Partnership Holdings Limited
Report and Financial Statements
Contents
Directors, Officers and Advisers ... 1
Summary Information ... 2
Key performance indicators ... 3
Chairman‟s Statement ... 5
Chief Executive‟s Review ... 7
Business Review ... 9
Corporate and Social Responsibility ... 17
Governance ... 19
Directors‟ Report ... 23
Statement of Directors‟ Responsibilities... 25
Independent Auditors‟ Report ... 26
Consolidated Statement of Comprehensive Income ... 27
Consolidated Statement of Changes in Equity ... 28
Consolidated Balance Sheet ... 29
Balance Sheet of the Company ... 30
Consolidated Cash Flow Statement ... 31
Directors, Officers and Advisers
Directors & Officers
Independent Advisers and
Consultants
Directors
IB Owen, FIA (Chairman)* PA Catterall*
C Berendsen* MD Crewe* RA Phipps*
DTM Young, FCA, CTA* AM Dearsley, ACA SJ Groves, FIA
*Non-executive Director
Company Secretary
FE Darby, Solicitor
Chief Financial Actuary and
Actuarial Function Holder
AJM Chamberlain, FIA
Auditors
Deloitte LLP
Bankers
Lloyds Banking Group plc
Solicitors
Clyde & Co LLP
Chief Medical Officer
Dr GH Robb, FRCP FAMS
Medical Advisers
Dr I Cox, MRCP Dr A Neal, MD, MRCP, FRCR Dr S Hudson, MBBS, DCH, MRCGP, DFFPConsulting Actuary
R Willetts, FFAInvestment Managers
Insight Investment Management (Global) Limited
Registered Office
Sackville House 143 – 149 Fenchurch Street London EC3M 6BNSummary Information
HistoryPartnership Holdings Limited (the “Company”) was incorporated on 4 June 2008. On 5 August 2008 the Company acquired Partnership Group Holdings Limited and its subsidiaries (all collectively, the “Group”). Those subsidiaries include Partnership Life Assurance Company Limited (“Partnership”), which began trading in October 2005, following its acquisition of the assets and liabilities of The Pension Annuity Friendly Society (“PAFS”), a pioneer of impaired annuities since its foundation in 1995. The Group also has significant holdings in two Independent Financial Advisors (“IFAs”) - Eldercare Group Limited, which specialises in financial solutions for the provision of long term care, and Gateway Specialist Advice Services Limited, which provides specialist later-life financial advice.
The acquisition of Partnership Group Holdings Limited was funded by a combination of private equity funds managed by Cinven Limited (the “Cinven funds”) and Partnership‟s existing management team. In addition to the equity funding, Partnership is also backed by a small amount of debt capital provided by Lloyds Banking Group plc and benefits from strong reassurance support from a number of major international reinsurers.
Vision
The Group is a specialist provider of financial solutions to customers living with health conditions. The Group‟s vision is:
“To be the acknowledged and trusted provider of enhanced financial benefits for people living with medical conditions.”
Strategy
The Group‟s strategy is to develop and bring to market insurance and other financial products that provide enhanced financial benefits and protection cover for customers with medical or lifestyle factors that lead to a reduced life expectancy. The Group‟s interest in distribution companies is intended to facilitate access to customers who may benefit from the specialist products that the Group writes.
Customers & Distribution
The Group‟s customers have a wide variety of lifestyle and health conditions, ranging from relatively minor conditions such as hypertension to more serious ones such as heart failure, stroke, diabetes, kidney failure and cancer. The product range currently consists of care annuities, retirement annuities, protection products and equity release loans.
The Group‟s distribution companies operate independently of Partnership and provide “whole of market” advice to their customers.
The Group distributes its products through a combination of IFAs, corporate partnerships and, for certain products, direct to the customer. Partnership has strong relationships with IFAs who specialise in products offered by the Group and also with the broader IFA community. An important ambition of the Group is to increase awareness of the benefits of our specialist annuity and equity release products. Partnership has established a number of corporate business partnerships enabling our products and expertise to supplement the product range of our corporate partners. These partners include major insurance institutions and banks, and they present us with the opportunity to raise awareness of Partnership and provide our specialist expertise to a much larger customer base. During 2010, the Group also commenced a direct sales channel for its care annuity products.
People
Key performance indicators
The Group has increased revenue, as measured by Single Premium Equivalent1 (SPE), during the year by accessing new distribution channels and successfully developing its products and pricing bases to ensure they compete effectively in the UK Market.
Retirement sales since 2006 have grown at an average annual rate of over 68% per year to reach £501m in 2010. Recent sales growth has benefited from an increasingly diversified distribution approach and targeted marketing activity to the Regional and Network IFA segments. In premium terms, the market for retirement annuities sold through the open market (rather than policies vesting with the pension provider) has increased by 12% to £6.1bn in 20102. Partnership‟s share of this open market has improved from 6% in 2009 to 8% in 2010.
Care sales since 2006 have grown at an average annual rate of over 11% per year to reach £81m in 2010. The care annuity market has grown by 7% in the same period2. Sales in 2010 have benefited from our work to improve awareness of the product amongst consumers, and promote the benefits of capping the policyholders‟ liability for future care costs through the purchase of an annuity. Partnership‟s share of this market was 70% in 20102.
Protection sales in 2010 were £6m (SPE). The specialist nature and relatively high cost of a product aimed at those with serious medical issues has meant that the economic slowdown, and in particular slowdown in residential mortgage activity, has disproportionately impacted sales of impaired protection products.
1 Single Premium Equivalent (SPE) is a standard industry measure that shows premium equivalence between a single
premium product (such as a pension annuity) and a regular premium product (such as a protection policy). Single Premium Equivalents are calculated as 1 x Single premium + 10 x Annual Regular Premium. SPE does not include equity release loans made by the Group.
Earnings (£m)
The Group has recorded earnings before interest and tax (EBIT) of £36.2m in 2010 (2009: £28.2m) and a pre-tax profit (PBT) in 2010 of £35.6m (2009: £27.7m). Profitability in 2010 has remained strong, driven by increased new business volumes at our target margins and careful management of our expense base. Nevertheless, the investment markets in 2010 proved more challenging than 2009, and impacted our total growth in PBT. A more sophisticated investment approach, including our re-entry into the Equity Release market using our own funds to provide loans to customers, has both reduced investment risk, and improved our returns (relative to corporate bonds in isolation), benefiting both customers (through improved annuity rates) and the Group‟s profitability.
Funds under management have grown on average 57% per year since 2006, and during 2010 surpassed the £1bn level, closing the year with a value of almost £1.4bn.
Assets by credit quality
Our risk appetite is to invest in BBB credit rating or above. Any stocks below this will have been downgrades. The asset mix in 2010 reflects the equity release loans made during the year.
Other Highlights for 2010 include
The Group continued to invest in people. The average headcount during 2010 was 261 compared to 236 in 2009. At the end of 2010, the Group employed 284 staff (2009: 255);
The Group‟s retirement annuity offering was strengthened considerably by the introduction of Partnership Lite, an automated e-enabled, low cost and accessible interface for IFAs providing annuity quotes incorporating enhanced terms for a wide range of medical conditions;
The Group launched a direct sales channel for the Immediate Needs Annuity product for care fee funding, bringing the security of our product to a much wider audience than the traditional IFA market is currently achieving;
The number of IFAs using Partnership has again increased, with over 12,600 individual IFAs seeking quotations from us in 2010 for new policies (up from over 10,500 in 2009);
The Group sold its 83.7% holding in Annuity Direct Limited for a small profit in 2010 (see Note 30); Partnership has been recognised in 2010 for its excellent products and service in the financial services industry, winning a number of awards, including:
o 5 Star Service Award (Financial Advisor);
o Best Long Term Care Provider (2010 Health Insurance Awards);
o Best Enhanced Annuity Provider (Investment Life & Pensions Moneyfacts Awards 2010);
o a “eee” rating (highest possible) in the e-Excellence awards for our Partnership Lite solution to enhanced retirement annuity sales; and
Chairman’s Statement
2010 is the second full year of Cinven‟s ownership, and the year that a number of important initiatives at Partnership have come to fruition. During the year we launched Partnership Lite our e-enabled, simplified retirement annuity solution designed to provide greater access to our products. We have also continued to diversify our distribution arrangements, most notably by launching a direct sales channel for care annuities and through further arrangements with new corporate partners. We have continued to innovate in our investment strategy, and I am very pleased to see Partnership‟s return into the Equity Release market, this time using its own funds to provide competitive loans to people with impaired lives. These initiatives have contributed to the impressive financial result set out later in this report. Premium income has increased by over 40% compared with 2009, and profit before tax has increased by almost 30% to £35.6 million demonstrating Partnership‟s solid business model in this difficult economic climate. Our plans for future growth remain ambitious, and are based on a continuation of Partnership‟s successful strategy to date.
As Partnership and the wider group grow and enter new lines of business, I, along with my Board colleagues, continue to monitor the appropriateness of our governance structures. Whilst privately owned, and therefore not subject to the requirements of the UK Corporate Governance Code for public companies, we have always sought to apply suitable levels of governance, and continually monitor the appropriateness of our governance structures. As a result of these reviews, during 2010 we have established new Board oversight committees for the group, separating Audit and Assurance from Risk and Compliance to ensure greater focus on each of those aspects of governance. In addition, the responsibilities of the Partnership Investment Committee were incorporated into the remit of the Partnership Board.
As well as our internal changes, 2010 has also been a year of change in the external environment. The arrival of a new government, especially a coalition government, brings change and uncertainty to many areas of corporate life, and the insurance industry has been no exception. We have already seen proposals for legislative change to remove compulsory annuitisation at age 75, and changes to state retirement ages, which will impact on our business. I feel that Partnership is not only well placed to respond to these changes, but also to contribute and help shape policy on some of the most pressing political issues facing the new government, including the provision of secure income in retirement, and how the increasing demands of an ageing population can be met. The costs of domestic and residential care for the elderly and infirm continue to increase. The question of how to ensure secure funding for these costs is something we are regularly consulted on and have been working closely with government ministers and their advisors. Along with many others, we look forward to hearing the outcome of the Care Commission due to report in mid-2011.
Perhaps the most significant legislative change for insurers was announced on 1 March 2011, when the European Court of Justice opined that the current exemption from certain aspects of the EU Gender Directive, which enabled insurers to price their contracts having regard to the policyholder‟s gender, will no longer apply after December 2012. Whilst I feel this is a retrograde move and will lead to distortions in the market potentially penalising policyholders, Partnership‟s use of multiple rating factors other than gender, will allow us to continue to provide an individual with the price most appropriate to their individual circumstances.
I personally chair the ABI‟s committee on Long Term Care, and other colleagues have been working with a number of trade and government bodies with an interest in providing solutions to the financial needs of the elderly, such as The International Longevity Centre, the Society for Later Life Advisers (SOLLA), the Safe Home Income Plans (SHIP) trade body, and the All Party Parliamentary, Ageing and Older People Group.
This political change has occurred with the now familiar backdrop of economic uncertainty and instability. Partnership‟s management team continue to monitor the security of the Group‟s investments, and look to minimise risk whilst providing competitive returns to our policyholders. I am pleased to say that once again Partnership has reached the end of the year with no asset defaults.
In such times of uncertainty, maintaining an effective and open communication channel is ever more important. Hearing the views of our policyholders has always been something that Partnership has cherished, and I am pleased to see the continued positive feedback on our regular policyholder newsletter. One of the victims of our successful growth, however, has been the decision to no longer hold our annual policyholder meeting. I recognise that for many of you, the annual meeting was seen as an opportunity to register your views with management, but the meeting was becoming an increasingly inefficient way to communicate with our ever growing policyholder base. Nevertheless, the
policyholder representative, Mr Miles Laddie, continues to be busy passing on comments and concerns from our policyholders, and working with management to resolve them.
Our relationship with IFAs is equally important to Partnership, as they remain the principal conduit for Partnership to speak to its existing and future policyholders. For the second year running we ran a series of Symposiums for IFAs to bring thought leadership and new opportunities to the IFA community. This, together with our continued high level of day-to-day service, contributed to IFAs voting Partnership the Financial Adviser 5 Star Service Award in 2010.
This award topped off a fantastic year of recognition for Partnership. Our innovation was recognised in the e-Excellence awards with our Partnership Lite solution receiving an “eee” rating (the highest possible). At the Moneyfacts Awards we were recognised as the “Best Enhanced Annuity Provider” and, at the Health Insurance Awards, Partnership received the award for “Best Long Term Care Provider”. It gives me great pleasure to see the staff and management of Partnership recognised for their efforts in this way.
Finally I would like to welcome Andrew Chamberlain as an Executive Director of Partnership. Andrew joins us from Towers Watson, the actuarial consultancy. For the past two years, in his role at Towers Watson, Andrew has acted as the Actuarial Function Holder for Partnership, and so he is already knowledgeable about the business and is a familiar face around the Boardroom table. He nevertheless brings a wealth of experience to the team and further strengthens our actuarial expertise.
Ian Owen
Chief Executive’s Review
2010 has been another outstanding year for Partnership with trading levels again showing strong growth and some well-deserved industry recognition for our innovation and commitment to service.
Combined SPE for Partnership was £588 million, on which we achieved an EBIT3 of £36.2 million (PAT4: £25.6m). This represents new premium growth of 43% and EBIT growth of 28% on 2009. Further details of the Group‟s performance by product line is set out in the Key performance indicators on page 3, but I would particularly like to highlight the fact that during 2010 we re-entered the Equity Release market. We are working with distribution partners to provide loan funding directly for new Equity Release mortgages. Demand for Equity Release products remains buoyant and, with the decline of many of the traditional funders for these products, we have been able to secure loan arrangements on attractive terms, providing competitive products to consumers and supporting good annuity rates for our annuity policyholders. In addition to the funding of new loans, we have also completed the acquisition of two significant in-force mortgage books, again on attractive terms.
Internally, our focus has been on further improvements to our service levels, and embedding efficient and effective processes in the business as it has continued its strong growth. We have increased staff numbers to support and drive the growth in business we have seen, but also in our IT infrastructure to improve processing efficiency. I am delighted to see recognition for our efforts in several industry awards in 2010, not least of which is the 5 Star Service Award, awarded by Financial Advisor which is based on the votes of IFAs. Our staff have worked extremely hard throughout the year, and so it is especially pleasing to have independent recognition of the efforts they put into serving our intermediary customers and policyholders.
Providing security to our policyholders
The products that we provide are designed to give peace of mind to those individuals who rely on the income payments we make, or protection cover that we provide.
Our commitment to policyholders is backed up by our investment philosophy and capital management procedures which we believe provide the best balance between achieving a high level of security and the need to provide the best possible income stream we can to our policyholders. The majority of the income and insurance that we provide is reinsured with a number of reinsurance companies that we believe provide strength and security. All business reinsured in 2010 was ceded to reinsurers that are AA rated and above (by Standard & Poor‟s or equivalent) and we have negotiated terms with the reinsurers that enable us to provide attractive annuity rates or protection premiums. In the event that one or more of the reinsurers enter financial difficulty, we have put in place further safeguards through either “deposit back” arrangements (where we manage the assets on behalf of the reinsurer), or “trust” arrangements, which mean we have direct access to the financial investments backing the annuity payments.
In order to fund annuity payments, we make investments in bonds issued by governments and corporate entities and loan funds to Equity Release mortgagees. We have in place a number of internal restrictions as to where the funds can be invested, in order to manage the level of risk whilst providing attractive returns. We diversify our investments across different credit qualities (to achieve an appropriate balance of security and investment return)5, across different sectors, and across different companies within each of those sectors. We do not invest in equities.
Partnership‟s solvency ratio (a standard industry measure of how much excess capital we have over the minimum we are required to hold by the FSA) has remained at 164%, as it was at 31 December 2009, despite the strong growth in sales which requires us to hold, in absolute terms, additional amounts of capital. Capital Resources applicable to the Group are disclosed in Note 29. Further details on how
3 EBIT is Earnings Before Interest and Tax, and represents profit earned by the Group before tax deduction and before the deduction of interest chargeable on external financing. EBIT is a standard industry measure of underlying profitability.
4 PAT: Profit after tax
we manage our risks including investment risk is set out on page 13 with further details set out in Note 28 of the financial statements.
Treating our customers fairly
The FSA has for a number of years been instigating a regime across the financial services industry as a whole to encourage companies to “treat their customers fairly”. We see this as a matter of course and the best possible business practice and not as a regulatory compliance exercise.
Our values internally, which are integral to the way we operate and interact with our customers, are: Fairness;
Integrity; Respect; Service; and Trust
We have formulated our policy on how we comply with the FSA‟s specific actions around treating customers fairly, and this can be found on our website at www.partnership.co.uk
We always aim to have effective and informative communication with our policyholders, and regularly review the most effective ways of achieving this aim. Our policyholder newsletter has been in issue for several years now, and our Policyholder representative has been active throughout the year in engaging with staff and management at Partnership to raise queries or concerns, and ensure all our policyholder‟s have a clear channel of communication with Partnership.
Looking to the future
Our strategy for Partnership remains clear and focussed: our desire is to bring the benefits of our expertise in impaired mortality to as many individuals in the UK as possible, so that they can benefit from the enhanced terms we can offer. We aim to achieve this strategy through continual development of the products we offer, and through continuing to expand the various channels of distribution to the end customer. We continue to see substantial opportunities for profitable growth in the UK market.
As ever, I would like to take this opportunity to thank our staff who continually strive to improve the service we offer to IFAs, distribution partners and the end customers. Without their dedication we would not be able to achieve the growth and service levels we have.
Steve Groves
Business Review
The Group’s strategy
The Group‟s strategy remains to:
Expand the number of distribution channels which sell Partnership‟s products and work with distributors to adapt their distribution models to accommodate changes arising from the Retail Distribution Review, where necessary;
Promote and expand the distribution of care annuity products for the self-funded sector, specifically working with relevant stakeholders that support those with care needs;
Further develop and promote an efficient, low cost distribution solution for enhanced retirement annuities to the increasing number of individuals retiring with smaller pension funds; and
Provide funding for equity release mortgages within our risk appetite limits, utilising our specialist underwriting, where appropriate.
We measure our success in achieving our strategic objectives through monitoring sales and profit levels of each product or initiative.
The Group’s products
Partnership is a provider of financial solutions to customers living with medical and lifestyle conditions and is organised into three divisions: the Retirement Division, which encompasses all our retirement annuity products and also our protection products; the Care Division, which focuses solely on our specialist annuity products to fund long term care needs; and the Equity Release division which focuses on our equity release assets.
Markets and business environment
Partnership operates in the UK life and pensions market and equity release market. The Group‟s expertise and proprietary data collected since 1995 gives a competitive advantage to develop products that offer the best annuity, protection and equity release rates to customers whilst delivering value to shareholders.
Demographic environment
The ageing population is a well publicised trend in the UK. As the proportion of the population over retirement age increases, this leads to growth in our most significant markets – those people seeking retirement incomes (through either pension annuities or self-funded annuities), those seeking funding solutions for people requiring long term care, and those seeking to realise funds bound in the value of their homes.
The fact that the total population seeking retirement incomes is growing, combined with an increasing awareness and use of the Open Market Option (which enables retirees to “shop around” for the best annuity rate, rather than vest with their existing pension fund provider) means that those people eligible for some form of enhancement to their annuity payments are increasingly benefiting from the products that we can provide. The FSA‟s Treating Customers Fairly regime encourages pension providers to advertise the Open Market Option to retirees.
Competitive environment
Within the retirement annuity market, there continues to be a trend of existing annuity providers increasingly introducing differentiation to their annuity offerings. However, it remains the case that the number of companies offering substantial differentiated benefits, based on medical and lifestyle factors (as opposed to “postcode” factors), is still limited to a small number of specialist providers. Of those, we believe Partnership remains the only provider in the UK to have its own credible proprietary data on which it bases the underwriting criteria, and we see this as a substantial barrier to entry into the specialist markets in which we operate. It also provides the data, combined with our expertise in mortality analysis and underwriting, to develop the complex underwriting tables that provide the “engine” to our Partnership Lite solution. Such innovation and ability to capitalise on our unique data set enables Partnership to remain ahead of the competition in this field.
Despite the enhanced profile of long term care funding in the UK during 2009 and 2010, through increased political and media coverage of the issues, we continue to be one of only two providers of annuity solutions to the issue of funding long term care needs for individuals. We continue to see the
potential for substantial growth in this market and would expect, as part of this growth, to see new insurers entering this market. Once again, our data and expertise in this area leaves us in a strong position to benefit from market growth ahead of other insurance companies.
The availability of non-standard protection cover in the UK remains extremely limited, and we believe that we are unique in the UK in terms of the level and breadth of cover we can now provide.
The competitiveness of the Equity Release market has weakened substantially over the last few years as the traditional lenders (banks and building societies) have significantly curtailed, and in many cases fully withdrawn, their lending to the market. The largest providers of equity release loans are now insurers, particularly annuity writers, where the symbiotic relationship between annuity and equity release products make this a particularly attractive market for insurers. With reduced competition from traditional lenders, the terms available for equity release loans are currently attractive. Partnership is able to apply its Intellectual property to offer enhanced terms to those with medical or lifestyle conditions, primarily through being able to offer a greater proportion of the property value in loan value.
Regulatory and Political environment
Partnership is regulated by the FSA and must comply with the Principles for Business and Prudential requirements set out in the FSA‟s Handbook. Current regulatory developments that are particularly relevant to Partnership include:
The Treating Customers Fairly regime, where Partnership has established its internal policies and procedures for compliance with the requirements, but more importantly, how we operate on a day to day basis to comply with the ethos that the regime espouses;
The Retail Distribution Review (RDR), which will change the way in which customers access financial advice, and how IFAs interact with both customers and product providers such as Partnership. Partnership has worked, and will continue to work closely with existing IFAs as the provision of financial advice in the UK develops and adapts to the changes the RDR will bring; and
Solvency II, which is a new risk and capital management regime for all insurers in the European Union. The new requirements are expected to come into place early in 2013. Partnership is working to continue to develop and enhance its risk and capital management procedures and overall business model, in line with the new proposed regime.
As well as the main regulatory developments noted above, there have been specific pieces of legislation introduced during 2010 following the change in government, that directly impact the markets Partnership operates in. Specifically these include:
the removal of compulsory annuitisation for pension funds at age 75. Whilst this gives the opportunity for certain retirees not to purchase an annuity with their pension funds, Partnership sees minimal impact from this change, as all retirees must still maintain a high minimum level of guaranteed income, and for the vast majority of retirees in the UK this will mean having to continue to purchase annuities; and
the removal of the ability of employers to force retirement on workers at age 65. Again, whilst this change may result in some members of the population no longer needing to secure a retirement income at age 65, it is less likely to impact on Partnership‟s target marketplace where ill health is a more likely cause of retirement than age.
On 1 March 2011, the European Court of Justice issued a judgement in the case of “Association Belge des Consommateurs Test-Achats ASBL and Others v Conseil des ministers” which established that the exemption from certain aspects of the EU Gender Directive that applies to insurance companies in the EU is to end with effect from December 2012. This change will mean that Partnership, along with all other insurers in the EU, will no longer be able to offer annuity or premium rates to its customers that are differentiated by gender, all other rating factors being equal. As Partnership takes many factors into account, primarily factors around lifestyle and health, as well as gender, the removal of our ability to use gender as a rating factor will have less impact on our ability to offer the most appropriate rates to our customers than for most other insurers in the EU.
In July 2011, the government‟s commission on care funding is due to announce its findings. Partnership is hopeful that the commission‟s review will highlight the important role insurance can have in securing the funding for long term care, but nevertheless we shall be closely monitoring the outcome of the review in order to determine any impact on group strategy.
Economic environment
Since the onset of the “credit crunch” at the end of 2008, the general economic environment has continued to be volatile. Equity markets in the UK have rallied in 20106, however, benefiting many new retirees through at least partial recovery in the value of their pension funds. However, yields available on government and corporate bonds, which are a main factor in determining annuity rates, have continued to be volatile during the year.
The Retirement Division
Retirement Annuities
Partnership‟s retirement annuities offer enhanced income to those with health impairments or lifestyle factors that may lead to a reduced life expectancy. Both the pension funded annuity and the purchased life annuity (funded from non pension assets) provide income at better than standard annuity rates to those with health or lifestyle factors. The pricing of these annuities is based on proprietary research and data collected by PAFS and Partnership since 1995. Since we launched the specialist annuities for impaired lives in 1995, we have continued to develop our retirement annuity products to provide benefits for an ever increasing spectrum of medical, and more recently, lifestyle conditions that may impact on life expectancy. We now offer specialist annuities for those who smoke, as well as enhanced terms for those with high Body Mass Index, high blood pressure and other conditions.
We are also able to quote on retirement annuities that include Guaranteed Minimum Pension (“GMP”) elements, so those in occupational pension schemes and defined benefit schemes with their employer can also now benefit from the enhanced income levels we offer.
A major development in 2010 has been the launch of Partnership Lite, which is a new distribution process offering quick and efficient access to the enhanced annuity rates we offer. Traditionally, to access enhanced benefits for retirement annuities, prospective policyholders and their IFAs are asked to complete a detailed medical questionnaire to form the basis of the underwriting that product providers then perform. This can be an intrusive and time consuming process, which is not suitable for those with minor health conditions, nor particularly for those with only small pension funds available to annuitise (where the prospective uplift in annuity benefits are outweighed by the time and inconvenience of accessing those enhanced rates). Our revised process provides quick and simple access to enhanced annuity rates through completion of an online questionnaire consisting of a maximum of eight simple “yes or no” questions that we are able to convert, from our in-depth expertise, into responses comparable to the completion of a much more complex health questionnaire. This means that for many individuals, especially those with smaller pension funds, this revised process makes the benefit of enhanced annuities easier to obtain.
We distribute our retirement annuities through IFAs and through corporate relationships where Partnership is able to provide enhanced terms to other insurance companies‟ vesting pension customers. We also continue to develop our corporate partner relationships, having established new arrangements with Friends Provident and B&CE in 2010.
Sales of retirement annuities have increased to £501m SPE in 2010 (2009: £332m), an increase of 50% on the prior year. This represents an extra 3,081 policyholders benefiting from the enhanced income levels we offer.
This increase in sales levels has also helped Partnership increase its share of the open market sales of retirement annuities to 8% in 2010 from 6% in 2009, and its share of the non-standard annuity market to 21% in 2010 compared to 19% in 2009.
Protection
Partnership uses its underwriting expertise to offer protection products to people who are unable to obtain cover elsewhere, normally as a result of health conditions. We endeavour to underwrite every application, whatever the customer‟s health condition. We also offer solutions for customers looking for protection with large sums assured and most of our policies can be written into a trust. We offer a range of products including level and decreasing term cover for mortgage or other loan protection, “Key Man” cover for companies, whole of life cover, family income benefit, and gift-inter-vivos cover (providing protection against possible inheritance tax due on gifts made within the previous seven years).
Our reinsurance arrangements enable us to offer cover to individuals with a significantly wider level of medical conditions that would normally prevent them from receiving cover.
In 2010 we have entered into corporate partnerships with two major protection providers where we offer terms to those policyholders who have been declined due to medical conditions. These partnerships are at an early stage of development but we are confident that they will provide access to more policyholders who would otherwise not have the opportunity of a protection quote.
Sales of protection cover in 2010 were £6.8m SPE (2009: £12.7m). All protection business is managed within the Retirement Division.
The Care Division
Partnership is the UK market leader in the provision of insurance products to fund long term care. Immediate Needs Annuities (INAs) are products which meet the immediate cost of care fees. Partnership will make tax-free monthly payments to a care home, or other registered carer, for as long as the insured lives. In this way, families can plan for the future in the knowledge that there is a predictable and secure income stream to pay for care. The INA product is available with a range of options that enable the product to be tailored to a policyholder‟s specific needs. All our policies now come with a money back guarantee providing a significant return of premium to the policyholder‟s estate should they die within the first six months of taking out the policy.
At Partnership, we believe that our insurance solutions provide peace of mind not available from any other funding source to those needing to pay for long term residential or domiciliary care. We continue to promote the financial benefits of annuity payments to fund long term care needs through many organizations, including government and industry bodies. However, it remains the case that only a small proportion of those needing care receive any form of financial advice as to how best to pay for that care and, in response to this, we have in 2010 developed a direct sales channel with the principal aim of bringing financial advice to a significantly wider market. In addition, we are working closely with a number of Local Authorities who are often an individual‟s first port of call to understand the availability and the cost of long term care. Through our understanding of the market we have been able to assist many local authorities in providing better information and, crucially, facilitate some form of financial advice to those seeking care.
We continue to sell care annuity products through IFAs, but current regulations mean that the IFA must have specific qualifications to advise on care annuity products. This limits the number of IFAs providing advice in this market, and is why we have sought to widen the availability of advice to the customer through other means.
We also have corporate relationships with Lloyds Banking Group plc, and St James Place, as their sole provider of care annuity products.
Sales of care annuity products for 2010 increased by 11% to £81m SPE (2009: £73m). Partnership remains the market leader for care annuity products, with a market share of 70%7 in 2010.
The Equity Release Division
During 2010, Partnership re-entered the equity release market. We have made direct equity release mortgage loans, through the provision of funding to the mortgage provider More2Life. We have agreed terms with More2Life that enable them to offer a higher “loan to value” than a standard equity release mortgage as they benefit from our underwriting expertise to more accurately predict life expectancy (either as a result of age or as a result of medical conditions). For those looking to release the maximum funding available from their home, this provides a real benefit. The product also offers a Protected Equity Guarantee, meaning that customers taking the loan are able to protect a certain level of equity remaining in their property, and, in any event, will never have to pay back more than the value of their house.
In addition, during 2010, Partnership completed the acquisition of two in-force equity release mortgage books, in total lending £132m. By the end of 2010 we had total loans outstanding of £141m.
7 Based on recent ABI statistics.
The Group’s Distribution Companies
Eldercare Group Limited (“Eldercare”) is a specialist advisor to those looking to fund care fees for family or friends going into residential care. Eldercare provides advice on annuity funding and investment solutions and on services to look after the individual‟s property once they have moved into residential care.
Partnership Home Loans Limited is a member of the Safe Home Income Plans (SHIP) trade body, and provides intermediary services for IFAs looking to benefit from specialist equity release products that take into account an individual‟s state of health to enable higher loan to value mortgage loans, or enhanced reversion products. The company suspended the promotion of equity release mortgage and reversion products due to the high cost of third-party funding. However, the company is currently considering offering specialist equity release mortgages again as market conditions have improved.
Gateway Specialist Advice Services Limited (“Gateway”) provides specialist later-life financial advice. The Group acquired a 50% holding in Gateway from the Sesame Bankhall Group („Sesame‟) on 12 March 2010. Sesame retains a 50% holding in Gateway.
The Group sold its 83.7% holding in Annuity Direct Limited on 9 December 2010 following a strategic review of the opportunities and growth prospects for Annuity Direct. The Group is confident that Annuity Direct will be able to capitalise on its new ownership structure, and drive significant growth. Partnership continues to benefit from close links with Annuity Direct.
Eldercare Group Limited, Gateway, Partnership Home Loans Limited and Annuity Direct Limited are collectively referred to as the Distribution Companies throughout this report.
Management of risk
In the course of its business activities, the Group is exposed to insurance, market, credit, liquidity and operational risks. Overall responsibility for the management of these risks is vested in the Boards of the subsidiary companies, with oversight provided by the Board of the Company. The Group has a risk management framework in place comprising formal committees, risk assessment processes and risk review functions. The framework provides assurance that risks are being appropriately identified and managed at a subsidiary company level and that an independent assessment of risks is being performed.
The Partnership Holdings Limited Risk Committee is the formal committee charged with monitoring, on behalf of the Board, the effectiveness of the risk management framework and system of internal control.
The Risk Management function works closely with the business to monitor risk issues, identify new and emerging risks, and establish appropriate procedures to mitigate those risks. This enables the Risk Management function to assess the overall risk exposure and maintain a risk profile that is reviewed each month by management and reported to the Board.
There are a number of key strategic risks and uncertainties that could have a material impact on the Group‟s long-term performance, and could cause actual results to differ from expected or historical results.
Details of the insurance and financial risks the Group is exposed to, together with the procedures adopted to manage those risks, is given in note 28 to the financial statements.
Principal risks and uncertainties
The Group issues contracts that accept insurance risk in return for a premium. In addition, the Group is exposed to risk through its financial assets and liabilities, its reinsurance assets and policyholder liabilities and through its operations.
The Group‟s key financial risk is that the proceeds from financial assets are not sufficient to fund the obligations arising from contracts with policyholders. The most important components of this financial risk are interest rate risk and credit risk. The Group is not exposed to any equity price risk, and only exposed to currency risk to an immaterial extent as it is managed through the use of derivative contracts. The Group is exposed to property price risk through its Equity Release assets.
The principal risks and uncertainties faced by the Group are summarised in the table below.
Category Description Mitigating factors
Insurance risk
Underwriting, pricing and reserving -
Underwriting and pricing risk is the risk that inappropriate business will be written, or an inappropriate premium will be charged for that business. Reserving risk is the risk that the reserves have been calculated incorrectly, or the
assumptions used in the calculations are incorrect.
As Partnership's insurance business is
specifically targeted at people with medical conditions affecting their life expectancy, or people seeking to fund domiciliary or residential care, the underwriting risk is managed through the use of highly trained, and qualified underwriting staff, together with tailored underwriting manuals designed to specifically cover a large array of
medical conditions.
Partnership has developed its own proprietary underwriting manuals for retirement annuity business and those seeking Care funding, based on industry standard mortality tables modified to take account of experience data recorded by Partnership and its predecessor.
The assumptions used in the reserving for future policyholder payments are set based on available market and experience data, on the advice of the Actuarial Function Holder. The assumptions are approved by the Partnership Board. The reserves are calculated using recognised actuarial methods with due regard to the actuarial principles set out in the FSA‟s Prudential sourcebooks.
Specific insurance risk - Insurance risk on
the annuity contracts arises through longevity risk and through the risk that operating factors, such as administration expenses, are worse than expected. Insurance risk on the protection policies arises through higher than expected mortality levels.
Longevity and mortality experience is monitored on a regular basis and compared to the underlying assumptions used to reserve for future insurance payments. The exposure to longevity and mortality risk is also reduced significantly through the use of reinsurance. Expense risk is managed through regular assessment and quarterly reforecasting of expenses incurred against budgets.
Concentration risk - Partnership writes
annuity contracts for the provision of retirement income or care fees, and protection insurance contracts, primarily for individuals in the UK with one or more medical conditions that is likely to reduce their overall life expectancy. Partnership's insurance risk is therefore concentrated on longevity and mortality risk.
This risk is primarily managed through the use of external reinsurance arrangements.
Investment
risk Interest rate risk - arises from open positions in fixed and variable rate stock issued by government and corporate bodies that are exposed to general and specific market movements. Partnership is exposed to the market movements in interest rates to the extent that the asset value movement is different to the accompanying movement in the value of insurance liabilities.
Partnership manages its interest rate risk within an asset liability management (ALM) framework that has been developed to achieve investment returns in excess of its obligations under insurance contracts. The principal technique of the ALM framework is to match assets to the liabilities arising from insurance contracts by reference to the type of benefits payable to policyholders. For each distinct category of liabilities, a separate portfolio of assets is maintained.
Category Description Mitigating factors Market credit risk – is the risk that
Partnership invests in assets that may default. If an asset fails to repay either interest or capital, or that payment is significantly delayed, Partnership may make losses and be unable to meet liabilities as they fall due.
Partnership‟s Investment Management Guidelines set out maximum exposure to bonds issued by a single, or related group of, counterparty(ies) and to credit ratings. The allowance made for issuer default in Partnership‟s valuation is regularly monitored and kept up to date.
Additionally, Partnership implemented a derivatives policy in 2010 to enable access to a significantly wider pool of investments, further diversifying credit exposure.
Property risk – arises from the provision of
a protected equity guarantee on the mortgages underlying the equity release assets purchased. Partnership is exposed to the risk that property values do not rise sufficiently to recover the full value of the loan made plus accrued interest.
The purchase price of the loan assets reflect a prudent assessment of future property price growth. The total loan value is restricted to a maximum “loan to value ratio” that limits the risk exposure for Partnership.
Liquidity risk Liquidity risk arises where cash flows from investments and from new premiums prove insufficient to meet our obligations to policyholders and other third parties as they fall due.
Partnership‟s ALM framework ensures that cash flows are sufficient to meet both long and short-term liabilities.
In current and expected market conditions and operating environments, cash flows from new business considerably exceed the obligations to existing policyholders. In addition, Partnership maintains a minimum level of cash and highly liquid assets such that, in the extreme scenario of new business cash flows being insufficient to meet current obligations, those obligations can continue to be met.
Counterparty
credit risk Credit risk arises if another party fails to honour its obligations to the Group including failure to honour these obligations in a timely manner. The Group‟s primary credit risk exposure arises from the inability of the reinsurers to meet their claim payment obligations.
Partnership has arrangements with its reinsurers whereby most reinsurance premiums are either deposited back to Partnership or held by a third party in a trust arrangement.
In addition, Partnership‟s reinsurance policy is to seek to choose companies with a minimum „A‟ credit rating.
Operational (including compliance) risk
Operational risk arises from inadequate or failed internal processes, people and systems or from external events.
The Group maintains a suite of risk management tools to help manage its operational risks including facilitated risk and control self-assessments, risk event
management and loss reporting. Underlying and informing the operation of these tools is a framework of formal policies and controls which govern the management and oversight of the risks faced by the Group. These include business continuity and disaster recovery arrangements. Regulatory, legal and political environment risk
Regulatory, legal and political
environment risk arises where changes in regulation or legislation may result in a detrimental effect on the Group‟s strategy and profitability.
The Group‟s strategic planning process sets a medium term strategy based on a clear understanding of the regulatory, legal and political risks inherent in the markets in which it operates.
Category Description Mitigating factors
Current areas of significant regulatory change include Solvency II and the Retail Distribution Review („RDR‟).
Our planning and response capability is supported by continued monitoring of the regulatory, legal and political landscape. The Group continues to develop and enhance its risk and capital management procedures in line with the new Solvency II regime and continues to work with existing IFA relationships as the provision of financial advice in the UK develops and adapts to the changes RDR will bring.
Corporate and Social Responsibility
The Corporate and Social Responsibility policy is rooted firmly in our principal value of fairness which underpins our business and the way in which we conduct ourselves with our customers, business partners, staff, stakeholders and the environment.
Our customers
Partnership was the first company in the UK to offer higher retirement incomes for individuals with complex health issues. We have led the way in providing products designed specifically for individuals whose health or lifestyle is likely to result in reduced life expectancy.
By looking at each of our customers individually and assessing their individual needs we are able to offer a product where the costs and benefits are based on the customer‟s own unique set of circumstances.
Our years of accumulated data and knowledge give us a unique understanding of the impact of health and lifestyle choices on longevity. This, in turn, enables us to offer the most accurate assessment of an individual‟s life expectancy and therefore offer the best products to them.
But we take our commitment to our customers much further than providing the best product.
Our customers are the best advocates – and critics - of our business and we engage with them on a regular basis to seek their thoughts and ideas as to how we can improve. During early 2009 we launched an ongoing policyholder survey whereby all new policyholders are asked for their views on our service provision performance. As at the end of 2010, 81% of our policyholders said that they would definitely or most probably recommend Partnership.
Additionally, we believe that we are unique in having a Policy Liaison Representative (PLR) who meets with the Directors and senior managers of Partnership on a regular basis and is able to discuss any matter with them that may be of concern to our policyholders. Our customers are encouraged to contact their PLR by email or letter with any queries or concerns that they may have.
Our Business Partners
Our products are primarily sold through IFAs, small and large, and an increasing number of corporate partners. Irrespective of size, we aim to offer all partners excellent service and to act in the spirit of true partnership.
It was with this spirit that, during October 2010, we held the Partnership Later Life Symposium at three venues across the UK to proactively support IFAs in their understanding of later life financial planning. The Symposium was very well attended and well received. It examined the state of the UK economy and challenges which lie ahead for the business sector. Importantly, it considered opportunities for advisers to continue to grow their businesses in such economic uncertainty, particularly in the context of in or at retirement planning.
Helping our business partners respond to the challenges they face in providing service to the end customer was a significant driving force in our launch in 2010 of Partnership Lite, a new service offering enabling quick and efficient quote production for customers to whom a full underwriting process is not appropriate.
Charitable donations
During 2010 the Group made a number of charitable donations.
At Christmas, staff were invited to help two homeless charities, Nightwatch in Croydon and The Soup Kitchen in London, by supplying warm clothing and food. Staff also contributed money towards a Christmas meal for over 200 homeless people. Partnership Services Limited matched staff donations. Also during 2010, Partnership Services Limited made a donation of £3,000 to a local branch of St John‟s Ambulance. As a thank you, their team visited the Redhill office and provided some first aid training for staff. St John‟s Ambulance was able to buy a Lifepak 1000 defibrillator, along with spare pads and battery – a crucial piece of life saving equipment.
Our staff
We recognise that to provide the high levels of technical expertise and service excellence that we look for we need to recruit and retain the highest possible calibre of staff.
We do this in a number of ways:
An extensive and thorough recruitment process;
The adoption of a core set of values in FIRST – Fairness, Integrity, Respect, Service and Trust; A remuneration and reward structure designed to encourage decision making for the long term good of the business. In addition to industry benchmarked salaries, there is significant staff participation in the equity of the business which we believe is the best way to reward ongoing commitment, discourage short-termism and build long term success;
Investing extensively in our staff and actively encourage them to enhance their knowledge, skills and qualifications by supporting them through programmes of personal and professional development, in line with a robust Training and Competency scheme; and
Building a positive working environment in which everyone is encouraged to contribute.
Our stakeholders
Using input from our customers, business partners and staff we actively engage with Government bodies, local authorities, charities and other organisations to raise awareness of the issues around enhancing retirement incomes and care funding.
We are particularly active in the long term care arena where we feel the current funding system is unfair and we are campaigning to improve the quality of information and advice that individuals receive at the point of needing long-term residential or domestic care.
We are one of the major backers of SOLLA – The Society of Later Life Advisers, which seeks to raise awareness amongst consumers, families and advisers about financial issues in later life and promotes the Later Life Advisers Scheme which has been developed by the Financial Services Skills Council. SOLLA aims to bring together those needing advice with accredited advisers who have had to demonstrate not only technical knowledge and competence which is externally and independently validated, but also demonstrate excellent softer skills relating to the understanding of the needs, capacities and issues of older customers.
At an industry level we are active members of the Association of British Insurers (ABI) and the Safe Home Income Plan (SHIP) in relation to the equity release market.
The Environment
We recognise that we all have a role to play in looking after the environment for future generations, and have adopted a number of environmental policies across our sites including:
Recycling - we aim to recycle the majority of our paper and other items including ink cartridges and old IT equipment where appropriate;
Saving energy: we save electricity by having movement sensor operated lighting systems. We also use filtered tap water rather than plastic bottles and discourage the use of plastic cups; and,
Reducing our carbon footprint: we do not use company cars and we encourage all our staff to travel by public transport whenever possible.
In summary, our ambition is to grow our business in a way that benefits all our stakeholders whilst being aware of, and sensitive to, our wider responsibilities.
Governance
The Company is a subsidiary of PAG Holdings Limited, which is majority owned by the Cinven Funds. These funds are managed by Cinven Limited. Senior personnel at Cinven Limited who have oversight of the Company and who are Directors of the parent undertaking of the largest group of undertakings for which Group accounts are drawn up, PAG Holdings Limited, are Mr P Catterall, Mr C Berendsen and Mr M Crewe.
The Board
The Board of the Company currently comprises six Non-Executive Directors and two Executive Directors. The Board is responsible for strategy, the monitoring of performance, approval of business plans and the framework of internal controls. The Board contains a balance of management, financial, investment, administrative and market expertise appropriate for the requirements of the Group‟s business.
Ian Owen FIA, Chairman
Ian is a fellow of the Institute of Actuaries. He was formerly Managing Director of Zurich Personal Lines, Managing Director of Eagle Star Life and Chief Executive of Eagle Star International Life. He has served as a Director or Chair of many other Zurich and Eagle Star Group Companies, both in the UK and overseas. In addition, he has previously served as a Executive Director of AA Insurance, as a Non-Executive Director and Chair of Endsleigh Insurance and Group Director at Liverpool Victoria. He is currently a Non-Executive Chairman of A-Plan Insurance, and a Non-Executive Director of Canopius (a Lloyd‟s underwriter) and of Unum. He has been a member of the Association of British Insurers‟ Life Insurance Council and Chair of the Medical Committee. He currently chairs the Long Term Care Group and sits on the Health Committee.
Ian was appointed as Non-Executive Chairman of Partnership on 28 September 2005 and was appointed to the Board of the Company at incorporation on 29 May 2009.
Peter Catterall, Non-Executive Director
Peter joined Cinven in 1997 and is a member of the Consumer and Financial Services sector teams at Cinven. Peter previously spent seven years at PricewaterhouseCoopers where he worked in the Transaction Services Group, providing due diligence and transaction advice to private equity companies.
Peter was appointed to the Board of the Company at incorporation on 29 May 2009. Caspar Berendsen, Non-Executive Director
Caspar joined Cinven in 2003 and is a member of the Financial Services sector team for Cinven. Prior to joining Cinven, Caspar worked at JP Morgan in London advising Dutch and Belgian clients in a variety of sectors.
Caspar was appointed to the Board of the Company at incorporation on 29 May 2009. Maxim Crewe, Non-Executive Director
Maxim joined Cinven in 2006 and is a member of the Financial Services sector team for Cinven. Previously he worked at Citigroup where he was involved in corporate finance within the European Retail and Consumer Group.
Maxim was appointed to the Board of the Company at incorporation on 29 May 2009. Robin Phipps, Non-Executive Director
Robin was formerly Group Executive Director at Legal & General responsible for the UK business, and previously held a wide range of senior positions, including Group Director - Sales and Marketing, Group Director - Retail, Managing Director - Customer Services and Director of Information Technology. He is currently a Non-Executive Director of Friends Provident Plc and GE Capital Bank, and an advisor to Ernst & Young.
David Young FCA, CTA, Non-Executive Director
David is a fellow of the Institute of Chartered Accountants and sits on the Committee of the Institute‟s Non-Executive Director Special Interest Group. He is also a member of the Chartered Institute of Taxation. He previously held the positions of Finance Director, Chief Operating Officer and Chief Executive of a Stock Exchange-listed insurance broking and financial advisory group. He is currently a senior independent Director of British Gas Insurance and British Gas Services and Non-Executive Chairman of BVCA Insurance Services. He has previously served as a Non-Executive Director of a number of insurance brokers.
David was appointed to the Board of the Company at incorporation on 29 May 2009. Mark Dearsley ACA, Chief Financial Officer
Mark joined Partnership in February 2009 from Savills plc, the FTSE 250 property adviser, where he was Group Finance Director. Prior to Savills, Mark was Finance Director of Aviva Europe & International, the international arm of Aviva plc, the world‟s fifth largest insurance group. He had previously been Aviva‟s Group Mergers & Acquisitions Director. After qualifying as a Chartered Accountant with Price Waterhouse (now PricewaterhouseCoopers), Mark joined Charterhouse Bank (now part of HSBC) where he spent 10 years, latterly as a Board Director.
Stephen Groves FIA, Chief Executive Officer
Steve joined Partnership in March 2005 as the Chief Financial Officer and on 21 December 2006 was appointed as Managing Director. On 26 June 2008 he became the Chief Executive Officer.
His previous role was as the Admin Re Senior Actuary for Swiss Re Life and Health where he successfully oversaw the acquisition of a number of life companies into a closed fund operation. Prior to joining Swiss Re, Steve was the Head of Actuarial Services and then Executive Head of Business Development for Britannic Retirement Solutions. Steve‟s other roles included working as Product Manager. Steve was a Director of the equity release trade body, SHIP, and was also a founder member of the Institute of Actuaries equity release working party.
Board Committees
The Company has established two standing Committees:
Partnership Holdings Limited Audit & Assurance Committee; Partnership Holdings Limited Risk Committee;
These Committees have specified terms of reference to assist the Board, or a subsidiary Board where relevant, to exercise their responsibilities.
Audit & Assurance Committee
The Audit & Assurance Committee comprises the Chairman and the Partnership Non-Executive Directors. The committee meets at least quarterly with the Chief Executive Officer, Chief Financial Officer, Chief Financial Actuary and senior management in Internal Audit, Risk Management and Compliance as required.
The key responsibility of the Committee is to support the Partnership Holdings Limited Board in discharging its responsibilities with regards to the integrity of the Company‟s financial statements and the effectiveness of the systems of risk management and internal control. In addition, the Committee is responsible for monitoring the effectiveness, performance and objectivity of the External Auditors and the Internal Audit and Compliance Monitoring functions and any other function which has a remit to provide assurance on internal controls.
The Committee, along with the Company‟s Risk Committee, was established in May 2010 replacing the previous Partnership Group Holdings Audit, Risk & Compliance Committee.
Risk Committee
The Risk Committee comprises the Chairman and the Partnership Non-Executive Directors. The committee meets at least quarterly with the Chief Executive Officer, Chief Financial Officer, Chief Financial Actuary and senior operational, Risk Management and Compliance management as required.
The key responsibility of the Committee is to support the Board in providing leadership, direction and oversight with regard to the Group‟s systems of risk management.
Board Committee Attendance in 2010
Audit & Assurance Committee Risk Committee
Total meetings held during year 6 3
I Owen 6/6 2/3
RA Phipps 6/6 3/3
Internal Controls
The Board of the Company is ultimately responsible for maintaining the Group‟s system of internal control and monitoring its effectiveness. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.
The key features of the system of internal control are:
A detailed Board Governance manual, setting out a clear organisational structure, roles and responsibilities, authorities and matters reserved for each Board sub-committee;
A strategic plan process which sets a medium term strategy based on a clear understanding of the risk inherent in the markets in which it operates;
A planning and budget process that delivers detailed annual and quarterly forecasts and targets for Board approval;
Management information systems enabling the Board to receive comprehensive reporting of financial and operational performance;
A Risk Management function which maintains the risk management framework and facilitates management‟s regular identification, assessment and reporting of the key risks;
The Group‟s risk management framework was reviewed and strengthened during 2010 to ensure its ongoing effectiveness in supporting controlled growth and in anticipation of Solvency II requirements;
A set of formal policies, including clearly defined risk appetites, which govern the management, control and oversight of the key risks faced by the Group‟s subsidiary companies;
A detailed annual capital assessment on a realistic basis, resulting in a greater understanding of the financial consequences of the risks faced by the business, and enabling effective capital management;
An Internal Audit function which reports to the Board on the effectiveness of internal controls in relation to the key risks identified. Internal audits are undertaken in accordance with an annual risk based plan approved by the Audit and Assurance Committee;
A Compliance function which identifies and monitors the control of our compliance risks and ensures compliance with regulatory requirements.
The Board considers that the controls effective during 2010 are appropriate to the needs of the Group. Nevertheless, it is committed to the highest standards of governance and business conduct and will ensure that those controls continue to develop in line with the requirements of the business, the FSA and leading practice. Certain Group subsidiaries are regulated entities, and as such are subject to the supervision of the FSA over its activities, including its systems of business control. The Group is required on an annual basis to submit prudential and statistical returns covering all areas of its business. The Group regularly meets its supervisors, conducting the relationship in an open and constructive manner.
Directors’ Report
For the year ended 31 December 2010
The Directors present their Annual Report and the audited financial statements for the Grou
