COMPANY REGISTRATION NUMBER: 00597740 LIVERPOOL VICTORIA LIFE COMPANY LIMITED REPORT AND FINANCIAL STATEMENTS
REPORT AND ACCOUNTS 2015 CONTENTS Page Directors, officers and registered office 3 Strategic report 4 Directors report 5 Independent Auditors report 7 Statement of comprehensive income 9 Statement of changes in equity 10 Statement of financial position 11 Statement of cash flows 12 Notes to the accounts 13 2
DIRECTORS, OFFICERS AND REGISTERED OFFICE Directors S R Haynes P W Moore M J Rogers R A Rowney Company Secretary R Small Registered Office County Gates Bournemouth BH1 2NF Telephone: 01202 292333 Fax: 01202 751825 Company Registration number 597740 Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants & Statutory Auditors 7 More London Riverside London SE1 2RT 3
(COMPANY REGISTRATION NUMBER 597740) STRATEGIC REPORT 1. Results and dividends The profit for the year after taxation was 91,000 (2014: profit of 1,162,000). The Directors paid dividends of 10,000,000 in the current year (2014: nil). 2. Principal activities The Company s main purpose during the year was to manage the run-off of the UIA business acquired in 2005 which relates to 98% of the insurance contract liabilities reported. The Company is also the reinsurer of Protection contracts consisting of term assurances and critical illness policies for which it receives premium income. 3. Business review The results for the Company and its financial position are set out in the financial statements that follow this report. Performance Monitoring The Board sets key performance indicators (KPI) and targets, which it monitors on a regular basis throughout the year. During 2015, the KPIs were focused on solvency & compliance: Solvency and Compliance The Company is regulated by both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The Company is required to hold minimum solvency capital in accordance with PRA Guidelines. Capital requirements are modelled monthly and form an integrated part of the risk management framework of the Company. The Company undertakes regular compliance reviews of its activities and reports to the Directors on observations and findings. Change to regulatory regime The new European-wide Solvency II insurance regulations replace the current regulatory regime on 1 January 2016. Future capital measurement and reporting will meet Solvency II requirements. Outlook The Company s main purpose will continue to be to manage the run-off of the UIA business acquired in 2005 and to act as reinsurer of Protection contracts. There are approximately 1683 UIA whole of life, endowment and term insurance policies in force. Principal Risks and Uncertainties The Company operates in a regulated environment and maintains a high quality control environment over its activities. The Board monitors all risks throughout the year and executes its strategy where practicable to reduce its exposure to the market risk as noted below: Market Risk This risk relates to fixed interest exposure in the assets that are held to back the insurance liabilities. If the Board considers the risk of a fall in values of these stocks is too great it would look to realise these stocks and increase the amount held as cash and deposits. Further information on the entity s financial risk management and policies is detailed within Note 3. APPROVED BY THE BOARD OF DIRECTORS AND SIGNED ON BEHALF OF THE BOARD P W Moore Director 11 March 2016 4
(COMPANY REGISTRATION NUMBER 597740) DIRECTORS REPORT The directors submit their annual report and the audited financial statements for Liverpool Victoria Life Company Limited (LVLC) (the Company) for the year to 31 December 2015. As permitted by section 414C(11) of the Companies Act 2006, certain information is not included in the Directors Report because it has instead been shown in the Strategic Report. This information is: Results and dividends; Principal activities of the Company; Business review and future prospects; Principal risks and uncertainties 1. Directors The directors of the company who were in office during the year and up to the date of signing the financial statements are listed on page 3. 2. Parent company The Company is a wholly owned subsidiary of Liverpool Victoria Friendly Society Limited, an incorporated Friendly Society registered under the Friendly Societies Act 1992. 3. Employees The Company utilised the staff and premises of Liverpool Victoria Friendly Society Limited in carrying out its activities in 2015. Costs not directly recharged were paid by way of a management charge. 4. Director s indemnity statement The Directors have the benefit of an indemnity which constitutes a "qualifying third party indemnity provision" as defined by Section 234 of the Companies Act 2006. The indemnity was in force throughout the last financial year and is currently in force. LVFS, the ultimate parent company, also purchased and maintained throughout the year on behalf of its subsidiaries Directors and Officers liability insurance in respect of the Company and its Directors. It is available for inspection at the registered office of the Company, details of which are provided on page 3. 5. Statement of directors responsibilities The directors are responsible for preparing the Strategic Report, Directors Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable International Financial Reporting Standards (IFRSs) as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 5
(COMPANY REGISTRATION NUMBER 597740) DIRECTORS REPORT 6. Independent auditors and disclosure of information to auditors Each director at the date of this report confirms that: a) so far as he is aware, there is no relevant audit information of which the Company s auditors are unaware, and b) he has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company s auditors are aware of that information. APPROVED BY THE BOARD OF DIRECTORS AND SIGNED BY ORDER OF THE BOARD R Small Company Secretary 11 March 2016 6
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF LIVERPOOL VICTORIA LIFE COMPANY LIMITED (COMPANY REGISTRATION NUMBER 597740) Report on the financial statements Our opinion In our opinion, Liverpool Victoria Life Company Limited s financial statements (the financial statements ): give a true and fair view of the state of the company s affairs as at 31 December 2015 and of its profit and cash flows for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006. What we have audited The financial statements, included within the Report and Financial Statements (the Annual Report ), comprise: the Statement of Financial Position as at 31 December 2015; the Statement of Comprehensive Income for the year then ended; the Statement of Changes in Equity for the year then ended; the Statement of Cash Flows for the year then ended; and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and IFRSs as adopted by the European Union. In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, the information given in the Strategic Report and the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Other matters on which we are required to report by exception Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: we have not received all the information and explanations we require for our audit; or adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Directors remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. 7
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF LIVERPOOL VICTORIA LIFE COMPANY LIMITED (COMPANY REGISTRATION NUMBER 597740) Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors Responsibilities set out on page 5, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) ( ISAs (UK & Ireland) ). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the parent company s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Andrew G Hill (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 11 March 2016 The maintenance and integrity of the Liverpool Victoria Friendly Society Limited website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 8
STATEMENT OF COMPREHENSIVE INCOME Note Gross earned premiums 5 166 197 Reinsurance premiums accepted 5 429 445 Net earned premiums 595 642 Investment income 6 622 674 (Loss) / Gains on investments 7 (501) 1,653 Total income 716 2,969 Net benefits and claims 8 (3,019) (1,969) Net benefits and claims (3,019) (1,969) Net change in insurance contract liabilities 9 2,478 742 Net change in contract liabilities 2,478 742 Other operating and administrative expenses 10 (73) (35) Other expenses (73) (35) Total benefits, claims and expenses (614) (1,262) Profit before tax 102 1,707 Income tax (expense) 13 (11) (545) Profit for the year attributable to shareholders 91 1,162 Profit for the year 91 1,162 Total Comprehensive Income for the year 91 1,162 The notes on pages 13 to 34 are an integral part of these financial statements. 9
STATEMENT OF CHANGES IN EQUITY Attributable to the shareholders of the Company Note Called up share capital Retained earnings Total equity 000 Balance at 1 January 2015 100 14,711 14,811 Dividend paid 25 - (10,000) (10,000) Total comprehensive income for the year - 91 91 Balance at 31 December 2015 100 4,802 4,902 Attributable to the shareholders of the Company Called up share capital Retained earnings Total equity 000 Balance at 1 January 2014 100 13,549 13,649 Total comprehensive income for the year - 1,162 1,162 Balance at 31 December 2014 100 14,711 14,811 10
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2015 Note Assets Financial assets - Fair value through income 14 15,701 17,837 Loans and other receivables 15 49 9 Insurance receivables 16-78 Prepayments and accrued income 17 101 131 Cash and cash equivalents 18 4,494 15,018 Total assets 20,345 33,073 Liabilities Insurance contract liabilities 19 15,382 17,873 Insurance payables 21 41 34 Current tax liability 22 11 289 Trade and other payables 23 9 66 Total liabilities 15,443 18,262 Equity Called up share capital 24 100 100 Retained earnings 25 4,802 14,711 Total equity 4,902 14,811 Total liabilities and equity 20,345 33,073 The notes on pages 13 to 34 are an integral part of these financial statements. The financial statements on pages 9 to 34 were approved by the Board of Directors on 11 March 2016 and signed on its behalf by: P W Moore Director 11
STATEMENT OF CASH FLOWS Note Cash and cash equivalents at 1 January 18 15,018 16,072 Cash flows arising from: Operating activities Cash used in operating activities 26 (857) (1,596) Interest income received 6 622 674 Income tax paid (289) (132) Net cash flows used in operating activities (524) (1,054) Financing activities Dividend paid 25 (10,000) - Net cash flows used in financing activities (10,000) - Net decrease in cash and cash equivalents (10,524) (1,054) Cash and cash equivalents at 31 December 18 4,494 15,018 12
1. General Information Liverpool Victoria Life Company Limited is a company limited by shares, domiciled and incorporated in the United Kingdom. 2. Accounting policies BASIS OF PRESENTATION These financial statements of Liverpool Victoria Life Company Limited have been prepared in accordance with International Financial Reporting Standards (IFRS), as endorsed by the European Union ( EU ) and the International Financial Reporting Interpretations Committee ( IFRIC ) and also with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. In accordance with IFRS 4 on Insurance Contracts, the Company has applied existing accounting practices for insurance contracts modified as appropriate to comply with the IFRS framework and applicable standards. Further details are given in policy b below. Insurance contracts are accounted for in accordance with the Statement of Recommended Practice issued by the Association of British Insurers in December 2005, and amended in December 2006. Whilst this SORP is no longer in force, the Group continues to apply it, as it was existing accounting practices for insurance contracts when the Group first time adopted IFRS. Items included in the financial statements of the Company are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). Unless otherwise noted, the financial statements are presented in thousands of pounds sterling, which is the Company s presentation currency. The financial statements have been prepared under the historical cost convention as modified by the revaluation of financial assets and liabilities at fair value through income. The preparation of financial statements in conformity with IFRSs requires management to exercise its judgement in the process of applying accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in the principal accounting policies below. After making enquiries, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The Company therefore continues to adopt the going concern basis in preparing its financial statements. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS In applying the Company s accounting policies, management has made the following judgements, estimations and assumptions which have the most significant effect on the financial statements. Valuation of insurance contract liabilities The liability is based on current assumptions reflecting the best estimate at the period end allowing for a margin of risk and adverse deviation. All contracts are subject to a liability adequacy test, which reflects management s best current estimate of future cash flows. The assumptions used for mortality, morbidity and longevity are based on standard industry tables, adjusted where appropriate to reflect the Company s own experience. The assumptions used for investment returns, expenses, lapse and surrender rates, and discount rates are based on historic market returns, product characteristics, claims experience and industry risk rates. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. 13
PRINCIPAL ACCOUNTING POLICIES a. Contract classification The Company issues contracts that transfer insurance risk, financial risk or both. Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. As a general guideline, the Company defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event that are at least 10% more than the benefits payable if the insured event did not occur. b. Earned premiums Insurance contracts Regular premiums on life insurance contracts and reinsurance premiums are recognised as income when due for payment. For single premium business, recognition occurs on the date from which the policy is effective. Reinsurance contracts Regular premiums on assumed reinsurance contracts are recognised as income when due for payment. For single premium business, recognition occurs on the date from which the policy is effective. c. Claims Insurance contracts Maturity claims and claims due under insurance agreements are accounted for when due for payment. Surrenders are accounted for on the earlier of the date when paid or when the policy ceases to be included within the long term business provision. Death claims and other claims are accounted for when the Company is notified. The value of claims on with-profits business includes bonuses paid or payable. Claims values include related internal and external claims handling costs. Reinsurance contracts Claims due under reinsurance agreements are accounted for when notified by ceding insurer. d. Fee and commission income Fees from investment contracts for investment management and other policy administration charges are recognised as income when due for payment. e. Investment income Investment income includes dividends, interest from investments at fair value and interest on other receivables. Dividends are included on an ex-dividend basis. Investment expenses are included on an accruals basis. Interest income for financial assets that are not classified as "fair value through income" is recognised using the effective interest method. The effective interest rate is calculated at outset by discounting the asset s estimated cash flows back to their net carrying amount. f. Gains and losses on investments Realised gains and losses on financial assets are calculated as the difference between net sales proceeds and purchase price. Unrealised gains and losses on financial assets represent the difference between the valuation of fair value investments at the statement of financial position date and their purchase price or, if they have been previously revalued, their valuation at the last statement of financial position date. An adjustment is made to unrealised gains and losses for the prior year s unrealised element included in the current year s realised gains and losses. g. Income taxes The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in equity, in which case the tax is also recognised in equity. 14
Current income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of the statement of financial position in the countries where the company operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate. Deferred income tax Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax 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, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of the statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. h. Foreign currencies Monetary assets and liabilities denominated in foreign currencies are translated to sterling at rates of exchange ruling at the end of the year. Purchases and sales of investments denominated in foreign currencies are translated at the rates prevailing at the dates of the respective transactions. Exchange gains and losses are dealt with in the income statement. i. Financial assets at fair value through income All investments of the Company classified as fair value are designated as fair value through income at inception. Such assets are valued at market prices, or prices consistent with market ratings should no price be available. Any unrealised or realised gains or losses are taken to the statement of comprehensive income, as fair value gains or losses, or realised gains or losses respectively, as they occur. j. Derecognition of financial assets A financial asset is derecognised when: - the rights to receive cash flows from the asset have expired; or - the Company has transferred its rights to receive cash flows from the asset and has either: - transferred the risks and rewards of the asset; or - has transferred control of the asset. k. Loans and other receivables Loans and other receivables are recognised when due and comprise amounts due to the Company from group undertakings and other receivables. Where there is objective evidence that the carrying value is impaired then the impairment loss will be recognised in the statement of comprehensive income. Loans and other receivables are initially recognised at fair value and then subsequently held at amortised cost. l. Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand, and short term deposits with an original maturity of three months or less. For the purpose of the cash flow statement, cash and cash equivalents are as defined above but are shown net of outstanding bank overdrafts. m. Life insurance contract liabilities Non-participating contracts The provision is calculated to comply with the reporting requirements under the Prudential Regulation Authority s Integrated Prudential Sourcebook using a gross premium valuation method or a method at least as prudent as the gross premium method. The principal assumptions are given in the notes to the financial statements. Liabilities for non-participating business will be either included within the life and pensions insurance contract liabilities or the investment contract liabilities, depending upon the product classification. 15
n. Trade and other payables Trade and other payables are recognised when due and comprise amounts due to group undertakings and payables. o. Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets. CHANGES IN ACCOUNTING POLICIES (i) New and amended standards adopted by the Company There were no new or amended accounting standards adopted by the Company for the first time for the financial year beginning on or after 1 January 2015. (ii) New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2016, and have not been applied in preparing these financial statements. None of these are expected to have a significant effect on the financial statements of the Company, except the following: Amendment to IAS 1 Presentation of Financial Statements seeks to clarify the disclosure requirements including considering the impact of materiality on the level of disaggregation and extent of disclosures presented; disclosure of additional sub totals and reconciliation to those required by IAS 1; and also additional flexibility regarding the order of notes to the financial statements. This amendment is effective from 1 January 2016 and will be adopted by the Company. The Company has reviewed the disclosures included in the financial statements against this amendment. As this amendment merely clarifies the existing requirements of IAS1 the Company does not consider the impact of the amendment to be significant. IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. The standard is effective for accounting periods beginning on or after 1 January 2018. The Company is currently assessing the impact of this new standard. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. 16
3. Risk management and control The Company seeks to create value for its shareholder by maintaining an appropriate balance between the capital available to support risk, and the level and type of risk it takes on in order to achieve returns for policyholders. The principal types of risk, which are detailed below, have been identified and the risk appetite for each of these has been set based on the amount necessary to meet the PRA s Individual Capital Assessment (ICA) capital requirements. The Liverpool Victoria Friendly Society Group recognises the critical importance of having efficient and effective risk management systems in place and these take the form of: Board and Executive committees with clear terms of reference. A clear organisation structure with documented apportionment of responsibilities. A uniform methodology of risk assessment, which is embedded within all companies in the LVFS Group so that they operate within agreed tolerances and with appropriate controls in place. Regular reviews of risks by senior managers, where frequency of review is determined by the potential impact of the risk and its likelihood. a) Insurance risk Insurance risk is the risk that arises from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities. Life insurance risk arises from risks in life insurance contracts such as mortality, morbidity, persistency and expense variances. Systems are in place to measure, monitor and control exposure to these risks. These are documented in policies for underwriting, pricing, claims and reinsurance. Higher than expected expense costs will increase the value of reserves required. The Company is exposed to the risk that the charges it deducts from policyholder benefits are not sufficient to cover future expenses. The table below sets out the concentration of life insurance contract liability (gross) by type of contract. All business is written in the UK. Whole life 12,721 13,422 Endowment 1,208 1,657 Term assurance 1,136 2,463 Other 115 116 Total 15,180 17,658 The table below sets out the impact on life insurance contract liabilities and profit before tax for movements in key assumptions. Sensitivity analysis for the change in assumptions used in insurance contract liabilities Impact on profit before tax Impact on profit before tax Impact on gross liabilities Impact on gross liabilities Increase in mortality rates by 10% 19 38 (19) (38) Increase in expenses by 10% (40) (45) 40 45 17
3. Risk management and control (continued) (b) Financial risk Market risk Market risk is the risk of adverse impact due to fluctuations in equity prices, interest rates or exchange rates. It arises due to fluctuations in liabilities arising from products sold and the value of investments held. The Company has defined policies and procedures in place to control the major components of market risk. Exposures to individual companies and to equity shares in aggregate are monitored in order to ensure compliance with the relevant regulatory limits for solvency purposes and with guidelines set for each fund. Investments held are primarily listed and traded on the UK and other recognised stock exchanges. Limits on the Company s exposure to equities are defined both in aggregate terms and by geography, industry and counterparty. Tactical asset allocation meetings are held weekly, and strategic asset allocation meetings quarterly, to discuss investment return and concentration and to agree any changes required. Equity price risk The Company does not have an exposure to equity price risk as all its insurance contract liabilities are backed by fixed interest securities. Interest rate risk Interest rate risk in respect of the Company s insurance contracts arises when there is a mismatch in duration of yield between liabilities and the assets backing these liabilities. The Company monitors interest rate risk by calculating the mean duration of the investment portfolio and the liabilities issued. The mean duration is an indicator of the sensitivity of the assets and liabilities to changes in current interest rates. The mean duration of the liabilities is determined by projecting expected cash flows from the contracts using best estimates of mortality and voluntary terminations. The mean duration of the assets is calculated in a consistent manner. Asset liability matching The Company manages its financial positions with an asset liability management (ALM) framework that has been developed to achieve long term investment returns in excess of its obligations under insurance and investment contracts. The principal technique of the Company s ALM is to match assets to the liabilities arising from insurance contracts by reference to the type of benefits payable to contract holders. The Company s ALM is integrated with the management of the financial risks associated with the Company s other financial assets and liabilities not directly associated with insurance and investment liabilities. Currency risk The Company is not exposed to foreign exchange risk as it only has a small holding of overseas listed securities within its investment portfolios supporting the Company s operations and these are denominated or payable in sterling. There is no other exposure to currency risk. 18
3. Risk management and control (continued) (b) Financial risk (continued) Summary of market risk sensitivities The table below sets out the impact on insurance contract liabilities and profit before tax for movements in sectors of the market in which the Company is invested. Sensitivity analysis to movements in key market sectors Impact on profit before tax Impact on insurance contract liabilities Impact on profit before tax Impact on insurance contract liabilities Decrease in fixed interest rates by 0.5% 154 765 159 856 Increase in fixed interest rates by 1% (225) (1,353) (219) (1,519) In determining the percentage rates to use in the sensitivity analysis the Company has made reference to those set by the regulators for calculating the risk capital margin. Asset values and, where appropriate, asset shares are adjusted to reflect the change in each sensitivity. Future policy related liabilities are recalculated using these revised values and, where appropriate, economic scenarios generated by an asset model calibrated to the revised risk free rate. Credit risk Credit risk is the risk of loss due to counterparties failing to meet all or part of their obligations when due. The principal credit risks arise from exposure to counterparties through exposure to corporate bonds, amounts due from insurance contract holders and amounts due from insurance intermediaries. Policies are in place to control the major components of credit risk, including counterparty default and concentration risk. The Company places limits on its exposure to a single counterparty, or groups of counterparties, and to industry segments. The table below shows the credit profile of the company s assets. AA A BBB Not Total rated Credit risk exposure 2015 000 Financial assets Fair value through income Debt and other fixed income securities 15,156 - - 32 15,188 15,156 - - 32 15,188 Loans and other receivables Loans secured by policies - - - 6 6 Amounts due from other group undertakings - - - 43 43 - - - 49 49 Cash and cash equivalents Deposits - 3,007 1,000-4,007 Bank Balances - 487 - - 487-3,494 1,000-4,494 Total 15,156 3,494 1,000 81 19,731 19
3. Risk management and control (continued) (b) Financial risk (continued) AA A Not rated Total Credit risk exposure 2014 Financial assets Fair value through income Debt and other fixed income securities 17,463-55 17,518 17,463-55 17,518 Loans secured by policies - - 6 6 Other receivables - - 3 3 - - 9 9 Cash and cash equivalents Deposits 1,000 13,627-14,627 Bank Balances - 391-391 1,000 14,018-15,018 Total 18,463 14,018 64 32,545 All financial assets fall into the neither past due nor impaired category. Liquidity risk Liquidity risk is the risk that the Company does not have sufficient available liquid assets to meet its obligations as they fall due. Sources of liquidity risk have been identified and systems are in place to measure, monitor and control liquidity exposures. Liquidity is maintained at a prudent level, with a buffer to cover contingencies including the provision of temporary liquidity to subsidiary companies. The table below summarises the maturity profile of the financial liabilities of the Company based on remaining undiscounted contractual obligations. Within 1 year 1-3 3-5 years years Over 5 years Total Maturity profile of financial liabilities 000 2015 Insurance contract liabilities 1,646 2,172 1,441 10,123 15,382 Insurance payables 41 - - - 41 Trade and other payables 9 - - - 9 1,696 2,172 1,441 10,123 15,432 Within 1 year 1-3 years 3-5 years Over 5 years Maturity profile of financial liabilities 2014 000 Insurance contract liabilities 2,590 2,503 1,769 11,011 17,873 Insurance payables 34 - - - 34 Trade and other payables 66 - - - 66 2,690 2,503 1,769 11,011 17,973 Total 20
3. Risk management and control (continued) (b) Financial risk (continued) The Company is responsible for ensuring there is sufficient liquidity within the asset portfolio to enable liabilities to unit-linked policyholders to be met as they fall due. The table below summarises the expected recovery or settlement of assets. Within 1 year Over 1 Total Within 1 Over 1 year year year Financial assets Fair value through income 1,433 14,268 15,701 2,171 15,666 17,837 Loans and receivables 49-49 9-9 Insurance receivables - - - 78-78 Prepayments and accrued income 101-101 131-131 Cash and cash equivalents 4,494-4,494 15,018-15,018 Total assets 6,077 14,268 20,345 17,407 15,666 33,073 Other risk types Operational risk Operational risk is the risk of loss, resulting from inadequate or failed internal processes, people and systems, or from external events, including legal and regulatory risk. Senior managers are responsible for the identification, assessment, control and monitoring of operational risks and for reporting these to the Group Enterprise Risk Committee (GERC) in accordance with the Group s escalation criteria. Operational risks are assessed in terms of their probability and impact in accordance with Group policy. Group risk Group risk is the risk of contagion that the Company incurs from its membership of a group of firms. The GERC oversees the management of such risks. Strategic risk Strategic risk is the risk arising from the implementation of agreed strategy. It includes risks arising from political, economic, sociological and technological changes, competitor actions and capital adequacy. Executive management identifies strategic risks when drawing up business plans for approval by the Board and monitors these, ensuring that excess risk is reported to the GERC and Board. Fair value estimation Effective 1 January 2009, the Company adopted the amendment to IFRS 7. This requires, for financial instruments held at fair value in the statement of financial position, disclosure of fair value measurements by level of the following fair value measurement hierarchy: Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2). Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). Total 21
3. Risk management and control (continued) (b) Financial Risk (continued) The following table presents the Company s assets and liabilities measured at fair value at 31 December 2015 and 2014. Level 1 Level 2 Level 3 Total fair value Financial assets held at fair value through income 2015 1 Shares, other variable yield securities and OEICs 1 UK listed 409 104-513 Debt and other fixed income securities UK listed 13,544 1,612 11 15,167 Overseas listed - - 21 21 13,953 1,716 32 15,701 Level 1 Level 2 Level 3 Total fair value Financial assets held at fair value through income 2014 Shares, other variable yield securities and OEICs UK listed 216 103-319 Debt and other fixed income securities UK listed 15,824 1,650-17,474 Overseas listed - 44-44 16,040 1,797-17,837 The fair value of financial instruments included in the Level 1 category are based on published quoted bid market prices in an active market at the year end date. A market is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm s length basis. Level 2 financial instruments are not traded in an active market, their fair value is determined using valuation techniques. These valuation techniques maximise the use of data from observable current market transactions where it is available, and assets for which pricing is obtained via pricing services, but where prices have not been determined in an active market, financial assets with fair values based on broker quotes. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. If the inputs for the level 3 assets and liabilities were changed they would not significantly change the fair value. 22
3. Risk management and control (continued) (b) Financial risk (continued) Specific valuation techniques used to value financial instruments include: Quoted market prices or dealer quotes for similar instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves. The fair value of forward exchange contracts is determined using forward exchange rates at the statement of financial position date, with the resulting value discounted back to present value. Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments. There were no changes to the valuation techniques during the year. There were no transfers between levels 1 and 2 during the year and there were no movements in level 3 financial instruments during the year ended 31 December 2015. The Group s policy is to recognise transfers into and out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. 4. Capital Management The Company maintains a capital structure which consists of a combination of equity shareholder s funds and retained earnings, consistent with the Company s risk profile and the regulatory and market requirements of its business. The Company retains capital to meet four key objectives: (i) (ii) (iii) (iv) To ensure financial stability; To enable the Company s strategy to be implemented To give confidence to policyholders and other stakeholders who have relationships with the Company; and To comply with capital requirements imposed by the Prudential Regulation Authority (PRA). At least annually, these objectives are reviewed and benchmarks are set by which to judge the adequacy of the Company s capital. The capital position is monitored against those benchmarks to ensure that sufficient capital is available to the Company. In the event that sufficient capital is not available, plans would be developed either to raise additional capital through, for example, subordinated loans, or to reduce the amount of risk accepted thereby reducing the capital requirement through, for example, reinsurance or a change in investment strategy. If it becomes apparent that excess capital is available to the Company above its potential needs, plans would be developed to return such excess to the shareholders. During 2015 there were no changes to the way in which the company manages its capital. Consistent with other insurers in the life industry, the PRA imposes two separate capital requirements on the Company: the Minimum Capital Requirement (MCR) as defined in the PRA regulations and reported publicly in the Company s Annual PRA return; and Individual Capital Guidance (ICG), which is entity specific and is derived using a more riskrelated approach as set out in the PRA regulations. The ICG is calculated and updated by the PRA following its reviews on a regular basis of the Company s own Individual Capital Assessment (ICA). 2015 is the final year of the PRA s ICAS solvency regime. Under this regime, the PRA imposes two separate capital requirements on the Company: the Minimum Capital Requirement ( MCR ) as defined in the PRA regulations and reported publicly in the annual PRA returns prepared by the Company s regulated subsidiaries; and Individual Capital Guidance ( ICG ), which is entity specific and is derived using a more risk-related approach as set out in the PRA regulations. The ICG is calculated and updated by the PRA following its reviews on a regular basis of the Company s own Individual Capital Assessment ( ICA ). 23
4. Capital Management (continued) 2016 marks the beginning of the Solvency II regime, an EU imposed legislation, which for UK firms replaces the ICAS regime. There are again two separate capital requirements; the Minimum Capital Requirement ( MCR ) and the Solvency Capital Requirement ( SCR ). The SCR can be calculated using a Standard Formula, as specified in the regulatory text, or an Internal Model, which is unique to each firm and must be approved by the firm s local regulator. The Company will use the Standard Formula to calculate its capital requirements throughout 2016, but the LV Group intends to apply for Internal Model approval during 2016 which will include LVLC. In aggregate the Company has at its disposal total available capital in respect of its long term business of 2,244,000 (2014: 11,909,000) representing the solvency capital of the Company. This capital is available to meet risks and regulatory requirements set by reference to regulatory guidance as prescribed by the PRA. Throughout the year, the Company complied with all externally imposed capital requirements to which it is subject. 24
5. Net earned premiums Gross earned premiums Investments and savings - regular premium 155 175 Life and health protection - regular premium 11 22 Gross earned premiums 166 197 Reinsurance premiums Insurance contract premiums non-participating business Life and health protection - regular premium 429 445 Reinsurance premiums 429 445 Net Premiums 595 642 All premiums are received from contracts written in the United Kingdom. 6. Investment income Income from investments at fair value through income - Interest income 615 661 Interest on loans and receivables 7 13 Investment income 622 674 7. (Loss)/gain on investments (Loss) / gain on investments at fair value through income - Debt securities (501) 1,653 Gains and losses on investments (501) 1,653 Included within gains and losses on investments are realised losses of 171,000 (2014: losses of 95,000). 8. Net benefits and claims Gross benefits and claims Insurance contracts Gross benefits and claims paid 3,032 2,092 Change in the provision for claims (13) (123) Net benefits and claims 3,019 1,969 25
9. Gross change in insurance contract liabilities Gross change in contract liabilities Change in insurance contract liabilities 2,478 742 Gross change in contract liabilities 2,478 742 10. Other operating and administrative expenses Investment management expenses and charges 31 30 Acquisition costs 2 1 Auditors' remuneration (see note 11) 79 76 Administrative expenses (39) (72) Other operating and administrative expenses 73 35 The Company has no employees and its expenses are borne by its parent, LVFS. LVFS charge the Company by way of a management charge. 11. Auditors' remuneration Audit of the company 56 54 Audit related assurance services 23 22 Auditors' remuneration 79 76 The above fees were payable to PricewaterhouseCoopers LLP. 26