Chairman's Statement

It is pleasing to see new business levels rise by almost 25% on the previous year.  We are seeing new distribution relationships flourish and are well positioned to maintain this growth in 2018 with additional business streams.

New business

Total new business levels rose 24% to £148.3m PVNBP.  As a consequence our new business margin has continued to improve and is now 0.9% (2016: 0.2%).

I indicated last year that the Group continues to work on a number of new initiatives that would enable us to sell our products in new markets in the financial year 2018 and beyond.  We remain on track with this target and were delighted to have signed a strategic alliance with a local insurance company in the UAE in Q3 FY 2017.  We have seen significant levels of interest in this product range and expect this to convert to issued business in the coming period.

Financial performance

Our IFRS profit for the year after taxation was £7.7m (2016: £8.3m).  This figure reflects a charge of £1.1m taken as a provision against balances due from a brokerage firm which has experienced financial difficulties during the year.  Underlying profit for FY 2017 was £8.8m compared to £9.2m for FY 2016.  This underlying performance reflects the development of the Group's international business within Hansard International, offset by reducing Hansard Europe income and increased legal defence costs.

On an EEV basis the profit for the year after taxation was £11.7m (2016: £13.1m).  EEV profit continues to be supported by positive investment return variances. 

Cash flows have improved reflecting the past two years of growth.  Cash flows from operations for the year increased to £8.4m for FY 2017 (2016: £4.7m). This remains less than our 2017 dividend payout but is comfortably funded by our substantial cash balances.  As announced in our 2017 half year results, we intend to reduce our dividend in 2018 to better match cash flows and to allow the business to capitalise on future business development opportunities.

Regulatory developments

During 2017, the Isle of Man Financial Services Authority (FSA) released its "2017 Roadmap for updating the Isle of Man's regulatory framework for insurance business", together with a number of key consultations.  These changes are wide ranging and will affect all aspects of Hansard's international insurance business from 1 January 2019.  The underlying objectives of the Roadmap are to improve policyholder protection, maintain confidence in the island's financial services industry through effective regulation, to observe international standards and core principles and to achieve a positive equivalence assessment under the EU Solvency II framework.  Some of the key changes include additional point of sale requirements, including commission disclosure, and a more robust approach to the acceptance and oversight of broker relationships.  Given the scale and complexity of these initiatives, we welcome the FSA's recent pragmatic decision to allow the industry until 2019 to develop and implement the necessary changes.

Capitalisation and solvency

The Group remains well capitalised to meet the requirements of regulators, contract holders, intermediaries and other stakeholders.  Aggregate minimum solvency margins are covered by £40.8m (2016: £35.5m) of excess assets.  We have maintained our prudent investment policy for shareholder assets, which minimises market risk and has provided a stable and resilient solvency position over recent years.

Dividends

The Board has resolved to pay a final dividend of 5.3p per share (2016: 5.3p). The dividend is subject to approval at the Annual General Meeting. If approved, this will represent total dividends for the financial year of 8.9p per share (2016: 8.9p).  The final dividend will be paid on 16 November 2017.

Concluding remarks

The Board is pleased to see the continuing growth of the business but is clear that further growth is required to achieve increased economies of scale and improved margins.  We are confident that there are significant additional opportunities to capitalise upon in FY 2018 and that we have the appropriate capabilities and structures in place to do so.

Philip Gregory

Chairman

27 September 2017

GROUP CHIEF EXECUTIVE OFFICER'S OVERVIEW

The year has built further on the growth and diversification of our business achieved over the past two years.  We have seen a number of regions mature and deliver consistent results while a number of others have grown rapidly as new distribution relationships come on stream.

We were delighted to launch a new business model in the UAE this year which pairs the local knowledge and experience of a domestic insurer with Hansard's leading technology, product and administration capabilities.  This locally licensed model allows us to expand our target market and we believe this offers an attractive growth opportunity for the current financial year.

I would also like to highlight the Group's 30-year anniversary which was reached in 2017.  There are few companies left in our industry which have not gone through some form of re-branding, takeover or market exit.  This stability and consistency we view as a strength and a source of comfort to our customers and distribution partners that we are here for the long term.  We were delighted to celebrate this longevity recently at a gala event in the historic grounds of University College Isle of Man.

STRATEGY DEVELOPMENT

In light of a global environment where technology and regulation are rapidly evolving, we decided during 2017 to establish a dedicated strategy team and appoint a Chief Strategy Officer. 

This team has three main aims:

i)        to capitalise on near term strategic opportunities;

ii)       to ensure the Group is correctly positioned for future regulatory developments and change; and

iii)      to consider and plan for longer term industry and technological evolution.

In due course, we will communicate the output from these considerations and ensure the Group is positioned correctly for the short, medium and long term.

In the meantime, we continue to focus on growing our core offering.  We still see plenty of opportunity in developing new and existing broker relationships and indeed as a number of the larger, multi-national insurers take a step back from non-core markets, we see opportunity to step in and meet the needs of customers in those regions.

We are also continuing initiatives to secure additional licenses and partnerships in a small number of targeted locations.

RESULTS FOR THE YEAR UNDER REVIEW

We believe that the following areas are the fundamental factors for the success of the Group.

1.     Sourcing significant flows of regular premium new business flows from diversified target markets;

2.     Managing our exposure to business risk;

3.     Positioning ourselves to incorporate ever-increasing levels of regulation into our business model;

4.     Leveraging Hansard OnLine developments and;

5.     Managing our cash flows through the cycle to fund the appropriate balance of investment in new business and dividends.

I would draw your attention to the following. Additional information is contained in the Business and Financial Review.

1.         New Business distribution

The level of new business* we earned during the financial year ("FY") of £148.3m (using the Present Value of New Business Premiums ("PVNBP") metric) is some 24% above the £119.3m from FY 2016.

Both regular and single premium new business grew during the year. Despite recent changes to UK regulations, we saw strong growth in international pension products and also in our refreshed Capital Builder product.  Latin America was our fastest growing region during the year as new relationships started to produce results. 

2.         Operational, Business and Financial Risks

Our business model involves the acceptance of a number of risks. We maintain an enterprise risk management framework to identify, assess, manage, monitor and control current and emerging risks. However the system of internal control can only provide reasonable and not absolute assurance against material misstatement or loss. The Group's internal control and risk management processes have operated satisfactorily throughout the year.  There are a number of areas outlined below which are of significance for understanding the results and operating environment of the Group.

2.1        Complaints and potential litigation

We continue to deal with complaints in circumstances where a contract holder believes that the performance of an asset linked to a particular contract is not satisfactory. We do not give investment advice and are not party to the selection of the asset and therefore we believe that such claims have no merit. Sometimes these complaints progress to litigation with the resulting increase in cost and resource to the Group. In many cases the litigation relates to decisions taken by individuals during, or as a result of, the global financial crisis some years ago.

During the year the Group successfully won a further two cases in Italy and Germany which continues to affirm confidence in the Group's legal arguments.  The outstanding writs have not materially reduced however as one case has since been appealed and the other case was of a relatively minor value.  Two additional claims were made during the year, resulting in a net increase of outstanding writs of €1.2m. The total level of net writs outstanding at the end of the year was €16.9m (£14.8m). At this time it is not possible to put a reliable estimate on the ultimate liability of such writs.  Such writs continue to be treated as contingent liabilities within the Annual Report and Accounts. 

*Following the closure of Hansard Europe DAC (previously Hansard Europe Limited) to new business with effect from 30 June 2013, new business performance commentary within this document will relate to Hansard International Limited alone, except where indicated.

3.         Leverage Hansard OnLine

Hansard OnLine is a powerful sales and business administration tool that is used by IFAs and clients the world over. It is an integral part of the Group's operating model and allows us to better service IFAs and clients, embed process efficiencies and be flexible in operational deployment.

Hansard OnLine provides IFAs and clients with a reliable online self-service model which they can access 24/7 from anywhere around the world with an internet connection. It provides an important foundation to our strategic goal of delivery of excellent customer service.

We have continued to invest in the system over the last year, extending its functionality and reporting capabilities.

Additional information concerning developments in Hansard OnLine is set out in the Business and Financial Review.

4.         Operating cash flows and dividends

The Group generates positive operating cash flows to fund investment in new business and support dividend payments.

Operating cash flows have recovered in line with the improved level of new business and Assets under Administration achieved.  As outlined in the Cash Flow analysis section of the Business Review, the Group generated £5.8m (2016: £1.2m) in net cash flows before dividends, after the investment of £17.4m (2016: £15.4m) in acquiring new business.  Dividends of £12.2m were paid in the financial year (2016: £12.2m), reflecting the strong cash reserves we have in place while we continue to grow the business.

An interim dividend of 3.6p per share was declared on 23 February 2017. A final dividend of 5.3p per share has been proposed by the Board and will be considered at the Annual General Meeting on 8 November 2017. When the final dividend is paid at this level, these dividends will total 8.9p per share in respect of this financial year.

As previously announced we intend to reduce the dividend in 2018 to 50% of current levels which will better match cash flows with dividend pay outs and furthermore allow the business to take advantage of strategic and new business opportunities. 

FINANCIAL PERFORMANCE

Results for the year

Financial performance is summarised as follows. A detailed review of performance is set out in the Business and Financial Review that follows this report.

IFRS results

Fees and commissions were £52.6m for the year, up 2.5% or £1.3m from 2016.  Fees from Hansard International have increased by £2.5m or 5.5% over 2016 as a result of increasing new business levels and the positive impact on income of sterling's continued weakness. Against this, income from Hansard Europe has continued to fall, as expected, and is 16% down on last year. Further detail and analysis is contained in the Business and Financial Review.

Administrative and other expenses were £27.1m for the year, increased from £25.3m in 2016.  The increase is primarily as a result of a £1.1m provision for doubtful debts and an increase of £0.3m in litigation costs.

After eliminating significant, one-off items, the underlying profit after tax was £8.8m compared to £9.2m in 2016.

EEV results

During the year, the Group has continued to invest in the development and implementation of its strategic objectives, while at the same time managing the expenses of supporting its existing business. Operating cash flows have remained positive.

With distribution levels increasing during the year, New Business Contribution has improved to £1.3m for the year (2016: £0.2m). Overall, an EEV profit after tax of £11.7m was produced (2016: £13.1m).  This was driven by strong positive investment return variances.  Offsetting that were a number of expense, persistency and encashment variances which are outlined further in the EEV section of this report.

The key drivers of these variances were:

Following the payment of dividends of £12.2m (2016: £12.2m), the Group's EEV was £195.5 at 30 June 2017 (30 June 2016: £195.9m).

Capitalisation and solvency

Our key financial objective is to ensure that the Group's solvency is managed safely through the economic cycle to meet the requirements of regulators, contract holders, intermediaries and shareholders. The Group is well capitalised. The required minimum solvency margins are covered by excess assets of £40.8m, which are typically held in a wide range of deposit institutions and in highly-rated money market liquidity funds. This prudent investment policy for shareholder assets minimises market risk and has provided a stable and resilient solvency position over recent years.

We recognise that Hansard Europe's capital surplus is not available for distribution in the near future. It is therefore included within the total of Required Capital of £27.8m in the analysis of the Group's EEV balance sheet at 30 June 2017.  Allowing for this, the EEV balance sheet reflects that the Group has a free surplus of £21.4m (2016: £27.9m) available for investment and distribution.

our people

The Group has a dedicated dynamic workforce across a number of locations around the world. We recognise that our people are key to our success and that our ambitious goals and development plans can only be achieved with their hard work and commitment. This year, many of our people across all disciplines were involved in establishing a new operating model with our strategic partner in the UAE and I am grateful for all the hard work and effort that went into that. It was also pleasing to see our employee engagement scores continue to increase this year and this reflects well on the many initiatives deployed to develop engagement levels in recent years.

G S Marr

Group Chief Executive Officer

27 September 2017

BUSINESS AND FINANCIAL REVIEW

Our Business Model and Strategy

Hansard is a specialist long-term savings provider that has been providing innovative financial solutions for international clients since 1987. We focus on helping financial advisors and institutions to provide their clients (individual and corporate investors) with savings and investment products in secure life assurance wrappers to meet long-term savings and investment objectives.

We administer assets in excess of £1 billion for over 500 financial advisor businesses with approximately 40,000 client accounts in as many as 155 countries.

Business

The Company's head office is in Douglas, Isle of Man, and its principal subsidiaries operate from the Isle of Man and the Republic of Ireland.  Hansard International Limited ("Hansard International") is regulated by the Financial Services Authority of the Isle of Man Government and has a branch in Malaysia, regulated by the Labuan Financial Services Authority, to support business flows from Asian growth economies.  Hansard Europe DAC ("Hansard Europe", previously Hansard Europe Limited) is regulated by the Central Bank of Ireland. Hansard Europe ceased accepting new business with effect from 30 June 2013.

Our products are designed to appeal to affluent international investors, institutions and wealth-management groups. They are distributed exclusively through independent financial advisors ("IFAs") and the retail operations of financial institutions.

Our network of Account Executives provides local language-based support services to financial advisors in key territories around the world, supported by our multi-language online platform, Hansard OnLine.

Strategy

Our aim is to be the preferred choice of distributors when recommending international savings and investment products to their clients.  

We have developed attractive products and services and will continue to improve them. We recognise that clients are at the heart of our business and, consequently, we must work hard to build long-term positive relationships with them.

Our vision encompasses every part of our business. Beneath this, we have identified a range of strategic objectives to meet this target and continue to work towards them. Through careful execution of our plans in each of the following areas we intend to add increased scale to the business, on a diversified basis, at acceptable levels of risk and profitability.

·      More long-term relationships with distributors;

·      Better value for clients;

·      A more visible profile in the market;

·      Excellent client service;

·      A motivated and engaged workforce; and

·      Market-leading online systems.

Products

The Group's products are unit-linked regular or single premium life assurance and investment contracts which offer access to a wide range of investment assets. The contracts are flexible, secure and held within "wrappers" allowing life assurance cover or other features depending upon the needs of the client. The contract benefits are directly linked to the value of those assets that are selected by, or on behalf of, the client and held within the wrapper. The Group does not offer investment advice. Contract holders bear the investment risk.

The Group's products do not include any contracts with financial options and/or guarantees regarding investment performance and, hence, unlike the situation faced by some other life assurers, the Group carries no guarantee risk that can cause capital strain. 

As a result of high levels of service, the nature of the Group's products, the functionality of Hansard OnLine, and the ability of the contract holder to reposition assets within a contract, we expect to retain the contract holder relationship over the long term.

Contract holder servicing and related activities are performed by Hansard Administration Services Limited, which is authorised by the Financial Services Authority of the Isle of Man Government to act as an Insurance Manager to both Hansard International and Hansard Europe.

We continuously seek to develop and enhance our products.  In particular during the past year, we launched an enhanced version of our flexible Capital Builder product. 

Revenues

The main sources of income for the Group are the fees earned from the administration of insurance contracts. These fees are largely fixed in nature and amount. Approximately 30% of the Group's revenues, under IFRS, are based upon the value of assets under administration. The new business generated in a particular year is expected to earn income for an average period of 14 years. Accordingly, with careful expense management, this provides a healthy return on the capital invested in that business. Our business is therefore long term in nature both from a contract holder perspective and with regards to the income that is generated. 

From this income we meet the overheads of the business, invest in our business, invest to acquire new insurance contracts and pay dividends.

Managing Risk

While markets have substantially emerged from the global financial crisis of 2007 and beyond, there remains fragility to global economic and market growth.  Events such as the UK referendum result on EU membership, terrorist attacks and geo-political tensions can cause significant volatility to stock market and foreign exchange markets.  We therefore continue to maintain a robust, low risk balance sheet. We believe this prudent approach to be appropriate to meet the requirements of regulators, contract holders, intermediaries and shareholders.

We are conscious that managing operational risk is critical to our business and we are continuously developing our enterprise risk management system and controls.  Further details of our approach to risk management and the principal risks facing the Group are outlined in the Risk Management and Internal Control Section.

Hansard OnLine

Hansard OnLine is a powerful and secure tool that is used by our IFAs around the world. It allows them to access vast amounts of information about their clients, to generate reports for their clients, to submit new business applications online, to place dealing and switch instructions online, to access all client correspondence and to access a library of forms and literature.

The number of reports and actions processed through Hansard OnLine continues to rise and is now approaching 3 million with over 85% of new business applications and dealing/switch instructions submitted online.

The benefit of this tool is recognised by many IFA's as market leading, which was recently independently acknowledged with Hansard International winning the prestigious International Life Award 2017 for the "Best Online Proposition - Middle East". This is one of, if not the largest International IFA markets in the world.

Online Accounts

Whilst many of our IFAs are technologically sophisticated and have been utilising our online offering for years, our client base has typically lagged behind. However, we are now observing a growing trend amongst our clients to take more control of their financial wellbeing by embracing mobile technology to better monitor and manage their finances.

To support our commitment to delivering 'excellent customer service', we believe it is vital to provide our clients with a modern and secure online platform that allows them to access their finances easily and comprehensively, 24/7. We provide this through our client-facing version of Hansard OnLine, called Online Accounts. Similar to our IFA-facing online platform, the client's Online Account allows them to access all their policy information, valuation statements, transaction history, premium reports, switch their funds online, access all correspondence, access a library of forms and literature, and much more.

A large and increasing number of clients have signed up for this service which allows them to view all documentation and communications relating to their contracts via their Online Account as well as choosing to receive post electronically, rather than in hard-copy form. This not only provides a more secure, faster and cost efficient means of communication with clients but also the convenience to manage their own contract within a timeframe which is more suitable.

Continuous Improvements to our Online Proposition

When it comes to improving how we operate and the proposition we offer, we value the views of our clients and IFAs. This means that we regularly seek feedback through surveys and office visits in order to identify ways in which we can improve our systems and processes to best meet their needs.

However, it is not just functionality that is important, we also have running alongside a continuous programme to enhance the overall user experience, for both IFA's and our clients.

Cyber Security

At a time when 'cyber criminals' are becoming increasingly active and targeting commercial and public enterprises alike, Hansard continues to invest in its cyber security.  In addition to continuous upgrades to our firewall protection we have also recently enhanced our forensic capabilities and will continue to do so.

Excellent Customer Service

The restructure mentioned last year has now bedded in and together with a supporting cross training program in place this has given us the flexibility to optimise our resource management.  In turn, this has allowed us to cover increased workload and operational peaks, whilst maintaining a high level of service, without the need for a commensurate increase in operational headcount.

Our service levels to IFA's has again been recognised externally by IFA's in Malaysia, where we have won the International Life Award "Readers' Choice" award for the second year running.

Process Re-engineering

The initiative now has significant momentum and is proving to be a huge success. To date, we have reengineered over 120 back office processes, delivering significant process efficiency savings and at the same time reducing operational risk.  With most of the core back office process now completed we are extending the program to other parts of the business where we anticipate similar outcomes.

Key performance indicators

The Group's senior management team monitors a wide range of Key Performance Indicators, both financial and non-financial, that are designed to ensure that performance against targets and expectations across significant areas of activity are monitored and variances explained.

The following is a summary of the key indicators that were monitored during the financial year under review.

business AND FINANCIAL REVIEW

Strategy DEVELOPMENT

We have sought to build distribution relationships for the long term over a diversified geographical base. We have been focussed in 2017 in leveraging our proposition across new and existing distribution channels and have seen a number of regions mature, such as Middle East & Africa, while others remain in a higher growth phase, such as Latin America. 

Our strategy takes account of current and future regulatory developments and we are pursuing opportunities to increase onshore business streams written through new licenses or partnerships in a small number of jurisdictions where we believe attractive levels of business can be obtained.

During the latter part of FY 2017 we successfully launched our first such partnership with a local insurer in the UAE.  This allies Hansard's market-leading technology and administration capabilities with the direct insurer's local knowledge and expertise. 

We are seeking opportunities to replicate this model in other targeted jurisdictions over the coming years.

STRATEGIC INITIATIVES

·      Office of Strategic Development

Given the changing industry landscape, particularly in terms of regulation and technology, the Group has established an Office of Strategic Development which comprises experienced resource from across the business to design, review and execute the Group's strategy.  Our Chief Operating Officer has been appointed to lead this group as Chief Strategy Officer.

The department has three initial primary aims:

i)          to capitalise on near term strategic opportunities;

ii)          to ensure the Group is correctly positioned for future regulatory developments and change and;

iii)         to consider and plan for longer term industry and technological evolution.

·      Regulatory change

The Isle of Man Financial Services Authority ("FSA") is in the process of introducing significant regulatory change to the island's insurance landscape via its "Roadmap for updating the Isle of Man's regulatory framework for insurance business".  In common with many other jurisdictions around the world, the intention of these changes is to implement regulatory best practice and ensure the continued reputation of the Isle of Man as a stable and well-regulated place to do business.  Changes will include enhanced requirements around consumer disclosures, certain minimum standards for distribution relationships and a Solvency II equivalent risk based capital regime. 

We are pro-actively working with the FSA and locally based insurers to shape the practical implementation of the Roadmap and to adapt our business model and processes accordingly.  The changes are currently scheduled for implementation on 1 January 2019.

New Business Flows - year ended 30 june 2017

New business performance for the year is summarised in the table below:

New business figures were substantially higher than the prior year as the business continued the roll-out of its refreshed product proposition. Expatriate broker distribution continues to perform strongly around the world and significant growth was seen in Latin America during the year as new relationships have developed.

·      Present Value of New Business Premiums ("PVNBP")

New business flows for Hansard International on the basis of PVNBP are summarised as follows:

We continue to receive business from a diverse range of financial advisors around the world. There has been no significant change in the currencies in which contractual premiums were received.

·      New business margins

New business margins (calculated on a PVNBP basis) are sensitive to sales levels and product mix (regular premium products and smaller premium sizes typically have a higher margin).  During FY 2017, we experienced higher new business levels than FY 2016 which is positive for our margin because much of our cost base is fixed.  However this has been offset by an increasing percentage of single premium business as a proportion of PVNBP and increased volumes of our Vantage Platinum product which has a lower margin than its predecessor.  Overall, our new business margin has improved to 0.9% for the year, compared to 0.2% for FY 2016.

Presentation of financial results

Our business is long term in nature. For this reason we present the results on an EEV basis in addition to the statutory IFRS basis. We believe that EEV is a valid measure of profitability and shareholder value. Our embedded value is based on the EEV principles which were set out as an industry standard by the Chief Financial Officers (CFO) Forum in 2004 and most recently extended in 2016.

The profit that the Group expects to earn from the issue of an insurance contract is the same, irrespective of the basis of measurement, however:

·      The EEV result is a discounted cash flow valuation of the future profits expected to emerge from the current book of insurance contracts and provides a more complete recognition of management's activity throughout the financial year. It demonstrates the expected emergence of shareholder cash over the long term, by reflecting the net present value of the expected future cash flows.

·      The IFRS methodology smooths recognition of profit from new business by spreading the initial costs (and revenues) evenly over the life of the business. The IFRS result therefore, reflects neither the future shareholder value added, nor the cash impact of the new business in a particular year.

Results for the year

The following is a summary of key items to allow readers to better understand the results for the year. A small number of comparative figures have been restated in this section to ensure consistency of presentation.  IFRS profit after tax for the year is £7.7m (2016: £8.3m).

The reduction in IFRS profit in 2017 is driven primarily by a £1.1m provision for bad debts and increased litigation defence costs of £0.3m, offset partially by an increase in income from the Group's book.

Prior to the significant, one-off items totalling a cost of £1.1m (2016: cost of £0.8m), the underlying IFRS profit was £8.8m before taxation, compared with £9.2m in 2016.

Abridged consolidated income statement

The consolidated statement of comprehensive income presented under IFRS reflects the financial results of the Group's activities during the year. This income statement however, as a result of its method of presentation, incorporates a number of features that might affect an understanding of the results of the Group's underlying transactions. This relates principally to:

·      Investment gains during the year attributable to contract holder assets of £134.5m (2016: £60.8m) and;

·      Fund management fees paid by the Group to third parties having a relationship with the underlying contract. In 2017, third party fund management fees attributable to contract holder assets were £4.3m (2016: £3.6m). These are reflected in both income and expenses under the IFRS presentation.

An abridged non-GAAP consolidated income statement in relation to the Group's own activities is presented below, excluding the items of income and expenditure indicated above.

Fees and commissions

Fees and commissions for the year attributable to Group activities were £48.3m, on a par with last year's level prior to one-off items.

Contract fee income totalled £34.6m for the year (2016: £34.4m). Contract fee income includes the amortised element of up-front income deferred under IFRS and contract-servicing charges.  Hansard International fee income has increased reflecting increases in new business and some AuA-based streams.  Against this we have seen a further reduction in the year of £1.0m due to the continuing run-off of Hansard Europe which closed to new business in 2013.

Fund management fees accruing to the Group and commissions receivable from third parties totalling £13.7m (2016: £13.2m) are related directly to the value of assets under administration and are therefore exposed to market movements, currency rates and valuation judgements.

A summary of fees and commissions is set out below:

Included in contract fee income is £18.1m (2016: £18.5m) representing the amortisation of fees prepaid in previous years, as can be seen in the analysis set out below:

Investment and other income

Historically low UK interest rates continue to result in relatively modest levels of interest income earned on the Group's deposits and money market funds. The Brexit-related foreign exchange gains of FY 2016 have not been repeated in FY 2017 with little net movement over the year in our primary foreign exchange rates.

Origination costs

Under IFRS, new business commissions paid, together with the directly attributable incremental costs incurred on the issue of a contract, are deferred and amortised over the anticipated life of that contract to match the longer-term income streams expected to accrue from the contracts issued this year. Typical terms range between 6 years and 16 years, depending on the nature of the product. Other elements of the Group's new business costs, for example recruitment costs and initial payments to new Account Executives, which reflect investment in distribution resources in line with our strategy, are expensed as incurred.

With the increased new business volumes which the Group experienced during the year, origination costs incurred in the year are similarly increased from the prior year.  Overall, net origination costs expensed to the consolidated statement of comprehensive income were slightly lower at £19.3m compared to £20.2m in 2016.

Amounts totalling £16.1m (2016: £17.7m) have been expensed to match contract fee income earned this year from contracts issued in previous financial years, as can be seen in the analysis below.

Origination costs in the year were:

Administrative and other expenses

We continue to manage our expense base robustly to control administrative expenses while supporting our strategic developments and other new business growth activities with targeted expenditure.

An analysis of administrative and other expenses is set out in notes 8 and 9 to the consolidated financial statements under IFRS. The following summarises some of the expenses attributable to the Group's own activities.

Salaries and other employment costs have decreased by £0.7m or 7% to £9.3m. Salaries in general have remained relatively flat, despite the increased levels of new business. Discretionary bonuses for management and administrative personnel of £0.3m were payable for 2016, with no comparable figure accrued this year. Costs of £0.3m were incurred in 2016 in recruitment and other handover costs relating to a number of senior management positions.

The average Group headcount for the 2017 financial year was 204 people (2016: 206 people).

Other administrative expenses have decreased marginally from £6.6m to £6.5m.

Professional fees including audit in the year include amounts totalling £0.5m paid to the Group's auditor (2016: £0.6m); £0.5m (2016: £0.3m) for administration, custody, dealing and other charges paid under the terms of the investment processing outsourcing arrangements; recruitment costs of £0.1m (2016: £0.2m) and costs of Investor Relations activities of £0.4m (2016: £0.4m).  In addition costs associated with the defence of the litigation against Hansard Europe totalled £0.8m (2016: £0.5m).

Growth investment spend represents internal and external costs to generate opportunities for growth. The Group continues to invest to build its business and to implement product and technological changes to support intermediaries, contract holders and other stakeholders. Specifically, this year's figure includes £0.3m invested in our strategic alliance with a local insurer in the UAE.

Provision for doubtful debts reflects a charge of £1.1m taken as a provision against balances due from a brokerage firm which has experienced financial difficulties.

Cash Flow ANALYSIS

Operating cash flows have increased this year reflecting improved levels of new business over the past two years, more than offsetting changes to our product pricing profile and the run-off of Hansard Europe. 

The operational cash surplus (fees deducted from contracts and commissions received, less operational expenses paid) for the year was £22.7m (2016: £15.9m). This surplus funds the cost of new business acquisition for the year which totalled £17.4m (2016: £15.4m).

Writing new business, particularly regular premium business, produces a short-term cash strain as a result of the commission and other costs incurred at the inception of a contract. Annual management charges offset this strain and produce a positive return over time.

Future increases in new business levels can be funded where necessary by the Group's significant cash resources, but over time as the level of contract holder assets is built up, the annual management charges that are earned from the Group's newer products will become sufficient to sustain new business growth and dividends.

To reduce the risk that the targeted return on investment in new business is jeopardised, the Group withholds a portion of initial commission from certain intermediaries pending completion of the initial period of particular contracts. At the balance sheet date, amounts totalling £2.2m (2016: £1.6m) had been withheld. These amounts are reflected within "Other payables" in note 19 to the consolidated balance sheet.

The following non-GAAP tables summarise the Group's own cash flows in the year. This analysis demonstrates that the in-force contract book generated the cash required to support the Group's primary business objective of investing in new business whilst enhancing distribution and other infrastructure. Dividends of £12.2m (2016: £12.2m) paid during the year were covered by the Group's excess cash resources. As we have previously communicated, we are planning to reduce the current level of dividend by 50% in 2018 which will better match the level of operating cash flows generated and allow the Group to take advantage of other new business development and strategic opportunities.  

Overall cash and deposits have decreased from £76.6m at 30 June 2016 to £71.6m at 30 June 2017. 

Bank deposits and money market funds

The Group holds its liquid assets in highly-rated money market liquidity funds and with a wide range of deposit institutions to minimise market risk. Deposits totalling £14.4m have original maturity dates greater than 3 months and are therefore excluded from the definition of "cash and cash equivalents" under IFRS as reflected in note 16 to the consolidated balance sheet (2016: £15.7m). The following table summarises the total shareholder cash and deposits at the balance sheet date.

The longer-term term deposits have maturity dates of between 4 months and 11 months from the balance sheet date.

Abridged consolidated balance sheet

The consolidated balance sheet presented under IFRS reflects the financial position of the Group at 30 June 2017. As a result of its method of presentation, the consolidated balance sheet incorporates the financial assets held to back the Group's liability to contract holders, and also incorporates the net liability to those contract holders of £1,049.7m (2016: £923.5m). Additionally, that portion of the Group's capital that is held in bank deposits is disclosed in "cash and cash equivalents" based on original maturity terms, as noted above. 

The abridged consolidated balance sheet presented below, adjusted for those differences in disclosure, allows a better understanding of the Group's own capital position.

Deferred origination costs

The deferral of origination costs reflects that the Group will earn fees over the long-term from contracts issued in a given financial year. These costs are recoverable out of future net income from the relevant contract and are charged to the income statement on a straight-line basis over the life of each contract. 

The movement in value over the financial year is summarised below.

Deferred income

The treatment of deferred income ensures that contract fees are taken to the consolidated statement of comprehensive income in equal installments over the longer-term, reflecting the services to be provided over the period of the contract. This is consistent with the treatment of deferred origination costs. Deferred income at the balance sheet date is the unamortised balance of accumulated initial amounts received on new business.

The proportion of income deferred in any one year is dependent upon the mix and volume of new business flows in previous years. The Group's focus on regular premium business means that these fees are received over the initial period of the contract, rather than being received up front, as is often the case with single premium contracts. 

The majority of initial fees collected during the year relates to charges taken from contracts issued in prior financial years demonstrating the cash generative nature of the business. Regular premium contracts issued in this financial year will generate the majority of their initial fees over the next 18 months on average.

The movement in value of deferred income over the financial year is summarised below.

CONTRACT holder Assets under administration

In the following paragraphs, contract holder assets under administration ("AuA"), refers to net assets held to cover financial liabilities, as analysed in note 17 to the consolidated financial statements presented under IFRS.

The Group enjoys a stream of cash flows from the large number of regular premium contracts administered on behalf of clients around the world. The Group has continued to build an increasing stream of single premium business which increased to £66.4m this year (2016: £52m). The majority of premium contributions are designated in currencies other than sterling, reflecting the wide geographical spread of those contact holders. Premium contributions during the year also includes additional contributions of approximately £4.0m (2016: £4.3m) relating to single and regular premium contracts issued by Hansard Europe in prior years.

These flows are offset by charges and withdrawals, by premium holidays affecting regular premium policies and by market valuation movements.  During the year, the Group benefitted from significant market gains which drove AuA to over £1 billion.

The currency composition of AuA at the balance sheet date is similar to that as at 30 June 2016, with 60% of AuA designated in US dollar (2016: 69%) and 19% in euro (2016: 12%).

The value of AuA at 30 June 2017 was £1,049.7m, £126.2m above the value at 30 June 2016.

The analysis of AuA held by each Group subsidiary to cover financial liabilities is as follows:

As expected the level of assets in Hansard Europe continues to decline after closing to new business in 2013. However, investment market strength and sterling's continued weakness has offset significantly the impact of net contract holder withdrawals. 

complaints and potential litigation

In valuation issues such as those referred to above, financial services institutions can be drawn into disputes in cases where the performance of assets selected directly by or on behalf of contract holders through their advisors fails to meet their expectations. This is particularly relevant in the case of more complex products distributed throughout Europe.

Even though the Group does not give any investment advice, as this is left to the contract holder directly or through an agent, advisor or an entity appointed at their request or preference, the Group has been subject to a number of complaints in relation to the performance of assets linked to contracts.

Some of these complaints escalate into litigation, particularly in Europe. At the beginning of this financial year the Group was facing litigation based on writs totalling €15.7m (£13.1m).

During the year the Group successfully won a further three cases in Italy and Germany which continues to affirm confidence in the Group's legal arguments.  The outstanding writs have not materially reduced as two cases have since been appealed and the other case was of a relatively minor value.  Two additional claims were made during the year, resulting in a net increase of outstanding writs of €1.2m. The total level of writs outstanding at the end of the year was €16.9m (£14.8m).

While it is not possible to forecast or determine the final results of such litigation, based on the pleadings and advice received from the Group's legal representatives, we believe we have a strong chance of success in defending these claims. The writs have therefore been treated as contingent liabilities and are disclosed in note 26 to the consolidated financial statements.

Results for the year under European Embedded Value

Headline results

During the course of the 2017 financial year, the Group made a European Embedded Value ("EEV") profit of £11.7m (2016: profit of £13.1m), analysed into an EEV operating loss of £8.2m (2016: loss of £1.1m) and gains from investment return variances and economic assumption changes of £19.9m (2016: gains of £14.2m).

The EEV operating loss is primarily driven by a negative experience variance of £4.7m and negative operating assumption changes of £5.9m.  Experience variances arise when actual experience differs from that assumed in the prior year's EEV. Operating assumption changes reflect changes in management's view of the behaviour of the existing business.

Headline results for the EEV are shown in the tables below:

The EEV at 30 June 2017 of £195.5m has remained broadly level with the 30 June 2016 amount of £195.9m, after the payment of dividends of £12.2m for the year (2016: £12.2m).

Sales metrics

New business comparatives are shown below:

The change is primarily due to the increase in new business volumes over the period and the existence of a greater number of insurance contracts to spread initial expenses over.

The New Business Contribution and Margin have increased primarily due to the increase in new business volumes over the period and the existence of a greater number of insurance contracts to spread initial expenses over. New Business Margin is also impacted by the mix of business written, with regular premium business having a larger margin than single premium business. During 2017, a higher proportion of single premium business was written than in 2016.

The high-level components of the EEV are shown in the table below:

Net Worth has reduced to £49.2m from £55.5m as profits earned from the existing business are offset by the dividend paid.  It is represented by liquid cash and money market balances.

Free Surplus, which is available for investment and distribution, has reduced to £21.4m from £27.9m reflecting the fact that more of the cash which continues to emerge from the existing policies was needed to invest in increasing levels of new business.  Required Capital has not changed significantly. It currently includes around £20m of Hansard Europe capital, the use of which management estimates is constrained for up to three years.

The increase in VFP reflects sterling exchange rates on 30 June 2017, increased new business levels, the conversion of VFP to Net Worth and the impact of contract holder behaviour and renewal expenses.

The Other component of VFP includes a reduction to non-market risk and frictional costs, which have not changed substantially over the year.

The Net Worth is lower than projected by £1.3m (2016: lower by £1.7m) primarily because of worse than assumed operating experience during the year. The Net Worth has grown by £26.7m (2016 £22.8m), of which £20.8m (2016: £18.6m) has been invested in new business (shown as New Business Strain) and £12.2m has been paid in dividends (2016: £12.2m).

EEV profit after tax

The Group's EEV profit after tax is £11.7m (2016: £13.1m). New business, experience variances, operating assumptions and model changes drive this result at an operating profit level. Thereafter, the impact of positive investment return variances and economic assumption changes more than offset the loss at an operating level.

Experience variances arise when the behavior of the existing book differs from that assumed. Major contributors to the experience variances this year are worse than assumed encashment and premium persistency.

Full encashments were significantly impacted by a single broker which has now ceased trading.

The primary change in operating assumption changes during the year was a strengthening of the expenses assumed to be borne by each in-force contract. This was to reflect a lengthier period being taken by the Group to achieve the scale assumed in its long-term assumptions, impacted also by the closure to new business of Hansard Europe.

Investment return variances

Investment performance principally reflects the investment choices, by nature and currency, made by contract holders. It is therefore largely outside the Group's control.

Economic assumption changes

There was a positive variance of £3.1m (2016: negative £4.6m) from economic assumption changes. This reflects changes to government yields for the currencies to which the Group is exposed in line with EEV Principles.

Net asset value per share

On an EEV basis, the net asset value per share at 30 June 2017 is 142.3p (2016: 142.5p) based on the EEV at the balance sheet date divided by the number of shares in issue at that date, being 137,444,792 ordinary shares (2016: 137,440,456 shares).

The net asset value per share at 30 June 2017 on an IFRS basis, is 23.1p (2016: 26.3p).

Risk management and internal control

As with all businesses, the Group is exposed to risk in pursuit of its objectives. The Board has overall responsibility for the Group's system of risk management and internal control and for reviewing its effectiveness. The schedule of powers reserved to the Board ensures that the Directors are responsible for determining, evaluating and controlling the nature and extent of the principal risks which the Board is willing to take in achieving its strategic objectives and the Board oversees the strategies for principal risks that have been identified.

The Executive Management Team works within the risk appetite established by the Board and the governance, risk management and internal control arrangements which constitute the Group Enterprise Risk Management (ERM) Programme and which direct the Group, including setting the cultural tone and expectations from the top, delegating authorities and monitoring compliance.

Having regard to the Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting', the ERM Programme encompasses the policies, processes, tasks, behaviours and other aspects of the Group's environment, which cumulatively:

·      Facilitate the effective and efficient operation of the Group and its subsidiaries by enabling appropriate responses to be made to significant business, operational, financial, compliance and other risks to business objectives, so safeguarding the assets of the Group;

·      Help to ensure the quality of internal and external reporting. This requires the maintenance of proper records and processes that generate a flow of timely, relevant and reliable information from within and outside the Group;

·      Seek to ensure compliance with applicable laws and regulations and also with internal policies with respect to the conduct of business.

Approach

The ERM Programme is structured in accordance with the component elements and supporting principles of the Committee of Sponsoring Organisations of the Treadway Commission (COSO) Enterprise Risk Framework and has been designed to be appropriate to the nature, scale and complexity of the Group's business at both corporate and subsidiary level. A comprehensive review of the component elements of the ERM Programme has been undertaken during the year ended 30 June 2017. The review has sought to strengthen the governance arrangements associated with the identification and management of risks across the Group and to enhance the reporting arrangements which assist the Directors in their assessment of the adequacy and effectiveness of the Group's risk management and internal control systems.

The ERM Programme continues to be built upon the 'three lines of defence' model, which addresses how specific duties relating to risk management and internal control are assigned and coordinated between front line management (first line), risk and compliance monitoring functions (second line) and the independent assurance services of internal audit (third line). Each of the three lines plays a distinct role within the Group's overarching governance framework.

The ERM Programme seeks to add value through embedding risk management and effective internal control systems as continuous and developing processes within strategy setting, programme level functions and day-to-day operating activities. The ERM Programme also acknowledges the significance of the Group's operating culture and values in relation to risk management and their impact on the overall effectiveness of the internal control framework.

The ERM Programme promotes the pursuit of its overarching performance, information and compliance objectives through focus on five interrelated elements, which enable the management of risk at strategic, programme and operational level to be integrated, so that layers of activity support each other. The five interrelated elements are defined as:

·      Management oversight and the control culture

·      Risk recognition and assessment

·      Control activities and segregation of duties

·      Information and communication

·      Monitoring activities and correcting deficiencies

Risk management processes are undertaken on both a bottom-up and top-down basis. The top-down aspect involves the Board assessing, analysing and evaluating what it believes to be the principal risks facing the Group. The bottom-up approach involves the identification, review and monitoring of current and forward-looking risks on a continuous basis at functional and divisional levels, with analysis and formal reporting to the Executive Risk Committee, established by the Board, on a quarterly basis and onward analytical reporting to the Board.  The terms of reference of the Committee are published on the Company's website.

The system of internal control is designed to manage rather than eliminate risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.

Review of risk management and internal control systems

The results of the risk management processes combine to facilitate identification of the principal business, financial, operational and compliance risks and any associated key risks at a subordinate level. Established reporting cycles enable the Board to maintain oversight of the quality and effectiveness of risk management and internal control activities throughout the year and ensure that the entirety of the governance, risk management and internal control frameworks, which constitute the ERM Programme, are operating as intended. These processes have been in place throughout the year under review and up to the date of this report.

Independently of the quarterly cyclical risk reporting arrangements and in accordance with provision C.2.1 of the UK Corporate Governance Code, the Board has conducted its annual review of the effectiveness of the company's risk management and internal control systems including financial, operational and compliance controls. This review is undertaken in collaboration with the Audit Committee and is based upon analysis and evaluation of:

·      Attestation reporting from subsidiary companies of the Group as to the effective functioning of the risk management and internal control framework and the ongoing identification and evaluation of risk within each subsidiary;

·      Formal compliance declarations from senior managers at divisional level that key risks are being managed appropriately within the functional and operational areas falling under their span of control and that controls have been examined and are effective;

·      The cumulative results of cyclical risk reporting by senior and executive management via the Executive  Risk Committee, covering financial, operational and compliance controls;

·      Independent assurance work by the Group Internal Audit Department to identify any areas for enhancements to internal controls and work with Management to define associated action plans to deliver them.

The Board has determined that there were no areas for enhancement which constituted a significant weakness for the year under review and they are satisfied that the Group's governance, risk management and internal control systems are operating effectively and as intended.

Financial reporting process

The Group maintains a process to assist the Board in understanding the risks to the Group of failing to meet its objectives. This incorporates a system of planning and sensitivity analysis incorporating Board approval of forecast financial and other information. The Board receives regular representations from the senior executives.

Performance against targets is reported to the Board quarterly through a review of the Group's and Company's results based on accounting policies that are applied consistently throughout the Group. Financial and management information is prepared quarterly by the Chief Financial Officer ("CFO") and presented to the Board and Audit Committee. The members of the Audit Committee review the draft financial statements for the half year ended 31 December annually and for the full financial year, and meet with the CFO to discuss and challenge the presentation and disclosures therein. Once the draft document is approved by the Audit Committee, it is reviewed by the Board before final approval at a Board meeting.

Outsourcing

The majority of investment dealing and custody processes in relation to policyholder assets are outsourced to Capital International Limited ("CIL"), a company authorised by the Isle of Man Financial Services Authority and a member of the London Stock Exchange.

These processes are detailed in a formal contract that incorporates notice periods and a full exit management plan. Delivery of services under the contract is monitored by a dedicated relationship manager against a documented Service Level Agreement and Key Performance Indicators.

CIL is required to confirm monthly that no material control issues have been identified in their operations; this is overseen via the delivery of services monitoring performed by the relationship manager. Each year CIL are required to confirm and evidence the adequacy and effectiveness of their internal control framework through an Assurance report, with an external independent review performed every second year. The last such report, which included an external independent review, was issued by CIL on 13 May 2016 and did not reveal any material control deficiencies in the period reviewed from 1 January 2015 to 31 December 2015.

Risks relating to the Group's financial and other exposures

Hansard's business model involves the controlled acceptance and management of risk exposures. Under the terms of the unit-linked investment contracts issued by the Group, the policyholder bears the investment risk on the assets in the unit-linked funds, as the policy benefits are directly linked to the value of the assets in the funds. These assets are administered in a manner consistent with the expectations of the contract holders. By definition, there is a precise match between the investment assets and the policyholder liabilities, and so the market risk and credit risk lie with policyholders.

The Group's exposure on this unit-linked business is limited to the extent that income arising from asset management charges and commissions is generally based on the value of assets in the funds, and any sustained falls in value will reduce earnings. In addition, there are certain financial risks (credit, market and liquidity risks) in relation to the investment of shareholders' funds. The Group's exposure to financial risks is explained in note 3 to the consolidated financial statements.

The Board believes that the principal risks facing the Group's earnings and financial position are those risks which are inherent to the Group's business model and operating environment.. The regulatory landscape continues to evolve at both a local and international level and the risk management and internal control frameworks of the Group must remain responsive to developments which may change the nature, impact or likelihood of such risks

Principal Risks

The following table sets out the principal inherent risks that may impact the Group's strategic objectives, profitability or capital and how such risks are managed or mitigated. The Board robustly reviews and considers its principal risks on at least an annual basis.

Other Key Risks

In addition to the principal risks identified above, there are other key risks that the Group is subject to that derive from the nature of the business it operates.  These are outlined below, together with how they are managed.

Further detail around financial risks is outlined in Note 3 (Financial Risk Management) to the consolidated financial statements.