Wrap Text
Quilter plc preliminary results for the year ended 31 December 2018
QUILTER PLC
(previously, Old Mutual Wealth Management Limited)
Incorporated under the Companies Act 1985 with registered number 06404270 and re-registered as a public limited company under the Companies Act 2006)
ISIN CODE: GB00BDCXV269
JSE SHARE CODE: QLT
Quilter plc (the "Company")
NEWS RELEASE
12 March 2019
Quilter plc preliminary results for the year ended 31 December 2018
Adjusted profit up 11% to GBP233 million, adjusted diluted earnings per share up 15% and a
recommended final dividend of 3.3 pence per share
Financial highlights
- Assets under Management/Administration ("AuMA") at GBP109.3 billion is down 4% year-on-year (2017: GBP114.4 billion) as a
result of positive net flows of GBP2.7 billion more than offset by negative market performance of GBP7.8 billion.
- Net Client Cash Flow ("NCCF") (excl. Quilter Life Assurance) of GBP4.7 billion (2017: GBP7.6 billion), representing 5% of
NCCF/opening AuMA (2017: 9%) in line with our medium-term target.
- Integrated flows (excl. Quilter Life Assurance) of GBP4.7 billion (2017: GBP5.2 billion).
- Improvement in operating margin to 30% (2017: 29%) and revenue margin to 57 bps (2017: 56 bps).
- Adjusted profit before tax of GBP233 million (2017: GBP209 million), up 11% from 2017.
- IFRS profit/(loss) before tax from continuing operations of GBP5 million (2017: GBP(5) million).
- Diluted earnings per share of 26.5 pence (2017: 8.6 pence) and adjusted diluted earnings per share of 12.3 pence
(2017: 10.7 pence), up 15%.
- Recommended final dividend of 3.3 pence per share, in line with our dividend policy.
- Solvency II ratio of 190% after payment of the recommended final dividend (2017: 154%).
Strategic highlights
- Completed Managed Separation from Old Mutual plc and listed on the London and Johannesburg Stock Exchanges on
25 June 2018.
- Successful completion of the sale of the Single Strategy asset management business on 29 June 2018, with separation
activity from this business progressing well. Special interim dividend of 12.0 pence per share paid on 21 September 2018,
returning GBP221 million net surplus proceeds to shareholders.
- FCA investigation into treatment of long-standing clients of closed life books concluded without sanction.
- UK Platform Transformation Programme in soft launch phase. Migration planning well advanced and expected to
commence by Autumn 2019. Total programme costs currently targeted to be at the upper end of the guidance range.
- Phased, multi-year Optimisation plans are underway: Targeting 4 percentage point uplift in operating margin by 2021.
- While macro-economic and political concerns may continue to weigh on investor sentiment in 2019, remain focused on
growing the business and confident in the Group's strategic path and growth prospects.
Paul Feeney, Quilter Chief Executive Officer, said:
"Quilter performed well in 2018 despite increasingly challenging market conditions as the year progressed. We are delighted to
report record profit with adjusted profit up 11% and adjusted diluted earnings per share up 15%. Although deteriorating investor
sentiment over the course of the year made net client cash flows more challenging, the resilience in our integrated flows
demonstrated that our business model is generating real traction with our customers.
2019 will again be an important year for our business. We will substantially implement our new UK Platform, progress our
Optimisation plans which will help to drive up our operating margin in 2020 and 2021, and we will increase numbers of advisers and
investment managers to deliver high quality solutions that our customers need."
Quilter highlights (from continuing operations only)(1,2) 2018 2017 Change
Assets and flows
AuMA (GBPbn) 109.3 114.4 (4%)
NCCF (GBPbn) 2.7 6.3 (57%)
NCCF (excl. Quilter Life Assurance) (GBPbn)(3) 4.7 7.6 (38%)
NCCF/opening AuMA (excl. Quilter Life Assurance)(3,4) 5% 9% (4pp)
Integrated flows (excl. Quilter Life Assurance) (GBPbn)(3) 4.7 5.2 (10%)
Productivity (GBPm) 1.7 1.8 (6%)
Asset retention % (excl. Quilter Life Assurance)(3) 91% 90% 1pp
Profit & loss
IFRS profit before tax from continuing operations (GBPm) 5 (5) 200%
IFRS profit after tax (GBPm) 488 157 211%
Adjusted profit before tax (GBPm) 233 209 11%
Operating margin 30% 29% 1pp
Revenue margin (bps) 57 56 1bp
Non-financial
Restricted Financial Planners ("RFPs") 1,621 1,561 4%
Investment Managers ("IMs") 155 164 (5%)
(1) Continuing operations represent Quilter plc excluding results of the Single Strategy asset management business (up to the date its sale completed on 29 June 2018)
and Old Mutual Wealth Italy S.p.A (up to the date its sale completed on 9 January 2017).
(2) Alternative Performance Measures ("APMs") are detailed on page 5.
(3) Quilter Life Assurance is excluded from this metric principally due to the closure of the institutional life book of business announced in 2017 and run-off of the legacy
book as it is a closed-book business.
(4) The underlying numbers for this calculation are detailed on page 24 and 25 of this announcement.
Quilter plc results for the year ended 31 December 2018
Enquiries
John-Paul Crutchley UK +44 20 7002 7016
Keilah Codd UK +44 20 7002 7054
Media
Jane Goodland UK +44 77 9001 2066
Tim Skelton-Smith UK +44 78 2414 5076
Camarco
Geoffrey Pelham-Lane UK +44 20 3757 4985
Aprio (South Africa)
Julian Gwillim SA +27 11 880 0037
Paul Feeney, CEO, Tim Tookey, CFO and Mark Satchel, CFO-Designate, will host a presentation for investors and analysts at 09:00am (GMT)
today, 12 March 2019 at Quilter plc, Millennium Bridge House, 2 Lambeth Hill, London, EC4V 4AJ.
Alternatively, if you are unable to attend but would like to watch a live webcast of the presentation, please click on the link below to join via our
website.
Live and on-demand: https://www.quilter.com/investor-relations
To join by telephone (listen only audio):
United Kingdom +44 333 300 0804
South Africa +27 21 672 4118
United States +1 631 913 1422
Access Code 12133910#
Playback facility:
United Kingdom/ Other +44 333 300 0819
South Africa +27 21 672 4123
United States +1 866 931 1566
Access Code 301278216#
Note: Neither the content of the Company's website nor the content of any website accessible from hyperlinks on this announcement (or any other
website) is incorporated into, or forms part of, this announcement.
Disclaimer
This announcement may contain certain forward-looking statements with respect to certain Quilter plc's plans and its current goals and expectations
relating to its future financial condition, performance and results.
By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are
beyond Quilter plc's control including amongst other things, international and global economic and business conditions, the implications and
economic impact of several scenarios of the UK leaving the EU in relation to financial services, market related risks such as fluctuations in interest
rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing and impact of
other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other
regulations in the jurisdictions in which Quilter plc and its affiliates operate. As a result, Quilter plc's actual future financial condition, performance
and results may differ materially from the plans, goals and expectations set forth in Quilter plc's forward looking statements.
Quilter plc undertakes no obligation to update the forward-looking statements contained in this announcement or any other forward-looking
statements it may make.
Nothing in this announcement should be construed as a profit forecast.
Business unit descriptor:
Previous Business Unit Name New Business Unit Name
Advice & Wealth Management
Multi-Asset Quilter Investors
Quilter Cheviot No change
Intrinsic Quilter Financial Planning
Old Mutual Wealth Private Client Advisers Quilter Private Client Advisers
Wealth Platforms
UK Platform Quilter Wealth Solutions
International Quilter International
Heritage Quilter Life Assurance
Alternative Performance Measures ("APMs")
We assess our financial performance using a variety of measures. APMs are not defined by the relevant financial reporting framework (which for the
Group is IFRS), but we use them to provide greater insight into the financial performance, financial position and cash flows of the Group and the
way it is managed.
APMs should be read together with the Group's IFRS consolidated income statements, IFRS consolidated statement of financial position and IFRS
consolidated statement of cash flows, which are presented in the financial statements on pages 31 to 36.
A number of our metrics exclude Quilter Life Assurance, principally due to the closure of the institutional life book of business announced in 2017
and run-off of the legacy book as it is a closed-book business. Further details of APMs used by the consolidated Group in our financial review are
provided below.
APM Definition
Adjusted profit Represents the adjusted profit before tax of the Group. It adjusts IFRS profit for key adjusting items and excludes non-
core operations, as detailed in note 5(a) in the financial statements.
Due to the nature of the Group's businesses, we believe that adjusted profit is an appropriate basis by which to
assess the Group's underlying operating results and it enhances comparability and understanding of the financial
performance of the Group.
Please refer to page 16 for a detailed reconciliation of adjusted profit to IFRS.
Revenue margin (bps) Represents net management fees, divided by average AuMA. Management use this APM as it represents the Group's
ability to earn revenue from AuMA.
Operating margin Represents adjusted profit before tax from continuing operations divided by total fee revenue including life tax
contributions and adviser fees. Operating margin excludes financing costs.
Management use this APM as this is an efficiency measure that reflects the percentage of net revenues that become
adjusted profit.
Gross sales Gross sales are the gross client cash inflows received from customers during the period and represent our ability to
increase AuMA and revenue.
Net client cash flows The difference between money received from and returned to customers during the relevant period for the Group or
("NCCF") for the business indicated.
This measure is considered to be a lead indicator of reported net revenue.
Integrated flows Total NCCF, before intra-Group eliminations that have flowed through two or more segments within the Group. It is
considered to be a lead indicator of revenue generation driven by our integrated business model.
Assets under Management Represents the total market value of all financial assets managed and administered on behalf of customers and
and Administration includes shareholder assets.
("AuMA")
Average AuMA Represents the average total market value of all financial assets managed and administrated on behalf of customers.
Average AuMA is calculated using a 7-point average (half year) and 13-point average (full year) of monthly closing
AuMA.
Consists of revenue generated from AuMA, fixed fee revenues including charges for life tax contributions, less trail
Net management fees commissions payable.
Please refer to page 14 for more information on financial performance.
Other revenue Represents revenue not directly linked to AuMA (e.g. encashment charges, closed book unit-linked policies, non-
linked Protect policies, adviser initial fees and adviser fees linked to AuMA in Quilter Financial Planning (recurring
fees)).
Please refer to page 14 for more information on financial performance.
Cash generation This presents a shareholder view of underlying cash earnings. The IFRS consolidated statement of cash flows
includes policyholder cash flows, and does not exclude adjustments for non-operating items. Cash generated from
operations is calculated by removing non-cash items from adjusted profit. Cash generated from operations is stated
after deducting an allowance for cash required to support the capital requirements of the business generated from
normal operations. The capital requirements of the business are assessed on each company's solo regulatory
solvency basis.
Asset retention The asset retention rate measures our ability to retain assets from delivering good customer outcomes and investment
performance. Asset retention reflects the outflows of the assets under management during the period as a percentage
of opening assets under management. Asset retention is calculated as: 1 - (gross outflow divided by opening assets
under management).
Productivity Productivity is a measure of the value created by NCCF from our advice business, and an indicator of the success of
our integrated business model. Restricted Financial Productivity is calculated as average integrated flow per
Restricted Financial Planner.
NCCF/opening AuMA This measure is calculated as total NCCF as described above divided by opening AuMA presented as a percentage.
(excluding QLA)
Quilter Life Assurance is excluded from this metric principally due to the closure of the institutional life book of
business announced in 2017 and run-off of the legacy book as it is a closed-book business.
Return on Equity ("RoE") This calculates how many pounds of profit the Group generates with each pound of shareholders equity. This
measure is calculated as adjusted profit after tax divided by average equity (after adjusting equity for the acquisition of
Skandia UK from Old Mutual plc as part of Managed Separation and equity allocated to the discontinued operations).
Adjusted diluted earnings Represents the adjusted profit earnings per share. Calculated as adjusted profit divided by the weighted average
per share number of shares. Refer to page 15.
Chief Executive Officers's Review
Execution
2018 was a landmark year in the history of Quilter. Six years after we set out to build a modern UK wealth management company and after two
years of hard work to get the business ready for Listing, on 25 June 2018 we completed the Managed Separation from Old Mutual plc and our
shares began trading on the London and Johannesburg Stock Exchanges. I would like to thank all of those who worked tirelessly to deliver this
outcome. We were delighted with the level of investor engagement and interest in Quilter from both new and existing investors throughout this
process, and we look forward to delivering prosperity for both shareholders and our broader stakeholders.
The Listing of Quilter was the beginning of our journey as an independent company. In that context, we are pleased to deliver a strong set of
maiden full year results, with an increase in adjusted profit of 11% to GBP233 million and a 30% operating margin (2017: 29%). Our IFRS profit before
tax from continuing operations was GBP5 million (2017: GBP(5) million).
Given the limited linkages between the Single Strategy asset management business and our retail-focused wealth business, the sale of that
business was consistent with our objective of building the UK's leading wealth management company. The full consideration received from the sale
of the business to its management team and funds managed by TA Associates, which completed at the end of June 2018, was GBP583 million. We
paid a special interim dividend of 12.0 pence per share from the proceeds of this transaction, equivalent to a GBP221 million return of capital to
shareholders. This represented the net surplus proceeds from this disposal after the repayment of the outstanding GBP300 million senior unsecured
term loan.
Capital and dividend
Our recommended final dividend of 3.3 pence per share is consistent with our dividend policy published at time of IPO. Capital discipline is very
important to us. We have started public life in a prudent fashion with a well-capitalised balance sheet. We do not apologise for this as we recognise
that at times of market uncertainty, when we face specific business and market risks, having a robust capital position is a source of strength and
opportunity. I am pleased that the feedback from our shareholders supports this position. The Board has no intention of hoarding excess capital for
no good reason and, I believe, the return of the net surplus proceeds from the sale of our Single Strategy asset management business has
demonstrated our commitment in this regard. We are excited about our growth potential over the next several years, both organically and through
bolt-on acquisitions. If we find ourselves in a position where growth options become unattractive, we will, of course, accelerate the return of capital
to shareholders.
Transformation
As I have said on many occasions, we know that Quilter is not the finished article. The task that my team and I are undertaking is nothing less than
a multi-year transformation of our business. There are two principal strands to this process: successfully delivering upon our UK Platform
Transformation Programme and optimising our business.
Our new UK Platform, once operational, will allow us immediately to widen the product set we currently offer to include SIPP capabilities, Junior
ISAs and cash accounts as well as allowing us to hold a broader spectrum of assets on behalf of clients such as ETFs and investment trust shares.
This will provide us with the opportunity to target a broader and higher net worth customer segment in the UK market than we are currently
reaching. It will significantly enhance our position in the UK platform market by providing us with a modern, resilient system built on current
technology rather than legacy code as is the case with the current platform.
We see four key stages to the successful completion and delivery of our new platform:
First, the core system completion enabled us to commence the soft launch phase in early February 2019. Soft launch was deliberately structured to
be on a limited basis and this valuable phase is being used to verify core system functionality, processes and controls in a live environment and it
continues to progress well.
Secondly, the final platform system, which will incorporate full adviser functionality, is in the last stages of development and, given the critical
nature of this, is undergoing rigorous testing. Subject to these testing results, we are targeting this to be completed by early Summer.
The third key stage is migration planning and this is at an advanced stage. We will undertake a phased, controlled migration of our existing book.
We aim to migrate an initial c.10% of assets under administration from our existing platform, representing the assets from around 100 adviser firms,
in early Autumn. Once we have incorporated feedback from this into our processes, we will continue migration of the remainder of the book in
appropriate phases considering, amongst other things, the time of year and market conditions.
Finally, our overriding principle is that high quality delivery is of the utmost importance and we are enhancing our detailed plans to ensure
customers and advisers are well supported throughout the transition period. This, together with the challenges imposed by the need to train a large
number of advisers on a new system, are key issues which have been highlighted in our reviews of a number of problematic high profile platform
transitions across the UK financial services industry in recent years. As a result, we are considering adding additional adviser/customer call centre
capacity and/or taking a more gradual approach to migration, which could extend the project timeframe slightly.
As at 31 December 2018, we had incurred costs of GBP79 million since the programme commenced in May 2017. If migration is completed by the end
of 2019, we would expect total programme costs towards the upper end of our GBP120 - GBP160 million guidance range. Should we decide that it is in
the best interests of both customers and advisers that programme completion is extended into the first half of 2020, we would expect modest
additional programme costs, largely reflecting the incremental potential initiatives referenced above and a longer period of dual system running than
originally planned.
Turning now to Optimisation. Optimisation means making Quilter the best version of ourselves that we can be. We want to eliminate the
inefficiencies in our operational processes.
First, we see an opportunity to deliver an improvement in operational performance and efficiency of middle and back office activities. Business
areas which are involved in the new UK Platform Transformation Programme will be ring-fenced and largely protected until that project is complete
to avoid any risk of disrupting the programme delivery timetable.
In addition to those Optimisation savings which have already been achieved through cost avoidance during 2018, we believe that the potential benefits
from running our existing businesses better can deliver around a two percentage point uplift toour 2020 operating margin target of 30%. This is despite
ongoing investment in distribution which has a negative short-term impact on our operating margin. We also expect a further two percentage point improvement
in 2021. This increases our previous 2020 guidance to around 32% and our 2021 guidance to around 34%, although, given that the outcome here is a function
of income and costs, this target assumes broadly normal market performance from around current levels together with steady net flows. The uplift will be
achieved from cost savings with an expected cost to achieve of c.GBP75 million (inclusive of identified IT spend) to deliver the programme over the next three years.
Once the UK Platform Transformation Programme is complete, we will then be able to consider further efficiency initiatives from those areas
previously ring-fenced until the UK Platform Transformation Programme has completed. Our goal will be to transition towards a simpler, higher-
growth business, over time.
Operational performance
Good customer outcomes remain central to everything we do. Delivering this starts with trusted advice. Client confidence in our proposition is
demonstrated through the strength of our integrated business model and is shown by our net client cash flow ("NCCF") and the resilience of
integrated flows which have held up well despite more challenging conditions in the second half of the year. Integrated flows were down just 10% to
GBP4.7 billion in the year.
Despite the significantly less buoyant market conditions in the second half of the year and more cautious investor sentiment, we delivered NCCF of
GBP4.7 billion in 2018, excluding Quilter Life Assurance. This represents 5% of opening Assets under Management and Administration ("AuMA") in line
with our medium-term target. Overall NCCF of GBP2.7 billion was down 57% on prior year (2017: GBP6.3 billion) with this largely due to the
pre-announced run-off of the low margin institutional life book within our Quilter Life Assurance (or Heritage) business and the natural attrition
of the rest of that book.
We have also demonstrated resilience in AuMA (excluding Quilter Life Assurance) which declined by just 2% over the year. This contrasts with an
overall decline in AuM across the industry of 6% during 2018, according to the Investment Association.
We added to our distribution capabilities within our Private Client Adviser business through 14 small acquisitions during the year, with a
corresponding total consideration of up to c.GBP12 million that may be paid, with just over half of this subject to performance conditions being attained.
This provides us with the potential to build our base of client assets over time.
Across our appointed representative firms, we achieved satisfactory growth of 4% in adviser numbers, and finished the year with 1,621 restricted
financial planners ("RFPs"). This is below our historic growth rate of 5% and reflects a disappointing rate of growth in the first half and so this was
an area of particular focus in the second half of the year when the majority of this growth was achieved.
On 14 February 2019, we purchased the remaining shares in Charles Derby Group that we did not already own. This business will be positioned as
part of our national advice business instead of being an appointed representative firm within our network. We see significant opportunity from
broadening the existing Quilter Private Client Advisers business model into the affluent market instead of solely servicing high net worth clients. The
acquisition and repositioning of Charles Derby Group will provide us with meaningful scale and strong market positioning to serve customers in the
affluent and mass affluent segment and will complement Quilter Private Client Advisers which focuses on high net worth customers. We will
continue to consider acquisitions in advice and distribution capacity on a selective and targeted basis but only where quality and culture are a good
fit with Quilter as well as offering a strong business and financial case.
As part of our commitment to advice we have developed the Quilter Financial Adviser School, which has been in operation since 2016. The School
has contributed to growth in financial advisers across the industry with an average student age of 29 years and with 33% female participation.
During 2018, the 100th student graduated, and currently we have 94 students enrolled on courses which cover all stages of financial advice; of
these, 46 are potential RFPs. In light of the success to date we are increasing our investment to expand the capacity of the School to deliver
a higher level of new RFPs to Quilter. At current capacity we can accommodate around 100 students per annum. The focused RFP programme takes
14 months to complete and so we expect to see this start to contribute to growth in our adviser numbers later this year.
Quilter Cheviot NCCF slowed over the course of the year mirroring the broader market trends. Whilst disappointing, this reflected lower levels of
gross inflow and broadly stable outflows. We expect the first half of 2019 flows to be impacted by the loss of a c.GBP0.2 billion client where notice
has been given and with the funds expected to move early in the year. The near institutional-type mandate of this portfolio means that we expect the
loss to have minimal impact on 2019 profitability.
During the last 18 months we have been investing in the Quilter Cheviot investment team with Investment Manager ("IM") headcount increasing to
168 by mid-2018. Following Listing we saw a small number of resignations from a particular cohort of IMs. As a result, IM headcount fell to 155 by
year-end and, while we have mitigation plans in place to reduce potential client departures, we are expecting this could lead to higher than trend
outflows for Quilter Cheviot in the second half of 2019 and early 2020. Growing our IM count is a key focus for 2019 and recruitment is ongoing with
a number of new starters in the pipeline.
Quilter Wealth Solutions achieved net inflows of GBP3.1 billion, down 31% on prior year. Gross sales of GBP7.7 billion (2017: GBP8.9 billion) were down
GBP1.2 billion as a result of the slower trading environment seen in the second half of the year as well as reduced transfers of defined benefit ("DB")
schemes to defined contribution ("DC") schemes, which were down 24% to GBP1.6 billion. We believe that this was driven by the impact of increased
FCA scrutiny and resultant impact on the availability and affordability of IFA professional indemnity insurance. Overall, our pension propositions
continue to perform well, with gross sales of GBP4.7 billion, representing 60% of total Quilter Wealth Solutions gross sales (2017: GBP5.4 billion
representing 61% of 2017 gross sales).
We continue to reposition our International business and inflows have been particularly weak in 2018. Our strategy is to focus our international
geographic footprint and maintain the quality and value of new business. We have deliberately taken an early adopter strategy to the shifting of the
regulatory environment and, as previously reported, this has had an impact on new business flow but we believe this is the right approach for both
customers and Quilter.
Quilter Life Assurance had net outflows of GBP2.3 billion, up from GBP1.6 billion in 2017, principally due to the closure of the institutional life book
of business announced in 2017. The remainder of the Quilter Life Assurance book ran off at a rate of c.14% which is broadly in line with expectations.
Investment performance
2018 was a challenging year for investors. Most major asset classes declined, and the broad nature of the decline, particularly in the fourth quarter,
made it difficult to achieve positive outcomes from Quilter Investor's diversified solutions.
Whilst we are conscious that short term performance in certain portfolios was disappointing, our multi-asset solutions are aligned to the advice
process, led by well-regarded portfolio managers, with good long term records. We remain particularly pleased with the medium and longer term
performance of our biggest ranges, Cirilium and Wealth Select as delivering to these goals here is how the products are positioned in the market.
Our largest multi-asset range, the GBP8.3 billion Cirilium active, had a disappointing first half of 2018, but, I am pleased to say, it has started this
year strongly. Over the 3, 5 and 10 year periods the performance continues to be strong. The GBP6.0 billion Managed Portfolio Service compares well against
its peer group and met its investment objectives in 2018, defending well in the last quarter of the year. It hit its fifth anniversary in good shape.
Turning now to Quilter Cheviot, overall performance remained consistently good across all time periods relative to ARC benchmarks to the end of
September. This is the most recent quarter for which we have the detailed ARC comparisons which are available as a benchmark.
Stewardship
We monitor employee engagement on a quarterly basis and are delighted that it has remained at a consistently high level despite the significant
work pressures that arose through the Listing process.
Building an environment where our people can thrive is important to me. One of the principal benefits of Quilter being a standalone business is the
reinforcement of our identity, and strengthening of the ties that bind our people in their delivery of our purpose. Virtually all of our staff were awarded
shares in Quilter on Listing and so have a direct stake in the outcomes of their efforts as we build the UK's leading wealth management company.
We believe that an organisation needs to have a broader moral compass than merely profit maximisation. Our Shared Prosperity Plan, which is part
of our Responsible Business strategy, seeks to improve financial capability across the UK population. By equipping people to make better financial
decisions, we enable them to have a secure financial future and we aim to protect customer assets over the long-term through inclusive and
responsible investment.
We were delighted to launch The Quilter Foundation at Listing. As a registered charity, the Foundation's mission is to tackle the barriers to
prosperity in our society. The Foundation's first step is to work in partnership with charities that support young carers in the UK to help overcome
the challenges they face such as isolation, mental health issues and poor outcomes in education and employment.
We also continue to make good progress in undertaking our voluntary redress for customers within Quilter Life Assurance who were subject to the
terms of the FCA's thematic review into the fair treatment of long-standing customers. We, of course, welcomed the FCA's decision to close their
investigation without any sanction on the Company. Of the GBP69 million provision taken in 2017 relating to our voluntary redress of historic business
written, we have paid out GBP27 million and we remain confident that the remaining provision will be sufficient to meet the costs that were identified
from our review process.
Outlook
The UK wealth management industry continues to offer strong secular growth potential notwithstanding the short-term headwinds. As it became
apparent in the second half of 2018 that global macro and geopolitical uncertainty was impacting flows and market sentiment, we increased our
focus on cost management and accelerated some of the benefits we expected to deliver from our first stage Optimisation initiatives.
As most of the decline in markets came late in the year, the impact on our 2018 revenues was relatively muted. Closing AuMA of GBP109.3 billion was
GBP5.4 billion less than the average AuMA for 2018 of GBP114.7 billion. Lower average asset values, if sustained, would impact revenue generation in
the current year. While we cannot avoid external headwinds, we aim to keep 2019 costs broadly flat on 2018 (excluding acquisition activity), through
Optimisation and other initiatives, to partially offset the anticipated tougher revenue environment.
We remain resolutely focused on growing our business and supporting our clients towards achieving their savings and investment goals. During
2019 we plan to increase adviser numbers, expand our national advice business including through the recently announced acquisitions, add
Investment Managers in Quilter Cheviot, finish the build out of our Quilter Investors operation and complete, or substantially complete, the safe
delivery of our new UK platform.
2019 will throw up other challenges for Quilter. Brexit and market uncertainty are having an impact upon investors' appetite to put new money to
work. In addition, we anticipate that the migration of advisers to our new platform may contribute to a slowdown in the flow of new money into our
platform services as advisers familiarise themselves with, and are migrated to, the new platform. As a result of both of these factors, while we
remain confident in a target of 5% growth for NCCF on a medium-term basis, we may undershoot this target during calendar year 2019.
Early 2019 has seen a partial recovery in markets. By the end of February 2019 our AuMA had increased to c.GBP113 billion up from GBP109.3 billion at
year-end. While this recovery in markets has been ahead of our expectations, the trend in net client cash flows has remained subdued. Brexit and
market uncertainty continue to temper momentum in year-to-date flows and therefore we remain cautious on net flows going into 2019. However,
as we set out in our Prospectus ahead of Listing, we are confident in our strategic path and growth prospects. We are a modern, purpose-built UK
wealth management company that has many opportunities ahead of it. Our focus remains on embedding last year's cost successes into our 2019
performance, delivering organic growth and executing upon our transformation plans. I am hugely excited about the journey ahead and look forward
to continuing to deliver on our promises.
Paul Feeney
Chief Executive Officer
Chief Financial Officer's Report
Summary financial information
Reconciliation of adjusted profit to profit after tax (GBPm) 2018 2017 % Change
Net management fee 647 591 9%
Other revenue 141 137 3%
Total fee revenue 788 728 8%
Expenses (555) (519) (7%)
Adjusted profit before tax 233 209 11%
Total adjusting items before tax (70) (263) 73%
Profit/(loss) before tax attributable to equity holders 163 (54) 402%
Income tax (expense)/credit attributable to policyholder returns (158) 49 (422%)
Profit/(loss) before tax from continuing operations 5 (5) 200%
Income tax credit/(expense) on continuing operations 169 (41) 512%
Profit after tax from continuing operations 174 (46) 478%
Profit after tax from discontinued operations 314 203 55%
Profit after tax for the period 488 157 211%
Adjusted weighted average number of ordinary shares (millions) 1,839 1,830 -
Diluted earnings per ordinary share (pence) 26.5 8.6 208%
Adjusted profit before shareholder tax 233 209 11%
Shareholder tax on adjusted profit (6) (14) 57%
Adjusted profit after tax attributable to ordinary shareholders of Quilter plc 227 195 16%
Adjusted weighted average number of ordinary shares used to calculate adjusted diluted
earnings per share (millions) 1,839 1,830 -
Adjusted diluted earnings per share (pence) 12.3 10.7 15%
Summary balance sheet (GBPm) At At
31 December 31 December
2018 2017 Change %
Assets
Financial investments 59,219 64,250 (8%)
Reinsurers' share of policyholder liabilities 2,162 2,908 (26%)
Contract costs/deferred acquisition costs 562 611 (8%)
Cash and cash equivalents 2,395 2,360 1%
Other assets 1,452 1,844 (21%)
Total assets 65,790 71,973 (9%)
Equity 2,005 1,099 82%
Liabilities
Investment contract liabilities 56,450 59,139 (5%)
Third-party interests in consolidated funds 5,116 7,905 (35%)
Contract liabilities/deferred revenue 226 244 (7%)
Borrowings 197 782 (75%)
Trade, other payables and other liabilities 999 1,331 (25%)
Other liabilities 797 1,473 (46%)
Total liabilities 63,785 70,874 (10%)
Total equity and liabilities 65,790 71,973 (9%)
Review of Financial Performance
Overview
Our financial performance in 2018 demonstrates a strong set of results despite investor uncertainty arising from Brexit and other geopolitical issues
which dominated over the course of the year, in particular in the fourth quarter. Despite the challenging external environment, Net Client Cash Flow
("NCCF") for the Group, excluding Quilter Life Assurance, was GBP4.7 billion, representing 5% of opening AuMA, in line with our medium-term target.
AuMA decreased by 4% to GBP109.3 billion as a result of negative market movements, partly offset by positive NCCF. Adjusted profit before tax grew
strongly in the year, up 11% to GBP233 million.
Key financial highlights
Year ended 31 December 2018 Advice &
Continuing operations only Wealth Wealth Head Office &
Management Platforms Eliminations Total Group
Gross sales (GBPbn) 8.0 10.1 (3.4) 14.7
Gross outflows (GBPbn) (4.5) (9.0) 1.5 (12.0)
NCCF (GBPbn) 3.5 1.1 (1.9) 2.7
NCCF (excl. Quilter Life Assurance (GBPbn)) 3.5 3.4 (2.2) 4.7
Integrated flows (excl. Quilter Life Assurance (GBPbn)) 3.6 1.1 - 4.7
AuMA (GBPbn) 41.2 80.7 (12.6) 109.3
NCCF/opening AuMA (excl. Quilter Life Assurance (%)) 8% 5% n/a 5%
Asset retention (excl. Quilter Life Assurance (%)) 89% 91% n/a 91%
Year ended 31 December 2017 Advice &
Continuing operations only Wealth Wealth Head Office &
Management Platforms Eliminations Total Group
Gross sales (GBPbn) 8.1 12.8 (3.6) 17.3
Gross outflows (GBPbn) (3.7) (8.5) 1.2 (11.0)
NCCF (GBPbn) 4.4 4.3 (2.4) 6.3
NCCF (excl. Quilter Life Assurance (GBPbn)) 4.4 5.9 (2.7) 7.6
Integrated flows (excl. Quilter Life Assurance (GBPbn)) 4.0 1.2 - 5.2
AuMA (GBPbn) 41.7 84.8 (12.1) 114.4
NCCF/opening AuMA (excl. Quilter Life Assurance (%)) 13% 10% n/a 9%
Asset retention (excl. Quilter Life Assurance (%)) 89% 90% n/a 90%
NCCF
NCCF performance was solid at GBP2.7 billion, in a year where investor sentiment progressively weakened, in part due to Brexit uncertainties and the
market declines experienced late in the year. There was a market-wide reduction of 85% year-on-year in net retail flows as reported by the
Investment Association. In comparison, 2017 NCCF of GBP6.3 billion was achieved when markets were more stable and investor sentiment
considerably more buoyant. NCCF as a percentage of opening AuMA (excluding Quilter Life Assurance) was 5%, in line with our medium-term
target, which demonstrates the robustness of our business model in a difficult environment. Excluding Quilter Life Assurance, the Group's NCCF
was GBP4.7 billion (2017: GBP7.6 billion), down 38%, representing weaker flows across all businesses. Quilter International experienced particular
headwinds due to previously disclosed changes in the regulatory environment which impacted distribution. Detailed analysis on NCCF by business
is shown in the supplementary information section of this announcement.
Integrated flows (excluding Quilter Life Assurance) were GBP4.7 billion, down 10% from 2017 (GBP5.2 billion), due to investor uncertainty arising from Brexit
and other geopolitical issues which dominated over the course of the year, particularly in the fourth quarter. Quilter Wealth Solutions experienced a
decline in flows as a result of the anticipated slowdown in transfers from Defined Benefit ("DB") schemes. The restricted channel of Quilter Financial
Planning accounted for GBP2.4 billion, 86% of Quilter Investors' net flows (2017: GBP2.5 billion, 76%), and GBP1.1 billion, 35% of Quilter Wealth Solutions
net flows (2017: GBP1.2 billion, 27%). Integrated flows from Quilter Financial Planning and Quilter Private Client Advisers into Quilter Cheviot
amounted to GBP300 million (2017: GBP238 million) of which GBP122 million (2017: GBP129 million) was through Quilter Private Client Advisers. The Group's total direct
flows (excl. Quilter Life Assurance) were GBP2.2 billion, down 57% (2017: GBP5.1 billion) primarily driven by both the challenging trading environment and
reduced transfers of DB to Defined Contribution ("DC") pension plans within the Independent Financial Adviser ("IFA") channel. This also influenced
a reduction in Quilter Wealth Solutions direct flows to GBP2.0 billion (2017: GBP3.3 billion). The changing regulatory environment in Quilter International
impacted direct flows in this market, where we recorded a reduction in net flows from GBP1.4 billion in 2017 to GBP0.3 billion in 2018.
Integrated flows (excl. Quilter Life Assurance)(GBPbn) 2018 2017 % Change
Total integrated flows 4.7 5.2 (10%)
Direct flows from third party distribution 2.2 5.1 (57%)
Eliminations (2.2) (2.7) 19%
Total Quilter plc NCCF (excl. Quilter Life Assurance) 4.7 7.6 (38%)
NCCF for the Advice and Wealth Management segment was GBP3.5 billion, down 20% from 2017 (GBP4.4 billion), reflecting a slower second half of the
year, particularly within Quilter Investors where net flows declined by 15% for the year to GBP2.8 billion (2017: GBP3.3 billion). Net flows of GBP2.4 billion
(2017: GBP2.5 billion) were from the restricted channel, of which GBP1.1 billion (2017: GBP1.1 billion) were from third party platforms and GBP1.3 billion
(2017: GBP1.4 billion) from our own platform, Quilter Wealth Solutions. Independent third party net flows through Quilter Wealth Solutions to Quilter Investors
were GBP0.8 billion for the year (2017: GBP1.3 billion). Quilter Cheviot experienced slower net flows in the second half of the year, with net flows for the
full year of GBP0.7 billion compared to GBP1.1 billion in 2017.
The Wealth Platforms segment contributed NCCF of GBP1.1 billion (2017: GBP4.3 billion). Quilter Wealth Solutions had net flows of GBP3.1 billion, down
31% on prior year. Gross sales of GBP7.7 billion (2017: GBP8.9 billion) were down GBP1.2 billion as a result of the difficult trading environment experienced
in the second half of the year, reduced transfers of DB schemes to DC schemes, which were down 24% to GBP1.6 billion, reflecting the impact of
increased FCA scrutiny and resultant impact on IFA PII ("Professional Indemnity Insurance") availability and affordability. Overall, our pension
propositions continue to perform well, with gross sales of GBP4.7 billion, representing 60% of total Quilter Wealth Solutions gross sales (2017: GBP5.4
billion representing 61% of 2017 gross sales). Quilter International had net inflows of GBP0.3 billion, down 79% on prior year (2017: GBP1.4 billion,
following a very strong final quarter in 2017). International markets remain challenging, particularly given the changing regulatory environment and
the Insurance Distribution Directive covering European and UK territories, which came into effect on 1 October 2018. The reduction in International
flows also reflects the Group's strategy to reduce its offshore geographic footprint and focus on the quality of new business. Quilter Life Assurance
had net outflows of GBP2.3 billion, up from GBP1.6 billion of net outflows in 2017, with the increase primarily due to the closure of the institutional life
book of business announced in 2017 which had net outflows of GBP1.3 billion in 2018.
Productivity for Quilter Financial Planning remained broadly stable at GBP1.7 million per RFP (2017: GBP1.8 million per RFP) with a moderate reduction in
the second half of the year reflective of broader market challenges that influenced investor confidence. The underlying trend remains positive with
growth in total flows from our employed advice distribution model within Quilter Private Clients and benefits from the full integration and adoption of
our investment proposition by RFPs that joined as part of the Caerus acquisition in June 2017. RFP headcount of 1,621 represents net growth of 60
(increase of 4%) in 2018, driven by a combination of organic growth within existing, and the recruitment of new, appointed representative firms. We
also continue to support IFAs converting to adopt our restricted advice proposition. New RFP appointments have been partially offset by natural
attrition of advisers, with turnover levels within our appointed representative firms staying relatively stable year on year. We expect further growth in
RFP numbers in 2019 following the repurposing of our Financial Adviser School, which we announced in September 2018. The newly rebranded
Quilter Financial Adviser School will fully fund training programmes for anyone who wishes to become an RFP within the Quilter advice network.
Asset retention (excl. Quilter Life Assurance) has improved marginally to 91%, as a result of our comprehensive product and proposition offering,
high customer service standards, and our continued focus on good customer outcomes.
AuMA
Year-end AuMA (including Quilter Life Assurance) was GBP109.3 billion, down 4% in the year, driven by negative market performance of GBP7.8 billion
which was primarily experienced in the fourth quarter. This was partially offset by positive NCCF of GBP2.7 billion.
Quilter Investors' AuM was GBP17.8 billion, up 5% (2017: GBP16.9 billion). The Cirilium fund range remained stable at GBP9.0 billion of AuM and the
WealthSelect fund range increased by 15% to GBP5.5 billion. Quilter Cheviot AuM of GBP22.4 billion decreased by 5% in the year primarily as a result of
negative market movements. Quilter Wealth Solutions' AuA decreased by 1% to GBP49.9 billion, which comprised primarily of GBP23.2 billion within
pension propositions (of which GBP3.0 billion has been generated from the restricted channel and GBP20.2 billion from third party advisers) and GBP14.5
billion of ISA products.
Adjusted profit before tax
Adjusted profit reflects the Directors' view of the underlying performance of the Group and is used for management decision making and internal
performance management. Adjusted profit is a non-GAAP measure which adjusts IFRS profit for specific agreed items, as detailed in note 5(a) in
the consolidated financial statements, and is the profit measure presented in the Group's segmental reporting. Adjusted profit before tax for 2018
was GBP233 million, 11% higher than the prior year (2017: GBP209 million), due to higher revenue, partially offset by higher costs.
Net management fee in 2018 of GBP647 million was 9% higher than the GBP591 million in 2017. Net management fee revenue is primarily influenced by
the value of the assets that we manage and administer, with different parts of the business employing different valuation points for charging the
management fees. Average AuMA for 2018 was GBP114.7 billion compared to GBP106.1 billion for 2017, an increase of 9%, in line with our income growth.
Other revenue for 2018 was GBP141 million, 3% up on 2017 (GBP137 million) primarily as a result of growth in advice fees of 13% in Quilter Financial
Planning with the increase in the number of RFPs, partially offset by higher claims experience and actuarial assumption changes in Quilter Life
Assurance.
Expenses increased 7% from GBP519 million to GBP555 million during the year. Increases include investment in the business, the expected higher costs
of being a standalone listed company, and the incremental costs in relation to the Long-Term Incentive Plan ("LTIP"), as well as the impact of
inflation. The Group's overall operating margin increased to 30% (2017: 29%) which is ahead of previous guidance as a result of an increased focus
on costs and early savings achieved through Optimisation.
Financial performance (from continuing operations only)
2018 (GBPm)
Advice &
Wealth Wealth
Management Platforms Head Office Total Group
Net management fee 276 371 - 647
Other revenue 97 43 1 141
Total fee revenue 373 414 1 788
Expenses (271) (252) (32) (555)
Adjusted profit before tax 102 162 (31) 233
Tax (6)
Adjusted profit after tax 227
Operating margin (%) 27% 39% 30%
Revenue margin (bps) 65 45 57
Financial performance (from continuing operations only)
2017 (GBPm)
Advice &
Wealth Wealth
Management Platforms Head Office Total Group
Net management fee 234 357 - 591
Other revenue 82 54 1 137
Total fee revenue 316 411 1 728
Expenses (234) (253) (32) (519)
Adjusted profit before tax 82 158 (31) 209
Tax (14)
Adjusted profit after tax 195
Operating margin (%) 26% 38% 29%
Revenue margin (bps) 63 46 56
Total fee revenue
The Group's total fee revenue increased by 8% to GBP788 million due to higher average AuMA, primarily driven by more favourable market conditions
through to September 2018 despite weakening net flows throughout the year. Net management fee revenue, which principally comprises asset-
based revenues including fixed fees, increased by GBP56 million to GBP647 million during the year, accounting for 82% of total fee revenue. Other
revenue for the Group increased 3% to GBP141 million, primarily within Quilter Financial Planning, as a result of the growth in advice fees with the
increase in the number of RFPs.
Total fee revenue for the Advice and Wealth Management segment grew by 18% to GBP373 million, with average assets increasing 15% during the
year, with higher net management fees primarily from Quilter Investors. Other revenue increased by GBP15 million to GBP97 million, principally due to the
growth in advice fees in Quilter Financial Planning, driven in part by the continued acquisitions in this part of the business.
Total fee revenue for the Wealth Platforms segment in 2018 was broadly flat at GBP414 million (2017: GBP411 million), due to higher fund-based revenue
offset by a decline in other revenue. Other revenue decreased due to higher claims experience within the protection book of business, actuarial
assumption changes and lower protection product volumes. Net management fee revenue for Quilter Wealth Solutions increased by 8% to GBP168
million as a result of increased average AuA from GBP45.9 billion to GBP51.5 billion, and Quilter International benefitted from foreign exchange rate
effects and improved interest-related margins during the year. Net management fees for Quilter Life Assurance increased by GBP2 million year on
year, where lower underlying fund-based revenue from both the retail and institutional book run-off were more than offset by one-off benefits from
provision releases related to the earlier introduction of capped exit fees on certain pension products and other benefits from the movement in life
charge provision.
The Group's blended revenue margin of 57 basis points ("bps") was a slight improvement upon the prior year (2017: 56 bps), with a mixture of
greater integrated assets (where we generate revenues for more than one service provision), a favourable impact from asset, and fund selection
mix as well as benefits from adjustments relating to life tax contributions.
The revenue margin for Advice and Wealth Management of 65 bps was 2 bps higher compared to the prior year, due to an increase in the revenue
margin for Quilter Investors of 8 bps to 59 bps, reflecting a change in the overall mix of AuM towards investment in products which earn a higher
margin, and additional revenue now recognised from the WealthSelect funds. Quilter Cheviot's revenue margin remained in line with the prior year
at 72 bps.
The revenue margin for Wealth Platforms decreased by 1 bp from the prior year to 45 bps. This decline was driven by lower margin gross sales for
Quilter Wealth Solutions and gross outflows of higher margin products for Quilter International. The revenue margin for Quilter Life Assurance
increased by 9 bps to 69 bps, reflecting the product mix change benefit from the continued run-off of the very low margin institutional life book and
benefits from adjustments relating to life tax contributions.
Expenses
Expenses increased by GBP36 million, up 7% to GBP555 million (2017: GBP519 million) in the year, which was driven by increased costs for Quilter Investors
as the functionality for the business is built out to be standalone, the inclusion of the full run rate costs for Caerus, which was acquired on 1 June
2017, and the continued expansion of the Quilter Private Client Advisers business, which has undertaken 14 small acquisitions over the past 12
months. Expenses also increased due to the expected higher costs of being a standalone listed company, and the incremental costs in relation to
the LTIP, as well as the impact of inflation. The overall impact of these increases is lower than originally anticipated due to strengthened cost
disciplines across the business and early savings achieved through Optimisation.
Expense split (GBPm) 2018 2017
Front office and operations 312 293
IT and development 120 120
Support functions 105 89
Other 18 17
Expenses 555 519
Front office and operations expenses increased by 6% to GBP312 million during the year (2017: GBP293 million), primarily due to the investment in the
business with the acquisitions for Quilter Private Client Advisers, the inclusion of full run rate of expenses for Caerus acquired on 1 June 2017 and
increased cost of being a standalone listed company.
IT and development costs remained flat year on year at GBP120 million, mainly due to increased IT run costs to facilitate growth in the business and
regulatory change, and the increased costs of being a standalone listed company, offset by a reduction in development costs.
Support function expenses relate to middle and back office expenses which have increased by 18% to GBP105 million (2017: GBP89 million), driven primarily by
the increased cost of being a standalone listed company.
Other costs include PII, charges for regulation, and licencing fees, which remained broadly in line with 2017 levels, primarily due to 2018 reflecting
nine months of the FCA regulatory fees compared to twelve months in 2017. As noted at the half year results, the FCA changed the period to which
regulatory charges are applied during 2018, and these are recognised in full at the point the charge is levied.
Taxation
The effective tax rate ("ETR") on adjusted profit was 3% (2017: 7%). The Group's ETR is lower than the UK corporation tax rate of 19%, principally
due to profits from Quilter International being taxed at lower rates than the UK and utilisation of brought forward capital losses. The ETR is expected
to normalise to 12%-14% within a couple of years, however this will be dependent upon a number of factors including the level of Quilter
International profits, the utilisation of capital losses which can be volatile, as well as the UK corporation tax rate which is due to reduce to 17% from
April 2020.
Earnings Per Share ("EPS")
Basic EPS was 26.6 pence, compared to 8.6 pence in 2017. During the year, the number of shares in issue increased to 1,902 million following
completion of the share capital restructure as part of the separation from Old Mutual plc. The shares in issue for the basic EPS calculation were
1,832 million (after deduction of shares in treasury of 70 million which are held in respect of staff share schemes within employee benefit trusts).
Comparative EPS has been restated accordingly. Adjusted diluted EPS increased by 15% to 12.3 pence (2017: 10.7 pence) as a result of increased
adjusted profit and a lower ETR on adjusted profit. The shares in issue for the basis of the adjusted diluted EPS calculation was 1,839 million
(following inclusion of the dilutive effect of shares and options awarded to employees under share-based payment arrangements - potential
ordinary shares, of 7 million). Shares in Treasury are expected to vest over the next two years at which point future share awards are anticipated to
be satisfied through the purchase of shares from the market.
Optimisation
We have maintained strong cost discipline during the year supplemented by the first phase of our Optimisation programme, which predominantly
focuses on improving our operational efficiency within middle and back office activities in the near to medium-term. We expect the programme to
deliver a 2 percentage point increase in operating margin in 2020, and a further 2 percentage point increase by the end of 2021. This increases our
previous 2020 guidance to 32% operating margin. Given operating margin is a function of income and costs, this target assumes broadly normal
market performance from around current levels together with steady net flows. The one-off costs to deliver Optimisation are anticipated to be c.GBP75
million over a three-year period, of which GBP7 million were incurred in 2018.
Reconciliation of adjusted profit to IFRS profit
IFRS profit after tax from continuing operations was GBP174 million for 2018, compared to GBP(46) million in 2017 and has increased due to a higher
level of adjusted profit, lower finance costs and GBP69 million of voluntary customer remediation costs incurred in 2017. The table below reconciles the
Group's adjusted profit to the IFRS results in 2018 and 2017.
Reconciliation of adjusted profit to profit after tax
For the year ended 31 December 2018 (GBPm) 2018 2017 % change
Adjusted profit before tax
Advice and Wealth Management 102 82 24%
Wealth Platforms 162 158 3%
Head Office (31) (31) -
Adjusted profit before tax 233 209 11%
Reconciliation of adjusted profit to profit after tax
Adjusting for the following:
Goodwill impairment and impact of acquisition accounting (50) (54) 7%
Profit on the acquisition and re-measurement of subsidiaries - 3
Business transformation costs (84) (89) 6%
Managed Separation costs (24) (32) 25%
Finance costs (13) (39) 67%
Voluntary customer remediation provision - (69)
Policyholder tax adjustments 101 17 494%
Total adjusting items before tax (70) (263) 73%
Profit/(Loss) before tax attributable to equity profits 163 (54) 402%
Income tax (expense)/credit attributable to policyholder returns (158) 49 (422%)
Profit/(loss) before tax from continuing operations 5 (5) 200%
Income tax credit/(expense) on continuing operations 169 (41) 512%
Profit/(loss) after tax from continuing operations 174 (46) 478%
Profit after tax from discontinued operations 314 203 55%
Profit after tax for the year 488 157 211%
Adjusted profit reflects the profit from the Group's core operations, and is calculated by making certain adjustments to IFRS profit to reflect the
Directors' view of the Group's underlying performance. Details of these adjustments are provided in note 5(a) of the consolidated financial
statements and, in respect of tax, in note 8(c).
Business transformation costs of GBP84 million in 2018 (2017: GBP89 million) included GBP58 million incurred on the UK Platform Transformation
Programme, GBP19 million of one-off costs associated with the separation of Quilter Investors as a result of the sale of the Single Strategy asset
management business in June, and GBP7 million of costs in relation to the Optimisation programme. In 2017, the costs associated with the UK
Platform Transformation Programme included GBP21 million relating to the new programme with FNZ and GBP53 million relating to the previous
programme, including the contracts with IFDS, which came to an end by mutual agreement with effect from 2 May 2017.
Managed Separation costs were GBP24 million (2017: GBP32 million), reflecting costs associated with our successful separation from Old Mutual plc and
Listing in June. Remaining future costs of Managed Separation of approximately GBP12 million, principally in respect of rebrand and residual systems
activity which are in line with previous cost guidance, are expected to be incurred in 2019.
Finance costs were GBP13 million (2017: GBP39 million). The prior year includes the cost of interest and finance charges on the Group's borrowings from
Old Mutual plc. As previously reported, these were converted into equity or repaid in February 2018.
Policyholder tax adjustments of GBP101 million in 2018 (2017: GBP17 million) relate to the removal of distortions arising from the decline in markets in the
fourth quarter of 2018 that can, in turn, lead to volatility in the policyholder tax charge between periods.
Cash generation
Cash generation measures the proportion of adjusted profit that is recognised in the form of cash generated from operations.
Cash generated from operations is calculated by removing non-cash generative items from adjusted profit, such as deferrals required under IFRS to
spread fee income and acquisition costs over the lives of the underlying contracts with customers. It is stated after deducting an allowance for net cash
required to support the capital requirements generated by new business offset by a release of capital from the in-force book.
The Group (excluding the now disposed Single Strategy asset management business) achieved a cash generation rate of 88% of adjusted profit
over 2018. This is ahead of the 80% conversion guidance provided at the time of IPO. The 2018 cash generation rate reflects improvements to the
attribution of changes in capital requirements to underlying drivers such as new business and the capital released from the in-force book.
Review of Financial Position
Capital and liquidity
The Group aims to maintain a strong solvency and liquidity position through disciplined management of capital resources and risks. This is
important given the security and peace of mind that it affords customers and advisers.
The Group maintains a disciplined approach to capital, in order to balance its current and anticipated liquidity, regulatory capital and investment
needs, with a view to returning excess capital to shareholders as appropriate. As part of its disciplined approach to capital, the Group has a prudent
capital management and liquidity policy.
On 28 February 2018, the Group fully drew down on a GBP300 million senior unsecured term loan facility with a number of relationship banks. This
term loan was fully repaid on 29 June 2018 from the proceeds of the sale of the Single Strategy asset management business.
Also on 28 February 2018, the Group entered into a GBP125 million revolving credit facility, which remains undrawn, and issued a GBP200 million
subordinated debt security. The subordinated debt security was issued in the form of a 10-year Tier 2 bond with a one-time issuer call option after
five years to J.P. Morgan Securities plc, paying a semi-annual coupon of 4.478% per annum. The debt security is listed on the London Stock
Exchange and has a Fitch instrument rating of BBB-. On 13 April 2018, the debt security was sold by J.P. Morgan Securities plc to traditional debt
capital market investors. Including the amortisation of set-up costs, financing costs of approximately GBP10 million per year are incurred in respect of
this security.
The subordinated debt security and the revolving credit facility are in place to ensure that the Group has sufficient capital and liquidity to maintain
strong capital ratios and free cash balances to withstand severe but plausible stress scenarios. The full amount of the subordinated debt security
remains outstanding as at 31 December 2018, representing a leverage ratio of 12% (defined as the ratio of debt to debt plus the consolidated IFRS
equity after deducting intangible assets) before the payment of the recommended final dividend.
Solvency II
The Group Solvency II surplus is GBP1,058 million at 31 December 2018 (2017: GBP651 million), representing a Solvency II ratio of 190% (2017: 154%)
calculated under the standard formula. The Solvency II information in this results disclosure has not been audited.
Group regulatory capital (GBPm) At At
31 December 31 December
2018(1) 2017(2)
Own funds(3) 2,237 1,849
Solvency capital requirement ("SCR") 1,179 1,198
Solvency II surplus 1,058 651
Solvency II coverage ratio 190% 154%
(1) Based on preliminary estimates. Formal annual filing due to the PRA by 3 June 2019.
(2) As represented within the Annual 2017 Solvency II submission of the Old Mutual plc group, the group Quilter plc previously formed part of, to the Prudential Regulation
Authority (PRA). Own funds include a GBP566 million subordinated loan from the parent company. This subordinated loan was effectively converted to equity during H1
2018, following the acquisition of the entity holding the loan.
(3) Group own funds are stated after allowing for the impact of the recommended final dividend payment relating to 2018 of GBP61 million.
The 36% increase in the Group Solvency II ratio is primarily due to corporate activity in the year with the two main contributors being the issuance of
the Tier 2 bond in February 2018 as described above and the sale of Single Strategy asset management business in June 2018, partly offset by the
special interim dividend paid to shareholders in September 2018 and the recommended final dividend payment relating to 2018.
The Board believes that the Group Solvency II surplus includes sufficient free cash and capital to complete all committed strategic investments
(including the UK Platform Transformation Programme). The impact of this prudent policy is that Quilter expects to continue to maintain a solvency
position in excess of its target in the near term.
Composition of qualifying Solvency II capital
The Group own funds for Solvency II purposes reflect the resources of the underlying businesses after excluding the recommended final dividend of GBP61 million.
The Group own funds include the Quilter plc issued subordinated debt security which qualifies as capital under Solvency II. The composition
of own funds by tier is presented in the table below.
Group own funds (GBPm) At
31 December
2018
Tier 1(1) 2,036
Tier 2(2) 201
Total Group Solvency II own funds 2,237
(1) All Tier 1 capital is unrestricted for tiering purposes.
(2) Comprises a Solvency II compliant subordinated debt security in the form of a Tier 2 bond, which was issued at GBP200 million in February 2018.
The Group's Solvency Capital Requirements ("SCR") is covered by Tier 1 capital, which represents 173% of the Group SCR of GBP1,179 million. Tier
1 capital represents 91% of Group Solvency II own funds. Tier 2 capital represents 9% of Group Solvency II own funds and 19% of the Group
surplus.
Net Asset Value ("NAV")
The NAV of the Group was GBP2.0 billion at 31 December 2018 (31 December 2017: GBP1.1 billion). The increase reflects the conversion of previous
loans from Old Mutual plc into equity in February 2018, the increased resources following the gain of GBP292 million on the sale of the Single Strategy
business and is after the GBP221 million special interim dividend paid in September 2018. The NAV at 31 December 2018 is stated before the
recommended final dividend of GBP61 million.
Dividend
The Board has recommended a final dividend of 3.3 pence per share, in line with our dividend policy. A special interim dividend of 12.0 pence per
share was paid on 21 September 2018, returning GBP221 million to shareholders from the surplus proceeds from the sale of the Single Strategy asset
management business. Subject to shareholder approval, the recommended final dividend will be paid on 20 May 2019 to shareholders on the UK
and South African share registers on 26 April 2019. For Shareholders on our South African share register a dividend of 61.92028 South African cents per
share will be paid on 20 May 2019, using an exchange rate of 18.76372.
Return on Equity ("RoE")
Adjusted RoE for the period ended 31 December 2018, calculated as adjusted profit after tax divided by average equity, was 12.9%. This remained
broadly stable with the adjusted RoE of 12.7% for the full year ended 31 December 2017 (after adjusting equity for the acquisition of Skandia UK
Limited from Old Mutual plc as part of Managed Separation and equity allocated to the discontinued operations).
Holding company cash
The holding company cash statement includes cash flows generated by the three holding companies within the business: Quilter plc, Old Mutual
Wealth Holdings Limited and Old Mutual Wealth UK Holding Limited. The flows associated with these companies will differ markedly from those
disclosed in the statutory statement of cash flows, which comprises flows from the entire Quilter plc group.
The holding company cash statement illustrates cash received from the key trading entities within the business units together with other cash
receipts, and cash paid out in respect of corporate costs and capital servicing (including interest and dividends). Other capital movements, including
those in respect of acquisitions and disposals, together with funding to business units, are also included. It is an un-audited non-GAAP analysis and
aims to give a more illustrative view of business cash flows as they relate to the Group's holding companies compared to the IFRS consolidated
statement of cash flows which is prepared in accordance with IAS 7 which includes co-mingling of policyholder related flows.
GBPm 2018
Opening cash at holding companies at 1 January 36
Short-term loan and tier 2 bond proceeds 500
Loans repaid to Old Mutual plc (200)
Single Strategy asset management business sale - cash proceeds 576
Short-term loan repayment (300)
Costs of disposal and external financing fees (19)
Special interim dividend (221)
Net capital movements 336
Managed Separation and Head Office costs (54)
External debt interest (6)
Net operational movements (60)
Cash remittances from subsidiaries 167
Net capital contributions and investments (65)
Other 2
Internal capital and strategic investments 104
Closing cash at holding companies at 31 December 416
Net capital movements
Net capital movements relate principally to transactions in respect of establishing a strong opening balance sheet in preparation for Listing. On 28
February 2018, borrowings totalling GBP500 million were incurred to ensure sufficient capital and liquidity to withstand severe but plausible stress
scenarios. The borrowings consisted of a GBP200 million Tier 2 bond which raised GBP197 million net of external fees of GBP3 million (shown within the
costs of disposal and external financing fees line above) and a GBP300 million senior unsecured term loan (plus external fees of GBP1 million) which was
subsequently repaid.
The Single Strategy asset management business sale in June 2018 generated GBP576 million of cash proceeds (GBP15 million of costs incurred in
relation to the sale are shown in the costs of disposal and external financing fees figure of GBP19 million) and includes a pre-completion dividend
receipt of GBP36 million.
The main outflows relate to repayment of the GBP200 million loan from Old Mutual plc in February 2018 and repayment of the GBP300 million senior
unsecured term loan following the sale of the Single Strategy business in June 2018. The GBP300 million senior unsecured term loan was required to
bridge the period from Listing until such time as the cash consideration from the sale of the Single Strategy asset management business was
received.
Following Managed Separation, a special interim dividend totalling GBP221 million was paid on 21 September 2018 to shareholders. This represented
the net surplus proceeds from this disposal after the repayment of the outstanding GBP300 million senior unsecured term loan following the sale of the
Single Strategy asset management business.
Net operational movements
Net operational movements for the holding companies of the Group were GBP60 million for the period. This was predominantly comprised of GBP54
million of corporate and transformation costs, which includes one-off Managed Separation and Listing costs and implementation costs for
Optimisation. Interest paid of GBP6 million includes initial fees paid on the Tier 2 bond and establishment costs for the revolving credit facility. Interest
on the Tier 2 bond is paid every six months in February and August each year.
Internal capital and strategic investments
The main inflow relates to cash remittances from the trading businesses totalling GBP167 million, partially offset by capital contributions of GBP47 million
to support business unit operational activities, the Platform Transformation Programme, and to fund strategic acquisitions within Quilter Financial
Planning and Quilter Private Client Advisers. The level of dividends paid to the holding companies is, where relevant, after funds have been set
aside in those businesses for the Platform Transformation Programme and the voluntary client redress programme.
London property relocation
Due to the expiry of property leases in 2020 which are not able to be extended, we are planning to consolidate our London office requirements at a new location.
We have a number of options under advanced consideration. The relocation will likely result in a one-off cash cost associated with the fit-out of the new premises
later in 2019 and 2020, and higher run-rate expenses which we will update the market in due course.
Principal Risks and Uncertainties
The principal risks and uncertainties that could impact the Group are summarised below. As a UK based financial services firm, the implications and
economic impact of several scenarios of the UK leaving the EU in relation to financial services will influence the degree to which these risks act
upon Quilter, particularly with regards to strategy, market, legal and regulatory, and third party risks, including potential disruption to Quilter's
business operations and supply chain. In addition, recent quarters have seen reduced levels of investor confidence and this could deteriorate
further, potentially materially further, under various scenarios related to the UK leaving the EU. A Group-wide Brexit programme is in place to
actively monitor these risks and a number of actions are already in place to mitigate any implications to our business and customers including for
example, establishing a regulated asset management company in Ireland.
Strategic risks: The risk that the strategy is unsound due to poor decision making, incorrect information or assumptions, or that the activities
supporting the delivery of the strategy are inadequate or poorly designed.
Strategy: If Quilter's strategy does not yield the anticipated benefits, for example, through inaccurate prediction of the type of products and the
level of advice required by its target customer base or inability to price such products and services competitively, this may have a material adverse
effect on the Group's business, financial condition, results of operations and prospects, and reputation.
Reputation and brand: Quilter is dependent on the strength of its reputation and its brands, which are vulnerable to adverse market perception or
negative publicity, and the Company may face challenges with regard to its ongoing rebranding initiative.
Competitive pressure: Quilter's business is conducted in a competitive environment and, if Quilter is not successful in anticipating and
responding to competitive change, adviser or customer preferences or demographic trends in a timely and cost-effective manner, its business,
financial condition, results of operations and prospects could be materially adversely affected.
People and culture: Quilter may fail to attract and retain talented advisers, investment managers, portfolio managers, senior management and
other key employees. This would present a risk to the delivery of Quilter's overall strategy, in particular during this period of significant change
across the Company. Additionally this could have a material adverse effect on Quilter's business, financial and operational performance,
prospects, and reputation.
Market risks: The risk of an adverse change in the level or volatility of market prices of assets, liabilities or financial instruments resulting in loss of
earnings or reduced solvency.
Market risks: Quilter's results may be materially adversely affected by conditions in global capital markets, the global economy generally and the
UK economy in particular that result in a decrease in the value of customer investment portfolios. The volatility and strength of debt and equity
markets, the direction and pace of change of interest rates and inflation all affect the economic environment, investor confidence, our reputation
and, ultimately, the volume and profitability of Quilter's business.
Business risks: The risk that business initiatives supporting the delivery of the strategy are not implemented correctly or in full, or that the business
performance fails to meet expectations across one or more key deliverables, resulting in an adverse impact to the Company's business plan
objectives.
Conduct risk: is the risk that decisions and behaviours made by Quilter, its employees, its advisers and appointed representatives lead to
customers being treated unfairly or otherwise result in detrimental customer outcomes and damage to our reputation. Conduct risk may arise
where Quilter fails to design, implement or adhere to appropriate policies and procedures, offer products, services or other propositions that do not
meet the needs of customers or fails to perform in accordance with its intended design, fails to communicate appropriately with customers, fails to
deal with complaints effectively, sells or recommends unsuitable products or solutions to customers, fails to provide them with adequate
information to make informed decisions or provide unsuitable investment for financial planning advice to customers, or fails to do any of the
foregoing on an ongoing basis after initial sales, amongst other things. This risk may also arise as a result of employee (mis)conduct.
Conflicts of interest: Quilter faces significant potential and actual conflicts of interest, including those which result from Quilter's advised
distribution channel. If the Company fails to manage conflicts of interest between its advice channel and other businesses across the Company, it
could result in reputational damage, regulatory liability or customer restitution, which could have a material adverse impact on Quilter's business,
financial condition, results of operations and prospects, and reputation.
Investment performance: An important factor in Quilter's ability to maintain and grow its customer base and its network of advisers is the
investment performance of the customer assets that Quilter manages. Actual or perceived underperformance of customer assets that are
managed by Quilter could have a material adverse effect on Quilter's business, financial condition, results of operations, prospects and reputation.
Insurance risks: The risk of a reduction in Own Funds from adverse experience or change in assumptions relating to claims, policyholder
behaviours, mortality, morbidity, longevity or expenses, resulting in an adverse impact to earnings or reduced solvency.
Insurance risks: Quilter has exposure to mortality risk (risk of higher than expected rate of death claims on life protection business) and morbidity
risk (risk of higher than expected rate of claims on critical illness protection business) from its life assurance business, which issues policies that
carry certain guaranteed benefits upon the death, or defined illness, of the policyholder. These risks could be aggravated by any potential failure in
underwriting processes and controls designed to identify sub-standard lives at the new business stage.
Operational risks: The risk of loss (or unintended gain/profit) arising from inadequate or failed internal processes, or from personnel and systems,
or from external events (other than financial or business environment risks), resulting in an adverse impact to earnings or reduced solvency.
Adviser and customer proposition: Failure by Quilter to offer products, services and platforms that meet adviser and customer needs and which
are considered suitable could result in advisers ceasing to recommend Quilter's products or services, or recommending fewer of Quilter's products
or services, and declining persistency of Quilter's products.
The asset classes or investment strategies underlying the portfolios managed by Quilter may become less attractive to customers or their advisers,
which could reduce demand for Quilter's products and have a material adverse impact on Quilter's business, financial condition, results of
operations and prospects, and reputation.
Information technology: Quilter uses computer systems to conduct its business, which involves managing and administering assets on behalf of
customers in its wealth portfolios and on its platforms. Quilter's business is highly dependent on its ability to access these systems to perform
necessary business functions and to provide adviser and customer support, administer products, make changes to existing policies, file and pay
claims, manage customer's investment portfolios and produce financial statements and regulatory returns. Failure to manage this risk could have a
material adverse impact on Quilter's business, financial condition, results of operations and prospects, and reputation.
Data, information and cyber-threats: Quilter's business, by its nature, requires it to store, retrieve, evaluate and utilise customer and company
data and information, which is highly sensitive. Quilter is subject to the risk of IT security breaches from parties with criminal or malicious intent
(including cyber-crime). Should Quilter's intrusion detection and anti-penetration software not anticipate, prevent or mitigate a network failure or
disruption, or should an incident occur to a system for which there is no duplication, it may have a material adverse effect on Quilter's customers,
business, financial condition, results of operations and prospects, and reputation.
Third party: Quilter outsources and procures certain functions and services to third parties and may increase its use of outsourcing in the future. If
Quilter does not effectively develop and implement its outsourcing strategies and its internal capability to manage such strategies, third party
providers do not perform as anticipated, or Quilter experiences technological or other problems with a transition, it may not realise productivity
improvements or cost efficiencies and may experience operational difficulties, increased costs and loss of business, and damage to its reputation.
Legal and regulatory: The risk of failing to comply with existing or new regulatory and legislative requirements including standards, principles and
practices, or an increased level of regulatory intervention resulting in sanctions or a capital add-on being imposed or a temporary restriction on our
ability to operate.
Legal and regulatory: Quilter's regulated businesses are subject to extensive regulation both in the UK (by the Prudential Regulatory Authority
("PRA") and the Financial Conduct Authority ("FCA") and internationally, and Quilter faces risks associated with compliance with these regulations.
Quilter's businesses are subject to the risk of adverse changes in laws, regulations and regulatory requirements in the markets in which they
operate. Regulatory reform initiatives could also lead to increased compliance costs or other adverse consequences for firms within the financial
services industry, including Quilter. Failure to manage these risks could have a material adverse impact on Quilter's business, financial condition,
results of operations and prospects, and reputation.
Financial crime: Quilter is required to comply with all applicable financial crime laws and regulations (anti-money laundering, anti-terrorism,
sanctions, anti-fraud, anti-bribery and corruption and insider dealing) in the jurisdictions in which it operates. Where Quilter is unable to comply
with applicable laws, regulations and expectations, regulators and relevant law enforcement agencies have the ability and authority to impose
significant fines and other penalties, including requiring a complete review of business systems, day-to-day supervision by external consultants
and ultimately the revocation of regulatory authorisations and licences. Failure to manage these risks could have a material adverse impact on
Quilter's business, financial condition, results of operations and prospects, and reputation.
Shareholder Information
The Quilter Board has agreed to recommend to shareholders the payment of a final dividend of 3.3 pence per share. This will be considered at
the first Quilter plc Annual General Meeting, which will be held on Thursday 16 May 2019. The final dividend will be paid on Monday 20 May 2019 to
shareholders on the UK and South African share registers on Friday 26 April 2019.
Dividend timetable
Dividend announcement in pounds sterling with South Africa ZAR Equivalent Tuesday 12 March 2019
Last day to trade cum dividend in South Africa Tuesday 23 April 2019
Shares trade ex-dividend in South Africa Wednesday 24 April 2019
Shares trade ex-dividend in the UK Thursday 25 April 2019
Record Date in UK and South Africa Friday 26 April 2019
Annual General Meeting Thursday 16 May 2019
Payment date Monday 20 May 2019
From the opening of trading on Tuesday 12 March 2019 until the close of business on Friday 26 April 2019, no transfers between the London and
Johannesburg registers will be permitted. Share certificates for shareholders on the South African register may not be dematerialised or
rematerialised between Wednesday 24 and Friday 26 April 2019, both dates inclusive.
Additional information
For Shareholders on our South African share register a dividend of 61.92028 cents per share will be paid on Monday 20 May 2019 to shareholders,
based on an exchange rate of 18.76372. Dividend Tax will be withheld at the rate of 20% from the amount of the gross dividend of 61.92028 South African
cents per share paid to South African shareholders unless a shareholder qualifies for exemption. After the Dividend Tax has been withheld, the net
dividend will be 49.53622 South African cents per share. The Company had a total of 1,902,251,098 shares in issue at today's date.
If you are uncertain as to the tax treatment of any dividends you should consult your own tax advisor.
Odd-lot Offer
As part of our drive for greater efficiency and in line with our desire to act in the best interests of all our shareholders, we intend to undertake an
Odd-lot Offer in 2019, subject to shareholder and other requisite approvals. An Odd-lot Offer entails Quilter making an offer to eligible shareholders
(holders of less than 100 shares) to repurchase their shares at a modest premium to the market price.
The proposed Odd-lot Offer will reduce the complexity and cost to Quilter of managing our shareholder base and will allow investors holding small
numbers of shares to dispose of their holdings in a timely and cost effective manner. Eligible shareholders can, of course, elect to retain their
shareholding in Quilter, if they so choose. Further information will be provided to eligible shareholders in due course.
Supplementary Information
For the year ended 31 December 2018
1. Key financial data
Change
Gross sales (GBPbn) 2018 (FY-18 vs 2017
FY-17)
Q1 Q2 Q3 Q4 FY % Q1 Q2 Q3 Q4 FY
Quilter Investors 1.6 1.5 1.3 1.1 5.5 4% 1.2 1.3 1.4 1.4 5.3
Quilter Cheviot 0.8 0.6 0.5 0.6 2.5 (11%) 0.7 0.8 0.7 0.6 2.8
Advice & Wealth Management 2.4 2.1 1.8 1.7 8.0 (1%) 1.9 2.1 2.1 2.0 8.1
Quilter Wealth Solutions 2.3 2.0 1.8 1.6 7.7 (13%) 2.2 2.2 2.3 2.2 8.9
Quilter International 0.5 0.4 0.4 0.5 1.8 (36%) 0.5 0.6 0.4 1.3 2.8
Quilter Life Assurance 0.2 0.1 0.1 0.2 0.6 (45%) 0.4 0.4 0.2 0.1 1.1
Wealth Platforms 3.0 2.5 2.3 2.3 10.1 (21%) 3.1 3.2 2.9 3.6 12.8
Elimination of intra-Group items (1.0) (0.9) (0.7) (0.8) (3.4) 6% (0.8) (0.9) (0.9) (1.0) (3.6)
Quilter plc 4.4 3.7 3.4 3.2 14.7 (15%) 4.2 4.4 4.1 4.6 17.3
NCCF (GBPbn) 2018 % of 2017
Opening
Q1 Q2 Q3 Q4 FY AuMA Q1 Q2 Q3 Q4 FY
Quilter Investors 1.0 0.8 0.5 0.5 2.8 17% 0.7 0.8 0.9 0.9 3.3
Quilter Cheviot 0.3 0.2 0.1 0.1 0.7 3% 0.2 0.4 0.4 0.1 1.1
Advice & Wealth Management 1.3 1.0 0.6 0.6 3.5 8% 0.9 1.2 1.3 1.0 4.4
Quilter Wealth Solutions 1.3 0.8 0.6 0.4 3.1 6% 1.0 1.1 1.2 1.2 4.5
Quilter International 0.1 - - 0.2 0.3 2% 0.2 0.2 0.2 0.8 1.4
Quilter Life Assurance (0.5) (0.5) (0.5) (0.8) (2.3) (15%) (0.3) (0.2) (0.7) (0.4) (1.6)
Wealth Platforms 0.9 0.3 0.1 (0.2) 1.1 1% 0.9 1.1 0.7 1.6 4.3
Elimination of intra-Group items (0.6) (0.7) (0.2) (0.4) (1.9) (0.4) (0.5) (0.7) (0.8) (2.4)
Quilter plc 1.6 0.6 0.5 - 2.7 2% 1.4 1.8 1.3 1.8 6.3
Quilter plc (excl. Quilter Life
Assurance) 2.0 1.0 1.1 0.6 4.7 5% 1.5 1.9 1.9 2.3 7.6
Integrated flows (excl. Quilter Life
Assurance) 1.5 1.3 0.9 1.0 4.7 1.1 1.3 1.4 1.4 5.2
Change
AuMA (GBPbn) 2018 (FY-18 vs 2017
FY-17)
Q1 H1 Q3 FY % Q1 H1 Q3 FY
Quilter Investors 17.1 18.4 18.8 17.8 5% 13.1 14.1 15.3 16.9
Quilter Cheviot 22.8 24.1 24.4 22.4 (5%) 21.8 22.5 23.0 23.6
Quilter Financial Planning 1.2 1.2 1.1 1.0 (17%) - 1.2 1.2 1.2
Advice & Wealth Management 41.1 43.7 44.3 41.2 (1%) 34.9 37.8 39.5 41.7
Quilter Wealth Solutions 49.7 52.3 53.4 49.9 (1%) 44.0 45.9 47.6 50.2
Quilter International 18.6 19.2 19.6 18.4 (5%) 17.5 17.8 18.0 19.3
Quilter Life Assurance 14.4 14.5 14.0 12.4 (19%) 16.0 15.6 15.1 15.3
Wealth Platforms 82.7 86.0 87.0 80.7 (5%) 77.5 79.3 80.7 84.8
Elimination of intra-Group assets (12.2) (13.2) (13.2) (12.6) (4%) (9.1) (9.8) (10.6) (12.1)
Quilter plc 111.6 116.5 118.1 109.3 (4%) 103.3 107.3 109.6 114.4
Quilter plc (excl. Quilter Life
Assurance)(1) 99.3 (2%) 101.7
(1) Opening AuMA excluding Quilter Life Assurance in 2017 was GBP85.2 billion
YTD Gross flows, net flows and AuMA (GBPbn)
AuMA AuMA
as at 31 Market and as at 31
December Gross Gross other December
2017 sales outflows Net flows movements 2018
Quilter Investors 16.9 5.5 (2.7) 2.8 (1.9) 17.8
Quilter Cheviot 23.6 2.5 (1.8) 0.7 (1.9) 22.4
Quilter Financial Planning 1.2 - - - (0.2) 1.0
Advice & Wealth Management 41.7 8.0 (4.5) 3.5 (4.0) 41.2
Quilter Wealth Solutions 50.2 7.7 (4.6) 3.1 (3.4) 49.9
Quilter International 19.3 1.8 (1.5) 0.3 (1.2) 18.4
Quilter Life Assurance 15.3 0.6 (2.9) (2.3) (0.6) 12.4
Wealth Platforms 84.8 10.1 (9.0) 1.1 (5.2) 80.7
Elimination of intra-group assets (12.1) (3.4) 1.5 (1.9) 1.4 (12.6)
Quilter plc 114.4 14.7 (12.0) 2.7 (7.8) 109.3
AuMA AuMA
as at 31 Market and as at 31
December Gross Gross other December
2016 sales outflows Net flows movements 2017
Quilter Investors 12.1 5.3 (2.0) 3.3 1.5 16.9
Quilter Cheviot 20.7 2.8 (1.7) 1.1 1.8 23.6
Quilter Financial Planning - - - - 1.2 1.2
Advice & Wealth Management 32.8 8.1 (3.7) 4.4 4.5 41.7
Quilter Wealth Solutions 41.4 8.9 (4.4) 4.5 4.3 50.2
Quilter International 16.9 2.8 (1.4) 1.4 1.0 19.3
Quilter Life Assurance 15.5 1.1 (2.7) (1.6) 1.4 15.3
Wealth Platforms 73.8 12.8 (8.5) 4.3 6.7 84.8
Elimination of intra-group assets (8.4) (3.6) 1.2 (2.4) (1.3) (12.1)
Quilter plc 98.2 17.3 (11.0) 6.3 9.9 114.4
2018 2017
Estimated asset allocation (%) (unaudited) Total Client Total Client
Fund profile by investment type(1) AuMA AuMA
Quilter
Fixed Interest 25% 23%
Equities 65% 66%
Cash 5% 5%
Property and Alternatives 5% 6%
Total 100% 100%
Retail 97% 96%
Institutional 3% 4%
Total 100% 100%
(1) Other Shareholder assets of GBP2.1 billion in 2018 (2017: GBP1.8 billion) are predominately invested in fixed interest and cash.
Revenue (GBPm) 2018 Quilter Advice & Quilter
Quilter Quilter Financial Wealth Wealth Quilter Quilter Life Wealth Head
Investors Cheviot Planning Management Solutions International Assurance Platforms Office Group
Net management fee 106 168 2 276 168 112 91 371 - 647
Other revenue 3 7 87 97 2 23 18 43 1 141
Total fee revenue 109 175 89 373 170 135 109 414 1 788
Revenue (GBPm) 2017 Quilter Advice & Quilter
Quilter Quilter Financial Wealth Wealth Quilter Quilter Life Wealth Head
Investors Cheviot Planning Management Solutions International Assurance Platforms Office Group
Net management fee 73 160 1 234 156 112 89 357 - 591
Other revenue 2 3 77 82 5 17 32 54 1 137
Total fee revenue 75 163 78 316 161 129 121 411 1 728
2. Advice & Wealth Management
The following table presents certain key financial metrics utilised by management with respect to the business units of the Advice & Wealth
Management segment, for the periods indicated.
Key financial highlights 2018 2017 % change
Quilter Financial Planning
Net management fee 2 1 100%
Other revenue 87 77 13%
Total fee revenue 89 78 14%
RFPs + PCA (#) 1,621 1,561 4%
Productivity (GBPm) 1.7 1.8 (6%)
Quilter Investors
Net management fee 106 73 45%
Other revenue 3 2 50%
Total fee revenue 109 75 45%
NCCF (GBPbn) 2.8 3.3 (15%)
Closing AuM (GBPbn) 17.8 16.9 5%
Average AuM (GBPbn) 17.9 14.2 26%
Revenue margin (bps) 59 51 8 bps
Quilter Cheviot
Net management fee 168 160 5%
Other revenue 7 3 133%
Total fee revenue 175 163 7%
NCCF (GBPbn) 0.7 1.1 (36%)
Closing AuM (GBPbn) 22.4 23.6 (5%)
Average AuM (GBPbn) 23.6 22.2 6%
Revenue margin (bps) 72 72 -
Asset retention (%) 92% 92% -
Investment managers (#) 155 164 (5%)
3. Wealth Platforms
The following table presents certain key financial metrics utilised by management with respect to the business units of the Wealth Platforms
segment, for the periods indicated.
Key financial highlights 2018 2017 % change
Quilter Wealth Solutions
Net management fee 168 156 8%
Other revenue 2 5 (60%)
Total fee revenue 170 161 6%
NCCF (GBPbn) 3.1 4.5 (31%)
Closing AuA (GBPbn) 49.9 50.2 (1%)
Average AuA (GBPbn) 51.5 45.5 13%
Revenue margin (bps) 32 33 (1) bps
Asset retention (%) 91% 90% 1 pp
Quilter International
Net management fee 112 112 -
Other revenue 23 17 35%
Total fee revenue 135 129 5%
NCCF (GBPbn) 0.3 1.4 (79%)
Closing AuA (GBPbn) 18.4 19.3 (5%)
Average AuA (GBPbn) 19.1 17.7 8%
Revenue margin (bps) 59 63 (4) bps
% premium-based charging (%) 57% 54% 3 pp
Asset retention (%) 92% 91% 1 pp
Quilter Life Assurance
Net management fee 91 89 2%
Other revenue 18 32 (44%)
Total fee revenue 109 121 (10%)
Adjusted profit before tax 57 66 (14%)
NCCF (GBPbn) (2.3) (1.6) (44%)
Closing AuA (GBPbn) 12.4 15.3 (19%)
- including closing AuA - Institutional (GBPbn) 3.4 4.9 (31%)
Average AuA (GBPbn) 14.3 14.9 (4%)
Revenue margin (bps) 69 60 9 bps
Asset retention (%) 81% 82% (1) pp
MCEV (GBPm) 536 498 8%
Statement of Directors' responsibilities
in respect of the preliminary announcement of the Annual report and accounts and the financial statements
The Directors confirm that to the best of their knowledge:
- The results in this preliminary announcement have been taken from the Group's 2018 Annual report and accounts, which will be available on
the Company's website on 28 March 2019; and
- The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group.
Paul Feeney Tim Tookey
Chief Executive Officer Chief Financial Officer
11 March 2019
Consolidated income statement
For the year ended 31 December 2018
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017
Revenue
Gross earned premiums 148 148
Premiums ceded to reinsurers (88) (88)
Net earned premiums 60 60
Fee income and other income from service activities 6(a) 1,046 895
Investment return 6(b) (3,482) 5,195
Other income 35 13
Total revenue (2,341) 6,163
Expenses
Insurance contract claims and changes in liabilities 18(b) (33) (15)
Change in investment contract liabilities 18(d) 3,236 (4,308)
Fee and commission expenses, and other acquisition costs (437) (320)
Change in third party interest in consolidated funds 369 (673)
Other operating and administrative expenses (772) (816)
Finance costs 7 (17) (39)
Total expenses 2,346 (6,171)
Profit on acquisitions 3(a) - 3
Profit/(Loss) before tax from continuing operations 5 (5)
Tax credit/(expense) attributable to policyholder returns 158 (49)
Profit/(Loss) before tax attributable to equity holders 163 (54)
Income tax credit/(expense) 8(a) 169 (41)
Less: tax (credit)/expense attributable to policyholder returns (158) 49
Tax credit attributable to equity holders 11 8
Profit/(Loss) after tax from continuing operations 174 (46)
Profit after tax from discontinued operations 3(c) 314 203
Profit for the period after tax 488 157
Attributable to:
Equity holders of Quilter plc 488 157
Earnings per ordinary share on profit attributable to ordinary shareholders of Quilter plc
Basic
From continuing operations (pence) 9.5 (2.5)
From discontinued operations (pence) 3(c) 17.1 11.1
Basic earnings per ordinary share (pence) 9(a) 26.6 8.6
Diluted
From continuing operations (pence) 9.4 (2.5)
From discontinued operations (pence) 3(c) 17.1 11.1
Diluted earnings per ordinary share (pence) 9(b) 26.5 8.6
Consolidated statement of comprehensive income
For the year ended 31 December 2018
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017
Profit for the period 488 157
Other comprehensive income:
Exchange gains on translation of foreign operations(1) - 3
Items that may be reclassified subsequently to income statement - 3
Income tax on items that will not be reclassified subsequently to income statement(2) - 3
Items that will not be reclassified subsequently to income statement - 3
Total other comprehensive income, net of tax(1) - 6
Total comprehensive income for the period 488 163
Attributable to:
Continuing operations 174 (47)
Discontinued operations 3(d) 314 210
Equity holders of Quilter plc 488 163
(1) In the year ended 31 December 2017, GBP3 million previously shown within the consolidated statement of changes in equity as a change in participation in subsidiaries
has been reclassified to other comprehensive income, to conform with current year presentation.
(2) In the year ended 31 December 2017, GBP3 million previously shown within other comprehensive income for the period has been reclassified to income tax on items that
will not be reclassified subsequently to income statement, to conform with current year presentation.
Reconciliation of adjusted profit to profit after tax
For the year ended 31 December 2018
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017
Adjusted profit before tax
Advice and Wealth Management 102 82
Wealth Platforms 162 158
Head Office (31) (31)
Adjusted profit before tax 4(b) 233 209
Reconciliation of adjusted profit to Profit after tax
Adjusting for the following:
Goodwill impairment and impact of acquisition accounting (50) (54)
Profit on business acquisitions and disposals - 3
Business transformation costs (84) (89)
Managed Separation costs (24) (32)
Finance costs (13) (39)
Policyholder tax adjustments 101 17
Voluntary customer remediation provision - (69)
Total adjusting items before tax 5(a) (70) (263)
Profit/(Loss) before tax attributable to equity holders 163 (54)
Income tax attributable to policyholder returns (158) 49
Profit/(Loss) before tax from continuing operations 5 (5)
Income tax credit/(expense) on continuing operations 8(b) 169 (41)
Profit/(Loss) after tax from continuing operations 174 (46)
Profit after tax from discontinued operations 3(c) 314 203
Profit for the period after tax 488 157
Adjusted profit after tax attributable to ordinary shareholders of Quilter plc
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017
Adjusted profit before shareholder tax 233 209
Shareholder tax on adjusted profit 8(c) (6) (14)
Adjusted profit after tax attributable to ordinary shareholders of Quilter plc 9(c) 227 195
Adjusted weighted average number of ordinary shares used to
calculate adjusted basic earnings per share (millions) 9(c) 1,832 1,830
Adjusted basic earnings per share (pence) 9(c) 12.4 10.7
Adjusted weighted average number of ordinary shares used to
calculate adjusted diluted earnings per share (millions) 9(c) 1,839 1,830
Adjusted diluted earnings per share (pence) 9(c) 12.3 10.7
Basis of preparation of adjusted profit
Adjusted profit is one of the Group's Alternative Performance Measures and reflects the Directors' view of the underlying performance of the Group.
It is used for management decision making and internal performance management and is the profit measure presented in the Group's segmental
reporting. Adjusted profit is a non-GAAP measure which adjusts the IFRS profit for specific agreed items as detailed in note 5(a): Adjusted profit
adjusting items.
Adjusted profit excludes significant costs or income that are non-operating or one-off in nature, including the impairment of goodwill; amortisation
and impairment of other intangibles acquired in business combinations; the profit or loss on business acquisitions and disposals; costs related to
business transformation; Managed Separation costs; the effects of interest costs on borrowings; and voluntary customer remediation provisions.
Adjusted profit also treats policyholder tax as a pre-tax charge (to offset against the related income collected from policyholders), though adjusted to
remove the impact of non-operating tax items.
Adjusted earnings applied in the calculation of adjusted earnings per share is calculated based on adjusted profit after tax. The calculation of the
adjusted weighted average number of shares includes own shares held in policyholders' funds.
The Group Audit Committee regularly reviews the use of adjusted profit to confirm that it remains an appropriate basis on which to analyse the
operating performance of the business. The Committee assesses refinements to the policy on a case-by-case basis, and where possible the Group
seeks to minimise such changes in order to maintain consistency over time.
Consolidated statement of changes in equity
For the year ended 31 December 2018
GBPm
Total
Share-based share-
Share Share Merger payments Other Retained holders'
For the year ended 31 December 2018 Notes capital premium reserve reserve reserves earnings equity
Balance at 1 January 2018 130 58 - 38 1 872 1,099
Profit for the period - - - - - 488 488
Total comprehensive income - - - - - 488 488
Dividends 10 - - - - - (221) (221)
Acquisition of entities due to managed separation restructure(1) 17(b) - - 591 - - - 591
Issue of share capital 17 3 - (3) - - - -
Movement in treasury shares - - - - - 5 5
Equity share-based payment transactions(2) - - - 7 - 35 42
Change in participation in subsidiaries - - - (12) - 12 -
Aggregate tax effects of items recognised directly in equity - - - 1 - - 1
Total transactions with the owners of the Company 3 - 588 (4) - (169) 418
Balance at 31 December 2018 133 58 588 34 1 1,191 2,005
(1) Acquisition of the Skandia UK group of entities from Old Mutual plc.
(2) Equity share-based payment transactions include GBP27 million of IFRS 2 costs and GBP35 million transfer to retained earnings representing share-based payment schemes
that have fully vested. In addition, GBP15 million was transferred in from liability accounts, mainly relating to cash settled awards that have been converted to equity settled
awards.
GBPm
Foreign Total
Share-based currency share-
Share Share Merger payments Other translation Retained holders'
For the year ended 31 December 2017 Notes capital premium reserve reserve reserves reserve earnings equity
Balance at 1 January 2017 130 - - 75 3 2 782 992
Profit for the year - - - - - - 157 157
Other comprehensive income - - - - - - 6 6
Total comprehensive income - - - - - - 163 163
Dividends 10 - - - - - - (210) (210)
Issue of share capital 17(a) 200 58 - - - - - 258
Reduction of share capital 17(a) (200) - - - - - 200 -
Movement in treasury shares(1) - - - - - - (99) (99)
Equity share-based payment transactions(2) - - - (36) - - 31 (5)
Change in participation in subsidiaries - - - (1) (2) (2) 5 -
Total transactions with the owners of the Company - 58 - (37) (2) (2) (73) (56)
Balance at 31 December 2017 130 58 - 38 1 - 872 1,099
(1) Movement in treasury shares includes GBP99 million of treasury shares within the JSOP Employee Benefit Trust that transferred from Old Mutual plc to the Company
during 2017.
(2) Equity share-based payment transactions include GBP18 million of IFRS 2 costs and GBP31 million transfer to retained earnings representing share-based payment schemes
that have fully vested. In addition, GBP23 million was paid to employee benefit trusts in respect of share-based payment scheme settlements.
Consolidated statement of financial position
At 31 December 2018
GBPm
At At
31 December 31 December
Notes 2018 2017
Assets
Goodwill and intangible assets 11 550 574
Property, plant and equipment 17 18
Investments in associated undertakings(2) 2 1
Deferred acquisition costs(1) 11 611
Contract costs(1) 551 -
Contract assets(1) 44 -
Loans and advances 12 222 199
Financial investments(2) 13 59,219 64,250
Reinsurers' share of policyholder liabilities 18 2,162 2,908
Deferred tax assets 20 38 22
Current tax receivable 20(c) 47 -
Trade, other receivables and other assets 486 497
Derivative assets 46 87
Cash and cash equivalents 16 2,395 2,360
Assets of operations classified as held for sale 3(f) - 446
Total assets 65,790 71,973
Equity and liabilities
Equity
Ordinary share capital 17(a) 133 130
Ordinary share premium reserve 17(a) 58 58
Merger reserve 17(b) 588 -
Share-based payments reserve 34 38
Other reserves 1 1
Retained earnings 1,191 872
Total equity 2,005 1,099
Liabilities
Long-term business insurance policyholder liabilities 18 602 489
Investment contract liabilities 18 56,450 59,139
Third-party interests in consolidated funds 5,116 7,905
Provisions 19 94 104
Deferred tax liabilities 20 59 190
Current tax payable 20(c) 5 38
Borrowings 21 197 782
Trade, other payables and other liabilities 999 1,331
Deferred revenue(1) - 244
Contract liabilities(1) 226 -
Derivative liabilities 37 433
Liabilities of operations classified as held for sale 3(f) - 219
Total liabilities 63,785 70,874
Total equity and liabilities 65,790 71,973
(1) The Group has initially applied IFRS 15 and IFRS 9 at 1 January 2018. It has applied IFRS 15 using the cumulative effect method, under which the comparative
information is not restated. It has also taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in respect of IFRS 9's classification
and measurement (including impairment) requirements.
(2) As at 31 December 2017, GBP2 million has been reclassified from investments in associated undertakings to financial investments to conform with current year
presentation.
Consolidated statement of cash flows
For the year ended 31 December 2018
The cash flows presented in this statement cover all the Group's activities and include flows from both policyholder and shareholder activities. All
cash and cash equivalents are available for use by the Group except for cash and cash equivalents in Consolidated Funds.
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017(2)
Cash flows from operating activities
Profit before tax 321 227
Non-cash movements in profit before tax 584 3,151
Net changes in working capital(1) (669) 980
Taxation paid (92) (9)
Total net cash flows from operating activities 144 4,349
Cash flows from investing activities
Net acquisitions of financial investments (366) (3,549)
Acquisition of property, plant and equipment (7) (8)
Acquisition of intangible assets (4) (9)
Acquisition of interests in subsidiaries - (33)
Cash added within acquisition of Skandia UK Limited 3(a) 25 -
Net proceeds from the disposal of interests in subsidiaries(3) 350 208
Total net cash used in investing activities (7) (3,391)
Cash flows from financing activities
Dividends paid to ordinary equity holders of the Company (221) (210)
Finance costs (8) (39)
Proceeds from issue of ordinary shares - 258
Proceeds from issue of subordinated and other debt 497 -
Subordinated and other debt repaid (516) (57)
Total net cash used in financing activities (248) (48)
Net (decrease)/increase in cash and cash equivalents (111) 910
Cash and cash equivalents at beginning of the year 2,507 1,595
Effects of exchange rate changes on cash and cash equivalents (1) 2
Cash and cash equivalents at end of the period 16 2,395 2,507
Cash flows include both continuing and discontinued operations and cash held for sale.
(1) In the year end 31 December 2017, the cash flow statement has been amended to include cash of GBP147 million that was previously included in assets held for sale in
respect of the Single Strategy Asset Management business which has subsequently been sold in 2018.
(2) A number of items within the 2017 comparatives have been reclassified to align with the presentation within the 2018 financial statements. There was no impact on cash
and cash equivalents resulting from these reclassifications.
(3) Net proceeds from the disposal of interests in subsidiaries in 2018 includes the cash consideration on disposal of the Single Strategy Asset Management business of
GBP540 million (see note 3(b)), less cash within the Single Strategy Asset Management business at the point of disposal of GBP170 million and GBP20 million transaction costs.
Notes to the financial statements of the Company
For the year ended 31 December 2018
General Information
Quilter plc (the 'Company'), a public limited company incorporated and domiciled in the United Kingdom ('UK'), together with its subsidiary
undertakings (collectively, the 'Group') offers investment and wealth management services, life assurance and long-term savings, and financial
advice through its subsidiaries and associates primarily in the UK with a presence in a number of cross-border markets.
The address of the registered office is Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ.
The Company was, until 25 June 2018, a wholly owned subsidiary of Old Mutual plc, a FTSE 100 listed group. The Company formed part of the Old
Mutual Wealth division of Old Mutual plc, for which it acted as a holding company and delivered strategic and governance oversight. On 25 June
2018, Quilter plc was listed on the London and the Johannesburg Stock Exchanges and is no longer part of the Old Mutual plc group.
1: Basis of preparation
The results in this preliminary announcement have been taken from the Group's 2018 Annual report and accounts which will be available on the
Company's website on 28 March 2019. The consolidated financial statements of Quilter plc for the year ended 31 December 2018 have been
prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU), and those parts of the
Companies Act 2006 applicable to those reporting under IFRS.
Significant accounting policies applicable to the Group's consolidated financial statements can be found in note 4 of the consolidated financial
statements within the 2018 Annual report and accounts.
The preliminary announcement for the year ended 31 December 2018 does not constitute statutory accounts as defined in Section 434 of the
companies Act 2006. The consolidated financial statements for full year 2018 have been audited by KPMG. Pursuant to section 435 of the
Companies Act 2006, the comparative figures for the financial year ended 31 December 2017 are not the Group's statutory accounts for that
financial year. Those accounts were separate financial statements of the Company and have been reported on by the company's auditor and
delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006. The comparative figures for the financial year 31 December 2017 are the same as those reported in the Group's listing
prospectus dated 20 April 2018, which is available on the Group's website.
This is the first set of the Group's annual financial statements in which IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with
Customers have been applied. Changes in significant accounting policies to reflect these new IFRSs are explained in note 2.
The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments, and are
presented in pounds sterling, which is the currency of the primary economic environment in which the Group operates.
Critical accounting estimates and judgements
The preparation of financial statements requires management to exercise judgement in applying accounting policies and make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. Critical accounting estimates and
judgements are those that involve the most complex or subjective assessments and assumptions. Management uses its knowledge of current facts
and circumstances and applies estimation and assumption setting techniques that are aligned with relevant actuarial and accounting guidance to
make predictions about future actions and events. Actual results may differ significantly from those estimates.
The Group Audit Committee reviews the reasonableness of judgements and estimates applied and the appropriateness of significant accounting
policies adopted in the preparation of these financial statements. The areas where judgements and estimates have the most significant effect on the
amounts recognised in these financial statements are summarised below:
Area Critical accounting judgements Notes
Group The Group has undertaken a number of acquisitions and disposals during the year including those as n/a(1)
accounting part of Managed Separation and the sale of the Single Strategy Asset Management business. Other
including the than for common control transactions, the Group uses the acquisition method of accounting for
consolidation business combinations where the cost is measured as the aggregate of the fair values (at the date of
of investment exchange) of assets acquired, liabilities incurred, and equity instruments issued for control of the
funds acquirer. Judgement is applied on determining the fair value of the consideration and net assets
acquired and also on the date at which the Group obtains or cedes control. In addition, the Group's
interest in investment funds can fluctuate according to the Group's participation in them as clients'
underlying investment choices change. Third-party interests in consolidated funds are classified as a
liability rather than a non-controlling interest as they meet the liability classification requirement
set out in IAS 32.
Insurance The Group is required to apply judgement in assessing the level of insurance risk transferred to the 18
contracts - Group in determining whether a contract should be classified (and accounted for) as an insurance or
classification investment contract. The majority of the contracts written by the Group do not meet the definition of an
insurance contract as they do not transfer significant insurance risk and as such are accounted for as
an investment contract.
Provisions - In assessing whether a provision should be recognised, the Group evaluates the likelihood of a 19
recognition constructive or legal obligation to settle an event that took place in the past and whether a reliable
estimate can be made. Significant provisions have been in respect of the voluntary client remediation
provision and the restructuring provision in respect of the sale of the Single Strategy Asset
Management business.
Deferred tax - The timing and recognition of any deferred tax assets have been impacted as the Group has become 20
recognition standalone under Managed Separation. Due to ambiguities in tax law and the complex nature of the
separation process, the tax treatment of specific potential tax assets are being discussed with the
relevant tax authorities. Where management believe there is a significant risk that the tax authorities
may take a different view no asset has been recognised. Management expects discussions with the
tax authorities on Managed Separation transactions to be concluded during 2019.
(1) Refer to note 4(a) in the financial statements included within the Group's 2018 Annual report and accounts.
Area Critical accounting estimates Notes
Insurance Measurement involves significant use of assumptions including mortality, morbidity, persistency, 18
contracts - expense valuation and interest rates.
measurement
Provisions - The amount of provision is calculated based on the Group's estimation of the expenditure required to 19
measurement settle the obligation at the statement of financial position date. The key assumptions in relation to the
voluntary customer remediation provision have included the investment return used, the point at which
customers are remediated and the timing of remediation. The provision includes estimates of the cost
of future claims and programme remediation costs.
Deferred tax - The estimation of future taxable profits is performed as part of the annual business planning process, 20
measurement and is based on estimated levels of assets under management, which are subject to a large number of
factors including worldwide stock market movements, related movements in foreign exchange rates
and net client cash flow, together with estimates of expenses and other charges.
Goodwill and The valuation of goodwill and intangible assets that are recognised as the result of a business
intangible combination involves the use of valuation models. These have arisen principally on the acquisition of 11
assets the Quilter Cheviot business, Intrinsic and on various adviser business acquisitions. In relation to
goodwill impairment, the determination of a cash generating unit's ('CGUs') recoverable value is based
on the discounted value of the expected future profits of each business. Significant estimates include
forecast cash flows, new business growth and discount rates.
Valuation of Where quoted market prices are not available, valuation techniques are used to measure financial
investments investments. When valuation techniques use significant unobservable inputs they are subject to 15
estimation uncertainty and are categorised as level 3 in the fair value hierarchy. Matching liabilities are
similarly categorised as level 3.
2: New standards, amendments to standards, and interpretations adopted by the Group
The Group adopted IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers for the first time in 2018. Although
significant standards, they did not have a material impact on the Group. The majority of the Group's financial assets and liabilities continue to be
measured at fair value through profit or loss ('FVTPL') after the implementation of IFRS 9. In relation to IFRS 15 the Group was already largely
compliant in the way it recognises fee and commission income. The impact of adopting these two new standards is explained in detail in note 4(r) of
the consolidated financial statements within the Group's 2018 Annual report and accounts.
Other standards:
In addition to IFRS 9 and IFRS 15, the following amendments to the accounting standards, issued by the IASB and endorsed by the EU, have been
adopted by the Group from 1 January 2018 with no material impact on the Group's consolidated results, financial position or disclosures:
- Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions
- Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
- Amendments to IAS 40 Transfers of Investment Property
- Amendments to IFRS 1 and IAS 28 Annual improvements to IFRSs 2014-2016 cycle
- IFRIC 22 Foreign currency transactions and advance consideration
3: Acquisitions, discontinued operations and disposal groups held for sale
This note provides details of the acquisitions and disposals of subsidiaries the Group has made during the period, together with details of
businesses held for sale during that same period.
3(a) Business acquisitions completed during the period
Business acquisitions completed during year ended 31 December 2018
Acquisition of Skandia UK Limited from Old Mutual plc
On 31 January 2018, the Group acquired the Skandia UK Limited group of entities from Old Mutual plc which comprises seven Old Mutual plc group
entities with a net asset value ('NAV') of GBP591 million. The transfer was effected by the issue of a share and with the balance represented by a
merger reserve. No debt was taken on as a result of this transaction. The most significant asset within these entities is a GBP566 million receivable
which corresponds to an equivalent payable within the Group's statement of financial position. The net effect of this transaction for the Group is to
replace a payable due to Old Mutual plc with equity. For further information see note 17.
Acquisition of adviser businesses by Quilter Private Client Advisers ('QPCA') (formerly Old Mutual Wealth Private Client Advisers)
During the year, the Group continued its expansion of the QPCA business, aiming to develop a Quilter plc branded, employed adviser business
focused upon servicing upper affluent and high net worth clients, offering a centrally-defined restricted advice proposition focused upon the Group's
investment solutions and platform. In the year the Group completed the acquisition of fourteen adviser businesses as part of the expansion of the
QPCA business. The total cash consideration paid was an initial GBP5.3 million with additional potential deferred consideration of GBP6.4 million which is
expected to be paid in full (discounted to net present value for this and all other acquisitions listed below), dependent upon meeting certain
performance targets generally relating to funds under management.
Net tangible assets of GBP0.2 million were acquired and goodwill of GBP5.1 million, other intangible assets of GBP7.4 million and a deferred tax liability of
GBP1.0 million were recognised as a result of the transaction. The deferred consideration was capitalised in the calculation of goodwill recognised.
Business acquisitions completed during year ended 31 December 2017
Caerus Capital Group Limited ('Caerus')
On 1 June 2017, the Group, completed the acquisition of 100% of the share capital of Caerus, a UK based adviser network that operates in a
similar manner to Intrinsic (another Group business within the Advice and Wealth Management segment) and which has approximately GBP4 billion of
funds under advice and 300 advisers.
The total consideration of GBP22 million includes GBP15 million cash consideration and up to GBP3 million that has been deferred for two years and up to GBP4
million that has been deferred for three years. The deferred consideration has been included as part of the cost of the acquisition as there is no
continuing employment condition applying to the sellers of the business. The deferred consideration payable is dependent on turnover targets post
acquisition and is potentially reduced by the amount of any relevant claims arising from in-force business existing prior to the payment dates.
The purchase price has been allocated based on the fair value of assets acquired and liabilities assumed at the date of acquisition determined in
accordance to IFRS 3 Business Combinations.
The carrying value of assets and liabilities in Caerus's consolidated statement of financial position on acquisition date approximates the fair value of
these items determined by the Group. Net tangible assets of GBP1 million were acquired and in addition, the Group recognised identified intangible
assets of GBP14 million and a deferred tax liability of GBP2 million relating to customer distribution channels. The value of the intangible assets was
determined by applying cash flows to standard industry valuations models. Goodwill of GBP9 million was recognised on the acquisition which is
attributable to the delivery of cost and revenue synergies that cannot be linked to identifiable intangible assets.
Transaction costs incurred of GBP1 million relating to the acquisition have been recognised within other expenses in the consolidated income
statement, but not included within adjusted profit.
Acquisition of adviser businesses by Quilter Private Client Advisers ('QPCA')
During 2017, the Group completed the acquisition of eight adviser businesses as part of the expansion of its QPCA business that was launched in
October 2015.
The purchase price has been allocated based on the fair value of assets acquired and liabilities assumed at the date of acquisition determined in
accordance to IFRS 3 Business Combinations.
The aggregate estimated consideration payable was GBP18 million, of which GBP10 million was cash consideration and up to GBP8 million in deferred
payments. The amount of deferred consideration is dependent upon meeting certain performance targets, generally relating to the value of funds
under management and levels of on-going fee income. The deferred consideration has been included as part of the cost of the acquisition. Total
other intangible assets of GBP13 million and a deferred tax liability of GBP2 million in respect of customer relationships have been recognised as a result
of the acquisitions, together with goodwill of GBP7 million, GBP2 million of which has been transferred from intangibles to goodwill following a review of the
purchase price allocations in 2018 (see note 11(a)).
Transaction costs incurred of GBP1 million relating to the acquisitions have been recognised within other operating expenses in the consolidated
income statement, but not included within adjusted profit.
Attivo Investment Management Limited ('AIM')
On 29 March 2017, the Group completed the acquisition of 100% of the share capital of AIM, a UK based investment management business
offering a comprehensive investment management service.
The fair value of the total estimated consideration was GBP8 million, of which GBP5 million was cash consideration and GBP3 million was deferred for two
years. The deferred consideration is included within the cost of the acquisition because it is dependent on levels of assets under management being
maintained, with no requirement for continuing employment applied to the sellers of the business.
The book value of total assets and total net assets of the acquired business were both less than GBP1 million.
The purchase price has been based on the fair value of assets acquired and liabilities assumed at the date of acquisition determined in accordance
to IFRS 3 Business Combinations.
The carrying value of assets and liabilities in AIM's statement of financial position on acquisition date approximates the fair value of these items
determined by the Group. Other intangible assets of GBP9 million and a deferred tax liability of GBP2 million, relating to customer relationships, were
recognised as a result of the acquisition. No goodwill was recognised on this transaction.
Transaction costs incurred of GBP0.5 million relating to the acquisition have been recognised within other operating expenses in the consolidated
income statement, but not included within adjusted profit.
Commsale 2000 Limited ('Commsale')
On 29 September 2017, the Group acquired Commsale from Old Mutual plc. Commsale is a UK based service company that runs the lease for the
London head office building and is responsible for the payment of rent, rates and service charges relating to the building and recharging the costs to
all tenants through a service charge.
This represents a business combination involving entities or businesses under common control because the combining businesses are ultimately
controlled by the same party or parties before and after the business combination.
The total consideration was GBP0.3 million. The fair value of the identifiable assets at the date of acquisition was GBP0.5 million, with a gain on
purchase of GBP0.2 million being recognised, representing assets not valued within the agreed consideration.
Global Edge Technologies(Pty) Ltd ('GET')
On 30 November 2017, the Group acquired 100% of the issued share capital of GET from Old Mutual plc. GET is a service company incorporated
in South Africa, with a branch in the UK that provides IT support for the Quilter Group's Platform business services.
This represents a business combination involving entities or businesses under common control because the combining businesses are ultimately
controlled by the same party or parties before and after the business combination.
The total consideration was GBP1 million. The fair value of the identifiable assets at the date of acquisition was GBP4 million, with a gain on purchase GBP3
million being recognised. The Group determined that the excess of book value over consideration paid was attributable to potential future
integration costs which, if incurred, would be expensed in future periods. As potential future integrating activities do not qualify to be recognised as
a liability in the application of the acquisition method of accounting, no such liability was recognised, and the Group recorded the excess as a
bargain purchase gain.
3(b) Disposal of subsidiaries, associated undertakings and strategic investments
Year ended 31 December 2018
In December 2017, the Group announced that it had entered into an agreement to sell its Single Strategy Asset Management business ('Single
Strategy business') to a special purpose vehicle ultimately owned by funds managed by TA Associates and certain members of the Single Strategy
management team (together 'the Acquirer'). On 29 June 2018, the Group completed the sale for a total consideration of GBP583 million, comprising
cash consideration of GBP540 million on completion, with an additional GBP7 million anticipated to be payable thereafter, to be paid primarily in 2019 to
2021 as surplus capital associated with the separation from the Group is released in the business. The deferred consideration is not subject to
performance conditions. The remaining proceeds of GBP36 million were received in cash as a pre-completion dividend on 15 June 2018. Economic
ownership of the Single Strategy business passed to the Acquirer effective from 1 January 2018 with all profits and performance fees generated up
until 31 December 2017 for the account of Quilter plc. The results of the Single Strategy business continued to be included as part of the Group up
until the date of sale on the 29 June 2018. The Group recognised a post tax profit on disposal of GBP292 million.
During the year an expense provision of GBP2 million in relation to the sale of Old Mutual Wealth Italy S.p.A. in the prior year (see below for details of
this sale) was released as it is not expected to be incurred, giving rise to a GBP2 million increase in the profit on sale.
Year ended 31 December 2017
In August 2016, the Group announced that it had agreed to sell Old Mutual Wealth Italy S.p.A. to Ergo Previdenza S.p.A. ('Ergo'), a member of the
Flavia insurance group. The sale completed on 9 January 2017. The consideration for the transaction was GBP221 million (EUR278 million) in cash, plus
interest to completion recognising a profit on disposal of GBP80 million.
GBPm
Year ended Year ended
31 December 31 December
2018 2017
Single Strategy
business and Old
Mutual Wealth Old Mutual Wealth
Italy adjustment Italy
Consideration received(1) 546 221
Less: transaction costs on the sale of Single Strategy (20) (4)
Plus: release of accrued expenses in relation to OMW Italy S.p.A. disposal 2 -
Net proceeds from sale 528 217
Carrying value of net assets disposed of (238) (137)
Profit on sale of operations before tax 290 80
Tax on disposals 4 -
Profit on sale of operations after tax 294 80
(1) Consideration received in respect of the Single Strategy business includes GBP540 million of cash received together with the discounted deferred
consideration of GBP6 million, and excludes the GBP36 million pre-completion dividend received in June 2018.
3(c) Discontinued operations - Income statement
For the years ended 31 December 2018 and 31 December 2017, the Group's discontinued operations included the Single Strategy business
(previously part of Old Mutual Global Investors). Old Mutual Wealth Italy S.p.A. is also included in discontinued operations up to the date its sale
completed on 9 January 2017.
The table below sets out the trading results of the Group's discontinued operations and also any profit on the sale of discontinued operations during
the period.
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017
Revenue
Fee income and other income from service activities 6(a) 136 389
Investment return 6(b) - 7
Other income 2 3
Total revenue 138 399
Expenses
Fee and commission expenses, and other acquisition costs (31) (62)
Other operating and administrative expenses (81) (185)
Total expenses (112) (247)
Profit on the disposal of subsidiaries 3(b) 290 80
Profit before tax from discontinued operations 316 232
Tax (expense) attributable to equity holders (2) (29)
Profit for the period after tax from discontinued operations 314 203
Attributable to:
Equity holders of Quilter plc 314 203
Earnings per ordinary share on profit attributable to ordinary shareholders of Quilter plc
Basic - from discontinued operations (pence) 17.1 11.1
Diluted - from discontinued operations (pence) 17.1 11.1
3(d) Discontinued operations - Statement of comprehensive income
GBPm
Year ended Year ended
31 December 31 December
2018 2017
Profit for the period 314 203
Other comprehensive income from discontinued operations:
Items that may be reclassified subsequently to income statement
Exchange gains on translation of foreign operations - 4
Other comprehensive income for the period - 3
Total other comprehensive income from discontinued operations, net of tax - 7
Total comprehensive income for the period from discontinued operations 314 210
3(e) Discontinued operations - Net cash flows
GBPm
Year ended Year ended
31 December 31 December
2018 2017
Total net cash flows from operating activities (63) (22)
Total net cash used in investing activities 131 137
Total net cash used in financing activities (45) -
Net increase in cash and cash equivalents 23 115
3(f) Assets and liabilities held for sale
Assets and liabilities held for sale
Assets and liabilities of operations classified as held for sale at 31 December 2017 relate to the Single Strategy business. The operation was
classified as held for sale from December 2017 and, on 29 June 2018, the Group completed the sale. See note 3(b) above. The assets and
liabilities held for sale are disclosed in the table below.
GBPm
At At
31 December 31 December
Notes 2018 2017
Assets classified as held for sale
Goodwill and intangible assets 11(b) - 82
Deferred acquisition costs - 4
Deferred tax assets 20 - 9
Trade, other receivables and other assets - 204
Cash and cash equivalents 16 - 147
Assets of operations classified as held for sale - 446
Liabilities directly associated with assets classified as held for sale
Current tax payable - 33
Trade, other payables and other liabilities - 186
Liabilities of operations classified as held for sale - 219
Net assets of operations classified as held for sale - 227
4: Segmental information
4(a) Segmental presentation
The Group's operating segments comprise Advice and Wealth Management and Wealth Platforms, which is consistent with how the Group is
managed. For all reporting periods, these businesses have been classified as continuing operations in the IFRS income statement and as core
operations in determining the adjusted profit. Head Office includes certain revenues and central costs that are not allocated to the segments.
For the period ended 31 December 2018, the Group has classified the Single Strategy Asset Management business as discontinued. For the period
ended 31 December 2017, the Group has classified the Italian business as discontinued. These businesses were sold or held for sale in these
periods. Further detail is included in note 3(b).
There have been no changes to the basis of segment information for the period in these financial statements.
The Group's segmental results are analysed and reported on a basis with the way that management and the Board of directors of Quilter plc assess
performance of the underlying businesses and allocate resources. Information is presented to the Board on a consolidated basis in pounds sterling (the
presentation currency) and in the functional currency of each business.
Adjusted profit is one of the key measures reported to the Group's management and Board of directors for their consideration in the allocation of
resources to, and the review of, the performance of the segments. As appropriate to the business line, the Board reviews additional measures to
assess the performance of each of the segments. These typically also include net client cash flows, assets under management and administration,
and revenue and operating margins.
Consistent with internal reporting, assets, liabilities, revenues and expenses that are not directly attributable to a particular segment are allocated
between segments where appropriate and where there is a reasonable basis for doing so. The Group accounts for inter-segment revenues and
transfers as if the transactions were with third parties at current market prices.
The revenues generated in each reported segment are provided in the analysis of profits and losses in note 4(b). The segmental information in this
note reflects the adjusted and IFRS measures of profit or loss and the assets and liabilities for each operating segment as provided to management and
the Board of directors. There are no differences between the measurement of the assets and liabilities reflected in the primary statements and that
reported for the segments.
The Group is primarily engaged in the following business activities from which it generates revenue: investment and asset management, financial
advice (revenue from fee income and other income from service activities), and life assurance (revenue from premium income). Investment return
includes gains and losses on investment securities and other income includes other fees and miscellaneous income.
The principal lines of business from which each operating segment derives its revenues are as follows:
Advice and Wealth Management
This segment comprises Quilter Investors, Quilter Cheviot Limited and Quilter Financial Planning, including Quilter Private Client Advisers ('QPCA').
Quilter Investors is a leading provider of investment solutions in the UK multi-asset market. It develops and manages investment solutions in the
form of funds for Quilter plc and third party clients. It has several fund ranges which vary in breadth of underlying asset class. The business has
primarily been accumulation focused, with recent development of decumulation solutions.
Quilter Cheviot Limited provides discretionary investment management in the United Kingdom with bespoke investment portfolios tailored to the
individual needs of affluent and high-net worth customers, charities, companies and institutions through a network of branches in London and the
regions. Investment management services are also provided by branches in Jersey, Channel Islands and the Republic of Ireland.
Quilter Financial Planning is a restricted and independent financial adviser network (including QPCA) providing mortgage and financial planning
advice and financial solutions for both individuals and businesses through a network of intermediaries. They operate across all markets, from wealth
management and retirement planning advice through to dealing with property wealth and personal and business protection needs.
Wealth Platforms
This segment comprises Quilter Wealth Solutions ('QWS') and Quilter Life Assurance ('QLA'), and Quilter International cross-border businesses.
QWS and QLA provide advice based predominantly unit-linked wealth management products and services in the UK, which serves a largely affluent
customer base through advised multi-channel distribution. The QLA business is predominantly a closed book, made up of legacy products.
Protection and institutional pension products are also part of the business.
Quilter International is a cross-border business, focusing on high net worth and affluent local customers and expatriates in Asia, the Middle East,
Europe and Latin America.
In addition to the two operating segments, Head Office comprises the investment return on centrally held assets, central function expenses, such as
Group treasury and finance functions, along with central core structural borrowings and certain tax balances in the segmental statement of financial
position.
4(b)(i): Adjusted profit statement - segmental information for the year ended 31 December 2018
GBPm
Adjusted profit - Continuing operations Reconciliation to IFRS
Operating segments
Advice and Adjusting IFRS
Wealth Wealth Head Adjusted Consolidation items Income
Notes Management Platforms Office profit Adjustments(1) (Note 5(a)) Statement
Revenue
Gross earned premiums - 148 - 148 - - 148
Premiums ceded to reinsurers - (88) - (88) - - (88)
Net earned premiums - 60 - 60 - - 60
Fee income and other income from service activities 6(a) 547 507 - 1,054 (8) - 1,046
Investment return 9 (3,248) 3 (3,236) (246) - (3,482)
Other income 2 101 6 109 (74) - 35
Segmental revenue 558 (2,580) 9 (2,013) (328) - (2,341)
Expenses
Claims and benefits paid - (87) - (87) - - (87)
Reinsurance recoveries - 60 - 60 - - 60
Net insurance claims and benefits incurred - (27) - (27) - - (27)
Change in reinsurance assets and liabilities - 103 - 103 - - 103
Change in insurance contract liabilities - (109) - (109) - - (109)
Change in investment contract liabilities - 3,236 - 3,236 - - 3,236
Fee and commission expenses,
and other acquisition costs (163) (170) - (333) (104) - (437)
Change in third-party interest in
consolidated funds - - - - 369 - 369
Other operating and administrative expenses (290) (347) (40) (677) 63 (158) (772)
Finance costs 7 (3) (1) - (4) - (13) (17)
Segmental expenses (456) 2,685 (40) 2,189 328 (171) 2,346
Adjusted profit/(loss) before all tax 102 105 (31) 176 - (171) 5
Tax attributable to policyholders' funds - 57 - 57 - 101 158
Adjusted profit/(loss) before tax attributable to
equity holders 102 162 (31) 233 - (70) 163
Reconciliation to IFRS:
Adjusted for non-operating items: 5(a)
Goodwill impairment and impact of acquisition
accounting (49) (1) - (50)
Business transformation costs (19) (58) (7) (84)
Managed Separation costs - (1) (23) (24)
Finance costs - - (13) (13)
Policyholder tax adjustments - 101 - 101
Reallocation of central costs(2) - (2) 2 -
Adjusting items before tax (68) 39 (41) (70)
Profit/(Loss) before tax attributable to equity
holders 34 201 (72) 163
(1) Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.
(2) Reallocation of central costs reverses management reallocations included within adjusted profit to reconcile back to IFRS profit.
4(b)(ii): Adjusted profit statement - segmental information for the year ended 31 December 2017
GBPm
Adjusted profit - Continuing operations Reconciliation to IFRS
Operating segments
Advice and Adjusting IFRS
Wealth Wealth Head Adjusted Consolidation items Income
Notes Management Platforms Office profit Adjustments(1) (Note 5(a)) Statement
Revenue
Gross earned premiums - 148 - 148 - - 148
Premiums ceded to reinsurers - (88) - (88) - - (88)
Net earned premiums - 60 - 60 - - 60
Fee income and other income from service activities 6(a) 382 526 - 908 (13) - 895
Investment return 3 4,412 1 4,416 779 - 5,195
Other income 2 83 3 88 (75) - 13
Segmental revenue 387 5,081 4 5,472 691 - 6,163
Expenses
Claims and benefits paid - (76) - (76) - - (76)
Reinsurance recoveries - 54 - 54 - - 54
Net insurance claims and benefits incurred - (22) - (22) - - (22)
Change in reinsurance assets and liabilities - 85 - 85 - - 85
Change in insurance contract liabilities - (78) - (78) - - (78)
Change in investment contract liabilities - (4,308) - (4,308) - - (4,308)
Fee and commission expenses,
and other acquisition costs (52) (198) - (250) (70) - (320)
Change in third-party interest in
consolidated funds - - - - (673) - (673)
Other operating and administrative expenses (253) (336) (35) (624) 52 (244) (816)
Finance costs 7 - - - - - (39) (39)
Segmental expenses (305) (4,857) (35) (5,197) (691) (283) (6,171)
Profit on disposal of subsidiaries, associated
undertakings and strategic investments - - - - - 3 3
Adjusted profit/(loss) before all tax 82 224 (31) 275 - (280) (5)
Tax attributable to policyholders' funds - (66) - (66) - 17 (49)
Adjusted profit/(loss) before tax attributable to
equity holders 82 158 (31) 209 - (263) (54)
Reconciliation to IFRS:
Adjusted for non-operating items: 5(a)
Goodwill impairment and impact of acquisition
accounting (53) - (1) (54)
Net profit on business disposals and acquisitions - - 3 3
Business transformation costs - (89) - (89)
Managed Separation costs - - (32) (32)
Finance costs - - (39) (39)
Policyholder tax adjustments - 17 - 17
Voluntary customer remediation provision - (69) - (69)
Adjusting items before tax (53) (141) (69) (263)
Profit/(Loss) before tax attributable to equity
holders 29 17 (100) (54)
(1) Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.
4(c)(i): Statement of financial position - segmental information at 31 December 2018
GBPm
Advice & Total
Wealth Wealth Head Consolidation Continuing Discontinued
Notes Management Platforms Office Adjustments(1) Operations Operations Total
Assets
Goodwill and intangible assets 11 386 164 - - 550 - 550
Property, plant and equipment 10 7 - - 17 - 17
Investments in associated undertakings - - 2 - 2 - 2
Deferred acquisition costs - 11 - - 11 - 11
Contract costs - 551 - - 551 - 551
Contract assets 44 - - - 44 - 44
Loans and advances 12 27 188 7 - 222 - 222
Financial investments 13 3 54,636 2 4,578 59,219 - 59,219
Reinsurers' share of policyholder liabilities 18 - 2,162 - - 2,162 - 2,162
Deferred tax assets 20 7 22 9 - 38 - 38
Current tax receivable 20(c) - 46 1 - 47 - 47
Trade, other receivables and other assets 197 178 8 103 486 - 486
Derivative assets - - - 46 46 - 46
Cash and cash equivalents 16 358 1,113 440 484 2,395 - 2,395
Inter-segment funding - assets - 12 - (12) - - -
Total assets 1,032 59,090 469 5,199 65,790 - 65,790
Liabilities
Long-term business insurance policyholder liabilities 18 - 602 - - 602 - 602
Investment contract liabilities 18 - 56,450 - - 56,450 - 56,450
Third-party interests in consolidated funds - - - 5,116 5,116 - 5,116
Provisions 19 26 59 9 - 94 - 94
Deferred tax liabilities 20 40 19 - - 59 - 59
Current tax payable 20(c) 9 14 (18) - 5 - 5
Borrowings 21 - - 197 - 197 - 197
Trade, other payables and other liabilities 340 579 20 60 999 - 999
Contract liabilities 1 225 - - 226 - 226
Derivative liabilities - 1 - 36 37 - 37
Inter-segment funding - liabilities - - 12 (12) - - -
Total liabilities 416 57,949 220 5,200 63,785 - 63,785
Total equity 2,005
Total equity and liabilities 65,790
(1) Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.
4(c)(ii): Statement of financial position - segmental information at 31 December 2017
GBPm
Advice & Total
Wealth Wealth Head Consolidation Continuing Discontinued
Notes Management Platforms Office Adjustments(1) Operations Operations(2) Total
Assets
Goodwill and intangible assets 11 412 162 - - 574 - 574
Property, plant and equipment 9 9 - - 18 - 18
Investments in associated undertakings(3) - - 1 - 1 - 1
Deferred acquisition costs - 611 - - 611 - 611
Loans and advances 12 18 180 1 - 199 - 199
Financial investments(3) 13 2 56,562 1 7,685 64,250 - 64,250
Reinsurers' share of policyholder liabilities 18 - 2,908 - - 2,908 - 2,908
Deferred tax assets 20 6 15 1 - 22 - 22
Trade, other receivables and other assets 208 210 19 60 497 - 497
Derivative assets - 1 - 86 87 - 87
Cash and cash equivalents 16 303 1,061 83 913 2,360 - 2,360
Assets of operations classified as held for sale 3(f) - - - - - 446 446
Inter-segment funding - assets 4 12 - (16) - - -
Total assets 962 61,731 106 8,728 71,527 446 71,973
Liabilities
Long-term business insurance policyholder liabilities 18 - 489 - - 489 - 489
Investment contract liabilities 18 - 59,139 - - 59,139 - 59,139
Third-party interests in consolidated funds - - - 7,905 7,905 - 7,905
Provisions 19 10 89 5 - 104 - 104
Deferred tax liabilities 20 40 150 - - 190 - 190
Current tax payable 20(c) 21 40 (23) - 38 - 38
Borrowings 21 - - 782 - 782 - 782
Trade, other payables and other liabilities 275 607 43 406 1,331 - 1,331
Deferred revenue 1 243 - - 244 - 244
Derivative liabilities - - - 433 433 - 433
Liabilities of operations classified as held for sale 3(f) - - - - - 219 219
Inter-segment funding - liabilities - - 16 (16) - - -
Total liabilities 347 60,757 823 8,728 70,655 219 70,874
Total equity 1,099
Total equity and liabilities 71,973
(1) Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.
(2) Discontinued operations includes the balances of the Group's Single Strategy Asset Management business.
(3) As at 31 December 2017, GBP2 million has been reclassified from investments in associated undertakings to financial investments to conform with current year
presentation.
2017 comparatives for the segmental statement of financial position have been re-presented due to the reallocation of a UK holding
company from Wealth Platforms to Head Office. This change was made to ensure that all material intercompany loan balances are reported (and
eliminate) within Head Office.
4(d)(i): Geographic segmental information
In presenting geographic segmental information, revenue is based on the geographic location of our businesses. The Group has defined two
geographic areas: UK and International.
GBPm
UK International
Advice and Total
For the year ended 31 December Wealth Wealth Head Wealth Consolidation continuing Discontinued Total
2018 Notes Management Platforms Office Platforms adjustments operations operations Group
Revenue
Gross earned premiums - 147 - 1 - 148 - 148
Premiums ceded to reinsurers - (87) - (1) - (88) - (88)
Net earned premiums - 60 - - - 60 - 60
Premium based fees 87 15 - 77 - 179 - 179
Fund based fees(1) 460 243 - 102 - 805 136 941
Retrocessions received, intragroup - 17 - 4 (21) - - -
Fixed fees - 4 - 28 - 32 - 32
Surrender charges - 1 - 16 - 17 - 17
Other fee and commission income - - - - 13 13 - 13
Fee income and other income
from service activities 6(a) 547 280 - 227 (8) 1,046 136 1,182
Investment return 9 (2,332) 3 (916) (246) (3,482) - (3,482)
Other income 2 98 6 3 (74) 35 2 37
Total revenue 558 (1,894) 9 (686) (328) (2,341) 138 (2,203)
(1) Income from fiduciary activities is included within fund based fees.
GBPm
UK International
Advice and Total
For the year ended 31 December Wealth Wealth Head Wealth Consolidation continuing Discontinued Total
2017 Notes Management Platforms Office Platforms adjustments operations operations Group
Revenue
Gross earned premiums - 147 - 1 - 148 - 148
Premiums ceded to reinsurers - (87) - (1) - (88) - (88)
Net earned premiums - 60 - - - 60 - 60
Premium based fees 76 29 - 74 - 179 - 179
Fund based fees(1) 306 241 - 107 - 654 389 1,043
Retrocessions received, intragroup - 17 - 6 (23) - - -
Fixed fees - 5 - 26 - 31 - 31
Surrender charges - 1 - 20 - 21 - 21
Other fee and commission income - - - - 10 10 - 10
Fee income and other income
from service activities 6(a) 382 293 - 233 (13) 895 389 1,284
Investment return 3 3,366 1 1,046 779 5,195 7 5,202
Other income 2 81 3 2 (75) 13 3 16
Total revenue 387 3,800 4 1,281 691 6,163 399 6,562
(1) Income from fiduciary activities is included within fund based fees.
5: Adjusted profit and adjusting items
5(a): Adjusted profit adjusting items
In determining the adjusted profit for core operations, certain adjustments are made to profit before tax to reflect the underlying long-term
performance of the Group. The following table shows an analysis of those adjustments before and after tax.
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017
Expense/(income)
Goodwill impairment and impact of acquisition accounting 5(b) 50 54
Profit on business acquisitions and disposals 5(c) - (3)
Business transformation costs 5(d) 84 89
Managed Separation costs 5(e) 24 32
Finance costs 5(f) 13 39
Policyholder tax adjustments 5(g) (101) (17)
Voluntary customer remediation provision 5(h) - 69
Total adjusting items before tax 70 263
Tax on adjusting items 8(c) (118) (39)
Less: policyholder tax adjustments 101 17
Total adjusting items after tax 53 241
5(b) Goodwill impairment and impact of acquisition accounting
The recognition of goodwill and other acquired intangibles is created on the acquisition of a business and represents the premium paid over the fair
value of the Group's share of the identifiable asset and liabilities acquired at the date of acquisition (as recognised under IFRS 3). The Group
excludes from adjusted profit the impairment of goodwill, the amortisation and impairment of acquired other intangible assets as well as the
movements in certain acquisition date provisions.
Costs incurred on completed acquisitions are also excluded from adjusted profit, including any finance costs related to discounted deferred
consideration.
The effect of these adjustments to determine adjusted profit are summarised below:
For the year ended 31 December 2018
GBPm
Advice and
Wealth Wealth
Management Platforms Head office Total Group
Impairment of other intangible assets - 1 - 1
Amortisation of other acquired intangible assets 41 - - 41
Acquisition costs(1) 5 - - 5
Unwinding of discount on deferred consideration 3 - - 3
Total goodwill impairment and impact of acquisition accounting 49 1 - 50
For the year ended 31 December 2017
GBPm
Advice and
Wealth Wealth
Management Platforms Head office Total Group
Amortisation of other acquired intangible assets 39 - - 39
Change in acquisition date provisions - - 1 1
Acquisition costs(1) 13 - - 13
Unwinding of discount on deferred consideration 1 - - 1
Total goodwill impairment and impact of acquisition accounting 53 - 1 54
(1) Acquisition costs include items such as transaction costs or deferred incentives arising on the acquisition of businesses.
5(c) Net profit/loss on business disposals and acquisitions
As part of the Group's Managed Separation from Old Mutual plc, the Group acquired Commsale 2000 Limited ('Commsale') from Old Mutual plc on
29 September 2017. The total consideration was GBP0.29 million. The NAV at the date of acquisition was GBP0.45 million, with a gain on purchase of
GBP0.16 million being recognised, representing assets not valued within the agreed consideration.
On 30 November 2017, the Company acquired 100% of the whole of the issued share capital of Global Edge Technologies (Pty) Ltd ('GET'), a
company incorporated in South Africa, from OM Group (UK) Limited (part of the Old Mutual plc group) for GBP1 million. Along with recording the book
values of the assets acquired and liabilities assumed of GBP4 million, the Company recognised a bargain purchase gain of GBP3 million.
We determined that the excess of book value over consideration paid was attributable to potential future integration costs which, if incurred, would
be expensed in future periods. As potential future integrating activities do not qualify to be recorded as a liability in the application of the acquisition
method of accounting, none were recorded.
5(d) Business transformation costs
Within business transformation costs are four items: costs associated with the UK Platform Transformation Programme, build out costs incurred
within Quilter Investors as a result of the sale of our Single Strategy Asset Management business, Optimisation Programme costs and, in the prior
period, certain one-off charges relating to the transformation of our business as we separated from Old Mutual plc. Each item is described in detail
below.
UK Platform Transformation Programme - 31 December 2018: GBP58 million, 31 December 2017: GBP74 million
In 2013, the Group embarked on a significant programme to develop new platform capabilities and to outsource UK business administration. This
involved replacing many aspects of the existing UK Platform, and on completion certain elements of service provision would be migrated to
International Financial Data Services ('IFDS') under a long-term outsourcing agreement. The cost of developing the new technology did not meet
the criteria for capitalisation and were expensed. These direct costs and the costs of decommissioning existing technology and migrating of services
to IFDS are excluded from adjusted profit. The contracts with International Financial Data Services related to the UK Platform transformation came
to an end by mutual agreement effective as of 2 May 2017. For the year ended 31 December 2018, these costs total GBPnil million (31 December
2017: GBP53 million).
The Group conducted a comprehensive review of the options available to the UK Platform business and, in May 2017, entered into a new contract
with FNZ, having concluded that FNZ's scale, market-proven and functionally-rich offering was the most suitable to meet the current and anticipated
needs of the business.
In partnership with FNZ, the Group expects to deliver all the existing functionality of the platform with increased levels of straight-through processing
and enhanced functionality for new business and to migrate the in-force (UK Platform) business over time. For the period ended 31 December
2018, these costs totalled GBP58 million (31 December 2017: GBP21 million).
Quilter Investors' build out costs - 31 December 2018: GBP19 million, 31 December 2017: GBPnil
In March 2016, Old Mutual plc announced its Managed Separation strategy that sought to unlock and create significant long-term value for
shareholders. As part of this strategy, Quilter's Multi-Asset (now renamed as Quilter Investors) and single strategy teams were to develop as
separate distinct businesses, and the Single Strategy Asset Management business was sold to its management and TA Associates on 29 June
2018. As result, the Group has incurred GBP24 million of one-off costs in the year ended 31 December 2018, GBP5 million of which are included in profit
on disposal within discontinued operations and GBP19 million is an adjusting item within continuing business.
One-off transformational costs as a result of Quilter's Managed Separation from Old Mutual plc - 31 December 2018: GBPnil, 31 December 2017:
GBP15 million
The Group historically had a number of arrangements with the wider Old Mutual plc group's South African businesses. As a consequence of
Managed Separation these arrangements were severed and, as a result, deferred acquisition cost balances totalling GBP10 million were written off
(included within fee and commission expenses in the income statement), together with a loss incurred of GBP5 million on the cancellation of
reinsurance arrangements (included within other costs within the income statement) in the year ended 31 December 2017. These charges are
regarded as one-off and related to the transformation of the business to a standalone group.
Optimisation Programme costs - 31 December 2018: GBP7 million, 31 December 2017: GBPnil
Following the Group's Managed Separation from Old Mutual plc, the Group has initiated an Optimisation Programme focused on driving operational
efficiencies, incurring GBP7 million of one-off project costs to date.
5(e) Managed Separation costs
One-off costs related to the implementation of Managed Separation recognised in the IFRS income statement have been excluded from adjusted
profit on the basis that they are not representative of the operating activity of the Group. These costs relate to preparing the Group to operate as a
standalone business and the execution of various transactions required to implement our Managed Separation strategy. They are not expected to
persist in the long term as they relate to a fundamental restructuring of the Group, which is not operational in nature, rather than more routine
restructuring activity which would be seen as part of the usual course of business. The treatment and the disclosure of these costs as an adjusting
item are also intended to make these costs more visible to the readers of the financial statements in the context of publicly disclosed estimates
previously given in relation to these items. For the period ended 31 December 2018, these costs totalled GBP24 million (31 December 2017:
GBP32 million).
5(f) Finance costs
The nature of much of the Group's operations means that, for management's decision-making and internal performance management, the effects of
interest costs on borrowings are removed when calculating adjusted profit. For year ended 31 December 2018, the finance costs totalled GBP13 million
(31 December 2017: GBP39 million) - see note 7.
5(g) Policyholder tax adjustments
Adjustments to policyholder tax are made to remove distortions arising from market volatility that can in turn lead to volatility in the policyholder tax
charge between periods. The significant market volatility during the year ended 31 December 2018 has resulted in a GBP96 million adjustment (31
December 2017: GBP(4) million). For a further explanation of the impact of markets on the policyholder tax charge see note 8(a). Adjustments are also
made to remove distortions from other non-operating adjusting items that results in a further GBP5 million tax adjustment as at 31 December 2018
(31 December 2017: GBP21 million).
For the period ended 31 December 2018, the policyholder tax adjustments to adjusted profit total GBP101 million (31 December 2017: GBP17 million) as
shown in note 8(c).
5(h) Voluntary Customer Remediation Provision
As detailed in Note 19, as part of its on-going work to promote fair customer outcomes, the Group conducted product reviews consistent with the
recommendations from the Financial Conduct Authority's ('FCA') thematic feedback and the FCA's guidance 'FG16/8 Fair treatment of long-
standing customers in the life insurance sector'. Following those reviews, the Group decided to commence voluntary remediation to customers in
certain products, resulting in an additional provision raised during 2017 of GBP69 million.
During 2018 GBP31 million of this provision has been utilised against programme costs and pension remediation incurred.
The provision was recognised in the IFRS income statement but has been excluded from adjusted profit on the basis that it is not representative of
the operating performance of the business.
6: Details of income
This note gives further detail on the items appearing in the income section of the consolidated income statement.
6(a): Fee income and other income from service activities
This note analyses the fees, commission and other income from service activities earned by the Group.
GBPm
Year ended Year ended
31 December 31 December
2018 2017
Premium based fees(1) 179 179
Fund based fees(1,2) 805 654
Fixed fees 32 31
Surrender charges 17 21
Other fee and commission income 13 10
Fee income and other income from service activities - continuing operations 1,046 895
Fee income and other income from service activities - discontinued operations 136 389
Total fee income and other income from service activities 1,182 1,284
(1) A number of items have been reclassified in the prior year comparatives to conform with current year presentation.
(2) Income from fiduciary activities is included within fund based fees.
6(b): Investment return
This note analyses the investment return from the Group's investing activities.
GBPm
Year ended Year ended
31 December 31 December
2018 2017
Net investment income
Interest and similar income
Investments and securities 59 53
Cash and cash equivalents(1) 21 10
Total interest and similar income 80 63
Dividend income 99 83
Foreign currency gains and losses 2 3
Total gains on financial instruments at fair value through profit and loss (3,663) 5,046
Mandatorily at fair value through profit and loss(2) (3,658) -
Designated at fair value through profit and loss(2) (5) 5,046
Net investment income - continuing operations (3,482) 5,195
Net investment income - discontinued operations - 7
Total net investment income (3,482) 5,202
(1) Included within interest on cash and cash equivalents is GBP2 million arising from assets held at amortised cost. The remainder is from assets at FVTPL.
(2) The Group has initially applied IFRS 9 at 1 January 2018 and has taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in
respect of IFRS 9's classification and measurement (including impairment) requirements.
7: Finance costs
This note analyses the interest costs on our borrowings and similar charges, all of which are valued at amortised cost. Finance costs comprise:
GBPm
Year ended Year ended
31 December 31 December
2018 2017
Term loans and other external debt 2 -
Subordinated debt securities (Tier 2 bond) 8 -
Loans from Old Mutual plc 3 39
Interest payable on borrowed funds 13 39
Other 4 -
Total finance costs - continuing operations 17 39
Finance costs represent the cost of interest and finance charges on the Group's borrowings from a number of relationship banks and Old Mutual
plc. The Group has had no borrowings from Old Mutual plc since 28 February 2018. More details regarding borrowed funds, including the interest
rates payable, are shown in note 21. These costs are excluded from adjusted profit within the 'Finance costs' adjusting item.
Including the impact of amortisation of bond set-up costs, the issuance of the Tier 2 Bond will result in expenses in the Head Office segment of
approximately GBP10 million on an annual basis. This has replaced the GBP39 million of interest on the borrowings with Old Mutual plc in prior years.
Within other finance costs above is GBP3 million relating to the impact of unwinding the discount rate on deferred consideration payable as a result of
various acquisitions. These costs are excluded from adjusted profit within the 'Goodwill impairment and impact of acquisition accounting' adjusting
item as shown in note 5(b).
8: Tax
This note analyses the income tax expense recognised in profit or loss for the period and the various factors that have contributed to the
composition of the charge.
8(a) Tax charged to the income statement
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017
Current tax
United Kingdom 6 43
International 4 3
Adjustments to current tax in respect of prior periods(1) (25) 1
Total current tax (15) 47
Deferred tax
Origination and reversal of temporary differences (155) 2
Effect on deferred tax of changes in tax rates (1) (1)
Adjustments to deferred tax in respect of prior periods 2 (7)
Total deferred tax (154) (6)
Total tax (credited)/charged to income statement - continuing operations (169) 41
Total tax charged to income statement - discontinued operations 3(c) 2 29
Total tax (credited)/charged to income statement (167) 70
Attributable to policyholder returns (158) 49
Attributable to equity holders (9) 21
Total tax (credited)/charged to income statement (167) 70
(1) The current year tax adjustment in respect of prior periods is GBP(25) million (31 December 2017: GBP1 million). This is primarily as a result of the carry back
of policyholder capital losses in the life businesses as permitted under UK tax legislation resulting in tax credits in respect of 2016 and 2017.
Policyholder tax
Certain products are subject to tax on policyholders' investment returns. This 'policyholder tax' is an element of total tax expense. To make the tax
expense more meaningful, tax attributable to policyholder returns and tax attributable to equity holders' profits is shown separately in the income
statement.
The tax attributable to policyholder returns is the amount payable in the year plus the movement of amounts expected to be payable in future years.
The remainder of the tax expense is attributed to shareholders as tax attributable to equity holders.
Significant market volatility during the year ended 31 December 2018 resulted in investment return losses of GBP623 million on products subject to
policyholder tax. This loss is a component of the total 'investment return' loss of GBP3,482 million shown in the income statement. The impact of the
GBP623 million investment return loss, together with the utilisation of brought forward capital losses, are the primary reasons for the GBP158 million tax
credit attributable to policyholder returns for the year ended 31 December 2018 (31 December 2017: GBP49 million charge).
8(b) Reconciliation of total income tax expense
The income tax charged to profit or loss differs from the amount that would apply if all of the Group's profits from the different tax jurisdictions had
been taxed at the UK standard corporation tax rate. The difference in the effective rate is explained below:
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017
Profit/(Loss) before tax 5 (5)
Tax at UK standard rate of 19% (2017: 19.25%) 1 (1)
Different tax rate or basis on overseas operations (5) (3)
Untaxed and low taxed income (15) (2)
Disallowable expenses 6 7
Adjustments to current tax in respect of prior years(1) (25) 1
Net movement on deferred tax assets not recognised (11) (14)
Effect on deferred tax of changes in tax rates (1) (1)
Adjustments to deferred tax in respect of prior years 2 (7)
Income tax attributable to policyholder returns (121) 61
Total tax (credited)/charged to income statement - continuing operations (169) 41
Total tax charged to income statement - discontinued operations 3(c) 2 29
Total tax (credited)/charged to income statement (167) 70
(1) The current year tax adjustment in respect of prior periods is GBP(25) million (31 December 2017: GBP1 million). This is primarily as a result of the carry back of policyholder
capital losses in the life businesses as permitted under UK tax legislation resulting in tax credits in respect of 2016 and 2017.
8(c) Reconciliation of income tax expense in the IFRS income statement to income tax on adjusted profit.
GBPm
Year ended Year ended
31 December 31 December
2018 2017
Income tax (credit)/expense on continuing operations (169) 41
Tax on adjusting items
Goodwill impairment and impact of acquisition accounting 8 8
Business transformation costs 16 14
Managed Separation costs 2 4
Finance costs 2 8
Policyholder tax adjustments 101 17
Voluntary customer remediation provision - 14
Other shareholder tax adjustments (11) (26)
Total tax on adjusting items 118 39
Tax attributable to policyholders returns 57 (66)
Tax charged on adjusted profit - continuing operations 6 14
Tax charged on adjusted profit - discontinued operations 5 29
Tax charged on adjusted profit 11 43
9: Earnings per share
The Group calculates earnings per share ('EPS') on a number of different bases as appropriate to prevailing International and UK practices and
guidance. IFRS requires the calculation of basic and diluted EPS. Adjusted EPS reflects earnings per share that is consistent with the Group's
alternative profit measure. The Group's EPS on these different bases are summarised below.
Disclosure of basic and diluted EPS is required by IAS 33 Earnings per Share. On 6 June 2018, the Board approved a reorganisation of the
Company's share capital to enable the implementation of the Managed Separation before the initial public offering on 25 June 2018 and,
consequently, both basic and diluted EPS for historical periods was not representative of the Group's current structure. In accordance with IAS 33,
share transactions that change the number of shares in issue but do not result in any corresponding change to an entity's resources, such as share
splits, bonus issues to existing shareholders and share consolidations are adjusted for in the EPS denominator as if these transactions had
occurred at the start of the earliest period for which EPS is presented. Accordingly, the weighted average number of ordinary shares in issue at 31
December 2017 have been retrospectively restated to take account of the new share structure at listing. As a result, the Group's EPS has fallen
relative to the position shown in the 31 December 2017 Historical Financial Information, within the listing prospectus, because the number of shares
has increased on listing.
For further information on share capital refer to note 17.
Pence
Year ended Year ended
31 December 31 December
Source of guidance Notes 2018 2017
Basic earnings per share IFRS 9(a) 26.6 8.6
Diluted basic earnings per share IFRS 9(b) 26.5 8.6
Adjusted basic earnings per share Group policy 9(c) 12.4 10.7
Adjusted diluted earnings per share Group policy 9(c) 12.3 10.7
Headline earning per share (net of tax) JSE Listing Requirements 9(d) 10.6 4.0
Diluted headline earning per share (net of tax) JSE Listing Requirements 9(d) 10.5 4.0
9(a) Basic earnings per share (IFRS)
Basic EPS is calculated by dividing the profit for the financial period attributable to ordinary equity shareholders of the parent by the weighted
average number of ordinary shares in issue during the year. The weighted average number of shares excludes the following treasury shares:
Quilter plc shares held within Employee Benefit Trusts ('EBTs') to satisfy the Group's obligations under employee share awards; and Quilter plc
shares held in consolidated funds. Treasury shares are deducted for the purpose of calculating both basic and diluted EPS.
(i) The profit attributable to ordinary shareholders is:
GBPm
Year ended Year ended
31 December 31 December
2018 2017
Profit/(loss) after tax from continuing operations 174 (46)
Profit after tax from discontinued operations 314 203
Profit for the financial period for the calculation of earnings per share 488 157
The table below summarises the calculation of the weighted average number of ordinary shares for the purposes of calculating basic earnings per
share:
Year ended Year ended
31 December 31 December
2018 2017
Weighted average number of ordinary shares in issue (millions) 1,902 1,902
Treasury shares including those held in EBTs (millions) (70) (72)
Adjusted weighted average number of ordinary shares used to
calculate basic earnings per share (millions) 1,832 1,830
Basic earnings per ordinary share (pence) 26.6 8.6
9(b) Diluted earnings per share (IFRS)
Diluted EPS recognises the dilutive impact of shares and options awarded to employees under share-based payment arrangements (potential
ordinary shares), to the extent they have value, in the calculation of the weighted average number of shares, as if the relevant shares were in issue
for the full year. The table below summarises the calculation of weighted average number of shares for the purpose of deriving diluted EPS:
Year ended Year ended
31 December 31 December
Notes 2018 2017
Profit attributable to ordinary equity holders (GBPm) 488 157
Diluted profit attributable to ordinary equity holders (GBPm) 488 157
Adjusted weighted average number of ordinary shares (millions) 9(a) 1,832 1,830
Adjustments for share options held by EBTs and similar trusts (millions) 7 -
Weighted average number of ordinary shares used to calculate
diluted earnings per share (millions) 1,839 1,830
Diluted earnings per ordinary share (pence) 26.5 8.6
There is no dilutive impact of potential shares on EPS for the period ended 31 December 2017 because the new sharebased payment
arrangements, settled in Quilter plc shares, have only been in place since listing (25 June 2018).
9(c) Adjusted earnings per share
The following table presents a reconciliation of profit for the financial period to adjusted profit after tax attributable to ordinary equity holders and
summarises the calculation of adjusted earnings per share:
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017
Profit for the financial period attributable to shareholders of the Company 488 157
Adjusting items 5 70 263
Income tax expense on adjusting items 8(c) (118) (39)
Less: Policyholder tax adjustments 8(c) 101 17
Less: Profit after tax from discontinued operations 3(c) (314) (203)
Adjusted profit after tax attributable to ordinary shareholders (GBPm) 227 195
Adjusted weighted average number of ordinary shares used to
calculate adjusted basic earnings per share (millions) 9(a) 1,832 1,830
Adjusted basic earnings per share (pence) 12.4 10.7
Adjusted weighted average number of ordinary shares used to
calculate diluted adjusted earnings per share (millions) 9(b) 1,839 1,830
Adjusted diluted earnings per share (pence) 12.3 10.7
9(d) Headline earnings per share
The Group is required to calculate headline earnings per share ('HEPS') in accordance with the Johannesburg Stock Exchange Limited ('JSE')
Listing Requirements, determined by reference to the South African Institute of Chartered Accountants' circular 02/2015 'Headline Earnings'. The
table below sets out a reconciliation of basic EPS and HEPS in accordance with that circular. Disclosure of HEPS is not a requirement of IFRS, but
it is a commonly used measure of earnings in South Africa.
The table below reconciles the profit for the financial period attributable to equity holders of the parent to headline earnings and summarises the
calculation of basic HEPS:
GBPm
Year ended Year ended
31 December 31 December
2018 2017
Gross Net of tax Gross Net of tax
Profit for the period attributable to shareholders of the Company 488 157
Adjusting items:
Less: Profit on disposals of subsidiaries (290) (294) (83) (83)
Headline earnings (290) 194 (83) 74
Diluted headline earnings 194 74
Weighted average number of ordinary shares (millions) 1,832 1,830
Diluted weighted average number of ordinary shares (millions) 1,839 1,830
Headline earnings per share (pence) 10.6 4.0
Diluted headline earnings per share (pence) 10.5 4.0
10: Dividends
This note analyses the total dividends and other appropriations paid during the year. The table below does not include the final dividend proposed
after the year end because it is not accrued in these financial statements.
GBPm
Year ended Year ended
Payment 31 December 31 December
date 2018 2017
Ordinary dividends declared and charged to equity in the year
2017 Special dividend paid - 161.47p per ordinary share 9 January 2017 - 210
2018 Special interim dividend paid - 12.00p per ordinary share 21 September 2018 221 -
Dividends paid to ordinary shareholders 221 210
Subsequent to year ended 31 December 2018 the directors proposed a final dividend for 2018 of 3.3 pence per ordinary share amounting to GBP61
million in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 20 May 2019. In compliance with the rules issued by
the Prudential Regulation Authority ('PRA') in relation to the implementation of the Solvency II regime and other regulatory requirements to which
the Group is subject, the dividend is required to remain cancellable at any point prior to it becoming due and payable on 20 May 2019 and to be
cancelled if, prior to payment, the Group ceases to hold capital resources equal to or in excess of its Solvency Capital Requirement, or if that would
be the case if the dividend was paid. The directors have no intention of exercising this cancellation right, other than where required to do so by the
PRA or for regulatory capital purposes.
Final and interim dividends paid to ordinary shareholders are calculated using the number of shares in issue at the record date less own shares
held in Employee Benefit Trusts.
11: Goodwill and intangible assets
11(a): Analysis of goodwill and intangible assets
The table below shows the movements in cost, amortisation and impairment of goodwill and intangible assets.
GBPm
Software Other
development intangible
Goodwill costs(4) assets(4) Total
Gross amount
At 1 January 2017 373 94 350 817
Acquisitions through business combinations(1) 15 - 30 45
Transfer to non-current assets held for sale(2) (82) (2) (3) (87)
Other movements - 5 (6) (1)
At 31 December 2017 306 97 371 774
Acquisitions through business combinations 5 - 9 14
Additions - 4 - 4
Transfer to non-current assets held for sale (1) - - (1)
Other movements(3) 4 (1) - 3
At 31 December 2018 314 100 380 794
Amortisation and impairment losses
At 1 January 2017 - (90) (73) (163)
Amortisation charge for the year - (2) (39) (41)
Transfer to non-current assets held for sale - 2 3 5
Other movements - (2) 1 (1)
At 31 December 2017 - (92) (108) (200)
Amortisation charge for the year - (4) (41) (45)
Impairment of other acquired intangibles - - (1) (1)
Other movements - 1 1 2
At 31 December 2018 - (95) (149) (244)
Carrying amount
At 31 December 2017 306 5 263 574
At 31 December 2018 314 5 231 550
(1) Goodwill acquired through business combinations for the year ended 31 December 2017 of GBP15 million relates to the acquisition of Caerus Capital Group Limited
(GBP10 million) and various acquisitions by the QPCA business (GBP5 million). Refer to note 3(a) for further information.
(2) Goodwill transferred to non-current assets held for sale relates to the Single Strategy Asset Management business (see note 3(f)).
(3) Goodwill has increased by GBP4 million in 2018 due to a review of the purchase price allocation ('PPA') calculation at 31 December 2017 year end relating to the QPCA
acquisitions resulting in a reclassification from other intangibles to goodwill.
(4) In year ended 31 December 2017, GBP6 million has been reclassified from software development costs to other intangible assets to conform with current year
presentation.
The net carrying amount of other intangible assets at 31 December 2018 principally comprises:
- GBP168 million (FY 2017: GBP196 million) relating to distribution channels in the Quilter Cheviot business (to be amortised over a further 6 years).
- GBP19 million (FY 2017: GBP25 million) relating to mutual fund and asset management relationship assets in the Intrinsic business (to be amortised
over a further 4 years).
- GBP4 million (FY 2017: GBP7 million) relating to the Quilter Cheviot brand (to be amortised over a further 1 year).
- GBP3 million (FY 2017: GBP3 million) relating to the acquisition of AAM Advisory Pte Ltd (to be amortised over a further 7 years).
- GBP9 million (FY 2017: GBP8 million) relating to customer distribution channels of Caerus Capital Group Limited (to be amortised over a further
6 years).
- GBP20 million (2017: GBP16 million) relating to customer relationships of the QPCA business (to be amortised over 6-8 years).
- GBP8 million (2017: GBP8 million) relating to customer relationships of Attivo Investment Management Limited (to be amortised over 6 years).
11(b): Allocation of goodwill to cash generating units ('CGUs') and impairment testing
Goodwill is allocated to the Group's CGUs, which are contained within the following operating segments as follows:
GBPm
At At
31 December 31 December
2018 2017
Goodwill (net carrying amount)
Advice and Wealth Management 153 148
Wealth Platforms 161 158
Goodwill (as per the Statement of Financial Position) 314 306
Goodwill held for sale - 82
Total goodwill 314 388
In accordance with the requirements of IAS 36 Impairment of Assets, goodwill in both the Advice and Wealth Management and Wealth Platforms
CGUs is tested for impairment annually by comparing the carrying value of the CGU to which the goodwill relates to the recoverable value of that
CGU, being the higher of that CGU's value-in-use or fair value less costs to sell. An impairment charge is recognised when the recoverable amount
is less than the carrying value.
The value-in-use calculations for life assurance operations are determined as the sum of net tangible assets, the expected future profits arising from
the in-force business, together with the expected profits from future new business derived from business plans. Future profit elements allow for the
cost of capital needed to support the business.
The net tangible assets and future profits arising from the in-force business are derived from Solvency II ("SII") calculations. The value of in-force
("VIF") is calculated as the prospective value of future expected cash flows on all in-force policies at the valuation date on a policy-by-policy basis
allowing for surrender or transfer payments, death claims, income withdrawals, maintenance expenses, fund-based fees, mortality
charge/protection premiums and other policy charges. The underlying assumptions are based on the best estimate view for the future, which is
largely based on recent business experience and any emerging trends. The unit fund growth rates (gross of investment charges) and the risk
discount rates are set using the prescribed SII term-dependent risk-free interest rates. The SII calculations are adjusted for a risk margin using the
prescribed SII rules.
The value-in-use calculations for asset management operations are determined as the sum of net tangible assets and the expected profits from
existing and expected future new business.
The cash flows that have been used to determine the value-in-use of the cash generating units are based on three year business plans. These cash
flows grow at different rates because of the different strategies of the CGUs. In cases where the CGUs have made significant acquisitions in the
recent past, the profits are forecast to grow faster than the more mature businesses. Post the three year growth business plan, the growth rate used
to determine the terminal value of the cash generating units approximates to the UK long-term growth rate of 2.1% (2017: 2.9%). Market share and
market growth information are also used to inform the expected volumes of future new business.
The Group uses a single cost of capital of 10.8% (2017: 9.4%) to discount future expected business plan cash flows across its two CGUs because
they are perceived to present a similar level of risk and are strongly integrated. Capital is provided to the Group predominantly by shareholders with
only a small amount of debt. The cost of capital is the weighted average of the cost of equity (return required by shareholders) and the cost of debt
(return required by bond holders). When assessing the systematic risk (i.e. beta value) within the calculation of the cost of equity, a triangulation
approach is used that combines beta values obtained from historical data, a forward looking view on the progression of beta values and the external
views of investors.
On business disposals, goodwill is allocated to the disposed business based on the relative value-in-use of the business from calculations used
within the impairment reviews.
During the period, the Group updated its assessment of goodwill for potential impairment. The recoverable amounts of goodwill allocated to the
CGUs are determined from value-in-use calculations. There was no indication of impairment of goodwill during the period. The goodwill model is
subject to certain stress tests, including sudden stock market falls, the absence of net client cash flow, and the impact of an increase in discount
rates. None of these have resulted in any indication of impairment to goodwill.
12: Loans and advances
This note analyses the loans and advances the Group has made. The carrying amounts of loans and advances were as follows:
GBPm
At At
31 December 31 December
2018 2017
Loans to policyholders 189 181
Loans to brokers and other loans to clients 27 19
Other loans 7 -
Gross loans and advances 223 200
Provision for impairments (1) (1)
Total net loans and advances 222 199
To be recovered within 12 months 199 190
To be recovered after 12 months 23 9
Total net loans and advances 222 199
The carrying amount of loans approximates to their fair value which is measured as the principal amounts receivable under the loan agreements.
Policyholder loans are amounts taken from an individual policyholder's unit-linked accounts and loaned to the same policyholder. Policyholder loans
are non-interest bearing and are deemed to be risk free from a shareholder perspective as the policyholder retains all associated risks. Policyholder
loans are available on demand as they have no repayment schedule.
Included within loans to brokers and other loans to clients, are loans to advisers made on commercial terms.
Other loans represent a loan to TA Associates in respect of the deferred consideration receivable arising from the sale of the Single Strategy Asset
Management business. The loan is repayable no later than 2022, but is expected to be repaid between 2019 and 2021 as surplus capital is
released from that business.
The provision for impairments is a specific impairment relating to a balance due from a financial adviser that is not expected to be recovered. The
impairment was recognised during 2016 under IAS 39; any future provisions will be recognised under IFRS 9 and disclosed in the expected credit
loss model in note 23.
13: Financial investments
The table below analyses the investments and securities that the Group invests in, either for its own proprietary behalf (shareholder funds) or on
behalf of third parties (policyholder funds).
GBPm
At At
31 December 31 December
2018 2017
Government and government-guaranteed securities 1,175 2,427
Other debt securities, preference shares and debentures 2,095 2,401
Equity securities(1) 10,006 12,556
Pooled investments 45,931 46,455
Short-term funds and securities treated as investments 12 15
Other - 396
Total financial investments 59,219 64,250
To be recovered within 12 months 59,044 64,074
To be recovered after 12 months 175 176
Total financial investments 59,219 64,250
(1) At 31 December 2017, GBP2 million has been reclassified from investments in associated undertakings to financial investments to aid comparability between periods.
The financial investments recoverability profile is based on the intention with which the financial assets are held. These assets, together with the
reinsurers' share of investment contract liabilities, are held to cover the liabilities for linked investment contracts (net of reinsurance), all of which can
be withdrawn by policyholders on demand.
13(a) Other debt securities, preference shares and debentures
All debt securities, preference shares and debentures are neither past due nor impaired. These debt instruments and similar securities are classified
according to their local credit rating (Standard & Poor's or an equivalent), by investment grade. Further information of the credit rating of debt
securities, preference shares and debentures is analysed in the table in note 23(b).
13(b) Equity securities
Equity securities are held to cover the liabilities for linked investment contracts. The majority of the listed securities are traded on the London Stock
Exchange.
The majority of the Group's holdings of unlisted equity securities arise principally from private equity investments, held exclusively on behalf of
policyholders.
14: Categories of financial instruments
The analysis of financial assets and liabilities into their categories as defined in IFRS 9 Financial Instruments is set out in the following tables.
Assets and liabilities of a non-financial nature, or financial assets and liabilities that are specifically excluded from the scope of IFRS 9, are reflected
in the non-financial assets and liabilities category.
For information about the methods and assumptions used in determining fair value please refer to note 15. The Group's exposure to various risks
associated with financial instruments is discussed in note 23(c).
At 31 December 2018
GBPm
Measurement basis Fair value(1)
Non-financial
Mandatorily Designated at Amortised assets and
at FVTPL FVTPL cost liabilities Total
Assets
Investments in associated undertakings(2) - - - 2 2
Reinsurers' share of policyholder liabilities 1,671 - - 491 2,162
Contract assets - - 44 - 44
Loans and advances 189 - 33 - 222
Financial investments 59,052 167 - - 59,219
Trade, other receivables and other assets - - 449 37 486
Derivative financial instruments 46 - - - 46
Cash and cash equivalents 1,361 - 1,034 - 2,395
Total assets that include financial instruments 62,319 167 1,560 530 64,576
Total other non-financial assets - - - 1,214 1,214
Total assets 62,319 167 1,560 1,744 65,790
Liabilities
Long-term business insurance policyholder liabilities - - - 602 602
Investment contract liabilities 56,450 - - - 56,450
Third-party interest in consolidation of funds 5,116 - - - 5,116
Borrowings - - 197 - 197
Trade, other payables and other liabilities - - 840 159 999
Derivative financial instruments 37 - - - 37
Total liabilities that include financial instruments 61,603 - 1,037 761 63,401
Total other non-financial liabilities - - - 384 384
Total liabilities 61,603 - 1,037 1,145 63,785
(1) The Group adopted IFRS 9 Financial Instruments for the first time in 2018. IFRS 9 introduces new classification and measurement categories. The Mandatorily at Fair
Value Through Profit or Loss (FVTPL) category includes financial assets that are managed (and their performance evaluated) on a fair value basis, including those
previously described as 'held for trading'. The majority of the Group's financial assets and liabilities continue to be measured at FVTPL. The Group has taken advantage
of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in respect of IFRS 9's classification and measurement (including impairment) requirements.
(2) Investments in associated undertakings classified as non-financial assets and liabilities are equity accounted.
At 31 December 2017
GBPm
Measurement basis Fair value(1) Amortised cost
Designated at Financial
fair value liabilities Non-financial
Held for through the Loans and amortised assets and
trading profit or loss receivables cost liabilities Total
Assets
Investments in associated undertakings(2,3) - - - - 1 1
Reinsurers' share of policyholder liabilities - 2,525 - - 383 2,908
Loans and advances - 180 19 - - 199
Financial investments(3) - 64,250 - - - 64,250
Trade, other receivables and other assets - - 154 - 343 497
Derivative financial instruments 87 - - - - 87
Cash and cash equivalents(4) - 412 1,948 - - 2,360
Total assets that include financial instruments 87 67,367 2,121 - 727 70,302
Total other non-financial assets - - - - 1,225 1,225
Total assets net of held for sale 87 67,367 2,121 - 1,952 71,527
Total assets classified as held for sale - - 147 - 299 446
Total assets 87 67,367 2,268 - 2,251 71,973
Liabilities
Long-term business insurance policyholder liabilities - - - - 489 489
Investment contract liabilities - 59,139 - - - 59,139
Third-party interest in consolidation of funds - 7,905 - - - 7,905
Borrowings - - - 782 - 782
Trade, other payables and other liabilities - - - 505 826 1,331
Derivative financial instruments 433 - - - - 433
Total liabilities that include financial instruments 433 67,044 - 1,287 1,315 70,079
Total other non-financial liabilities - - - - 576 576
Total liabilities net of held for sale 433 67,044 - 1,287 1,891 70,655
Total liabilities classified as held for sale - - - - 219 219
Total liabilities 433 67,044 - 1,287 2,110 70,874
(1) The Group adopted IFRS 9 Financial Instruments for the first time in 2018. The Group has taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from
restating prior periods in respect of IFRS 9's classification and measurement (including impairment) requirements.
(2) Investments in associated undertakings classified as non-financial assets and liabilities are equity accounted.
(3) As at 31 December 2017, GBP2 million has been reclassified from investments in associated undertakings to financial investments to conform with current year
presentation.
(4) As at 31 December 2017, GBP412 million money market collective investment funds has been reclassified from amortised costs to FVTPL level 1 to aid comparability
between periods.
15: Fair value methodology
This section explains the judgements and estimates made in determining the fair values of financial instruments that are recognised and measured
at fair value in the financial statements. Classifying financial instruments into the three levels below, prescribed under accounting standards,
provides an indication about the reliability of inputs used in determining fair value.
15(a) Determination of fair value
The fair value of financial instruments that are actively traded in organised financial markets is determined by reference to quoted market exit prices
for assets and offer prices for liabilities, at the close of business on the reporting date, without any deduction for transaction costs.
- For units in unit trusts and shares in open ended investment companies, fair value is determined by reference to published quoted prices
representing exit values in an active market.
- For equity and debt securities not actively traded in organised markets and where the price cannot be retrieved, the fair value is determined by
reference to similar instruments for which market observable prices exist.
- For assets that have been suspended from trading on an active market, the last published price is used. Many suspended assets are still
regularly priced. At the reporting date all suspended assets are assessed for impairment.
- Where the assets are private company shares the valuation is based on the latest available set of audited financial statements where available,
or if more recent, a statement of valuation provided by the private company's management.
There have been no significant changes in the valuation techniques applied when valuing financial instruments. The general principles applied to
those instruments measured at fair value are outlined below:
Reinsurers' share of policyholder liabilities
Reinsurers' share of policyholder liabilities are measured on a basis that is consistent with the measurement of the provisions held in respect of the
related insurance contracts. Reinsurance contracts which cover financial risk are measured at fair value of the underlying assets.
Loans and advances
Loans and advances include loans to policyholders, loans to brokers, and other secured and unsecured loans. Loans and advances to
policyholders of investment linked contracts are measured at fair value. All other loans are stated at their amortised cost.
Financial investments
Financial investments include government and government-guaranteed securities, listed and unlisted debt securities, preference shares and
debentures, listed and unlisted equity securities, listed and unlisted pooled investments (see below), short-term funds and securities treated as
investments and certain other securities.
Pooled investments represent the Group's holdings of shares/units in open-ended investment companies, unit trusts, mutual funds and similar
investment vehicles. Pooled investments are recognised at fair value. The fair values of pooled investments are based on widely published prices
that are regularly updated.
Other financial investments that are measured at fair value are measured at observable market prices where available. In the absence of
observable market prices, these investments and securities are fair valued utilising various approaches including discounted cash flows, the
application of an earnings before tax interest depreciation and amortisation multiple or any other relevant technique.
Derivatives
The fair value of derivatives is determined with reference to the exchange traded prices of the specific instruments. In situations where the
derivatives are traded over the counter the fair value of the instruments is determined by the utilisation of option pricing models.
Investment contract liabilities
The fair value of the investment contract liabilities is determined with reference to the underlying funds that are held by the Group.
Third-party interests in consolidation of funds
Third-party interests in consolidation of funds are measured at the attributable net asset value of each fund.
Borrowed funds
Borrowed funds are stated at amortised cost.
15(b) Fair value hierarchy
Fair values are determined according to the following hierarchy:
Description of hierarchy Types of instruments classified in the respective levels
Level 1 - quoted market prices: financial assets and liabilities with Listed equity securities, government securities and other listed debt
quoted prices for identical instruments in active markets. securities and similar instruments that are actively traded, actively
traded pooled investments, certain quoted derivative assets and
liabilities, reinsurers' share of investment contract liabilities and
investment contract liabilities directly linked to other Level 1 financial
assets.
Level 2 - valuation techniques using observable inputs: financial Unlisted equity and debt securities where the valuation is based on
assets and liabilities with quoted prices for similar instruments in active models involving no significant unobservable data.
markets or quoted prices for identical or similar instruments in inactive Over the counter (OTC) derivatives, certain privately placed debt
markets and financial assets and liabilities valued using models where instruments and third-party interests in consolidated funds.
all significant inputs are observable.
Level 3 - valuation techniques using significant unobservable inputs: Unlisted equity and securities with significant unobservable inputs,
financial assets and liabilities valued using valuation techniques where securities where the market is not considered sufficiently active,
one or more significant inputs are unobservable. including certain inactive pooled investments.
The judgement as to whether a market is active may include, for example, consideration of factors such as the magnitude and frequency of trading
activity, the availability of prices and the size of bid/offer spreads. In inactive markets, obtaining assurance that the transaction price provides
evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the asset or liability
requires additional work during the valuation process.
The majority of valuation techniques employ only observable data and so the reliability of the fair value measurement is high. However, certain
financial assets and liabilities are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable and,
for them, the derivation of fair value is more judgemental. A financial asset or liability in its entirety is classified as valued using significant
unobservable inputs if a significant proportion of that asset or liability's carrying amount is driven by unobservable inputs.
In this context, 'unobservable' means that there is little or no current market data available for which to determine the price at which an arm's length
transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of
fair value. Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant unobservable data may be
attributable to observable inputs. Consequently, the effect of uncertainty in determining unobservable inputs will generally be restricted to
uncertainty about the overall fair value of the asset or liability being measured.
15(c) Transfer between fair value hierarchies
The Group deems a transfer to have occurred between Level 1 and Level 2 or Level 3 when an active, traded primary market ceases to exist for
that financial instrument. A transfer between Level 2 and Level 3 occurs when the majority of the significant inputs used to determine fair value of
the instrument become unobservable.
There were transfers of financial investments of GBP13 million from Level 1 to Level 2 during the year (2017: GBP154 million). There were transfers of
financial investments of GBP107 million from Level 2 to Level 1 during the year (2017: GBP20 million). These movements are matched exactly by transfers
of investment contract liabilities. See note 14(e) for details of movements in Level 3.
15(d) Financial assets and liabilities measured at fair value, classified according to fair value hierarchy
The tables below present a summary of the Group's financial assets and liabilities that are measured at fair value in the consolidated statement of
financial position according to their IFRS 9 classification. The Group has initially applied IFRS 9 at January 2018. Under the transition methods
selected, comparative information is not restated.
The Group has not disclosed the fair value for financial instruments not measured at fair value because their carrying values are a reasonable
approximation of fair value.
The majority of the Group's financial assets are measured using quoted market prices for identical instruments in active markets (Level 1) and there
has been no significant change during the year.
The assets, together with the reinsurers' share of investment contract liabilities, are held to cover the liabilities for linked investment contracts (net of
reinsurance). The difference between linked assets and linked liabilities is principally due to short term timing differences between policyholder
premiums being received and invested in advance of policies being issued, and tax liabilities within funds which are reflected within the Group's tax
liabilities.
At 31 December 2018 At 31 December 2017
GBPm % GBPm %
Financial assets measured at fair value
Level 1 52,060 83.4% 58,357 86.5%
Level 2 9,272 14.8% 7,928 11.8%
Level 3(1) 1,154 1.8% 1,169 1.7%
Total 62,486 100.0% 67,454 100.0%
Financial liabilities measured at fair value
Level 1 54,944 89.2% 57,399 85.1%
Level 2 5,508 8.9% 8,911 13.2%
Level 3 1,151 1.9% 1,167 1.7%
Total 61,603 100.0% 67,477 100.0%
(1) At 31 December 2017, GBP2 million has been reclassified from investments in associated undertakings to Level 3 financial assets to conform with current year presentation.
GBPm
At 31 December 2018 Level 1 Level 2 Level 3 Total
Financial assets measured at fair value
Mandatorily (fair value through profit or loss) 51,893 9,272 1,154 62,319
Reinsurers' share of policyholder liabilities 1,671 - - 1,671
Loans and advances 189 - - 189
Financial investments 48,672 9,226 1,154 59,052
Cash and cash equivalents 1,361 - - 1,361
Derivative financial instruments - assets - 46 - 46
Designated (fair value through profit or loss) 167 - - 167
Financial investments 167 - - 167
Total assets measured at fair value 52,060 9,272 1,154 62,486
Financial liabilities measured at fair value
Mandatorily (fair value through profit or loss) 54,944 5,508 1,151 61,603
Investment contract liabilities 54,944 355 1,151 56,450
Third-party interests in consolidated funds - 5,116 - 5,116
Derivative financial instruments - liabilities - 37 - 37
Total liabilities measured at fair value 54,944 5,508 1,151 61,603
GBPm
At 31 December 2017 Level 1 Level 2 Level 3 Total
Financial assets measured at fair value
Held-for-trading (fair value through profit or loss) - 87 - 87
Derivative financial instruments - assets - 87 - 87
Designated (fair value through profit or loss) 58,357 7,841 1,169 67,367
Reinsurers' share of policyholder liabilities 2,525 - - 2,525
Loans and advances 180 - - 180
Financial investments(1) 55,240 7,841 1,169 64,250
Cash and cash equivalents(2) 412 - - 412
Total assets measured at fair value 58,357 7,928 1,169 67,454
Financial liabilities measured at fair value
Held-for-trading (fair value through profit or loss) - 433 - 433
Derivative financial instruments - liabilities - 433 - 433
Designated (fair value through profit or loss) 57,399 8,478 1,167 67,044
Investment contract liabilities 57,399 573 1,167 59,139
Third-party interests in consolidated funds - 7,905 - 7,905
Total liabilities measured at fair value 57,399 8,911 1,167 67,477
(1) At 31 December 2017, GBP2 million has been reclassified from investments in associated undertakings to Level 3 financial investments to conform with current year
presentation.
(2) At 31 December 2017, GBP412 million money market collective investment funds has been reclassified from amortised costs to FVTPL Level 1 to aid comparability between
periods.
15(e) Level 3 fair value hierarchy disclosure
The majority of the assets that are classified as Level 3 are held within linked policyholder funds. This means that all of the investment risk
associated with these assets is borne by policyholders and that the value of these assets is exactly matched by a corresponding liability due to
policyholders. The Group bears no risk from a change in the market value of these assets except to the extent that it has an impact on management
fees earned. Also included within the assets classified as Level 3 is a shareholder investment in an unlisted equity of GBP3 million (2017: GBP2 million);
this is not matched by a corresponding liability and therefore any changes in market value are taken to the Group's income statement.
The table below reconciles the opening balance of Level 3 financial assets to closing balance at the end of the year:
GBPm
At At
31 December 31 December
2018 2017
At beginning of the year 1,169 581
Total net fair value gains recognised in:
- profit or loss 54 (23)
Purchases 38 618
Sales (25) (23)
Transfers in 69 167
Transfers out (151) (152)
Foreign exchange and other - 1
Total Level 3 financial assets 1,154 1,169
Unrealised fair value gains/(losses) relating to assets held at the year end recognised in:
- profit or loss 54 (23)
Amounts shown as sales arise principally from the sale of private company shares and unlisted pooled investments and from distributions received
in respect of holdings in property funds.
Transfers into Level 3 assets for the current period comprise GBP69 million (2017: GBP167 million) of stale priced assets that were previously shown
within Level 2 and for which price updates have not been received for more than six months. Transfers out of Level 3 assets in the current period
comprise GBP151 million (2017: GBP152 million) of stale priced assets that were not previously being repriced and that have been transferred into Level 2
as they are now actively priced.
The table below analyses the type of Level 3 financial assets held:
GBPm
At At
31 December 31 December
2018 2017
Pooled investments 86 186
Unlisted and stale price pooled investments 82 185
Suspended funds 4 1
Private equity investments 1,068 983
Total Level 3 financial assets 1,154 1,169
All of the liabilities that are classified as Level 3 are investment contract liabilities which exactly match against the Level 3 assets held in linked
policyholder funds.
The table below reconciles the opening balances of Level 3 financial liabilities to closing balances at the end of the year:
GBPm
At At
31 December 31 December
2018 2017
At beginning of the year 1,167 581
Total net fair value gains recognised in:
- profit or loss 53 (23)
Purchases 38 616
Sales (25) (23)
Transfers in 69 167
Transfers out (151) (152)
Foreign exchange and other - 1
Total Level 3 financial liabilities 1,151 1,167
Unrealised fair value gains/(losses) relating to liabilities held at the year end recognised in:
- profit or loss 53 (23)
15(f) Effect of changes in significant unobservable assumptions to reasonable possible alternatives
Favourable and unfavourable changes are determined on the basis of changes in the value of the financial asset or liability as a result of varying the
levels of the unobservable parameters using statistical techniques. When parameters are not amenable to statistical analysis, quantification of
uncertainty is judgemental.
When the fair value of a financial asset or liability is affected by more than one unobservable assumption, the figures shown reflect the most
favourable or most unfavourable change from varying the assumptions individually.
The valuations of the private equity investments are performed on an asset-by-asset basis using a valuation methodology appropriate to the specific
investment and in line with industry guidelines. Private equity investments are valued at the value disclosed in the latest available set of audited
financial statements or if more recent information is available from investment managers or professional valuation experts at the value of the
underlying assets of the private equity investment.
Details of the valuation techniques applied to the different categories of financial instruments can be found in note 15(a) above.
Management believe that in aggregate, 10% (31 December 2017: 10%) change in the value of the financial asset or liability represents a
reasonable possible alternative judgement in the context of the current macro-economic environment in which the Group operates. It is therefore
considered that the impact of alternative assumptions will be in the range of GBP115 million, both favourable and unfavourable (31 December 2017:
GBP117 million). As described in note 15(e) above, changes in the value of level 3 assets held within linked policyholder funds are exactly matched by
corresponding changes in the value of liabilities due to policyholders and therefore have no impact on the Group's net asset value or profit or loss,
except to the extent that it has an impact on management fees earned.
15(g): Fair value hierarchy for assets and liabilities not measured at fair value
Certain financial instruments of the Group are not carried at fair value. The carrying values of these are considered reasonable approximations of
their respective fair values, as they are either short term in nature or are repriced to current market rates at frequent intervals. Their classification
within the fair value hierarchy would be as follows:
Contract assets Level 3
Trade, other receivables, and other assets Level 3
Cash and cash equivalents Level 1
Trade, other payables, and other liabilities Level 3
Loans and advances are financial assets held at amortised cost and therefore not carried at fair value, with the exception of policyholder loans
which are categorised as FVTPL. Loans and advances held at amortised cost would be classified as Level 3 in the fair value hierarchy.
Borrowed funds are financial liabilities held at amortised cost and therefore not carried at fair value. Borrowed funds relate to subordinated liabilities
and would be classified as Level 2 in the fair value hierarchy.
16: Cash and cash equivalents
16(a) Total cash and cash equivalents can be broken down as follows:
GBPm
Year ended Year ended
31 December 31 December
2018 2017
Cash at bank 550 1,036
Money market funds 1,361 412
Cash and cash equivalents in Consolidated Funds 484 912
Total cash and cash equivalents per statement of financial position 2,395 2,360
Cash within held for sale - 147
Total cash and cash equivalents per consolidated statement of cash flows 2,395 2,507
Except for cash and cash equivalents subject to consolidation of funds of GBP484 million (2017: GBP912 million), management do not consider that there
are any material amounts of cash and cash equivalents which are not available for use in the Group's day-to-day operations.
17: Share capital and merger reserve
17(a) Share capital
Financial instruments issued are classified as equity when there is no contractual obligation to transfer cash, other financial assets or issue a
variable number of own equity instruments. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a
deduction from the proceeds, net of tax. The Parent Company's equity capital currently comprises 1,902,251,098 ordinary shares of 7p each with
an aggregated nominal value of GBP133,157,577 (2017: 130,000,257 ordinary shares of 100p each with an aggregated nominal value of
GBP130,000,257).
This note gives details of the Company's ordinary share capital and shows the movements during the period:
GBPm GBPm
Number of shares Nominal value Share premium
At 1 January 2017 130,000,256 130 -
Issue of share capital(1,2) 200,000,001 200 58
Reduction of share capital(3) (200,000,000) (200) -
At 31 December 2017 130,000,257 130 58
At 1 January 2018 130,000,257 130 58
Issue of share capital(4) 1 - -
Sub-division of ordinary shares of 100p each to 1p each(5) 12,870,025,542 - -
Bonus shares issued to ordinary shareholders of 1p each(6) 315,731,886 3 -
Conversion of ordinary shares of 1p each to 7p each(7) (11,413,506,588) - -
At 31 December 2018 1,902,251,098 133 58
(1) On 3 May 2017, the Company allotted and issued 200 million GBP1 ordinary shares, for a consideration of GBP200 million, to its now former parent Old Mutual plc.
(2) On 21 December 2017, Old Mutual plc contributed GBP58 million to the Company in exchange for the issue of 1 share.
(3) On 27 November 2017, the Company carried out a share capital reduction, which cancelled the 200 million GBP1 ordinary shares.
(4) On 31 January 2018, the Company allotted and issued 1 ordinary share of GBP1.
On 6 June 2018, the Board approved a reorganisation of its share capital to enable the implementation of the Managed Separation and to ensure that existing
shareholders of Old Mutual plc received one ordinary share for every three ordinary shares they hold in Old Mutual plc, as described in the prospectus document. The
share capital reorganisation consisted of the following steps:
(5) Each of the Company's existing 130,000,258 ordinary shares of GBP1.00 each was sub-divided into 100 ordinary shares of GBP0.01 each, following which the Company's
share capital consisted of 13,000,025,800 ordinary shares of GBP0.01 each, with an aggregate nominal value of GBP130,000,258;
(6) The Company allotted 315,731,886 bonus ordinary shares of GBP0.01 each to the existing shareholders of the Company (with any fractional entitlements arising to be
aggregated and allotted to Old Mutual plc), following which the Company's share capital consisted of 13,315,757,686 ordinary shares of GBP0.01 each, with an aggregate
nominal value of GBP133,157,577; and
(7) The Company's 13,315,757,686 ordinary shares of GBP0.01 each were consolidated into ordinary shares of GBP0.07 each (with any fractional entitlements arising to be
aggregated and allotted to Old Mutual plc), following which the Company's share capital consists of 1,902,251,098 ordinary shares of GBP0.07 each, with an aggregate
nominal value of GBP133,157,577.
17(b) Merger reserve
On 31 January 2018, the Group acquired the Skandia UK Limited group of entities from its then parent company Old Mutual plc. This comprised of
seven Old Mutual plc group entities with a net asset value of GBP591 million. The transfer was effected by the issue of one share and with the balance
giving rise to a merger reserve of GBP591 million in the consolidated statement of financial position, being the difference between the nominal value of
the share issued by the parent company for the acquisition of the shares of the subsidiaries and the subsidiaries' net asset value. No debt was
taken on as a result of this transaction. The most significant asset within these entities is a GBP566 million receivable which corresponds to an
equivalent payable within the Group's consolidated statement of financial position. The net effect of this transaction for the Group was to replace a
payable due to Old Mutual plc with equity.
Following the acquisition the Company allotted 315,731,886 bonus ordinary shares of GBP0.01 each to the existing shareholders of the Company (with
any fractional entitlements arising to be aggregated and allotted to Old Mutual plc), with a total nominal value of GBP3 million. This had the effect of
reducing the merger reserve by GBP3 million to GBP588 million at 31 December 2018.
This transaction attracted merger relief under section 612 of the Companies Act 2006.
18: Insurance and investment contract liabilities
The following is a summary of the Group's insurance and investment contract provisions and related reinsurance assets:
GBPm
At 31 December 2018 At 31 December 2017
Re- Re-
Notes Gross insurance Net Gross insurance Net
Life assurance policyholder liabilities
Long-term business insurance policyholder liabilities
Life assurance policyholder liabilities 18(a) 588 (478) 110 480 (375) 105
Outstanding claims 14 (13) 1 9 (8) 1
602 (491) 111 489 (383) 106
Investment contract liabilities
Unit-linked investment contracts 18(d) 56,450 (1,671) 54,779 59,139 (2,525) 56,614
Total life assurance policyholder liabilities 57,052 (2,162) 54,890 59,628 (2,908) 56,720
18(a) Insurance contract liabilities
Movements in the amounts outstanding in respect of life assurance policyholder liabilities, other than outstanding claims, are set out below:
GBPm
At 31 December 2018 At 31 December 2017
Re- Re-
Notes Gross insurance Net Gross insurance Net
Carrying amount at 1 January 480 (375) 105 402 (290) 112
Impact of new business 2 (10) (8) 42 (55) (13)
Impact of experience effects 38 (26) 12 30 (23) 7
Impact of assumption changes 69 (68) 1 7 (7) -
Other movements (1) 1 - (1) - (1)
Movement shown in consolidated income statement 18(b) 108 (103) 5 78 (85) (7)
Total insurance contract life assurance policyholder liabilities 588 (478) 110 480 (375) 105
18(b) Insurance contract claims and change in liabilities
GBPm
Year ended Year ended
31 December 31 December
Notes 2018 2017
Claims and benefits paid (87) (76)
Reinsurance recoveries 59 54
Net insurance claims and benefits incurred (28) (22)
Change in reinsurance assets and liabilities 18(a) 103 85
Change in insurance contract liabilities 18(a) (108) (78)
Insurance contract claims and change in liabilities (33) (15)
A presentational change has been made to the face of the consolidated income statement from the prior year. Details of the breakdown of
insurance and investment expenses, which were previously shown on the face of the income statement, are now included in this note.
18(c) Assumptions - life assurance
The key assumptions considered are mortality/morbidity rates, maintenance expenses, interest rates, persistency rates and maintenance expense
inflation. These assumptions are based on market data and internal experience data. External data is also used where either no internal experience
data exists or where internal data is too sparse to give credible estimates of the true expectation of experience. Anticipated future trends have been
allowed for in deriving mortality and morbidity assumptions.
The liabilities for non-linked contracts have been calculated using a gross premium discounted cash flow approach on a policy by policy basis, using
the following assumptions:
Mortality/morbidity Interest rates
Class of business 2018 2017 2018 2017
Non-linked protection business (pre Based on relevant CMI tables Risk reinsurance rates 1.724% 1.610%
1 January 2013)1
Non-linked protection business (post Based on relevant CMI tables Risk reinsurance rates 1.378% 1.287%
31 December 2012)(1)
Pension annuity payment 100% PA92 (C2030) ult. projected using the long-term cohort basis 1.420% 1.330%
(1) On 1 January 2013, the discount rate was impacted by Finance Act 2012 amendments to the life tax rules.
The Continuous Mortality Investigation ('CMI'), supported by the Institute and Faculty of Actuaries ('IFoA'), provides mortality and sickness rate
tables for UK life insurers and pension funds.
The interest rate assumption is set with reference to a matching portfolio of gilts. During 2017, a modification was made to achieve a better match of
the IFRS liabilities to available gilts. In aggregate, the non-linked protection business is expected to generate net income over the next 3 years. This
net income has been excluded from the matching exercise and has instead been discounted using Bank of England forward rates of the relevant
durations. Liabilities after these three years are matched and the rates provided above are used.
For non-linked contracts (defined as insurance contracts under IFRS 4), the margin of prudence for the individual assumptions is generally taken as
the 60% confidence interval over a one year timeframe so that, broadly speaking, in 100 scenarios the reserves are expected to cover the liabilities
in 60 of those scenarios. Overall, the level of confidence is likely to be greater than 60% on the basis that these margins are applied to several
assumptions at the same time and prudence is applied to all future years.
The liability values do not make allowance for the amortisation of the DAC asset. A separate liability adequacy test is carried out on best estimate
assumptions allowing for all of the cash flows used to derive the liability values and the run off of the DAC.
Impact of assumption changes
Assumptions are reviewed on an annual basis and updated as appropriate. The impact of the assumption changes on annual IFRS profit are as
follows:
GBPm
Impact on IFRS reported Impact on IFRS
profit Impact of reported profit
2018 (before reinsurance) reinsurance (after reinsurance)
Assumption
Mortality/morbidity rates (86.5) 81.4 (5.1)
Maintenance expense 1.9 (0.0) 1.9
Maintenance expense inflation 0.1 0.0 0.1
Interest rates 21.3 (18.3) 3.0
Persistency rates (5.4) 4.6 (0.8)
(68.6) 67.6 (1.0)
GBPm
Impact on IFRS Impact on IFRS
reported profit Impact of reported profit
2017 (before reinsurance) reinsurance (after reinsurance)
Assumption
Mortality/morbidity rates 10.1 (10.7) (0.6)
Maintenance expense 3.1 (0.1) 3.0
Maintenance expense inflation 0.3 - 0.3
Interest rates (15.1) 13.0 (2.1)
Persistency rates (5.0) 4.8 (0.2)
(6.6) 7.0 0.4
The sensitivity of IFRS profit before tax to variations in key assumptions are shown below:
GBPm
(Decrease)/Increase in IFRS profit before tax 2018 2017
+10 -10% +10% -10%
Mortality/morbidity rates (3.3) 3.4 (3.0) 3.1
Maintenance expenses (2.2) 2.2 (2.6) 2.6
Persistency rates 2.6 (2.8) 2.4 (2.6)
The values have, in all cases, been determined by varying the relevant assumption as at the reporting date and considering the consequential
impact assuming other assumptions remain unchanged.
18(d) Unit-linked investment contract liabilities
Movements in the amounts outstanding in respect of unit-linked and other investment contracts are set out below:
GBPm
At 31 December 2018 At 31 December 2017
Re- Re-
Gross insurance Net Gross insurance Net
Carrying amount at 1 January 59,139 (2,525) 56,614 51,265 (2,560) 48,705
Fair value movements (4,119) 78 (4,041) 3,958 (330) 3,628
Investment income 805 - 805 680 - 680
Movements arising from investment return (3,314) 78 (3,236) 4,638 (330) 4,308
Contributions received 7,117 774 7,891 9,718 365 10,083
Maturities (183) - (183) (220) - (220)
Withdrawals and surrenders (6,091) - (6,091) (5,682) - (5,682)
Claims and benefits (234) - (234) (217) - (217)
Other movements (2) 2 0 (408) - (408)
Change in liability (2,707) 854 (1,853) 7,829 35 7,864
Currency translation (gain)/loss 18 - 18 45 - 45
Total unit-linked investment contract policyholder liabilities 56,450 (1,671) 54,779 59,139 (2,525) 56,614
For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
The benefits offered under the unit-linked investment contracts are based on the risk appetite of policyholders and the return on their selected
investments and collective fund investments, whose underlying investments include equities, debt securities, property and derivatives. This
investment mix is unique to individual policyholders.
The maturity value of these financial liabilities is determined by the fair value of the linked assets at maturity date. There will be no difference
between the carrying amount and the maturity amount at maturity date.
The reinsurers' share of policyholder liabilities relating to investment contract liabilities of GBP1,671 million (2017: GBP2,525 million) were rated according
to the table in note 23. None of these were past due as at 31 December 2018 (2017: GBPnil).
18(e) Methodology and assumptions - investment contracts
For unit-linked business, the unit liabilities are determined as the value of units credited to policyholders. Since these liabilities are determined on a
retrospective basis no assumptions for future experience are required. Assumptions for future experience are required for unit-linked business in
assessing whether the total of the contract costs asset and contract liability is greater than the present value of future profits expected to arise on
the relevant blocks of business (the 'recoverability test'). If this is the case, then the contract costs asset is restricted to the recoverable amount. For
linked contracts, the assumptions are on a best estimate basis.
19: Provisions
GBPm
Compensation Sale of Single
Year ended 31 December 2018 provisions Strategy business Other Total
Balance at beginning of the period 82 - 22 104
Additions from business combinations - - 1 1
Charge to income statement 11 25 3 39
Utilised during the period (31) (5) (5) (41)
Unused amounts reversed (4) - (1) (5)
Reclassification within Statement of Financial Position (4) - - (4)
Balance at 31 December 2018 54 20 20 94
GBPm
Compensation Sale of Single
Year ended 31 December 2017 provisions Strategy business Other Total
Balance at beginning of the year 13 - 16 29
Charge to income statement - Voluntary remediation 69 - - 69
Charge to income statement - Other 7 - 6 13
Utilised during the year (5) - (5) (10)
Foreign exchange and other movements (2) - 5 3
Balance at 31 December 2017 82 - 22 104
Compensation provisions
Compensation provisions totalled GBP54 million (31 December 2017: GBP82 million).
Voluntary client remediation provision
During 2017, as part of ongoing work to promote fair customer outcomes, the Group conducted product reviews consistent with the
recommendations from the FCA's thematic feedback and the FCA's guidance 'FG16/8 Fair treatment of long-standing customers in the life
insurance sector'. Following these reviews, the Group decided to commence voluntary remediation to customers of certain legacy products,
establishing a provision in 2017 for GBP69 million.
The redress relates to early encashment charges and contribution servicing charges made on pension products and, following the re-introduction of
annual reviews, compensation payable to a subset of protection plan holders.
During 2018, GBP27 million has been utilised against programme costs and pension remediation incurred. There was also a GBP4 million reclassification
to 'liabilities for linked investment contracts', reflecting the capping of early encashment charges on live pension plans. The remaining provision
includes GBP6 million of programme costs and GBP7 million of estimated interest. Of the total provision outstanding, GBP20 million is estimated to be
payable after one year.
Estimates and assumptions
Key assumptions in relation to the provision calculation are:
- Investment return used within the protection remediation calculations;
- Timing of protection customer remediation; and
- The programme costs of carrying out the remediation activity.
The model used to calculate the costs of protection remediation assumes a generic annual investment return across the population of plans in
scope. A sensitivity analysis has been calculated to determine the impact of adjusting the return rate.
The current model assumes protection customers will be compensated within a certain timeframe. Delays to the programme and more specifically,
in locating customers and resolving complicated plan arrangements will increase the final cost of remediation.
The programme costs of conducting the remediation activity are highly variable and are subject to a number of uncertainties. In calculating the best
estimate of these costs, consideration has been given to such matters as the identification of impacted customers, likelihood of the customer
contesting the offer, the complexity of the calculations, the level of quality assurance and checking, the ease of contacting and communicating with
customers and the level of customer interactions. As a result of these uncertainties, the current provision for programme costs has been calculated
as falling within a range of approximately GBP5 million to GBP7 million.
Sensitivities relating to the assumptions and uncertainties are provided in the table below:
Assumption/estimate Change in assumption/estimate Consequential change in provision
(GBPm)
Modelled investment return +/- 2% +/- 0.2
Timing of protection remediation 12 month delay + 2.0
Compensation provision (other)
The other compensation provision includes amounts relating to the cost of correcting deficiencies in policy administration systems, including
restatements and clawbacks, any associated litigation costs and the related costs to compensate previous or existing policyholders. This provision
represents best estimates based upon management's view of expected outcomes based upon previous experience. Due to the nature of the
provision, the timing of the expected cash outflows is uncertain. Estimates are reviewed annually and adjusted as appropriate for new
circumstances.
Sale of Single Strategy Asset Management business
A restructuring provision was recognised as a result of the sale of the Single Strategy Asset Management business to enable the remaining Quilter
Investors business to function as a standalone operation going forward. The provision includes those costs directly related to replacing and
restoring the operational capability that previously underpinned and supported both parts of the asset management business. Key parts of this
capability had either been disposed of or disrupted as a consequence of the sale. The total provision established in the year was GBP19 million, of
which GBP5 million has now been utilised. The carried forward provision at 31 December 2018 is GBP14 million. Further provisions may be established as
the project progresses.
Additional provisions totalling GBP6 million have been made as a consequence of the sale of the Single Strategy Asset Management business. These
have been made in relation to various sale related future commitments, the outcome of which was uncertain at the time of the sale and the most
significant of which is in relation to the guarantee of revenues in future years.
Other provisions
Other provisions include amounts for the resolution of legal uncertainties and the settlement of other claims raised by contracting parties, property
dilapidation provisions and indemnity commission provisions. Where material, provisions and accruals are discounted at discount rates specific to
the risks inherent in the liability. The timing and final amounts of payments in respect of some of the provisions, particularly those in respect of
litigation claims and similar actions against the Group, are uncertain and could result in adjustments to the amounts recorded.
Of the other provisions recorded above, GBP5 million (2017: GBP10 million) is estimated to be payable after one year.
20: Tax assets and liabilities
Deferred income taxes are calculated on all temporary differences at the tax rate applicable to the jurisdiction in which the timing differences arise.
Deferred tax summary
GBPm
At At
31 December 31 December
Notes 2018 2017
Deferred tax asset 38 31
Less: amounts classified as held for sale 3(f) - 9
Deferred tax assets 38 22
Deferred tax liabilities 59 190
Net deferred tax liability 21 168
20(a) Deferred tax assets
Deferred tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable, being
where on the basis of all available evidence it is considered more likely than not that there will be suitable taxable profits against which the reversal
of the deferred tax asset can be deducted.
The movement on the recognised deferred tax assets account is as follows:
GBPm
Income
statement Acquisition/
At beginning (charge)/ disposal of At end of the
Year ended 31 December 2018 of the year credit subsidiaries year
Tax losses carried forward 6 13 - 19
Accelerated depreciation 17 (4) - 13
Other temporary differences 4 - - 4
Share based payments 2 2 - 4
Contract liabilities 3 (1) - 2
Deferred expenses 24 11 - 35
Netted against liabilities (34) (5) - (39)
Deferred tax assets at 31 December 2018 22 16 - 38
GBPm
Income
At statement Acquisition/ At
beginning (charge)/ disposal of end of the
Year ended 31 December 2017 of the year credit(1) subsidiaries year
Tax losses carried forward 6 - - 6
Accelerated depreciation - 17 - 17
Other temporary differences 9 (2) (3) 4
Share based payments - 2 - 2
Contract liabilities 4 (1) - 3
Deferred expenses 27 (3) - 24
Netted against liabilities (38) 4 - (34)
Deferred tax assets at 31 December 2017 8 17 (3) 22
(1) GBP5 million has been reclassified from acquisition/disposal of subsidiaries to income statement movements, to conform with current year presentation. Closing deferred
tax assets are unchanged.
Unrecognised deferred tax assets
The amounts for which no deferred tax asset has been recognised comprise:
GBPm
At 31 December 2018 At 31 December 2017
Gross amount Tax Gross amount Tax
Expiring in less than a year - - - -
Expiring between one and five years - - - -
Expiring after five years 663 112 471 80
Unrelieved tax losses 663 112 471 80
Accelerated capital allowances 93 16 108 18
Other timing differences 285 49 269 46
Total unrecognised deferred tax assets 1,041 177 848 144
Movements in unrecognised deferred tax assets
The unrelieved tax losses have increased by GBP192 million during the year which is mainly as a result of the reclassification of capital losses
previously shown in 'Other timing differences' that have now crystallised. Other timing differences have increased due to the net impact of the
reclassification of capital losses (as described above) and the addition of previously unrecognised assets on the acquisition of Skandia UK Limited
under Managed Separation.
20(b) Deferred tax liabilities
The movement on the deferred tax liabilities account is as follows:
GBPm
Income
At statement Acquisition/
beginning (credit)/ disposal of At end of
Year ended 31 December 2018 of the year charge subsidiaries the year
Deferred acquisition costs 15 (4) - 11
Other acquired intangibles 41 (8) 7 40
Other temporary differences 1 - - 1
Investment gains 167 (121) - 46
Netted against assets (34) (5) - (39)
Deferred tax liabilities at 31 December 2018 190 (138) 7 59
GBPm
Income
At statement Acquisition/
beginning (credit)/ disposal of At end of
Year ended 31 December 2017 of the year charge subsidiaries the year
Deferred acquisition costs 20 (5) - 15
Other acquired intangibles 49 (8) - 41
Other temporary differences 2 (1) - 1
Investment gains 146 21 - 167
Netted against assets (38) 4 - (34)
Deferred tax liabilities at 31 December 2017 179 11 - 190
20(c) Current tax receivables and liabilities
Current tax receivables and current tax liabilities at 31 December 2018 were GBP47 million (2017: GBPnil) and GBP5 million (2017: GBP38 million), excluding
amounts classified as held for sale in 2017 (see note 3(f)).
21: Borrowings
The following table analyses the Group's borrowed funds, repayable on demand and categorised in terms of IFRS 9 Financial Instruments as
'Financial liabilities amortised cost'. All amounts outstanding at 31 December 2018 are payable to a number of relationship banks. All amounts
outstanding at 31 December 2017 were payable either to the Group's previous ultimate Parent Company, Old Mutual plc, or to other related entities
within the Old Mutual plc group.
GBPm
At At
31 December 31 December
2018 2017
Subordinated debt
Fixed rate loan at 5.50%(1) - 566
Fixed rate loan at 4.478%(2) 197 -
Other borrowed funds
Floating rate loan at 6 month LIBOR + 0.25%(3) - 93
Floating rate loan at 3 month LIBOR + 0.10%(4) - 80
Fixed rate loan at 3.125%(5) - 43
Total borrowings 197 782
(1) Commenced on 25 February 2015 and was used to finance the acquisition of the Quilter Cheviot group.
(2) Commenced on 28 February 2018 and used for general corporate purposes.
(3) Commenced during 2014 and was used to finance the acquisition of Intrinsic Financial Services Limited.
(4) Commenced in 2011 and was used to finance other historical corporate activity.
(5) Commenced on 21 June 2016 and was used to finance one of the Group's employee benefit trusts.
On 23 February 2018, the Group entered into and fully drew down the New Term Loan, a GBP300 million senior unsecured term loan with 5
relationship banks with an annual coupon of 45 basis points above LIBOR, to be updated every three months. The New Term Loan was repaid in
full using proceeds from the sale of the Single Strategy Asset Management business following the completion of the transaction in June 2018.
On 28 February 2018, the Group issued a GBP200 million subordinated debt security in the form of a 10-year Tier 2 bond with a one-time issuer call
option after 5 years to J.P. Morgan Securities plc, paying a semi-annual coupon of 4.478% (the "Tier 2 Bond"). The bond was remarketed and sold
to the secondary market in full on the 13th April 2018. It is now listed and regulated under the terms of the London Stock Exchange. In addition, the
Group entered into a GBP125 million revolving credit facility which remains undrawn and is being held for contingent funding purposes across the
Group.
As part of a series of internal transactions, GBP566 million of intercompany indebtedness to other companies within the Old Mutual plc group was
equitised, with the effect of the intercompany indebtedness being cancelled and replaced with equity in the form of share capital and a merger
reserve. The overall indebtedness also reduced by GBP16 million from ordinary course transactions.
The remaining GBP200 million intercompany indebtedness was repaid in full from the new facilities referred to above and from existing cash resources
on 28 February 2018. On the same date, the GBP70 million revolving credit facility with Old Mutual plc was cancelled.
Borrowings at 31 December 2017 were borrowed from Old Mutual plc and were unsecured and were repayable on demand. The carrying amount
approximates to fair value which is valued as the principal amount repayable.
22: Contingent liabilities
The Group, in the ordinary course of business, enters into transactions that expose it to tax, legal and business risks. The Group recognises a
provision when it has a present obligation as a result of past events, it is probable that a transfer of economic benefits will be required to settle the
obligation and a reliable estimate of the amount can be made (see note 19). Possible obligations and known liabilities where no reliable estimate
can be made or it is considered improbable that an outflow would result are reported as contingent liabilities in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.
Tax
The Revenue authorities in the principal jurisdictions in which the Group operates routinely review historical transactions undertaken and tax law
interpretations made by the Group. The Group is committed to conducting its tax affairs in accordance with the tax legislation of the jurisdictions in
which they operate. All interpretations made by management are made with reference to the specific facts and circumstances of the transaction and
the relevant legislation.
There are occasions where the Group's interpretation of tax law may be challenged by the Revenue authorities. The financial statements include
provisions that reflect the Group's assessment of liabilities which might reasonably be expected to materialise as part of their review. The Board is
satisfied that adequate provisions have been made to cater for the resolution of tax uncertainties and that the resources required to fund such
potential settlements are sufficient.
Due to the level of estimation required in determining tax provisions, amounts eventually payable may differ from the provision recognised.
Complaints and disputes
The Group is committed to treating customers fairly and supporting its customers in meeting their lifetime goals. The Group does from time to time
receive complaints, claims and have commercial disputes with service providers, in the normal course of business. The costs, including legal costs,
of these issues as they arise can be significant and where appropriate, provisions have been established under IAS 37.
Contingent liabilities - acquisitions and disposals
The Group routinely monitors and reassesses contingent liabilities arising from matters such as litigation, warranties and indemnities relating to past
acquisitions and disposals. These are not expected to result in any material provisions.
23: Capital and financial risk management
23(a) Capital management
The Group manages its capital with a focus on capital efficiency and effective risk management. The capital objectives are to maintain the Group's
ability to continue as a going concern while supporting the optimisation of return relative to the risks. The Group ensures that it can meet its
expected capital and financing needs at all times having regard to the Group's business plans, forecasts and strategic initiatives and regulatory
requirements in all businesses in the Group. The Group's overall capital risk appetite is set with reference to the requirements of the relevant
stakeholders and seeks to:
- Maintain sufficient, but not excessive, financial strength to support stakeholder requirements;
- Optimise debt to equity structure to enhance shareholder returns; and
- Retain financial flexibility by maintaining liquidity including unutilised committed credit lines.
The primary sources of capital used by the Group are equity shareholders' funds and subordinated debt. Alternative resources are utilised where
appropriate. Risk appetite has been defined for the level of capital, liquidity and debt within the Group. The risk appetite includes long term targets,
early warning thresholds and risk appetite limits. The dividend policy sets out the target dividend level in relation to profits.
The regulatory capital for the Group is assessed under Solvency II requirements.
23(a)(i) Regulatory capital
Solvency II is the European Union solvency regime for insurance undertakings and insurance groups which came into force on 1 January 2016. The
Group is subject to Solvency II group supervision by the Prudential Regulation Authority ('PRA'). The Group is required to measure and monitor its
capital resources under the Solvency II regulatory regime.
The Group's insurance undertakings are included in the Group solvency calculation on a Solvency II basis. Other regulated entities are included in
the Group solvency calculation according to the relevant sectoral rules. The Group's Solvency II surplus is the amount by which the Group's capital
on a Solvency II basis (own funds) exceeds the Solvency II capital requirement (the Solvency Capital Requirement or 'SCR').
The Group's Solvency II surplus is GBP1,058 million at 31 December 2018 (2017: GBP651 million), representing a Solvency II ratio of 190% (2017: 154%)
calculated under the standard formula. The Solvency II information in this results disclosure has not been audited.
The estimated SCR and corresponding eligible own funds for each period (unaudited) were as follows:
GBPm
At At
31 December 31 December
2018(1) 2017(2)
Own Funds(3) 2,237 1,849
Solvency capital requirements (SCR) 1,179 1,198
Solvency II surplus 1,058 651
Coverage 190% 154%
(1) Based on preliminary estimates. Formal annual filing due to the PRA by 3 June 2019.
(2) As represented within the Annual 2017 Solvency II submission of the Old Mutual plc group, the group Quilter plc previously formed part of, to the PRA. Own funds
include a GBP566 million subordinated loan from the parent company at the time. This subordinated loan was effectively converted to equity during H1 2018, following the
acquisition of the entity holding the loan.
(3) Group own funds are stated after allowing for the impact of the proposed final dividend payment relating to 2018 of GBP61 million.
The Group own funds include the Quilter plc issued subordinated debt security which qualifies as capital under Solvency II. The composition of own
funds by tier is presented in the table below for year ended 31 December 2018. At 31 December 2017, Solvency II group reporting was not required
at a Quilter plc level and is therefore not included in the table below.
GBPm
At
Group own funds 31 December
2018
Tier 1(1) 2,036
Tier 2(2) 201
Total Group Solvency II own funds 2,237
(1) All Tier 1 capital is unrestricted for tiering purposes.
(2) Comprises a Solvency II compliant subordinated debt security in the form of a Tier 2 bond, which was issued at GBP200 million in February 2018.
The Group's EU insurance undertakings are also subject to Solvency II at entity level. The Group's asset management and advisory businesses are
subject to group supervision under the Capital Requirement Directive IV ('CRD IV'). Other regulated entities in the Group are subject to the locally
applicable entity-level capital requirements in the jurisdictions in which they operate.
The solvency and the capital requirements for the Group and each of its regulated subsidiaries are reported and monitored through monthly Capital
Management Forum meetings. Throughout 2018, the Group and each of its regulated subsidiaries have complied with the applicable regulatory
capital requirements.
23(a)(ii) Loan covenants
Under the terms of the revolving credit facility agreement, the Group is required to comply with the following financial covenant: the ratio of total net
borrowings to consolidated equity shareholders' funds shall not exceed 0.5.
GBPm
At
31 December
Notes 2018
Total external borrowings of the Company 21 197
Less: cash and cash equivalents of the Company (281)
Total net external borrowings of the Company (84)
Total shareholders' equity of the Group 2,005
Tier 2 bond 21 197
Total Group equity (including Tier 2 bond) 2,202
Ratio of Company net external borrowings to Group equity -0.038
The Group has complied with the covenant since the facility was created in February 2018.
23(a)(iii) Own Risk and Solvency Assessment ('ORSA') and Internal Capital Adequacy Assessment Process ('ICAAP')
The Quilter Group ORSA process is an ongoing cycle of risk and capital management processes which provide an overall assessment of the
current and future risk profile of the Group and demonstrates the relationship between business strategy, risk appetite, risk profile and solvency
needs. These assessments support strategic planning and risk-based decision making.
The underlying ORSA processes cover the entire Quilter Group and consider how risks and solvency needs may evolve over the planning period.
The ORSA includes stress and scenario tests, which are performed to assess the financial and operational resilience of the Group.
The Group ORSA report is produced annually. This report summarises the analysis, insights and conclusions from the underlying risk and capital
management processes in respect of the Quilter Group. The ORSA report is submitted to the Prudential Regulation Authority ('PRA') as part of the
normal supervisory process and may be supplemented by ad-hoc assessments where there is a material change in the risk profile of the Group
outside the usual reporting cycle.
In addition to the Group ORSA process, entity level ORSA processes are performed for each of the solo insurance entities within the Quilter Group.
The Quilter Group ICAAP process is similar to the ORSA process although the ICAAP process is performed for a subset of the Group consisting of
the investment and advisory firms within the Quilter Group (the 'ICAAP Group'). The Group ICAAP report is also produced annually. This report
summarises the analysis, insights and conclusions from the underlying risk and capital management processes in respect of the ICAAP Group. The
ICAAP report is submitted to the Financial Conduct Authority ('FCA') as part of the normal supervisory process and may be supplemented by ad-
hoc assessments where there is a material change in the risk profile of the ICAAP Group outside the usual reporting cycle.
The conclusions of ORSA and ICAAP processes are reviewed by management and the Board throughout the year.
23(b) Credit risk
Overall exposure to credit risk
Credit risk is the risk of adverse movements in credit spreads (relative to the reference yield curve), credit ratings or default rates leading to a
deterioration in the level or volatility of assets, liabilities or financial instruments resulting in loss of earnings or reduced solvency. This includes
counterparty default risk, counterparty concentration risk and spread risk.
The Group has established a credit risk framework that includes a Credit Risk Policy, Credit Risk Standard and Credit Risk Appetite Statement. This
framework applies to all activities where the shareholder is exposed to credit risk, either directly or indirectly, ensuring appropriate identification,
measurement, management, monitoring and reporting of the Group's credit risk exposures.
The credit risk arising from all exposures is mitigated through ensuring the Group only enters into relationships with appropriately robust
counterparties, adhering to the Group Credit Risk Policy. For each asset, consideration is given as to:
- The credit rating of the counterparty, which is used to derive the probability of default;
- The loss given default;
- The potential recovery which may be made in the event of default;
- The extent of any collateral that the firm has in respect of the exposures; and
- Any second order risks that may arise where the firm has collateral against the credit risk exposure.
The credit risk exposures of the Group are monitored regularly to ensure that counterparties remain creditworthy, to ensure there is appropriate
diversification of counterparties and to ensure that exposures are within approved limits. At 31 December 2018, the Group's material credit
exposures were to financial institutions (primarily through the investment of shareholder funds), corporate entities (including external fund managers
and reinsurers) and individuals (primarily through fund management trade settlement activities).
There is no direct exposure to European sovereign debt (outside of the UK) within the shareholder investments. The Group has no significant
concentrations of credit risk exposure.
Reinsurance arrangements
The Group has reinsurance arrangements in place to mitigate the risk of excessive claims on unit-linked and non-linked protection contracts.
Reinsurance arrangements are also used in respect of unit-linked institutional business to access specific funds not available through direct fund
links and to provide liquidity.
Since the Group uses reinsurance as a means of mitigating insurance risk, reinsurance counterparties bear a significant financial obligation to the
Group.
In general, credit risk is controlled through the use of risk premium reinsurance terms, where reinsurance cover is paid for as the cover is provided.
In these arrangements credit risk is limited to the risk of being unable to recover amounts due as a result of claims arising over the latest quarter,
since reinsurance accounts are settled quarterly in arrears. This risk is largely mitigated since the Group would be able to withhold amounts due to
the reinsurer to offset amounts due from the reinsurer.
The Group also has reinsurance arrangements in which there is a timing difference between the reinsurance premium payment and the provision of
cover, which results in prepayment for cover by the Group. In respect of these arrangements, a credit risk exposure can arise.
Reinsurance credit risk is managed by dealing only with reinsurance firms with credit ratings which meet the requirements of the Group's credit risk
policy on inception of new reinsurance arrangements. The Group monitors the exposure to and credit rating of reinsurance counterparties regularly
to ensure that these remain within acceptable limits. Legal agreements are in place for all reinsurance arrangements which set out the terms of the
arrangement and the rights of both the Group and the reinsurance providers.
None of the Group's reinsurance assets are either past due or impaired. Of the reinsurance assets shown in the statement of financial position all
are considered investment grade with the exception of GBP20 million of unrated exposures (2017: GBP51 million). Collateral is not taken against
reinsurance assets or deposits held with reinsurers other than in limited circumstances. For further information see note 18.
Details of the age analyses and credit quality of reinsurance assets in respect of insurance contracts and investment contracts are included below.
Investment of shareholder funds
The risk of counterparty default in respect of the investment of shareholder funds is managed through:
- Setting minimum credit rating requirements for counterparties;
- Setting limits and key risk indicators for individual counterparties and counterparty concentrations;
- Monitoring exposures regularly against approved limits; and
- On-going monitoring of counterparties and associated limits.
Other credit risks
The Group is exposed to financial adviser counterparty risk through a number of loans that it makes to its advisers and the payment of upfront
commission on the sale of certain types of business. The risk of default by financial advisers is managed through monthly monitoring of loan and
commission debt balances.
The Group is exposed to the risk of default by fund management groups in respect of settlements and rebates of fund management charges on
collective investments held for the benefit of policyholders. This risk is managed through the due diligence process which is completed before
entering into any relationship with a fund group. Amounts due to and from fund groups are monitored for prompt settlement and appropriate action
is taken where settlement is not timely.
Legal contracts are maintained where the Group enters into credit transactions with a counterparty.
Details of the credit quality of debt securities can be found in this note in the table below.
Impact of credit risk on fair value
Due to the limited exposure that the Group has to credit risk, credit risk does not have a material impact on the fair value movement of financial
instruments for the year under review. The fair value movements on these instruments are mainly due to changes in market conditions.
Maximum exposure to credit risk
The table below represents the Group's maximum exposure to credit risk. The Group's maximum exposure to credit risk does not differ from the
carrying value disclosed in the relevant notes to the financial statements. Exposure arising from financial instruments not recognised on the
statement of financial position is measured as the maximum amount that the Group would have to pay, which may be significantly greater than the
amount that would be recognised as a liability. The 'not rated' balances represent the pool of counterparties that do not require a rating. These
counterparties individually generate no material credit exposure and this pool is highly diversified, monitored and subject to limits.
The Group does not have any significant exposure arising from items not recognised on the statement of financial position.
GBPm
Credit rating relating to financial assets that are neither past due nor impaired
Included
through
Internally consolidation Carrying
At 31 December 2018 AAA AA A BBB <BBB rated of funds value
Financial investments at FVTPL - 201 - - - 532 2,549 3,282
Government and government-related securities - 201 - - - - 974 1,175
Other debt securities, preference shares and debentures - - - - - 520 1,575 2,095
Short-term funds and securities - - - - - 12 - 12
Other investments and securities - - - - - - - -
Reinsurance assets - 930 1,186 26 - 20 - 2,162
Cash and cash equivalents 1,358 60 451 1 6 35 484 2,395
Cash at amortised cost, subject to lifetime ECL - 60 451 1 3 35 484 1,034
Money market funds at FVTPL 1,358 - - - 3 - - 1,361
Loans and advances - - - - - 222 - 222
Loans and advances subject to 12 month ECL - - - - - 33 - 33
Loans and advances at FVTPL - - - - - 189 - 189
Other receivables - - - - - 486 - 486
Other receivables subject to lifetime ECL - - - - - 283 166 449
Prepayments and accruals - - - - - 37 - 37
Contract assets subject to lifetime ECL - - - - - 44 - 44
1,358 1,190 1,637 27 6 1,339 3,033 8,591
GBPm
Credit rating relating to financial assets that are neither past due nor impaired
Included
through
Internally consolidation Carrying
At 31 December 2017 AAA AA A BBB <BBB rated of funds value
Financial investments - 183 - 12 - 508 4,536 5,239
Government and government-related securities - 183 - - - - 2,244 2,427
Other debt securities, preference shares and debentures - - - - - 505 1,896 2,401
Short-term funds and securities - - - 12 - 3 - 15
Other investments and securities - - - - - - 396 396
Reinsurance assets - 1,050 1,807 - - 51 - 2,908
Loans and advances neither past due not impaired - - - - - 199 - 199
- 1,233 1,807 12 - 758 4,536 8,346
The Group has initially applied IFRS 9 at 1 January 2018 and has taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating
prior periods in respect of IFRS 9's classification and measurement (including impairment) requirements. Refer to note 2 for further information.
Impairment allowance
Consistent with IFRS 9 Financial instruments, assets that are measured and classified as amortised costs are monitored for any expected credit
loss (ECL) on either a 12 month or lifetime ECL model. The majority of such assets within the Group are measured on the lifetime ECL model, with
the exception of some specific loans that are on the 12 month ECL model.
Changes in significant accounting policies, upon adoption of IFRS 9 the Group incurred an impairment allowance of GBP0.2 million. The table below
shows a reconciliation of Group's total impairment allowance through to year end 31 December 2018.
Impairment allowance GBPm
Opening impairment allowance under IAS 39 (0.3)
Impact upon adoption of IFRS 9 (0.2)
Additions due to increased broker loans (0.4)
At 31 December 2018 (0.9)
23(c) Market risk
Market risk is the risk of an adverse change in the level or volatility of market prices of assets, liabilities or financial instruments resulting in loss of
earnings or reduced solvency. Market risk arises from changes in equity, bond and property prices, interest rates and foreign exchange rates.
Market risk arises differently across the Group's businesses depending on the types of financial assets and liabilities held.
The Group has a market risk policy which set out the risk management framework, permitted and prohibited market risk exposures, maximum limits
on market risk exposures, management information and stress testing requirements which are used to monitor and manage market risk. The policy
is cascaded to the businesses across the Group and Group level governance and monitoring processes provide oversight of the management of market
risk by the individual businesses.
The Group does not undertake any principal trading for its own account. The Group's revenue is however affected by the value of assets under
management and consequently it has exposure to equity market levels and economic conditions. Scenario testing is undertaken to test the
resilience of the business to severe but plausible events and to assist in the identification of management actions.
23(c)(i) Equity and property price risk
In accordance with the market risk policy, the Group does not invest shareholder assets in equity or property, or related collective investments,
except where the exposure arises due to:
- Mismatches between unitised fund assets and liabilities. These mismatches are permitted, subject to maximum limits, to avoid excessive
dealing costs.
- Seed capital investments. Seed capital is invested within new unit-linked funds at the time when these funds are launched. The seed
capital is then withdrawn from the funds as policyholders invest in the funds.
The above exposures are not material. Due to the nature of the investments held there is no material exposure to equity and property price risk on
non-linked assurance policyholder assets.
The Group derives fees (e.g. annual management charges) and incurs costs (e.g. adviser fund based renewal commissions) which are linked to the
performance of the underlying assets. Therefore future earnings will be affected by equity and property market performance.
Equity and property price sensitivity testing
A movement in equity and property prices would impact the fee income that is based on the market value of the investments held for the
policyholders. In this analysis, all linked renewal commission is assumed to be fund based and all gains are assumed to be realised gains. The
sensitivity is applied as an instantaneous shock to equity and property prices at the start of the year. The sensitivity analysis is not limited to the
unit-linked business and therefore reflects the sensitivity of the Group as a whole.
GBPm
Impact on profit after tax
At At
31 December 31 December
2018 2017
Impact of 10% increase in equity and property prices 36 32
Impact of 10% decrease in equity and property prices (36) (31)
23(c)(ii) Interest rate risk
Interest rate risk arises primarily from investment in fixed interest government securities, which are exposed to fluctuations in interest rates and
bank balances held with financial institutions.
Fixed interest UK government securities are held predominantly to match liabilities by durations for non-linked protection business determined on an
IFRS basis. Therefore, on an IFRS basis there is low exposure to interest rate movements such that any movement in asset values is balanced by
a movement in the insurance provision.
A rise in interest rates would also cause an immediate fall in the value of investments in fixed income securities within unit-linked funds. The unit-
linked funds asset look-through analysis has revealed that less than 30% of the linked assets are invested in the fixed income securities which
generally have short durations, resulting in a low material impact in fund based revenues.
Exposure of the IFRS income statement and statement of financial position equity to interest rates are summarised below.
Interest rate sensitivity testing
The impact of an increase and decrease in market interest rates of 1% is tested (e.g. if the current interest rate is 5%, the test allows for the effects
of an instantaneous change to 4% and 6% from the start of the year). The test allows consistently for similar changes in investment returns and
movements in the market value of assets backing non-linked liabilities. The sensitivity of profit to change in interest rates is provided.
GBPm
Impact on profit after tax
At At
31 December 31 December
2018 2017
Impact of 1% increase in interest rates 19 20
Impact of 1% decrease in interest rates (12) (10)
23(c)(iii) Currency translation risk
Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
The Group's functional currency is Sterling, which accounts for the majority of the Group's transactions, but the Group also has minor exposure to
foreign exchange risk in respect to accounts receivable and future revenues denominated in US Dollars, Euros and Swedish Krona through its
International business. The currency risk is mitigated using derivative financial instruments such as forward foreign exchange contracts. After risk
mitigation, the Group does not have material foreign currency risk exposure.
23(d) Liquidity risk
Liquidity risk is the risk that there are insufficient assets or that assets cannot be realised in order to settle financial obligations as they fall due or
that market conditions preclude the ability of the Group to trade in illiquid assets in order to maintain its asset and liability matching ('ALM') profile.
The Group manages liquidity through:
- Maintaining adequate high quality liquid assets and banking facilities, the level of which is informed through appropriate liquidity stress
testing;
- Continuously monitoring forecast and actual cash flows; and
- Matching the maturity profiles of financial assets and liabilities, where possible.
Individual businesses maintain and manage their local liquidity requirements according to their business needs within the overall Group Liquidity
Risk Framework that includes a Group Liquidity Risk Policy, Group Liquidity Risk Standard and Group Liquidity Risk Appetite Statement. The Group
framework is applied consistently across all businesses in the Group to identify, manage, measure, monitor and report on all liquidity risks that have
a material impact on liquidity levels. This framework considers both short-term liquidity and cash management considerations and longer-term
funding risk considerations.
Liquidity is monitored centrally by Group Treasury, with management actions taken at a business level to ensure each business has liquidity to
cover its minimum liquidity requirement, with an appropriate buffer.
The Group maintains contingency funding arrangements to provide liquidity support to businesses in the event of severe liquidity stresses.
Contingency Funding Plans are in place for each individual business in order to identify a comprehensive list of contingent funding sources and the
order and speed in which they could be utilised in a stress scenario. The plans undergo an annual review and testing cycle to ensure they are fit for
purpose and can be relied upon during a liquidity stress.
Information on the nature of the investments and securities held is given in note 13.
Prior to separation from Old Mutual plc the Group had a GBP70 million revolving credit facility in place with Old Mutual plc which could be drawn down
in a liquidity stress and utilised freely within the Group. On 28 February 2018 debt financing arrangements were put in place that allowed the Group
to become financially independent from Old Mutual plc and maintain sufficient liquidity ahead of listing at the end of June 2018. This allowed the
Group to terminate existing arrangements with Old Mutual plc. The debt financing consisted of the following:
- GBP200 million Tier 2 Bond issuance details of which are given in note 21.
- GBP300 million Term Loan that was repaid in full at the end of June following the sale of the Single Strategy Asset Management business.
- GBP125 million 5 year Revolving Credit Facility with a 5 bank club that represents a form of contingency liquidity for the Group. No drawdown
on this facility has been made since inception. The Group has the option to extend the facility for a further 2 year period.
The financing arrangements are considered sufficient to maintain the target liquidity levels of the Group and offer coverage for appropriate stress
scenarios identified within the liquidity stress testing undertaken across the Group.
Further details, together with information on the Group's borrowed funds, are given in note 21.
The Group does not have material liquidity exposure to special purpose entities or investment funds.
23(e) Insurance risk (risk arising within insurance contracts)
23(e)(i) Overview
The Group assumes insurance risk by issuing insurance contracts, under which the Group agrees to compensate the policyholder or other
beneficiary in the event that a specified uncertain future event (the insured event) affecting the policyholder occurs. The Group offers life assurance,
critical illness and other life protection business. The Group does not offer general insurance business and therefore does not take on other forms of
insurance risk such as motor and property insurance risks.
Insurance risk arises through exposure to variable claims experience on life assurance, critical illness and other protection business and exposure
to variable operating experience in respect of factors such as persistency levels and management expenses. Unfavourable persistency, expenses
and mortality and morbidity claim rates, relative to the actuarial assumptions made in the pricing process, may result in profit margins reducing
below the target levels included in the pricing process.
The Group has implemented an insurance risk policy which sets out the Group requirements for the management, measurement, monitoring and
reporting of insurance risks. The Group has implemented 3 standards which sit within the insurance risk policy, as follows:
- Underwriting and claims standard;
- Reinsurance standard; and
- Technical provisions standard.
The sensitivity of the Group's earnings and capital position to insurance risks is monitored through the Group's business planning and capital
management processes. The insurance risk profile and experience is closely monitored relative to key risk metrics and defined tolerances.
The Group manages its insurance risks effectively through the following mechanisms:
- An agreed risk appetite for all risk types including insurance risks;
- Pricing of insurance contracts utilising analysis of mortality, morbidity, persistency and expense experience;
- Underwriting of mortality and morbidity risks;
- Reinsurance, which is used to limit the Group's exposure to large single claims and catastrophes through transfer of insurance risk
exposures;
- The Group does not offer group insurance business in order to avoid risk concentrations of insurance risk.
Terms and conditions of life assurance and critical illness protection business
The terms and conditions for life assurance and critical illness protection business determine the level of insurance risk accepted by the Group. The
following table outlines the general form of terms and conditions that apply to contracts for the key protection products offered by the Group, and the
nature of the risk incurred by the Group.
Policyholder
participation in
Category Essential terms Main risks Policyholder guarantees investment return
Unit-linked life assurance Mortality charges may be Mortality The initial premium is guaranteed to None
re-priced sustain the original cover for the first
10 years
Unit-linked critical illness Mortality and morbidity charges Mortality, Morbidity The initial premium is guaranteed to None
may be re-priced sustain the original cover for the first
10 years
Non-linked life assurance Premium rates defined at Mortality, Morbidity Rates guaranteed for the life of the None
and critical illness inception(1) contract(1)
(1) Certain non-linked life assurance and critical illness contracts have premiums which are reviewable if the contract term is extended beyond the initial term.
Mortality and morbidity
Mortality and morbidity risk is the risk that death, critical illness and disability claims experience is higher than the rates assumed when pricing
contracts. Possible causes are new and unexpected epidemics, reductions in the effectiveness of treatments such as antibiotics and widespread
changes in lifestyle.
For unit-linked contracts, a risk charge is applied to meet the expected cost of the insured benefit (in excess of the unit value). This risk charge can
be altered in the event of changes in the expectation for future claims experience, subject to the objective to provide fair customer outcomes.
Persistency
Persistency risk is the risk that policyholder surrenders, transfers or premium cessation on contracts occur at levels that are different to the levels
expected and allowed for within the pricing process. Persistency statistics are monitored monthly and a detailed persistency analysis at a product
level is carried out on an annual basis. Management actions may be triggered if persistency statistics indicate significant adverse movement or
emerging trends in experience.
Expenses
Expense risk is the risk that actual expenses and expense inflation differ from the levels expected and allowed for within the pricing process. Expense levels
are monitored quarterly against budgets and forecasts. Expense drivers are used to allocate expenses to entities and products. Some product structures
include maintenance charges. These charges are reviewed annually in light of changes in maintenance expense levels and the market rate of inflation. This
review may result in changes in charge levels.
23(e)(ii) Sensitivity analysis - life assurance
Changes in key assumptions used to value insurance contracts would result in increases or decreases to the insurance contract liabilities
recognised, with impact on profit/(loss) and/or shareholders' equity.
Sensitivity analysis has been performed by applying the following parameters to the statement of financial position and income statement as at 31
December 2018 and 31 December 2017. Interest rate and equity and property price sensitivities are included within the Group market sensitivities
above.
Expenses
The increase in expenses is assumed to apply to the costs associated with the maintenance and acquisition of insurance contracts. It is assumed
that these expenses are increased by 10% from the start of the year, so is applied as an expense shock rather than a gradual increase. The only
administrative expenses that are deferrable are sales bonuses but as new business volumes are unchanged in this sensitivity, sales bonuses and
the associated deferrals have not been increased. Administrative expenses have been allocated equally between life and pensions. An increase in
expenses of 10% would have decreased profit by GBP6.5 million after tax (2017: GBP9.1 million).
Mortality/morbidity
The impact on profit of an increase in mortality and morbidity claims rates of 5% is tested. This would affect the level of insurance contract claims
and is assumed to apply throughout the year. An increase in mortality and morbidity claims of 5% each would have decreased profit after tax by
GBP1.2 million (2017: GBP0.9 million).
23(f) Operational risk
Operational risk is the risk that failure of people, processes, systems or external events results in financial loss, damage to brand/reputation or
adverse regulatory intervention, or government or regulatory fine. Operational risk includes all risks resulting from operational activities, excluding
the risks already described above and excluding strategic risks and risks resulting from being part of a wider group of companies.
Operational risk includes the effects of failure of administration processes, IT maintenance and development processes, investment processes
(including settlements with fund managers, fund pricing and matching and dealing), product development and management processes, legal risks
(e.g. risk of inadequate legal contract with third parties), risks relating to the relationship with third party suppliers and outsourcers, and the
consequences of financial crime and business interruption events.
In accordance with Group policies, management have primary responsibility for the identification, assessment, management and monitoring of risks,
and the escalation and reporting on issues to executive management.
The Group executive management have responsibility for implementing the Group Operational Risk management methodologies and frameworks
and for development and implementation of action plans to manage risk levels within acceptable tolerances and to resolve those issues identified.
23(g) Contractual maturity analysis
The following table is a maturity analysis of liability cash flows based on contractual maturity dates for investment contract liabilities and expected
claim dates for insurance contracts. Investment contract policyholders have the option to terminate or transfer their contracts at any time and to
receive the surrender or transfer value of their policies, and are therefore classified as less than three months maturity. Although these liabilities are
payable on demand, the Group does not expect that all liabilities will be settled within this period.
GBPm
Undiscounted cash flows
Three Between
Carrying Up to three months to one and five More than
At 31 December 2018 amount months one year years five years Total
Life assurance policyholder liabilities
Insurance contracts 602 21 11 46 992 1,070
Life assurance policyholder liabilities 588 7 11 46 992 1,056
Outstanding claims 14 14 - - - 14
Investment contracts
Unit-linked investment contracts and similar contracts 56,450 56,450 - - - 56,450
Total policyholder liabilities 57,052 56,471 11 46 992 57,520
GBPm
Undiscounted cash flows
Three Between
Carrying Up to three months to one and five More than
At 31 December 2017 amount months one year years five years Total
Life assurance policyholder liabilities
Insurance contracts 489 15 8 34 855 912
Life assurance policyholder liabilities 480 6 8 34 855 903
Outstanding claims 9 9 - - - 9
Investment contracts
Unit-linked investment contracts and similar contracts 59,139 59,139 - - - 59,139
Total policyholder liabilities 59,628 59,154 8 34 855 60,051
24: Related party transactions
In the normal course of business, the Group enters into transactions with related parties. These are conducted on an arm's length basis and are not
material to the Group's results. There were no transactions with related parties during the current and prior year which had a material effect on the
results or financial position of the Group except for the repayment of intercompany indebtedness with Old Mutual plc which has been disclosed in
note 21: Borrowings. Except for these intra-group loan repayments, the nature of the related party transactions of the Group has not changed over
the course of the year.
24(a) Transactions with previous Parent company, Old Mutual plc
Prior to the Group's Managed Separation from Old Mutual plc in June 2018, the Group had various transactions with Old Mutual plc and other related
entities within the Old Mutual group, all of which were in the normal course of business. All receivables and payables were settled at the point of
separation, resulting in receivables and payables of GBPnil as at 31 December 2018 (2017: receivables were GBP28 million and payables were GBP790
million). In addition, the Group incurred GBP3 million of interest expense in relation to intercompany indebtedness at the time, paid to Old Mutual plc
prior to separation in 2018 (2017: GBP60 million) and received GBPnil income (2017: GBP5 million in respect of other transactions with Old Mutual plc group).
25: Events after the reporting date
On 14 February 2019, Intrinsic Financial Services Limited ("IFSL"), a subsidiary company, acquired the remaining equity of the Charles Derby Group Limited
("CDG"), having previously held a minority interest in CDG. The acquisition represents the next stage of Quilter's ambition to broaden out its national advice business.
The acquisition complements the growth of Quilter Private Client Advisers which serves upper affluent and high net worth customers.
The provisional valuation of CDG at acquisition was GBP32 million. After deducting the existing holding (with a fair value of GBP2 million immediately prior to acquisition),
the fair value of consideration for the remaining GBP30 million equity was GBP28 million comprising a cash payment of GBP21 million and deferred consideration of GBP9 million
(discounted to present value of GBP7 million) payable in 2 equal instalments, 18 and 36 months after the date of acquisition.
Intangible assets including the value of the distribution channel will be recognised at acquisition. Intangible assets are grossed up by the current tax rate, with a corresponding
deferred tax liability created on the statement of financial position. Because the purchase price allocation ("PPA") model is not yet complete, the excess of acquisition cost
over the net liabilities acquired has been apportioned on an estimated basis 50% to intangible assets, with the remainder being classified as goodwill. Provisional balances of
GBP19 million for intangible assets, GBP(3) million for deferred tax liability and GBP15 million for goodwill will be recognised within the group consolidated financial statements at
acquisition. During 2019, the allocation will be finalised, with the potential for a reallocation between intangible assets and goodwill.
The provisional consolidated statement of financial position for CDG at acquisition date comprised total assets of GBP1.4 million, total liabilities of GBP2.0 million and equity of
GBP(0.6) million.
The goodwill is derived from the existing adviser base which at the date of completion was around 200 mostly self-employed Registered Financial Planners. Strong synergies exist between
IFSL and CDG, with the CDG advisers operating within Intrinsic's advice processes and proposition. CDG has proven lead generation capability which will help to deliver Intrinsic's national
growth strategy.
The deferred consideration payments are variable, subject to changes in the value of assets under administration and deduction for indemnity claims. The full estimated amount of deferred
consideration is currently expected to be paid.
JSE Sponsor: J.P. Morgan Equities South Africa (Pty) Ltd
Date: 12/03/2019 09:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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