Significant Accounting Policies (continued) (y) Accounting standards issued but not yet effective at 30 June 2018 (continued) AASB 2016-5: Amendments to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions (applicable for annual reporting periods commencing on or after 1 January 2018). This Amending Standard amends AASB 2: Share-based Payment to address: • the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; • the classification of share-based payment transactions with a net settlement feature for withholding tax obligations; and • the accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. This Standard is not expected to significantly impact the consolidated entity’s financial statements. AASB Interpretation 22: Foreign Currency Transactions and Advance Consideration (applicable for annual reporting periods commencing on or after 1 January 2018). Interpretation 22 clarifies that, in applying AASB 121: The Effects of Changes in Foreign Exchange Rates, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. Accordingly, if there are multiple payments or receipts in advance, the entity is required to determine a date of the transaction for each payment or receipt of advance consideration. This Interpretation is not expected to significantly impact the consolidated entity’s financial statements. ANNUAL REPORT 2018 47 PSC INSURANCE GROUP Note 2: Critical Accounting Estimates and Judgements Certain accounting estimates include assumptions concerning the future, which, by definition, will seldom represent actual results. Estimates and assumptions based on future events have a significant inherent risk, and where future events are not as anticipated there could be a material impact on the carrying amounts of the assets and liabilities discussed below: Business combinations and goodwill (a) When a business combination occurs, the fair values of the identifiable assets and liabilities assumed, including intangible assets, are recognised. The determination of the fair values of acquired assets and liabilities is based, to a considerable extent, on management’s judgement. If the purchase consideration exceeds the fair value of the net assets acquired then the difference is recognised as goodwill. If the purchase price consideration is lower than the fair value of the assets acquired then a gain is recognised in the income statement. Allocation of the purchase price between finite life assets and indefinite life assets such as goodwill affects the results of the consolidated entity as finite lived intangible assets are amortised, whereas indefinite life intangible assets, including goodwill, are not amortised. Impairment of goodwill (b) Goodwill is allocated to cash generating units (CGU’s) according to applicable business operations. The recoverable amount of a CGU is based on value in use calculations. These calculations are based on projected cash flows approved by management covering a period of 5 years. Management’s determination of cash flow projections and gross margins are based on past performance and its expectation for the future. The present value of future cash flows has been calculated using an average growth rate of 5% (2017: 5%) for cash flows in year two to five and which is based on the historical average and a terminal value growth rate of 2% (2017: 2%) a pre-tax discount rate of 16.67% (2017: 16.67%) to determine value-in-use. Income Tax (c) Deferred tax assets and liabilities are based on the assumption that no adverse change will occur in the income tax legislation and the anticipation that the consolidated entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Deferred consideration (d) The consolidated entity has made a best estimate of consideration payable for the acquisitions where there is a variable purchase price (generally a multiple of revenue). Should the final revenue vary from estimates, the consolidated entity will be required to vary the consideration payable and recognise the difference as an expense or income. 48 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Intangible assets Note 2: Critical Accounting Estimates and Judgements (continued) (e) The carrying value of intangible assets with finite lives are assessed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated on the same basis as goodwill above. An impairment loss is recognised if the carrying value of the intangible assets exceed their recoverable amount. Employee benefits (f) The determination of employee benefit provisions required is dependent on a number of forward estimate assumptions including expected wage increases, length of employee service and bond rates. Note 3: Revenue and Other Income Fee and commission income Commission income Fees income Other fees Other revenue Dividend income and trust distributions Interest income Other revenue Other Income Share of equity accounted results Gain on fair value adjustments Gain on deferred consideration Profit on sale of subsidiary 2018 $’000 2017 $’000 61,509 26,969 6,680 95,158 2,134 1,678 1,234 5,046 285 17,311 – 886 47,422 23,473 6,659 77,554 1,517 1,110 1,047 3,674 37 – 3,210 – 18,482 3,247 118,686 84,475 ANNUAL REPORT 2018 49 PSC INSURANCE GROUP 2018 $’000 2017 $’000 2,789 1,761 138 253 10 248 626 1,275 1,032 3,908 2,537 261 – 2,943 40,173 43,116 – 125 380 11 218 2,720 3,908 1,406 127 94 136 3 194 362 789 726 314 2,317 88 168 2,430 34,119 36,717 200 120 106 261 118 88 314 – 8 Note 4: Operating Profit Profit before income tax has been determined after: Finance costs Depreciation: – Leasehold Improvements – Investment Property – Motor Vehicles – Office Equipment – Computer Equipment Amortisation of non-current assets – Identifiable intangibles Bad and doubtful debts Rental expense on operating leases Foreign currency translation losses Employee benefits – Share-based payments – Superannuation – Other Employee benefits Administration and other expenses includes: IPO costs Bank Refinance Costs Acquisition Legal and professional fees Acquisition Restructure Costs Non recurring Professional Fees – Non Acquisition Loss on foreign exchange Bad and doubtful debts Deferred consideration loss relating to business combinations Other Other income includes Deferred consideration gains relating to business combinations Fair value revaluation of assets – 3,210 17,311 – 50 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 5: Income Tax (a) Components of tax expense Current tax Deferred tax Adjustment to tax expense on recognition of prior year losses Under/(over) provision in prior years (b) Prima facie tax payable 2018 $’000 6,727 6,188 (505) 95 2017 $’000 6,398 723 – 23 12,505 7,144 2018 $’000 2017 $’000 The prima facie tax payable on profit before income tax is reconciled to the income tax expense as follows: Prima facie income tax payable on profit before income tax at 30.0% (2017: 30.0%) 12,098 8,135 Add tax effect of: – Overseas tax rate differential – Non allowable adjustments on formation of tax consolidated group – Under provision for income tax in prior years – Other non-allowable items – Gross up of franking credits – Non assessable gain/non deductible loss on business acquisition rise and fall – Amortisation Less tax effect of: – Non assessable gain/non-deductible loss on business acquisition rise and fall – Income tax losses not recognised – Franking credit offset – Transfer to deferred tax – Other non-assessable items Income tax expense attributable to profit 67 140 95 270 9 325 324 1,230 – – 29 505 289 823 12,505 (512) 120 23 281 – – 215 127 984 30 – – 104 1,118 7,144 ANNUAL REPORT 2018 51 PSC INSURANCE GROUP 2018 $’000 2017 $’000 3,239 6,727 (6,608) – 95 150 (324) 551 6,398 (3,676) (171) 23 114 – 3,279 3,239 2018 $’000 2017 $’000 1,620 922 92 170 739 492 686 – 254 461 3,543 1,893 2,220 5,909 68 5,193 92 – 13,482 (9,939) 735 3,979 97 – – 24 4,835 (2,942) (c) Current tax Current tax relates to the following: Opening balance Income tax Tax payments Utilisation of losses against current period liability Under provisions Exchange translation difference Transfer to/(from) deferred tax Current tax liabilities (d) Deferred tax Deferred tax relates to the following: Deferred tax assets The balance comprises: Tax losses carried forward Employee benefits Provision for doubtful debts Accrued expenses Listing costs deductible over time Deferred tax liabilities The balance comprises: Customer Lists Accrued income Deferred expense Financial Assets at fair value through profit and loss Capital allowances Utilisation of tax losses Net deferred tax assets/(liabilities) 52 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 5: Income Tax (continued) (e) Consolidated Statement of Financial Position Deferred tax asset Deferred tax liability 2018 $’000 3,543 (13,482) (9,939) (f) Deferred income tax (revenue)/expense included in income tax expense comprises Decrease/(increase) in deferred tax assets (Decrease)/increase in deferred tax liabilities Note 6: Dividends (a) Dividends paid or declared 2018 $’000 (1,650) 7,838 6,188 2017 $’000 1,893 (4,835) (2,942) 2017 $’000 321 402 723 Dividends paid at 6.5 cents per share by PSC Insurance Group fully franked Dividends paid to non-controlling interests (b) Dividends declared after the reporting period and not recognised Since the end of the reporting period the directors have recommended/declared dividends of 4.5 cents per share (2017: 4.0 cents per share) fully franked (c) Franking account Balance of franking account on a tax paid basis at financial year-end adjusted for franking credits arising from payment of provision for income tax and dividends recognised as receivables, franking debits arising from payment of proposed dividends and any credits that may be prevented from distribution in subsequent years 2018 $’000 2017 $’000 15,640 10,148 300 – 15,940 10,148 2018 $’000 11,000 11,000 2017 $’000 9,040 9,040 2018 $’000 2017 $’000 342 3,738 ANNUAL REPORT 2018 53 PSC INSURANCE GROUP 2018 $’000 2 8,043 43,124 109,803 160,972 2017 $’000 1 4,907 3,902 71,314 80,124 2018 $’000 2017 $’000 Note 7: Cash and Cash Equivalents Cash on hand Cash at bank Cash on deposit Cash held on trust Note 8: Receivables Current Receivables from broking, reinsurance and underwriting agency operations 360,963 326,352 Provision for doubtful receivables Other receivables Provision for other receivables Loans to related parties Non-Current Loans to related parties (4,071) (286) 356,892 326,066 2,953 (228) 321 2,967 (228) – 359,938 328,805 3,189 3,747 (a) (i) Provision for impairment Receivables from broking and underwriting agency operations Trade receivables are non-interest bearing with 14-60 day terms. An impairment loss is recognised when there is objective evidence that an amount being carried as receivable is impaired. The impairment losses have been included within administration and other expenses in the consolidated Statement of Profit or Loss and other Comprehensive Income. All trade receivables that are not impaired are expected to be received within trading terms. (ii) Receivables from reinsurance operations Trade receivables are non-interest bearing with 30-60 day terms. An impairment loss is recognised when the actual profit is quantifiable or when there is objective evidence that an amount being carried as receivable is impaired. (iii) Other receivables and loans receivables An impairment loss is recognised when there is objective evidence that an individual receivable is impaired. The impairment losses have been included within administration and other expenses in the consolidated Statement of Profit or Loss and other Comprehensive Income. All advances and loan receivables that are not impaired are expected to be received within payment terms. 54 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 8: Receivables (continued) (a) Provision for impairment (continued) Movements in the provision for impairment were: Opening balance 1 July Charge for the year Amounts written off Closing balance at 30 June (b) Ageing of Receivables – 0-30 Days – 30-60 Days – 60-90 Days – Over 90 Days 2018 $’000 2017 $’000 514 3,908 (123) 4,299 381 314 (181) 514 2018 $’000 2017 $’000 120,174 108,651 19,921 18,011 32,061 28,987 188,807 170,703 360,963 326,352 ANNUAL REPORT 2018 55 PSC INSURANCE GROUP 2018 $’000 2017 $’000 1,582 29 1,487 3,098 1,561 41 565 2,167 2018 $’000 2017 $’000 3,474 20,562 24,036 5,613 250 5,863 2018 $’000 2017 $’000 8,151 8,123 Note 9: Other Current Assets Current Prepayments Bonds and deposits Accrued income Note 10: Other Financial Assets Non Current Financial assets Other shares and Units held – at cost Shares in listed corporations – at fair value Total financial assets held at cost and fair value Note 11: Equity Accounted Investments Non-Current Equity accounted associates 56 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 12: Interests in Associates and Joint Ventures (a) Associates and joint ventures Investments in associates and joint ventures are accounted for using the equity method in the consolidated entity and carried at cost in the parent entity. Interests are held in the following associated companies: Associated Companies Associates BCS Broking Pty Ltd RP-Baulkham Hills RP-Caboolture RP-Canning Vale RP-Cannington RP-Carlton RP-Construction Risk RP-CPRS RP-Edwardstown RP-Fremantle RP-Hoppers Crossing Pty Ltd RP-Horsham RP-Joondalup RP-Malaga RP-Mona Vale RP-Morayfield RP-Nerang RP-Newcastle RP-North Perth PSC Property Lync Insurance Brokers Pty Ltd (previously RP-Oakleigh Pty Ltd) RP-Rockingham Pty Ltd RP-South Perth RP-Success RP-Tullamarine RP-Wanneroo RP-Warragul RP-Windsor RP-Yanchep RP-Yarrawonga RP-Penrith RP-Parramatta PSC Insurenet JV Pty Ltd Nature of Relationship Principal place of business (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (iii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (iii) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ownership Interest 2018 25.00% 50.00% 50.00% 50.00% 50.00% 50.00% 0.00% 0.00% 50.00% 50.00% 50.00% 50.00% 0.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 0.00% 50.00% 50.00% 50.00% 50.00% 2017 25.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 0.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 100.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 100.00% 50.00% 50.00% 50.00% 50.00% 50.00% ANNUAL REPORT 2018 57 PSC INSURANCE GROUP 2018 $’000 – 8,151 8,151 2017 $’000 27 8,096 8,123 2018 $’000 2017 $’000 1,327 (989) 338 1,315 (946) 369 10,107 10,107 (389) 9,718 79 (24) 55 2,869 (1,580) 1,289 3,727 (2,160) 1,567 2,911 (136) 9,971 22 (14) 8 2,290 (1,528) 762 2,397 (1,544) 853 1,623 12,967 11,963 Associated Companies Nature of relationship (i) Non-controlling interests in UK broking businesses (ii) Investments in entities holding client lists Note 13: Property, Plant and Equipment Leasehold improvements Leasehold improvements at cost Accumulated depreciation Land and Buildings cost Land and buildings at cost Accumulated depreciation Plant and equipment Motor vehicles at cost Accumulated depreciation Office equipment at cost Accumulated depreciation Computer equipment at cost Accumulated depreciation Total plant and equipment Total property, plant and equipment 58 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 13: Property, Plant and Equipment (continued) (b) Reconciliations Leasehold improvements Carrying amount at beginning of year Additions Additions through acquisition of entities/operations Disposals Depreciation expense Net foreign currency movements arising from foreign operation Carrying amount end of year Investment Property at Cost Carrying amount at beginning of year Additions Depreciation expense Carrying amount end of year Plant and equipment Motor vehicles Carrying amount at beginning of year Additions Additions through acquisition of entities/operations Depreciation expense Carrying amount end of year Office equipment Carrying amount at beginning of year Additions Additions through acquisition of entities/operations Disposals Depreciation expense Net foreign currency movements arising from foreign operation Carrying amount end of year 2018 $’000 2017 $’000 369 122 – (15) (138) – 338 425 24 14 – (94) – 369 9,971 – – 10,107 (253) 9,718 (136) 9,971 8 – 57 (10) 55 762 659 141 (30) (248) 5 1,289 11 – – (3) 8 698 232 5 – (194) 21 762 ANNUAL REPORT 2018 59 PSC INSURANCE GROUP 2018 $’000 2017 $’000 853 1,324 20 – (626) (4) 1,567 2,911 12,967 616 578 – – (362) 21 853 1,623 11,963 2018 $’000 2017 $’000 59,955 53,306 24,675 14,237 (3,195) 11,042 95,672 13,206 8,729 (2,163) 6,566 73,078 Computer equipment Carrying amount at beginning of year Additions Additions through acquisition of entities/operations Disposals Depreciation expense Net foreign currency movements arising from foreign operation Carrying amount end of year Total plant and equipment Total property, plant and equipment Additions through acquisitions represent assets acquired through acquisitions per Note 23. Note 14: Intangible Assets Goodwill at cost Goodwill on consolidation at cost Identifiable intangible assets at cost Accumulated amortisation and impairment Total intangible assets 60 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 14: Intangible Assets (continued) (a) Reconciliation of the carrying amounts of intangible assets at the beginning and end of the current financial year Reconciliations Goodwill at cost Opening balance Additions (a) Net foreign currency movement arising from foreign operations Closing balance Goodwill on consolidation at cost Opening balance Additions (b) Net foreign currency movements arising from foreign operations’ amount Closing balance Identifiable Intangible assets at cost Opening balance Additions (c) Additions through acquisition of entities/operations Net foreign currency movement arising from foreign operations Amortisation expense Closing balance Total intangible assets 2018 $’000 2017 $’000 53,306 52,770 5,429 1,220 966 (430) 59,955 53,306 13,206 12,426 (957) 8,955 4,251 – 24,675 13,206 6,566 2,800 2,704 4 (1,032) 11,042 95,672 5,652 1,640 – – (726) 6,566 73,078 (a) Additional goodwill recognised for the acquisitions over the year, includes business purchases of Riley & Associates, National Franchise Insurance Brokers and Insurance Solutions. (b) Additional goodwill on consolidation recognised on the acquisition of Insurance Marketing Group of Australia Pty Ltd, Medisure Indemnity Australia Pty Ltd, Capital Insurance Brokers Pty Ltd and Easy Broking Online Ltd. (c) Additional identifiable intangible assets represent the acquisition of Riley & Associates, National Franchise Insurance Brokers, PSC NFIB Markets Pty Ltd, Insurance Marketing Group of Australia Pty Ltd, Medisure Indemnity Australia Pty Ltd, Capital Insurance Brokers Pty Ltd, Insurance Solutions Corporation, Martin Hayward portfolio, Skyline Underwriting and Gow Gates Portfolio. The consolidated entity performs, on an annual basis, impairment testing for goodwill and any identifiable intangible assets (customer relationships) which have impairment indicators. There was no impairment for the year ended 30 June 2018 (2017: no impairment provision). In performing impairment testing, each subsidiary acquired or portfolio of businesses acquired is considered a separate cash generating unit (CGU) or grouped into one CGU where operations are linked. ANNUAL REPORT 2018 61 PSC INSURANCE GROUP The methodologies used in the impairment testing are: • Value in use – a discounted cash flow model, based on a five year projection commencing with the year one approved budget of the tested CGUs plus a terminal value: and • Fair value – based on the consolidated entity’s estimates of sustainable earnings before interest expense, tax and amortisation (EBITA) for each CGU multiplied by an earnings multiple appropriate for similar businesses less costs to sell. The following table sets out the key assumptions for the value use model: Revenue Growth Cost Growth Terminal growth rate (EBITDA) Discount rate (pre tax) 2018 % 2017 % 5% pa for first 5 years 5% pa for first 5 years 3% pa for first 5 years 3% pa for first 5 years 2.00% 16.67% 2.00% 16.67% Sensitivity analysis has been conducted and no reasonable change in the key assumptions of the value in use calculations would result in impairment. Note 15: Payables Current Unsecured liabilities Trade creditors 2018 $’000 2017 $’000 1,888 1,203 Payables from broking, reinsurance and underwriting agency operations 437,548 370,818 Sundry creditors and accruals Note 16: Borrowings Current Secured liabilities Bank loans Non Current Secured liabilities Bank loans 3,984 3,416 443,420 375,437 2018 $’000 2017 $’000 935 635 53,410 43,748 62 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 16: Borrowings (continued) (a) The consolidated entity has two primary funding facilities: Terms and conditions and assets pledging as security relating to the above financial instruments • PSC Insurance Group Limited – Syndicated Facility Agreement – Limit $83,000,000 • Insurance Holdings Ltd – Loan Facility (Clydesdale Bank) – Limit $4,884,428 (£2,885,720) There is a funding facility to PSC Property Holdings Pty Ltd, totalling $7,624,000. The key terms and conditions are as follows: Syndicated Facility Agreement (SFA) The syndication is led by Commonwealth Bank of Australia, and Macquarie Bank is a participant in the syndicate. Security was granted in favour of a security trustee, including a registered first ranking security over all assets and undertakings of the parent entity and certain subsidiaries of the parent entity. The SFA contains a number of representations, warranties and undertakings (including financial covenants and reporting obligations) from the parent entity and each guarantor that are customary for a facility of this nature, including covenants ensuring the parent entity maintains a debt to EBITDA ratio below agreed levels and a debt service cover ratio above agreed levels. These covenants have been met during the year. The SFA is interest only with a 5 year term, current maturity date is March 2022. The interest rate is a variable interest rate based on BBSY plus a margin. Clydesdale Bank Facility The agreement provides for a Cross Guarantee and Mortgage Debenture over the assets of IHL, and all related trading subsidiaries as security. The Clydesdale Facility contains a number of representations, warranties and undertakings, including financial covenants and reporting obligations. The financial covenants cover IHL’s rolling EBITDA to loan value ratio, its interest ratio and cashflow cover. These covenants have to be met quarterly and have been met during the Facility term to date. At balance date, the Clydesdale Facility has a remaining 4 year term, maturing July 2022, repayment terms of the Clydesdale Facility are £412,240 per annum. The interest rate is a variable interest rate based on LIBOR plus a margin. Commonwealth Bank of Australia (Property Loan) The facility provided to fund the property at 96 Wellington Parade, East Melbourne, which the parent entity and its subsidiaries occupy. The facility is secured by a first registered mortgage over the property and supporting guarantees from the parent entity and various subsidiaries. The loan is interest only with a 5 year term, current maturity date is March 2022. The interest rate is a variable interest rate based BBSY plus a margin. ANNUAL REPORT 2018 63 PSC INSURANCE GROUP 2018 $’000 2017 $’000 2,930 2,031 398 3,328 337 2,368 2018 $’000 232 6,713 6,945 2017 $’000 320 6,435 6,755 1,347 774 Note 17: Provisions Current Employee benefits provision Non Current Employee benefits Total employee benefits liability Note 18: Other Liabilities Current Deferred income Amounts payable to vendors (a) Non Current Amounts payable to vendors (a) (a) Amounts payable to vendors represents deferred consideration expected to be made to vendors for acquisitions. The consideration payable is calculated based on a multiple of revenue as defined in the various sale and purchase agreements. Note 19: Share Capital (a) Issued and paid-up capital 244,453,508 Ordinary shares fully paid (2017: 225,912,026) Fully paid ordinary shares carry one vote per share and have the right to dividends. 2018 $’000 2017 $’000 140,395 85,994 64 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 19: Share Capital (continued) (b) Movements in shares on issue 2018 Beginning of financial year Capital Raising issue Capital Raising issue costs Shares in lieu of cash for acquisition of subsidiary undertaking End of financial year 2017 Beginning of financial year Shares in lieu of cash for acquisition of subsidiary undertaking Option holders conversion End of financial year Parent Entity No of shares $’000 225,912,026 85,994 18,334,000 55,002 – 207,482 (1,155) 554 244,453,508 140,395 225,378,110 85,194 233,916 300,000 500 300 225,912,026 85,994 Rights of each type of share (c) Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held. At shareholders meetings each ordinary share gives entitlement to one vote when a poll is called. Capital Management (d) When managing capital, management’s objective is to ensure the consolidated entity continues to maintain optimal returns to shareholders. This is achieved through the monitoring of historical and forecast performance and cashflows. During 2018, management paid dividends of: • Dividends paid by PSC Insurance Group Limited $15,639,646 (2017: $10,148,015) • Dividends paid to non-controlling interests $300,000 (2017: $nil) Management manages capital by proactively assessing future funding needs and determining the best funding measures, principally through retained earnings and debt facilities. When considering prudent gearing levels, the consolidated entity considers its gross debt levels against the forecast levels of EBITDA and free cash flow. The consolidated entity also considers the gearing ratio being net debt/total capital. Net debt is calculated as total borrowings as shown in the balance sheet less cash and cash equivalents (excluding cash held in trust) and total capital includes net debt and book equity. ANNUAL REPORT 2018 65 PSC INSURANCE GROUP 2018 $’000 323 (340) 2017 $’000 323 (1,166) (37,351) (37,351) (37,368) (38,194) 40,429 28,496 Note 20: Reserves and Retained Earnings Share-based payment reserve Foreign currency translation reserve Non-controlling interest reserve Retained Earnings (a) (i) Share-based payment reserve Nature and purpose of reserve The share-based payment reserve comprises the fair value of options and performance share rights recognised as an expense. Upon exercise of options or performance share rights, any proceeds received are credited to share capital. The share-based payment reserve remains as a separate component of equity. (ii) Movements in reserve Opening balance Fair value of options and performance share rights issued during the year Closing balance 2018 $’000 323 – 323 2017 $’000 155 168 323 (b) (i) Foreign currency translation reserve Nature and purpose of reserve The foreign currency translation reserve is used to record the unrealised exchange differences arising on translation of a foreign entity and is not distributable. (ii) Movements in reserve Opening balance Exchange differences on translation of foreign operations Closing balance 2018 $’000 (1,166) 826 (340) 2017 $’000 (544) (622) (1,166) 66 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 20: Reserves and Retained Earnings (continued) (c) (i) Non-controlling interest reserve The non-controlling interest reserve is used to record the fair value of shares issued to buyout non-controlling interests (ii) Movements in reserves Opening Balance (d) Retained Earnings Retained earnings at beginning of year Net profit Dividends provided for or paid 2018 $’000 (37,351) (37,351) 2018 $’000 28,496 27,573 2017 $’000 (37,351) (37,351) 2017 $’000 18,920 19,724 (15,640) (10,148) 40,429 28,496 ANNUAL REPORT 2018 67 PSC INSURANCE GROUP Note 21: Interests in Subsidiaries (a) Subsidiaries Subsidiaries of the group Country of incorporation Ownership interest held by group 2018 2017 Alsford Page & Gems (Holdings) Limited United Kingdom 100.00% 100.00% Alsford Page & Gems Limited United Kingdom 100.00% 100.00% AB Risk Solutions Ltd United Kingdom 100.00% 100.00% Ownership interest held by NCI 2018 0.00% 0.00% 0.00% 2017 0.00% 0.00% 0.00% AR (WA) Pty Ltd Australia 70.00% 70.00% 30.00% 30.00% Breeze Underwriting (Aust) Pty Ltd Australia 100.00% 100.00% Breeze Underwriting Limited United Kingdom 100.00% 100.00% Breeze Underwriting Pty Ltd (PSC Insurance Pty Ltd) Australia 100.00% 100.00% Capital Insurance Brokers Pty Ltd *** Australia 100.00% 0.00% Carroll London Markets Limited United Kingdom 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00% Carvan Pty Ltd ** Australia 51.00% 0.00% 49.00% Certus Life Australia Pty Ltd Certus Life Melbourne Pty Ltd Certus Life Pty Ltd CH (Holdings) Ltd Chase Surety Pty Ltd Chase Underwriting Pty Ltd Chase UK Holdings Pty Ltd Chase Global UK Ltd Connect Life Deskhaven Pty Ltd Insurance Marketing Group of Australia Pty Ltd Just Equestrian Insurance Services Limited Australia Australia Australia 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% United Kingdom 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% 80.00% 80.00% 20.00% 20.00% Australia Australia 100.00% 100.00% ** ** United Kingdom 100.00% United Kingdom 100.00% 0.00% 0.00% Australia Australia 100.00% 100.00% 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 77.00% 0.00% 0.00% *** Australia 100.00% 0.00% 0.00% 0.00% Easy Broking Online Ltd *** United Kingdom 100.00% 23.00% Fenchurch Insurance Risk Management Limited United Kingdom 100.00% 100.00% Insurance Holdings Limited United Kingdom 100.00% 100.00% Just Leisure Insurance Services Limited United Kingdom 35.03% United Kingdom 35.03% 35.03% 35.03% 64.97% 64.97% 64.97% 64.97% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 68 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 21: Interests In Subsidiaries (continued) (a) Subsidiaries (continued) Subsidiaries of the group Country of incorporation Ownership interest held by group Ownership interest held by NCI Just Motorsport Limited United Kingdom 35.03% 35.03% 64.97% 64.97% Medisure Indemnity Australia Pty Ltd *** Australia 100.00% 0.00% 0.00% 0.00% 2018 2017 2018 2017 McKenna Hampton Insurance Brokers Pty Ltd Online Insurance Brokers Pty Ltd Professional Services Corporation Pty Ltd PSC Coastwide Insurance Services Pty Ltd PSC Coastwide Newcastle Pty Ltd PSC Connect NZ Ltd PSC Connect Pty Ltd PSC Direct Pty Ltd PSC Foundation Pty Ltd PSC Group Holdings Pty Ltd PSC Holdings (Aust) Pty Ltd PSC Insurance Brokers (Brisbane) Pty Ltd PSC Insurance Brokers (Darwin) Pty Ltd PSC Insurance Brokers (Melbourne) Pty Ltd PSC Insurance Brokers (Western) Pty Ltd PSC Insurance Services Pty Ltd PSC International Pty Ltd PSC JLG Investment Pty Ltd PSC McKenna Hampton Insurance Brokers Pty Ltd Australia Australia 100.00% 100.00% 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% Australia 100.00% 100.00% 0.00% 0.00% Australia Australia 100.00% 100.00% 100.00% 100.00% New Zealand 100.00% 100.00% Australia Australia Australia Australia Australia 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Australia 100.00% 100.00% 0.00% 0.00% Australia 100.00% 100.00% 0.00% 0.00% PSC Insurance Brokers (Aust) Pty Ltd Australia 100.00% 100.00% PSC Insurance Brokers (Wagga) Pty Ltd Australia 100.00% 100.00% PSC Insurance Brokers Pty Ltd Australia 100.00% 100.00% Australia 100.00% 100.00% 0.00% 0.00% 0.00% ** Australia 70.00% 0.00% 30.00% Australia Australia Australia 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 0.00% 0.00% 0.00% Australia 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% ANNUAL REPORT 2018 69 PSC INSURANCE GROUP Subsidiaries of the group Country of incorporation Ownership interest held by group Ownership interest held by NCI 2018 2017 2018 2017 PSC National Franchise Insurance Brokers Pty Ltd (previously ACN 151 774 668 Pty Ltd) PSC NFIB Markets Pty Ltd T/as Skyline Underwriting (formerly Morris Group investments Pty Ltd) PSC Nominees Pty Ltd PSC Property Holdings Pty Ltd PSC Reliance Franchise Partners Pty Ltd (2015 – PSC Share Nominees Pty Ltd) PSC UK Pty Ltd Australia 100.00% 100.00% 0.00% 0.00% Australia Australia Australia Australia Australia 100.00% 0.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% PSC UK Holdings Ltd ** United Kingdom 100.00% 0.00% PSC Workers Compensation and Consulting Pty Ltd PSC Wright Fahey Pty Ltd Australia Australia 75.00% 75.00% 25.00% 25.00% 100.00% 100.00% 0.00% 0.00% Reliance Workplace Solutions Pty Ltd Australia 70.00% 70.00% 30.00% 30.00% UK Facilities Limited United Kingdom 100.00% 100.00% Upper Hillwood Holdings Limited United Kingdom 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% 1 – ** Entity entered Group during the 2018 financial year. 2 – *** Entity acquired during the 2018 financial year. (b) Reconciliation of the non-controlling interest Accumulated NCI at the beginning of the year Profit or loss allocated to NCI during the year Dividends paid to NCI NCI arising from business combination Accumulated NCI at the end of the year 2018 $’000 1,676 249 (300) 339 1,964 2017 $’000 1,429 247 – – 1,676 70 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 22: Cash Flow Information (a) Cash at the end of the financial year as shown in the consolidated statement of cash flows is reconciled to the related items in the consolidated statement of financial position as follows: Reconciliation of cash Cash on hand Cash at bank Cash on deposit Cash held on trust (b) Reconciliation of net profit after tax to net cash flows from operations Profit from ordinary activities after income tax Add/(Less) items classified as investing/financing activities Loss/(Gain) on Deferred consideration Adjustments and non cash items Non-cash items Depreciation and amortisation Bad and doubtful debts Foreign currency translation (gains)/losses Fair Value Adjustment of shares Share-based payment expense 2018 $’000 2 8,043 43,124 109,803 160,972 2017 $’000 1 4,907 3,902 71,314 80,124 2018 $’000 27,822 2017 $’000 19,971 1,406 (3,210) 2,307 3,908 2,981 (17,311) – 1,515 – (622) – 168 Net cash flows from operations before change in assets and liabilities 21,113 17,822 ANNUAL REPORT 2018 71 PSC INSURANCE GROUP 2018 $’000 2017 $’000 (32,818) (931) 9,232 (355) 61,282 (22,050) 601 763 (125) 5,915 55,800 183 (74) 1,127 1,561 7,446 Change in assets and liabilities (Increase)/decrease in receivables (Increase)/decrease in other assets Increase/(decrease) in payables Increase/(decrease) in provisions (Decrease)/Increase in other liabilities Increase/(decrease) in income taxes payable Increase/(decrease) in deferred tax liabilities Net cash flow from operating activities Acquisitions (c) During the period the consolidated group made a number of acquisitions. The fair value of assets acquired and liabilities assumed were as follows: Cash Property, plant and equipment Identifiable Intangibles Trade receivables Other assets Other financial assets Trade and other creditors Income tax payable Provisions Deferred tax balances Net Identifiable assets acquired Net assets exceeding consideration paid Consideration paid in cash Cash acquired Net cash (dispensed)/acquired 2018 $’000 7,977 218 3,609 1,542 – 4 2017 $’000 1,004 19 1,118 878 1 – (8,291) (956) (165) (359) (1,082) 3,453 11,572 (15,025) 7,977 7,048 – – (139) 1,925 1,754 (3,679) 1,004 (2,675) 72 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 22: Cash Flow Information (continued) (d) Loan facilities Loan facilities Amount utilised Unused loan facility (e) Reconciliation of liabilities arising from financing activities Balance at the beginning of the year Interest accrued Payments made Foreign currency movements Other changes Balance at the end of the year Note 23: Business Combinations Consideration and costs paid Deferred (contingent) consideration Total purchase consideration Fair value of non-controlling interests Acquisitions for the Period Ended 30 June 2018 2018 $’000 95,508 54,345 41,163 2017 $’000 69,639 45,288 24,351 2018 $’000 2017 $’000 44,383 26,720 (2,789) (1,871) 270 14,352 54,345 2018 $’000 15,328 5,980 21,308 – (1,761) (17,021) – 36,445 44,383 2017 $’000 4,083 2,360 6,443 – In accordance with consolidated entity strategy, as series of acquisitions were completed during the year. These included the following acquisition vehicles: (i) Company and its subsidiary entity/(ies) (ii) Client list and employee benefits (iii) Client list, employee benefits and other business assets ANNUAL REPORT 2018 73 PSC INSURANCE GROUP (a) Consideration paid/payable National Franchise Insurance Brokers Pty Ltd $’000 Insurance Marketing Group of Australia Pty Ltd $’000 Medisure Indemnity Australia Pty Ltd $’000 Riley & Associates $’000 Capital Insurance Brokers $’000 Insurance Solutions $’000 Easy Broking Online $’000 Total Group $’000 2018 Cash consideration paid 175 4,785 2,529 764 3,414 2,414 944 15,025 Equity Consideration Deferred consideration – – – – – – – – 303 – – 303 – 1,050 405 1,455 Contingent consideration 830 1,140 580 416 929 630 – 4,525 Total purchase consideration 1,005 5,925 3,109 1,180 4,646 4,094 1,349 21,308 Ownership share 100% 100% 100% 100% 100% 100% 100% Acquisition vehicle (ii) (i) (i) (ii) (i) (ii) (i) (b) Identifiable assets and liabilities acquired 2018 – Cash and Cash equivalents – Property, plant and equipment – Identifiable intangibles – Trade and other receivables – Other Shares and Units held – Other assets – Other financial Assets – Deferred tax Liabilities – Trade and other payables – Income tax payable – Provisions National Franchise Insurance Brokers Pty Ltd $’000 Insurance Marketing Group of Australia Pty Ltd $’000 Medisure Indemnity Australia Pty Ltd $’000 Riley & Associates $’000 – – 53 – – – – (16) – – (59) (22) 4,508 1,664 66 824 158 – – 1 – 908 85 – – – (247) (272) (4,170) (1,405) (89) (61) 990 (45) (5) 930 – – 17 – – – – (5) – – (9) 3 Capital Insurance Brokers $’000 1,038 58 414 184 – – 3 Insurance Solutions $’000 Easy Broking Online $’000 Total Group $’000 – – 1,393 – – – – 767 7,977 94 – 218 3,609 1,115 1,542 – – – – – – 4 (1,082) (124) (418) (1,148) (16) (119) 290 – – (106) 869 (1,568) (8,291) (15) – (165) (359) 393 3,453 74 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 23: Business Combinations (continued) (c) Goodwill on acquisition 2018 Total consideration paid/payable Total net identifiable (assets)/liabilities acquired Goodwill on acquisition (Excess over consideration paid/payable) National Franchise Insurance Brokers Pty Ltd $’000 Insurance Marketing Group of Australia Pty Ltd $’000 Medisure Indemnity Australia Pty Ltd $’000 Riley & Associates $’000 Capital Insurance Brokers $’000 Insurance Solutions $’000 Easy Broking Online $’000 Total Group $’000 1,005 5,925 3,109 1,180 4,646 4,094 1,349 21,308 (22) 990 930 3 290 869 393 3,453 1,027 4,935 2,179 1,177 4,356 3,225 956 17,855 (d) Financial performance since acquisition date 810 299 948 562 418 331 557 309 2018 Revenue Profit after tax National Franchise Insurance Brokers Pty Ltd $’000 Insurance Marketing Group of Australia Pty Ltd $’000 Medisure Indemnity Australia Pty Ltd $’000 Riley & Associates $’000 Capital Insurance Brokers $’000 Insurance Solutions $’000 Easy Broking Online $’000 827 (98) 2,496 482 954 308 738 517 96 (64) Total Group $’000 6,339 1,775 Financial performance if held for 12 months Revenue Profit after tax 827 (98) 2,993 776 2,138 1,455 1,134 10,052 507 763 135 2,954 Goodwill on acquisition 1,027 4,935 2,179 1,177 4,356 3,225 956 17,855 Customer Lists 53 824 908 17 414 1,080 5,759 3,087 1,194 4,770 1,393 4,618 – 3,609 956 21,464 The value of goodwill represents the future benefit arising from the future earnings and synergies expected from the acquisitions. (e) Acquisition-related Costs The consolidated entity incurred transaction costs of $0.07 million (2017: $0.02 million) in respect of the above acquisitions. Transaction costs included legal fees, stamp duty, due diligence and other direct costs incurred in relation to these acquisitions. These costs are included within Administration and other expenses in the Consolidated Statement of Profit or Loss and other Comprehensive Income. ANNUAL REPORT 2018 75 PSC INSURANCE GROUP Note 24: Commitments (a) Operating leases (non-cancellable): Lease expenditure commitments (i) Nature of leases Operating leases comprise lease for premises from which the consolidated entity operates and several novated leases of motor vehicles that form part of the salary packages of employees. (ii) Minimum lease payments – Not later than one year – Later than one year and not later than five years Aggregate lease expenditure contracted for at reporting date (b) Capital expenditure commitments Land and Buildings payable Plant and equipment payable Total capital expenditure commitments (c) Business acquisition commitments for acquisitions completed post-balance date* Turner Financial Services Limited (purchase of business) BP Marsh & Partners plc National Franchise Insurance Brokers Pty Ltd (purchase of business) *Refer to Note 32: Subsequent Events. 2018 $’000 2,414 6,422 8,836 2018 $’000 – – – 2018 $’000 7,060 32,962 – 40,022 2017 $’000 2,901 4,109 7,010 2017 $’000 305 58 363 2017 $’000 – – 1,155 1,155 Bank guarantee commitments (d) The consolidated entity has provided bank guarantees in relation to a number rental premises from which various businesses operate. Total bank guarantees outstanding $805,538 (2017: $810,836). Contingent liabilities (e) The consolidated entity has provided guarantees on indebtedness amounting to $1,874,536. This contingent liability relates to the guarantee of loans made to non-group interests in certain associate entities and is supported by Put Option agreements held by the lender over the non-group holdings in these associate entities. A UK subsidiary is in a commercial dispute regarding a line of business that was discontinued over 2 years ago and placed into run-off. We will defend the matter should it progress. Disclosure of any further information may prejudice the position of the entity. Note 24: Discontinued Operations (continued) 76 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 25: Earnings Per Share Reconciliation of earnings used in calculating earnings per share: Profit from continuing operations attributable to owners of PSC Insurance Group Limited attributable to owners of PSC Insurance Group Limited Profit used in calculating basic earnings per share Profit used in calculating diluted earnings per share Earnings used in calculating diluted earnings per share 2018 $’000 2017 $’000 27,573 27,573 27,573 27,573 19,724 19,724 19,724 19,724 2018 No of Shares 2017 No of Shares Weighted average number of ordinary shares used in calculating basic earnings per share 237,795,176 225,486,400 Effect of dilutive securities: Share options 900,000 1,098,626 Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share 238,695,176 226,585,026 ANNUAL REPORT 2018 77 PSC INSURANCE GROUP Note 26: Financial Risk Management The consolidated entity is exposed to a variety of financial risks comprising: • Market price risk • Currency risk • Interest rate risk • Credit risk • Liquidity risk The board of directors has overall responsibility for identifying and managing operational and financial risks. The consolidated entity holds the following financial instruments: Financial assets Cash and cash equivalents Bonds and Deposits Receivables from broking, reinsurance and underwriting agency operations Other receivables Loans to related parties Financial assets at cost Financial liabilities Trade creditors Payables from broking, reinsurance and underwriting agency operations Sundry creditors & accruals Borrowings Amounts payable to vendors 2018 $’000 2017 $’000 160,972 80,124 29 42 356,892 326,065 2,725 3,510 24,036 2,739 3,747 5,863 548,164 418,580 1,888 1,203 437,548 370,818 3,984 54,345 8,060 3,416 44,383 7,209 505,825 427,029 78 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 26: Financial Risk Management (continued) (a) Market price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk). Market price risk Sensitivity The consolidated entity holds one market security, currently held at fair value. Price sensitivity at 30 June 2018 at +/– 10% represents exposure of $2,056,000 (2017: $25,000). Currency risk (b) Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Sensitivity If foreign exchange rates were to increase/decrease by 10% from rates used to determine fair values of all financial instruments as at the reporting date, assuming all other variables that might impact on fair value remain constant, then the impact on profit for the year and equity is as follows: +/– 10% Impact on profit after tax Impact on equity 2018 $’000 2017 $’000 307 20 29 242 Fair value of Financial Instruments (c) The consolidated entity’s deferred consideration liability is measured at fair value at the end of each reporting period. The following table gives information about how the fair value of this financial liability is determined, including the valuation technique and inputs used. Financial instrument Valuation technique Significant unobservable inputs Deferred consideration The fair value is calculated based on an agreed multiple of fees and commissions Forecast fees and commissions Relationship of unobservable inputs to fair value The estimated fair value would increase/(decrease) if: • The forecast fees and commissions were higher/(lower) ANNUAL REPORT 2018 79 PSC INSURANCE GROUP Interest rate risk (d) Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market interest rates. The exposure to interest rate risks in relation to future cash flows and the effective weighted average interest rates on classes of financial assets and financial liabilities, is as follows: Financial Instruments 2018 (i) Financial assets (variable) Cash Bonds and Deposits Receivables from broking, reinsurance and underwriting agency operations Other receivables Loans to director related entities Financial Assets at cost Total financial assets (ii) Financial liabilities (variable) Trade creditors Payables from broking, reinsurance and underwriting agency operations Sundry creditors & accruals Borrowings Amounts Payable to Vendors Total financial liabilities 2017 (i) Financial assets (variable) Cash Bonds and Deposits Receivables from broking, reinsurance and underwriting agency operations Other receivables Loans to director related entities Financial Assets at cost Total financial assets Interest- bearing $’000 Non-interest bearing $’000 Total carrying amount $’000 Weighted average effective interest rate % 160,972 – – – 3,510 – 29 160,972 1.39% 29 356,892 356,892 2,725 – 2,725 3,510 5.65% – 24,036 24,036 164,482 383,682 548,164 – – – 1,888 1,888 437,548 437,548 3,984 3,984 54,345 – 54,345 5.65% – 8,060 8,060 54,345 451,480 505,825 80,124 – – – 3,747 – 41 80,124 1.35% 41 326,066 326,066 2,739 – – 5,863 2,739 3,747 5,863 5.65% 83,871 334,709 418,580 80 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 26: Financial Risk Management (continued) Financial Instruments (ii) Financial liabilities (variable) Trade creditors Payables from broking, reinsurance and underwriting agency operations Sundry creditors & accruals Borrowings Amounts Payable to Vendors Total financial liabilities Interest- bearing $’000 Non-interest bearing $’000 Total carrying amount $’000 Weighted average effective interest rate % – – – 1,203 1,203 370,818 370,818 3,416 3,416 44,383 – 44,383 4.95% 7,209 7,209 44,383 382,646 427,029 No other financial assets or financial liabilities are expected to be exposed to interest rate risk. Sensitivity If interest rates were to increase/decrease by 100 basis points from rates used to determine fair values as at the reporting date, assuming all other variables that might impact on fair value remain constant, then the impact on profit for the year and equity is as follows: +/– 100 basis points Impact on profit after tax Impact on equity 2018 $’000 (1,102) (1,102) 2017 $’000 (250) (250) Credit risk (e) Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The consolidated entity obtains guarantees where appropriate to mitigate credit risk. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the Consolidated Statement of Financial Position and notes to the Financial Statements. The consolidated entity does not hold any collateral. Credit risk of the consolidated entity mainly arises from cash and cash equivalents, trade and other receivables, loan to shareholders and loan to a joint venture. Although there is a concentration of cash and cash equivalents held with a major bank, credit risk is not considered significant. The consolidated entity’s exposure to credit risk is concentrated in the financial services industry with parties which are considered to be of sufficiently high credit quality to minimise credit risk losses. Receivables include amounts due from policyholders in respect of insurances arranged by controlled entities. Insurance brokers and underwriting agencies have credit terms of 90 days from policy inception to pay funds received from policyholders to insurers. Should policyholders not pay, the insurance policy is cancelled by the insurer and a credit given against the amount due. The consolidated entity’s credit risk exposure in relation to these receivables is limited to commissions and fees charged. Commission revenue is recognised after taking into account an allowance for expected revenue losses on policy lapses and cancellations, based on past experiences. ANNUAL REPORT 2018 81 PSC INSURANCE GROUP (f) Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk The consolidated entity’s risk management includes maintaining sufficient cash and the availability of funding via an adequate amount of credit facilities as disclosed in note 22. Fair value compared with carrying amounts (g) The fair value of financial assets and financial liabilities approximates their carrying amounts as disclosed in the consolidated statement of financial position and notes to the consolidated financial statements. Maturity analysis (h) The tables below represents the undiscounted contractual settlement terms for financial instruments and management’s expectation for settlement of undiscounted maturities. Year ended 30 June 2018 Cash and cash equivalents 160,972 – – < 6 Months $’000 6-12 Months $’000 1-5 years $’000 Total contractual cash flows $’000 171,131 188,807 3,189 3,098 – 24,036 (208,973) (230,555) (3,891) (468) – (467) (53,410) (6,713) (1,347) 125,759 (48,928) (31,423) – – – – – – – < 6 Months $’000 6-12 Months $’000 1-5 years $’000 Total contractual cash flows $’000 80,124 – 158,102 170,703 41 – – 3,747 5,863 (178,491) (192,716) (4,230) (318) – (317) (43,748) (6,435) (774) 59,458 (28,765) (39,142) – – – – – – – Carrying amount $’000 160,972 363,127 27,134 (443,420) (54,345) (8,060) 45,408 Carrying amount $’000 80,124 332,552 5,904 (375,437) (44,385) (7,209) (8,451) Receivables Other financial assets Payables Borrowings Other financial liabilities Net maturities Year ended 30 June 2017 Cash and cash equivalents Receivables Other financial assets Payables Borrowings Other financial liabilities Net maturities 82 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 27: Directors’ and Executives’ Compensation Compensation by category Short-term employment benefits Post-employment benefits Share-based payments The names of directors who have held office during the year are: Name Paul Dwyer John Dwyer Brian Austin Antony Robinson Melvyn Sims Key management personnel during the year are the directors. Note 28: Related Party Disclosures Ownership interests in related parties (a) Details of interests in controlled entities are set out in Note 21. Appointment date 10/12/2010 10/12/2010 10/12/2010 13/07/2015 8/08/2016 2018 $ 2017 $ 1,665,543 1,288,881 5,205 5,205 – 152,785 1,670,748 1,446,871 Related party transactions (b) The following table provides the total amount of transactions that were entered into with related parties for the relevant financial year: (i) Transactions with subsidiaries All transactions that have occurred among the subsidiaries within the consolidated entity have been eliminated for consolidation purposes. ANNUAL REPORT 2018 83 PSC INSURANCE GROUP (ii) Transactions with entities with director related entities Fuse Recruitment Pty Ltd, The Lead Agency Pty Ltd and ADD Aviation Services Pty Ltd are owned by Directors of the consolidated entity and are therefore considered related entities. The Group engages Fuse Recruitment Pty Ltd for recruitment and contractor services, The Lead Agency Pty Ltd for Marketing services, and ADD Aviation Services Pty Ltd for transportation services. The following fees were paid on normal third party commercial terms: Fees Paid or Payable to associates on normal commercial terms (ex GST): Recruitment/ contractor fees Marketing service fees Transportation service fees 2018 $ 2017 $ 166,373 106,575 353,422 338,073 266,390 66,368 Additionally, during the year the PSC Insurance Group Limited provided insurance services to related parties of a Director totalling $344,320 (2017: $258,262). The services supplied were in the normal course of business and on normal commercial terms and conditions. The fees outstanding for these services at balance date are $nil (2017: $33k). Additionally, during the year the PSC Insurance Group Limited received trust distributions from a related party of a Director totalling $2,186,386 (2017: $1,466,966). Outstanding balances due to related parties of a Director are $376,566 (2017: nil). Remuneration paid to the Directors for services provided are paid to their respective companies, as disclosed in the Remuneration Report. Fuse Recruitment Pty Ltd was no longer a subtenant of the consolidated entity (2017: subtenant). Estimated rent receivable from associates on normal commercial terms 2018 $ 2017 $ – 139,181 From time to time, the consolidated entity issues loans to Directors, Key management personnel and other related parties. The following balances are outstanding at the reporting date in relation to loans with related parties. Current receivables Loans to related parties Non-Current receivables Loans to related parties Loans to associates 2018 $ 2017 $ 321,207 – 3,185,915 3,581,974 – 165,000 All loans with Directors, key management personnel and other related parties are granted at arms length commercial terms for repayment. All pre-listing related party loans met the minimum requirements of the Income Tax Assessment Act 1936 Division 7A in relation to interest rates and repayment terms. All post-listing related party loans are interest bearing at a minimum rate of the Fringe Benefit Tax Reference rate. The maximum loan term is 7 years. (iii) Transactions with joint ventures in which the consolidated entity is a venturer There were no transactions with joint ventures in this financial year. 84 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 29: Auditor’s Remuneration (a) (i) Amounts paid and payable to Pitcher Partners Melbourne for: Audit and other assurance services An audit or review of the financial report of the entity and any other entity in the consolidated entity Total remuneration for audit and other assurance services (ii) Other non-audit services Corporate secretarial services Taxation services Total remuneration for non-audit services 2018 $ 2017 $ 396,600 322,000 396,600 322,000 2018 $ – 18,715 18,715 2017 $ 4,743 29,550 34,293 Total remuneration of Pitcher Partners Melbourne 415,315 356,293 (c) (i) Amounts paid and payable to non-related auditors of group entities for: Audit and other assurance services An audit or review of the financial report of the entity and any other entity in the consolidated entity Total remuneration for audit and other assurance services (ii) Other non-audit services Taxation services Other services Total remuneration for non-audit services Total remuneration of non-related auditors of group entities Total auditors’ remuneration 2018 $ 2017 $ 143,743 110,576 143,743 110,576 2018 $ 32,086 19,522 51,608 2017 $ 14,115 8,402 22,517 195,351 133,093 610,667 489,386 ANNUAL REPORT 2018 85 PSC INSURANCE GROUP 2018 $’000 2017 $’000 138,087 85,780 53,661 41,856 191,748 127,636 625 462 42,120 34,280 42,745 34,742 149,003 92,894 146,870 92,470 278 1,855 278 146 149,003 92,894 2018 $’000 17,349 17,349 2017 $’000 10,108 10,108 Note 30: Parent Entity Information (a) Summarised statement of financial position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity (b) Summarised statement of comprehensive income Profit for the year Total comprehensive income for the year Parent entity guarantees (c) The amount of $1,874,536 of this contingent liability relates to the guarantee of loans made to non-group interests in certain associate entities and is supported by Put Option agreements held by the lender over the non-group holdings in these associate entities. (d) The parent entity has contractual commitments $40,827,224 comprised as follows: Parent entity contractual commitments • Capital Expenditure Commitments $nil • Business Acquisition Commitments $40,021,686 • Bank Guarantee Commitments $805,538 86 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 31: Segment Information Description of segments (a) The consolidated entity’s Chief Financial decision maker has identified the following reportable segments: • Australasia – The consolidated entity’s Australasian operations represent insurance broking and underwriting agency operations present in Australia and New Zealand. • UK – The consolidated entity’s UK operations represent its insurance broking, reinsurance and underwriting agency operations present in the United Kingdom. • All these operating segments have been identified based on internal reports reviewed by the consolidated entity’s Chief Financial officer in order to allocate resources to the segment and assess its performance. Segment information (b) The consolidated entity’s Chief Financial decision maker uses segment revenue, segment result, segment assets and segment liabilities to assess each operating segment’s financial performance and position. Amounts reported for each operating segment are the same amount recorded in the internal reports to the Chief Financial officer. Amounts of segment information are measured in the same way the financial statements. They include items directly attributable to the segment and those that can reasonably be allocated to the segment based on the operations of the segment. Inter-segment revenue is determined on an arm’s length basis. Segment information is reconciled to financial statements and underlying profit disclosure notes if provided elsewhere where these amounts differ. ANNUAL REPORT 2018 87 PSC INSURANCE GROUP Segment 1 – Australia/ NZ/Asia $’000 Segment 2 – UK $’000 Total $’000 94,079 94,079 27,896 27,896 1,658 (2,599) (2,176) (12,211) 285 17,311 24,607 24,607 118,686 118,686 (74) (74) 20 (190) (131) 607 – – 27,822 27,822 1,678 (2,789) (2,307) (11,604) 285 17,311 374,904 296,660 671,566 2018 Segment revenue Total segment revenue Segment revenue from external source Segment result Total segment result Segment result from external source Items included within the segment result: Interest income Interest expense Depreciation and amortisation expense Income tax expense Share of net profits/(losses) of associates and joint ventures accounted for using the equity method Fair Value gains relating to significant investments Total segment assets Total segment assets include: Investments in equity accounted associates and joint ventures 8,151 – 8,151 Additions to non-current assets other than financial instruments and deferred tax assets Total segment liabilities 18,308 991 19,299 244,317 281,829 526,146 88 NOTES TO THE FINANCIAL STATEMENTS (continued) year ended 30 June 2018 Note 31: Segment Information (continued) 2017 Segment revenue Total segment revenue Segment revenue from external source Segment result Total segment result Segment result from external source Items included within the segment result: Interest income Interest expense Depreciation and amortisation expense Income tax expense Total segment assets Total segment assets include: Segment 1 – Australia/ NZ/Asia $’000 Segment 2 – UK $’000 62,838 62,838 21,637 21,637 16,107 16,107 1,093 (1,602) (1,400) (6,059) 3,864 3,864 17 (159) (116) (1,085) Total $’000 84,475 84,475 19,971 19,971 1,110 (1,761) (1,516) (7,144) 205,242 310,521 515,763 Investments in equity accounted associates and joint ventures 8,097 26 8,123 Additions to non-current assets other than financial instruments and deferred tax assets Total segment liabilities 17,764 189 17,953 149,735 288,056 437,791 ANNUAL REPORT 2018 89 PSC INSURANCE GROUP Note 32: Subsequent Events Circumstances which have arisen since 30 June 2018 that affect the state of affairs of the consolidated entity are detailed as follows: (a) Acquisitions 1. Turner Financial Services Ltd – On 2 July 2018, the consolidated entity acquired 70% of Turner Financial Services Ltd, a retail broking business in the UK. Details of the acquisition will be disclosed in the next reporting date. The calculation of the fair value of assets is yet to be finalised and accordingly the carrying value of goodwill is yet to be determined. Consideration paid/payable Consideration and costs paid Deferred consideration Contingent consideration Total Consideration * * Approximate. $’000 3,527 1,763 1,764 7,054 2. B P Marsh & Partners PLC – On 5 July 2018, the consolidated entity acquired a 19.6% shareholding in B P Marsh & Partners plc (BPM), an insurance specialist private equity and venture capital investor, listed on the AIM market in the UK. Consideration paid/payable Consideration and costs paid Total Consideration $’000 32,962 32,962 3. APG Ltd entered into an Agreement with UIB Group on 15 August 2018 to introduce select clients based in regions of Africa for the annual renewal of their business. Upon successful renewal and payment APG would receive a commission sharing for a period of up to 3 years. 4. RP Parramatta Pty Ltd – On 17 August 2018 the consolidated entity acquired the remaining 50% of RP Parramatta Pty Ltd for a total consideration of approximately $226,000. (b) On 20 August, 2018, the Board declared an interim dividend for 2018 of 4.5 cents per share, 100% franked. Final dividend Note 33: Entity Details The registered office and principal place of business of the group is: PSC Insurance Group Limited 96 Wellington Parade East Melbourne Victoria, 3002 90 DIRECTORS’ DECLARATION The directors declare that the financial statements and notes set out on pages 31 to 89 are in accordance with the Corporations Act 2001, including: (a) Comply with Australian Accounting Standards and the Corporations Regulations 2001, and other mandatory professional reporting requirements; (b) As stated in Note 1(a) the consolidated financial statements also comply with International Financial Reporting Standards; and (c) Give a true and fair view of the financial position of the consolidated entity as at 30 June 2018 and of its performance for the year ended on that date. In the directors’ opinion there are reasonable grounds to believe that PSC Insurance Group Limited will be able to pay its debts as and when they become due and payable. This declaration has been made after receiving the declarations required to be made by the chief executive officer and chief financial officer to the directors in accordance with section 295A of the Corporations Act 2001 for the financial year ending 30 June 2018. This declaration is made in accordance with a resolution of the directors. Paul Dwyer Director Melbourne Date: 22 August 2018 ANNUAL REPORT 2018 91 PSC INSURANCE GROUP INDEPENDENT AUDITOR’S REPORT PSC INSURANCE GROUP LIMITED ABN 81 147 812 164 AND CONTROLLED ENTITIES INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PSC INSURANCE GROUP LIMITED Report on the Audit of the Financial Report Opinion We have audited the financial report of PSC Insurance Group Limited “the Company” and its controlled entities “the consolidated entity”, which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the consolidated entity is in accordance with the Corporations Act 2001, including: (a) (b) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2018 and of its financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the consolidated entity in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants “the Code” that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International 92 INDEPENDENT AUDITOR’S REPORT (continued) PSC INSURANCE GROUP LIMITED ABN 81 147 812 164 AND CONTROLLED ENTITIES INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PSC INSURANCE GROUP LIMITED Key Audit Matter How our audit addressed the key audit matter Impairment of intangible assets Refer to Note 14: Intangible Assets and Note 2: Critical accounting estimates and judgements Intangibles assets of $95.7m ($73.1m in FY17) are recorded on the consolidated statement of financial position, which comprise: - $84.6m of goodwill ($66.5m FY17;) and $11.0m of client list assets ($6.6m in FY17). in - Client list assets are amortised over a 10- year period. Valuation of intangible assets is considered a key audit matter due to the following factors: - - Management prepare the goodwill and client list assets value-in-use calculations to support the carrying value of each cash generating unit (CGU). Significant judgement is involved in the preparation of these impairment assessment models including management’s key assumptions used, which could have a material impact on the impairment assessment including: o forecast cash flows; o growth rates; and, o discount rates applied. Our procedures included, amongst others: - - - Assessing management’s determination of the consolidated entity’s CGUs based on our understanding of the nature of the consolidated entity’s business; Evaluating the goodwill value-in-use calculation to ensure it is consistent with the expected methodology (present value of 5-year period future cash flow expected to be derived from the CGU); Obtaining supporting evidence to determine if the goodwill value-in-use calculation inputs are reasonable, including assessing the accuracy of prior period budgets; calculation - With the assistance of a valuation expert reviewing the discount rates used in the goodwill value-in-use industry against comparable organisations, standards and including re-calculating using market data and benchmark listed company betas; Performing sensitivity analysis around key assumptions, including: - o forecast cash flows; o growth rates; and, o discount rates applied. The following procedures were conducted in relation to the carrying value of client list assets: - - Assessing the initial valuation and on-going performance of the portfolio against budget, and Determining if there are any indications of impairment or indicators of changes to useful life of the client list assets. An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International ANNUAL REPORT 2018 93 PSC INSURANCE GROUP PSC INSURANCE GROUP LIMITED ABN 81 147 812 164 AND CONTROLLED ENTITIES INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PSC INSURANCE GROUP LIMITED Business acquisitions Refer Note 23: Business Combinations During the year the PSC consolidated entity purchased an interest in seven businesses with gross consideration totalling $21.3m. These acquisitions are considered a key audit matter as accounting for these transactions is a complex and judgemental exercise, requiring management to determine: • Key terms and conditions of the sale and purchase agreement; • Whether control has been • obtained of the entity and the transaction is a business acquisition, investment or asset purchase; Acquired assets and liabilities, including those which may not be recorded on the acquirer’s balance sheet, such as intangible assets, including client lists or brands; Fair values of the identified assets and liabilities; Fair value of consideration including deferred payments which are subject to earn out; • Goodwill or gain on bargain • • • purchase associated with the acquisition; Impairment assessments regarding the carrying value of goodwill and intangible assets acquired, at 30 June 2018, using a present value valuation model. Our procedures included, amongst others: • • • • Reviewing the sale and purchase agreement to understand key terms and conditions; Assessing the accounting treatment for the acquisitions to ensure adherence with contract terms and relevant Australian Accounting Standards, with specific focus on judgemental areas such as: o Assessing whether AASB3: Business Combinations applies by ensuring the acquisition meets the definition of a business combination; o Evaluating and challenging the assumptions and methodology in management’s calculations of fair value of assets and liabilities acquired and impairment assessments at year end. Present value valuation model inputs were reviewed against previous performance for reasonableness and discount rates used were assessed against comparable industry rates; o Re-calculating the goodwill and gain on bargain purchase calculations, to ensure mathematical accuracy. Considering the deferred consideration clauses within the contracts subject to earn out and reviewing current forecast models; Assessing the adequacy of the consolidated entity’s disclosures in respect of business acquisitions. An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International 94 INDEPENDENT AUDITOR’S REPORT (continued) PSC INSURANCE GROUP LIMITED ABN 81 147 812 164 AND CONTROLLED ENTITIES INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PSC INSURANCE GROUP LIMITED Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the consolidated entity’s annual report for the year ended 30 June 2018, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the consolidated entity 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 consolidated entity or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International ANNUAL REPORT 2018 95 PSC INSURANCE GROUP PSC INSURANCE GROUP LIMITED ABN 81 147 812 164 AND CONTROLLED ENTITIES INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PSC INSURANCE GROUP LIMITED As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the consolidated entity’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the consolidated entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the consolidated entity to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the consolidated entity to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the consolidated entity audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International 96 INDEPENDENT AUDITOR’S REPORT (continued) PSC INSURANCE GROUP LIMITED ABN 81 147 812 164 AND CONTROLLED ENTITIES INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PSC INSURANCE GROUP LIMITED From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 18 to 29 of the directors’ report for the year ended 30 June 2018. In our opinion, the Remuneration Report of PSC Insurance Group Limited and controlled entities for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. S SCHONBERG Partner 22 August 2018 PITCHER PARTNERS Melbourne An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International ANNUAL REPORT 2018 97 PSC INSURANCE GROUP SHAREHOLDER INFORMATION As required under the ASX Listing Rules, the Directors provide the following information. Shareholding Analysis (a) At 8 August 2018, the distribution of shareholdings was as follows: Distribution of Shareholders Range 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total 08 August 2018 Securities % No. of holders 233,100,653 95.36 9,219,025 1,183,479 908,481 41,870 3.77 0.48 0.37 0.02 244,453,508 100.00 87 288 144 280 106 905 % 9.61 31.82 15.91 30.94 11.71 100.00 Substantial Shareholders (b) The number of shares held by the substantial shareholders listed in the Company’s register of substantial shareholders as at 8 August 2018 were: Name Mrs Melissa Jane Dwyer Austin Superannuation Pty Ltd Glendale Dwyer Pty Ltd HSBC Custody Nominees (Australia) Limited Number of Shares 69,500,000 35,410,600 34,571,522 20,411,998 Class of shares and voting rights (c) At 8 August 2018, there were 905 holders of ordinary shares in the Company. All of the issued shares in the capital of the parent entity are ordinary shares and each shareholder is entitled to one vote per share. 98 SHAREHOLDER INFORMATION (continued) year ended 30 June 2018 (d) Twenty Largest Shareholders (At 8 August 2018): Rank Shareholder 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 MRS MELISSA JANE DWYER AUSTIN SUPERANNUATION PTY LTD GLENDALE DWYER PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED CITICORP NOMINEES PTY LIMITED LOCUST FUND PTY LTD J P MORGAN NOMINEES AUSTRALIA LIMITED MR MICHAEL DAVID GUNNION & MRS DEBRA LEE GUNNION WALKER INSURANCE & FINANCIAL SERVICES PTY LTD NAMARONG INVESTMENTS PTY LTD UYB.COM PTY LTD NATIONAL NOMINEES LIMITED UBS NOMINEES PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED – A/C 2 SILVERVALE PASTORAL CO PTY LTD MR JOSHUA MARTIN REID BNP PARIBAS NOMS PTY LTD MRS TRACEY MCLAREN RABBIT ROO TAS PTY LTD 20 BANDS SA PTY LTD Number of Shares 69,500,000 35,410,600 34,571,522 20,411,998 10,472,182 8,013,078 7,736,287 4,715,403 4,451,168 3,320,354 3,117,479 2,813,234 2,491,997 2,471,289 1,486,769 1,000,000 952,347 865,781 860,531 859,049 ANNUAL REPORT 2018 99 PSC INSURANCE GROUP CORPORATE INFORMATION Directors Brian M Austin (Non-Executive Chairman) Paul R Dwyer (Managing Director) John R Dwyer Antony D Robinson Melvyn S Sims Group Secretary Stephen G Abbott Registered Office 96 Wellington Parade East Melbourne, Victoria, 3002 W : www.pscinsurancegroup.com.au Auditors Pitcher Partners Level 13, 664 Collins Street Docklands, Victoria, 3008 Share Registry Link Market Services Ltd Tower 4, 727 Collins Street Melbourne, Victoria, 3008 Stock Exchange Listing PSC Insurance Group Ltd shares are listed on the Australian Stock Exchange with ASX Code: PSI This page has been left blank intentionally. www.colliercreative.com.au #PSC0004 P S C I N S U R A N C E G R O U P A n n u a l R e p o r t 2 0 1 8 www.pscinsurancegroup.com.au