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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Quilter Plc | LSE:QLT | London | Ordinary Share | GB00BNHSJN34 | ORD 8 1/6P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 2.60 | 2.19% | 121.10 | 120.90 | 121.10 | 121.30 | 117.70 | 119.00 | 476,405 | 14:46:31 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Finance Services | 4.49B | 42M | 0.0299 | 40.17 | 1.66B |
From Jul 2022 to Jul 2024
TIDMQLT
RNS Number : 2155S
Quilter PLC
08 March 2023
Statement of Directors' responsibilities
in respect of the preliminary announcement of the Annual Report and the financial statements
The Directors confirm to the best of their knowledge:
-- The results in this preliminary announcement have been taken from the Group's 2022 Annual Report, which will be available on the Company's website on 23 March 2023; and
-- The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group.
Signed on behalf of the Board
Steven Levin Mark Satchel Chief Executive Officer Chief Financial Officer
8 March 2023
Hot Features
Premium
Consolidated income statement
For the year ended 31 December 2022
--------------------------------------------------------- ----- ------------ ------------
GBPm
------------ ------------
Year ended Year ended
31 December 31 December
Notes 2022 2021
--------------------------------------------------------- ----- ------------ ------------
Income
Fee income and other income from service activities 581 666
Investment return (4,649) 4,002
Other income 28 18
--------------------------------------------------------- ----- ------------ ------------
Total income (4,040) 4,686
--------------------------------------------------------- ----- ------------ ------------
Expenses
Change in investment contract liabilities 15 4,318 (3,293)
Fee and commission expenses, and other acquisition
costs (54) (61)
Change in third-party interests in consolidated
funds 438 (599)
Other operating and administrative expenses (584) (636)
Finance costs (13) (14)
--------------------------------------------------------- ----- ------------ ------------
Total expenses 4,105 (4,603)
--------------------------------------------------------- ----- ------------ ------------
Profit on sale of subsidiary 4(a) - 2
--------------------------------------------------------- ----- ------------ ------------
Profit before tax from continuing operations 65 85
Tax credit/(expense) attributable to policyholder
returns 7(a) 134 (73)
========================================================= ===== ============ ============
Profit before tax attributable to equity holders
from continuing operations 199 12
========================================================= ===== ============ ============
Income tax credit/(expense) 7(a) 110 (62)
Less: tax (credit)/expense attributable to policyholder
returns (134) 73
--------------------------------------------------------- ----- ------------ ------------
Tax (expense)/credit attributable to equity holders (24) 11
--------------------------------------------------------- ----- ------------ ------------
Profit after tax from continuing operations 175 23
Profit after tax from discontinued operations 4(b) - 131
--------------------------------------------------------- ----- ------------ ------------
Profit after tax 175 154
--------------------------------------------------------- ----- ------------ ------------
Attributable to:
Equity holders of Quilter plc 175 154
--------------------------------------------------------- ----- ------------ ------------
Earnings per Ordinary Share on profit attributable
to Ordinary Shareholders of Quilter plc
--------------------------------------------------------- ----- ------------ ------------
Basic
From continuing operations (pence) 8(b) 12.2 1.4
From discontinued operations (pence) 4(b) - 8.0
--------------------------------------------------------- ----- ------------ ------------
Basic earnings per Ordinary Share (pence) 8(b) 12.2 9.4
--------------------------------------------------------- ----- ------------ ------------
Diluted
From continuing operations (pence) 8(b) 12.0 1.4
From discontinued operations (pence) 4(b) - 7.8
--------------------------------------------------------- ----- ------------ ------------
Diluted earnings per Ordinary Share (pence) 8(b) 12.0 9.2
--------------------------------------------------------- ----- ------------ ------------
Consolidated statement of comprehensive income
For the year ended 31 December 2022
GBPm
------------ ------------
Year ended Year ended
31 December 31 December
Note 2022 2021
------------------------------------------------------ ---- ------------ ------------
Profit after tax 175 154
Exchange losses on translation of foreign operations - (1)
Items that may be reclassified subsequently to income
statement - (1)
Total other comprehensive income, net of tax - (1)
------------------------------------------------------ ---- ------------ ------------
Total comprehensive income 175 153
------------------------------------------------------ ---- ------------ ------------
Attributable to:
Continuing operations 175 22
Discontinued operations 4(b) - 131
------------------------------------------------------ ---- ------------ ------------
Equity holders of Quilter plc 175 153
------------------------------------------------------ ---- ------------ ------------
Consolidated statement of changes in equity
For the year ended 31 December 2022
Ordinary Total
Ordinary Share Capital Share-based share-
Share premium B redemption Merger payments Other Retained holders'
31 December capital reserve shares reserve reserve reserve reserves earnings equity
2022 Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- -------- -------- ------- ---------- -------- ----------- -------- -------- ---------
Balance at 1
January 2022 116 58 - 17 25 42 (1) 1,482 1,739
Profit after
tax - - - - - - - 175 175
Total
comprehensive
income - - - - - - - 175 175
-------- -------- ------- ---------- -------- ----------- -------- -------- ---------
Dividends - - - - - - - (78) (78)
Ordinary
Shares
repurchased
in the
buyback
programme(1) 14 (1) - - 1 - - - - -
Issue of B
shares(2) 14(a,c) - - 328 - (25) - - (303) -
Redemption of
B shares(2) 14(a) - - (328) 328 - - - (328) (328)
Exchange rate
movement
(ZAR/GBP)(3) - - - - - - - (4) (4)
Movement in
own shares - - - - - - - 22 22
Equity
share-based
payment
transactions - - - - - 1 - 23 24
Aggregate tax
effects of
items
recognised
directly
in equity - - - - - (2) - - (2)
Total transactions with
the
owners of the Company (1) - - 329 (25) (1) - (668) (366)
----------------------- -------- -------- ------- ---------- -------- ----------- -------- -------- ---------
Balance at 31
December
2022 115 58 - 346 - 41 (1) 989 1,548
-------------- ------- -------- -------- ------- ---------- -------- ----------- -------- -------- ---------
Ordinary Total
Ordinary Share Capital Share-based share-
Share premium B redemption Merger payments Other Retained holders'
31 December capital reserve shares reserve reserve reserve reserves earnings equity
2021 Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- -------- -------- ------- ---------- -------- ----------- -------- -------- ---------
Balance at 1
January 2021 125 58 - 8 149 42 1 1,495 1,878
-------- -------- ------- ---------- -------- ----------- -------- -------- ---------
Profit after
tax - - - - - - - 154 154
Other
comprehensive
income - - - - - - (1) - (1)
-------- -------- ------- ---------- -------- ----------- -------- -------- ---------
Total comprehensive
income - - - - - - (1) 154 153
Dividends - - - - - - - (89) (89)
Ordinary
Shares
repurchased
in the
buyback
programme(1) 14 (9) - - 9 - - - (204) (204)
Release of
merger
reserve 14(c) - - - - (124) - - 124 -
Movement in
own shares - - - - - - - (20) (20)
Equity
share-based
payment
transactions - - - - - (1) - 21 20
Aggregate tax
effects of
items
recognised
directly
in equity - - - - - 1 - - 1
Total transactions with
the
owners of the Company (9) - - 9 (124) - - (168) (292)
----------------------- -------- -------- ------- ---------- -------- ----------- -------- -------- ---------
Transfer to
retained
earnings - - - - - - (1) 1 -
-------------- ------- -------- -------- ------- ---------- -------- ----------- -------- -------- ---------
Balance at 31
December 2021 116 58 - 17 25 42 (1) 1,482 1,739
-------------- ------- -------- -------- ------- ---------- -------- ----------- -------- -------- ---------
(1) On 11 March 2020, the Company announced a share buyback programme to purchase Ordinary Shares up to a maximum value of GBP375 million, in order to return the net surplus proceeds to shareholders arising from the sale of Quilter Life Assurance which had the impact of reducing the share capital of the Company. During the year ending 31 December 2022, the Company acquired 17.7 million shares (31 December 2021 128.1 million) for a total consideration of GBP26 million (31 December 2021: GBP197 million) and incurred additional costs of GBP1 million (31 December 2021: GBP3 million). The shares, which have a nominal value of GBP1 million (31 December 2021: GBP9 million), were subsequently cancelled, giving rise to a capital redemption reserve of the same value as required by the Companies Act 2006. The share buyback was completed in January 2022.
(2) On 9 March 2022, the Company announced a capital return of GBP328 million from the net surplus proceeds arising from the sale of Quilter International by way of a B Share Scheme accompanied by a Share Consolidation. Refer to note 3 for further details of the capital return and Share Consolidation. Following the issue and redemption of the B preference shares as part of the B Share Scheme, the Company transferred GBP328 million from retained earnings to the capital redemption reserve, as required under the provisions of sections 688 and 733 of the Companies Act 2006, being an amount equal to the nominal value of the B shares redeemed in the year. The increase in the capital redemption reserve results from the UK company law requirement to maintain the company's capital when shares are redeemed out of the company's distributable profits.
(3) The South African Rand value of the proposed capital return for shares registered on the Johannesburg Stock Exchange was set on 9 March 2022. The impact of exchange rate movements between the year-end Market Announcement on 9 March 2022 and the redemption of the B shares on 24 May 2022 on the pound sterling equivalent of payments to JSE shareholders in South African Rand is recognised directly in equity. Additionally, the impact of exchange rate movements between the announcement date of dividends payable and the payment date on the pound sterling equivalent of payments to JSE shareholders in South African Rand is recognised directly in equity. The Group held cash in South African Rand equal to the expected cash outflows and therefore was economically hedged for the outflows.
Consolidated statement of financial position
At 31 December 2022
GBPm
----------- -----------
31 December 31 December
Notes 2022 2021
-------------------------------------------- ----- ----------- -----------
Assets
Goodwill and intangible assets 9 413 457
Property, plant and equipment 112 131
Investments in associated undertakings 1 2
Contract costs 10 9
Loans and advances 34 29
Financial investments 10 43,617 47,565
Deferred tax assets 94 88
Current tax receivable 10 -
Trade, other receivables and other assets 303 381
Derivative assets 40 14
Cash and cash equivalents 13 1,782 2,064
Assets held for sale 1 -
Total assets 46,417 50,740
-------------------------------------------- ----- ----------- -----------
Equity and liabilities
Equity
-------------------------------------------- ----- ----------- -----------
Ordinary Share capital 14(a) 115 116
Ordinary Share premium reserve 14(a) 58 58
Capital redemption reserve 14(a) 346 17
Merger reserve 14(c) - 25
Share-based payments reserve 41 42
Other reserves (1) (1)
Retained earnings 989 1,482
-------------------------------------------- ----- ----------- -----------
Total equity 1,548 1,739
-------------------------------------------- ----- ----------- -----------
Liabilities
Investment contract liabilities 15 38,186 41,071
Third-party interests in consolidated funds 5,843 6,898
Provisions 16 69 93
Deferred tax liabilities 24 139
Current tax payable 1 2
Borrowings and lease liabilities 290 299
Trade, other payables and other liabilities 436 484
Derivative liabilities 20 15
Total liabilities 44,869 49,001
-------------------------------------------- ----- ----------- -----------
Total equity and liabilities 46,417 50,740
-------------------------------------------- ----- ----------- -----------
Approved by the Board of Directors and authorised for issue on 8 March 2023 and signed on its behalf:
Steven Levin Mark Satchel Chief Executive Officer Chief Financial Officer
Consolidated statement of cash flows
For the year ended 31 December 2022
The cash flows presented in this statement cover all the Group's activities (continuing and discontinued operations) and include flows from both policyholder and shareholder activities. All cash and cash equivalents are available for general use by the Group for the purposes of the disclosures required under IAS 7 Statement of Cash Flows except for cash and cash equivalents in consolidated funds (as shown in note 13). Cash flows for discontinued operations are shown separately in note 4(d).
GBPm
------------ ------------
Year ended Year ended
31 December 31 December
Notes 2022 2021
------------------------------------------------------------ ----- ------------ ------------
Cash flows from operating activities
Cash flows from operating activities 1,698 3,103
Taxation paid (22) (10)
------------------------------------------------------------ ----- ------------ ------------
Total net cash flows from operating activities 13(b) 1,676 3,093
------------------------------------------------------------ ----- ------------ ------------
Cash flows from investing activities
Net acquisitions of financial investments (1,494) (2,839)
Acquisition of property, plant and equipment (3) (13)
Acquisition of interests in subsidiaries(1) 4(f) (5) (7)
Net proceeds from the disposal of interests in subsidiaries - 218
------------------------------------------------------------ ----- ------------ ------------
Total net cash flows from investing activities (1,502) (2,641)
------------------------------------------------------------ ----- ------------ ------------
Cash flows from financing activities
Dividends paid to equity holders of the Company (78) (89)
Finance costs on external borrowings (9) (9)
Payment of interest on lease liabilities (3) (2)
Payment of principal of lease liabilities (11) (10)
Redemption of B shares(2) (328) -
Repurchase and cancellation of Ordinary Shares(3) (28) (197)
Exchange rate movements paid to shareholders(4) (4) -
------------------------------------------------------------ ----- ------------ ------------
Total net cash flows from financing activities (461) (307)
------------------------------------------------------------ ----- ------------ ------------
Net (decrease)/increase in cash and cash equivalents (287) 145
Cash and cash equivalents at the beginning of the
year 2,064 1,921
Effect of exchange rate changes on cash and cash
equivalents 5 (2)
------------------------------------------------------------ ----- ------------ ------------
Cash and cash equivalents at end of the year 13(a) 1,782 2,064
------------------------------------------------------------ ----- ------------ ------------
(1) The acquisition of interests in subsidiaries outflow of GBP5 million results from contingent consideration payments relating to historical acquisitions (31 December 2021: GBP7 million).
(2) On 9 March 2022, the Company announced a capital return of GBP328 million from the net surplus proceeds arising from the sale of Quilter International by way of a B Share Scheme accompanied by a Share Consolidation. Please refer to note 3 for further details of the capital return and Share Consolidation.
(3) The repurchase and cancellation of Ordinary Shares outflow relates to the cash movements associated with the share buyback programme. Further details are included within the consolidated statement of changes in equity.
(4) The exchange rate movements paid to shareholders relate to foreign exchange gains that have arisen on the capital return and dividend payments to JSE shareholders. Further details are included within the consolidated statement of changes in equity.
Basis of preparation and significant accounting policies
For the year ended 31 December 2022
General information
Quilter plc (the "Parent Company"), a public limited company incorporated in England and Wales and domiciled in the United Kingdom ("UK"), together with its subsidiaries (collectively, the "Group") offers investment and wealth management services, long-term savings and financial advice through its subsidiaries and associates primarily in the UK. Quilter plc is listed on the London and Johannesburg Stock Exchanges.
The address of the registered office is Senator House, 85 Queen Victoria Street, London, EC4V 4AB.
1: Basis of preparation
The results in this preliminary announcement have been taken from the Group's 2022 Annual report which will be available on the Company's website on 23 March 2023. These condensed consolidated financial statements of Quilter plc for the year ended 31 December 2022 have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and the applicable legal requirements of the Companies Act 2006. In addition to complying with international accounting standards in conformity with the requirements of the Companies Act 2006, the condensed consolidated financial statements also comply with International Financial Reporting Standards ("IFRS") as adopted by the UK. These condensed consolidated financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments, and are presented in pounds sterling, which is the currency of the primary economic environment in which the Group operates.
Going concern
The Directors have considered the resilience of the Group, its current financial position, the principal risks facing the business and the effectiveness of any mitigating strategies which are or could be applied. This included an assessment of capital and liquidity over a three-year planning period. As part of the going concern assessment, the Group took into consideration the current position of the UK economy including the impact of inflation and increases in the cost of living. The Group also took into consideration risks related to climate change. Based on the assessment, the Directors believe that both the Group and Quilter plc as the Parent Company, have sufficient financial resources to continue in business for a period of at least 12 months from the date of approval of these financial statements and continue to adopt the going concern basis in preparing the Group and Parent Company financial statements. Further information is contained in the viability statement and going concern section of the Annual Report.
Liquidity analysis of the statement of financial position
The Group's statement of financial position is in order of liquidity as is permitted by IAS 1 Presentation of Financial Statements. For each asset and liability line item, those amounts expected to be recovered or settled more than 12 months after the reporting date are disclosed separately in the notes to the consolidated financial statements.
Critical accounting estimates and judgements
The preparation of financial statements requires management to exercise judgement in applying the Group's significant accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. The Board Audit Committee reviews these areas of judgement and estimates and the appropriateness of significant accounting policies adopted in the preparation of these financial statements.
Critical accounting judgements
The Group's critical accounting judgements are detailed below and are those that management makes when applying the significant accounting policies and that have the most effect on the net profit and net assets recognised in the Group's financial statements.
Recognition of provisions following the sale of Quilter International
Management exercised significant judgement in determining the accounting treatment for a number of provisions related to business activities to separate the business from the Group in respect of the sale of Quilter International. Significant judgement was required to assess whether the costs were directly attributable and incremental to the sale and whether a legal or constructive obligation existed in order to recognise the provisions. See note 16 for further details.
Recognition of insurance recovery asset in respect of Lighthouse defined benefit pension advice
For Lighthouse defined benefit ("DB") to defined contribution ("DC") pension transfer advice provided, management has previously applied judgement in order to determine whether an asset can be reasonably estimated, and in respect of the measurement of such an asset, in relation to an insurance recovery under Lighthouse's professional indemnity policies ("PI Policies"). During 2022, the insurers confirmed coverage up to the PI Policies' limit of indemnity of GBP15 million for these legal liabilities. These obligations to the Group were settled in full during 2022. As a result the recognition and measurement of an insurance asset is no longer considered a critical accounting judgement.
Critical accounting estimates
The Group's critical accounting estimates involve the most complex or subjective assessments and assumptions, which have a significant risk of resulting in material adjustment to the net carrying amounts of assets and liabilities within the next financial year. Management uses its knowledge of current facts and circumstances and applies estimation and assumption setting techniques that are aligned with relevant actuarial and accounting standards and guidance to make predictions about future actions and events. Actual results may differ from those estimates.
Provision for the cost of defined benefit pension advice
An estimate was determined for unsuitable pension advice related to schemes other than those concluded as part of the skilled person review, using a methodology which takes account of recent experience of redress payments calculated by an independent expert and applying a proportion of transfer value to determine redress payable as an indicative provision. The calculations are based upon FCA guidelines and modelling performed, and factors including pension transfer value, date of retirement, discount rate and inflation rate assumptions.
Measurement of deferred tax
The estimation of future taxable profits is performed as part of the annual business planning process, and is based on estimated levels of AuMA, which are subject to a large number of factors including global stock market movements, related movements in foreign exchange rates and net client cash flows, together with estimates of expenses and other charges. The Business Plan, adjusted for known and estimated tax sensitivities, is used to determine the extent to which deferred tax assets are recognised. In general, the Group assesses the recoverability of shareholder assets based on estimated taxable profits over a three-year planning horizon and assesses policyholder assets based on estimated investment growth over the medium term. Management has reassessed the sensitivity of the recoverability of deferred tax assets based on the latest forecast cash flows.
Other principal estimates
The Group's assessment of goodwill and intangible assets for impairment uses the latest cash flow forecasts from the Group's three-year Business Plan. These forecasts include estimates relating to equity market levels and growth in AuMA in future periods, together with levels of new business growth, net client cash flow, revenue margins, and future expenses and discount rates (see note 9). These forecasts take account of the climate-related risks and other responsible business considerations. Management does not consider that the use of these estimates has a significant risk of causing a material adjustment to the carrying amount of the assets within the next financial year.
2: New standards, amendments to standards, and interpretations adopted by the Group
There were no new standards or interpretations which became effective from 1 January 2022.
The following amendments to accounting standards became applicable for the current reporting year, with no material impact on the Group's consolidated results, financial position or disclosures:
Adopted by Amendments to standards
the Group from
1 January 2022 Amendments to IAS 16 Property, Plant and Equipment
- Proceeds before Intended Use
---------------------------------------------------
1 January 2022 Annual Improvements 2018-2020 Cycle
---------------------------------------------------
1 January 2022 Amendments to IFRS 3 References to the Conceptual
Framework
---------------------------------------------------
1 January 2022 Amendments to IAS 37 Onerous Contracts - Cost
of Fulfilling a Contract
---------------------------------------------------
3: Significant changes in the year
Capital return, Share Consolidation and changes to comparative amounts
On 12 May 2022, shareholder approval was received at the General Meeting for a capital return of GBP328 million (20 pence per share) to shareholders of Quilter plc by way of a B Share Scheme. The capital return represented the net surplus proceeds from the sale of Quilter International after retaining funds for planned Business Simplification and selected revenue enhancing investments. The B shares were created out of the Company's merger reserve, which had a balance of GBP1,687 million prior to the share creation.
To maintain comparability of shareholder metrics before and after the capital return, the scheme was accompanied by a Share Consolidation (see note 14(a)). The weighted average number of shares used to calculate the comparative EPS metrics has not been adjusted for the impact of the Share Consolidation due to the associated reduction in resources as a result of the return of capital.
The capital return reduced the Group's IFRS net assets and Solvency II own funds by GBP328 million, comprised of GBP331 million cash paid upon redemption of the B shares, offset by a foreign exchange gain of GBP3 million on South African Rand held between the date the capital return was announced and the redemption of the B shares for the JSE portion of the capital return.
Notes to the condensed consolidated financial statements
For the year ended 31 December 2022
4: Business combinations
4(a): Business disposals
Year ended 31 December 2022
There have been no material disposals of businesses during the year ended 31 December 2022.
Year ended 31 December 2021
On 30 November 2021, the Group completed the sale of Quilter International to Utmost Group for consideration of GBP481 million. The Group recognised a profit on disposal of GBP89 million. Provisions established in respect of this disposal are shown in note 16. Separation, migration and decommissioning expenses of GBP19 million incurred as a result of the disposal were included within Other operating and administrative expenses in the discontinued operations income statement for 2021.
Profit on sale of operations
----------------------------------------------------- --------------- ---------------------
GBPm
--------------- ---------------------
Year ended Year ended
31 December 31 December
2022 2021
--------------- ---------------------
Quilter
International Quilter International
and Single and Single
Strategy Strategy
business business(1)
----------------------------------------------------- --------------- ---------------------
Quilter International
Consideration received - 481
Less: transaction costs - (17)
Net proceeds from sale - 464
Carrying value of net assets disposed of - (324)
Goodwill allocated and disposed of - (50)
Recycling of foreign currency translation reserve - (1)
----------------------------------------------------- --------------- ---------------------
Profit on sale of Quilter International - 89
Change in accrued expenses in relation to the Single
Strategy business (sold in 2018) - 1
----------------------------------------------------- --------------- ---------------------
Profit on sale of operations before tax - 90
Separation, migration and decommissioning costs - (19)
Profit on disposal after separation, migration and
decommissioning costs - 71
----------------------------------------------------- --------------- ---------------------
(1) In 2021, the Group also sold LighthouseCarrwood Limited generating a profit of GBP2 million which is not reflected in the table above as the former subsidiary's activities did not represent a major line of business and therefore is regarded as being part of the Group's continuing operations.
4(b): Discontinued operations - income statement
In the prior year, the Group's discontinued operations principally related to Quilter International, the sale of which completed on 30 November 2021.
GBPm
------------ ------------
Year ended Year ended
31 December 31 December
Notes 2022 2021
---------------------------------------------------- ----- ------------ ------------
Income
Gross earned premiums - 1
Premiums ceded to reinsurers - (1)
Fee income and other income from service activities - 169
Investment return - 1,816
Other income - 1
---------------------------------------------------- ----- ------------ ------------
Total income - 1,986
Expenses
Change in investment contract liabilities 15 - (1,818)
Fee and commission expenses, and other acquisition
costs - (72)
Other operating and administrative expenses - (55)
Total expenses - (1,945)
Profit on sale of operations before tax 4(a) - 90
---------------------------------------------------- ----- ------------ ------------
Profit before tax attributable to equity holders
from discontinued operations - 131
Profit after tax from discontinued operations - 131
---------------------------------------------------- ----- ------------ ------------
Attributable to:
Equity holders of Quilter plc - 131
---------------------------------------------------- ----- ------------ ------------
Earnings per Ordinary Share on profit attributable to Ordinary Shareholders
of Quilter plc
---------------------------------------------------------------------------------------
Basic - from discontinued operations (pence) 8(b) - 8.0
---------------------------------------------------- ----- ------------ ------------
Diluted - from discontinued operations (pence) 8(b) - 7.8
---------------------------------------------------- ----- ------------ ------------
4(c): Discontinued operations - statement of comprehensive income
GBPm
------------- ------------
Year ended Year ended
31 December 31 December
2022 2021
-------------------------------------------------------- ------------- ------------
Profit after tax - 131
Total comprehensive income from discontinued operations - 131
-------------------------------------------------------- ------------- ------------
4(d): Discontinued operations - net cash flows
GBPm
------------- ------------
Year ended Year ended
31 December 31 December
2022 2021
----------------------------------------------- ------------- ------------
Total net cash flows from operating activities - 276
Total net cash flows from investing activities - (411)
Total net cash flows from financing activities - (2)
------------------------------------------------ ------------ ------------
Net decrease in cash and cash equivalents - (137)
------------------------------------------------ ------------ ------------
4(e): Assets and liabilities held for sale
Assets classified as held for sale at 31 December 2022 relate to a leasehold interest in an office property which is vacant for which the Group is actively seeking a buyer. There were no assets or liabilities classified as held for sale at 31 December 2021.
4 (f): Business acquisitions
There have been no material acquisitions of businesses during the year ended 31 December 2022 or the year ended 31 December 2021.
Contingent consideration arising from historical business acquisitions:
The table below details the movements in the contingent consideration balance during the current and prior year arising from the business acquisitions in previous years.
GBPm
------------ ------------
Year ended Year ended
31 December 31 December
2022 2021
------------ ------------
Opening balance 5 16
Payments (5) (7)
Financing interest charge - 1
Unused amounts reversed and other movements - (5)
-------------------------------------------- ------------ ------------
Closing balance - 5
-------------------------------------------- ------------ ------------
Contingent consideration represents the Group's best estimate of the amount payable in relation to each acquisition discounted to net present value. The basis used for each acquisition varies but includes payments based on a percentage of the level of assets under administration, funds under management and levels of ongoing fee income at future dates.
5: Alternative performance measures ("APMs")
5(a): Adjusted profit before tax and reconciliation to profit after tax
Basis of preparation of adjusted profit before tax
Adjusted profit before tax is one of the Group's alternative performance measures and represents the Group's IFRS profit, adjusted for specific items that management considers to be outside of the Group's normal operations or one-off in nature, as detailed in note 5(b). Adjusted profit before tax does not provide a complete picture of the Group's financial performance, which is disclosed in the IFRS income statement, but is instead intended to provide additional comparability and understanding of the financial results.
GBPm
------------ ----------- -------------- -----
Year ended 31 December
2021
------------
Year ended
31 December Continuing Discontinued
Notes 2022 operations operations(1) Total
---------------------------------------------- ---------- ------------ ----------- -------------- -----
Affluent 105 111 50 161
High Net Worth 45 56 - 56
Head Office (16) (29) - (29)
---------------------------------------------- ---------- ------------ ----------- -------------- -----
Adjusted profit before tax 134 138 50 188
Reallocation of Quilter International costs - (10) 10 -
---------------------------------------------- ---------- ------------ ----------- -------------- -----
Adjusted profit before tax after reallocation 6(b) 134 128 60 188
---------------------------------------------- ---------- ------------ ----------- -------------- -----
Adjusting items:
Impact of acquisition and disposal-related
accounting 5(b)(i) (42) (41) - (41)
Profit on business disposals(2) 4(a) - 2 90 92
Business transformation costs 5(b)(ii) (30) (51) (19) (70)
Managed separation costs 5(b)(iii) - (2) - (2)
Finance costs 5(b)(iv) (10) (10) - (10)
Policyholder tax adjustments 5(b)(v) 138 (7) - (7) Voluntary customer repayments 5(b)(vi) (6) - - - Other adjusting items 5(b)(vii) (1) - - - Exchange rate gain (ZAR/GBP) 5(b)(viii) 4 - - - Customer remediation 5(b)(ix) 12 (7) - (7) ---------------------------------------------- ---------- ------------ ----------- -------------- ----- Total adjusting items before tax 65 (116) 71 (45) ---------------------------------------------- ---------- ------------ ----------- -------------- ----- Profit before tax attributable to equity holders 199 12 131 143 Tax attributable to policyholder returns 7(a) (134) 73 - 73 Income tax credit/(expense) 7(a,b) 110 (62) - (62) ---------------------------------------------- ---------- ------------ ----------- -------------- ----- Profit after tax(3) 175 23 131 154 ---------------------------------------------- ---------- ------------ ----------- -------------- -----
(1) 2021 discontinued operations include the results of Quilter International.
(2) In 2021, the discontinued operations profit on business disposals of GBP90 million resulted from the disposal of Quilter International. The GBP2 million continuing operations profit on business disposals resulted from the disposal of LighthouseCarrwood Limited. See note 4(a) for details.
(3) IFRS profit after tax.
5(b): Adjusting items
In determining adjusted profit before tax, the Group's IFRS profit before tax is adjusted for specific items that management considers to be outside of the Group's normal operations or one-off in nature. These are detailed below.
5(b)(i): Impact of acquisition and disposal-related accounting
Goodwill and other acquired intangibles are recognised on the acquisition of a business and represent the premium paid over the fair value of the Group's share of the identifiable assets and liabilities acquired at the date of acquisition (as recognised under IFRS 3 Business Combinations). The Group excludes any impairment of goodwill from adjusted profit as well as the amortisation and impairment of acquired intangible assets, any acquisition costs, finance costs related to the discounting of contingent consideration and incidental items relating to past disposals.
The effect of these adjustments to determine adjusted profit are summarised below. All adjustments are in respect of continuing operations.
GBPm
------------ ------------
Year ended Year ended
31 December 31 December
Note 2022 2021
------------------------------------------------------------ ---- ------------ ------------
Amortisation of other acquired intangible assets 9 42 45
Fair value gains on revaluation of contingent consideration - (5)
Unwinding of discount on contingent consideration - 1
------------------------------------------------------------ ---- ------------ ------------
Total impact of acquisition and disposal-related accounting 42 41
------------------------------------------------------------------ ------------ ------------
5(b)(ii): Business transformation costs
Business transformation costs include four key items: costs associated with the UK Platform Transformation Programme, Optimisation programme costs, Business Simplification costs and business separation costs following disposal of Quilter International. For the year ended 31 December 2022, these costs totalled GBP30 million (31 December 2021: GBP70 million) in aggregate, the principal components of which are described below:
UK Platform Transformation Programme - 31 December 2022: GBPnil, 31 December 2021: GBP28 million
The Platform Transformation Programme concluded in 2021 with lifetime costs of GBP202 million. No further costs were incurred in 2022.
Optimisation programme costs - 31 December 2022: GBP6 million, 31 December 2021: GBP22 million
The Optimisation programme commenced in 2018 to provide closer business integration, create central support, rationalise technology and reduce third-party spend. The programme has now achieved its target of delivering annualised run-rate cost savings of GBP65 million with total implementation costs since inception of GBP87 million. This programme concluded during 2022.
Business Simplification costs - 31 December 2022: GBP17 million, 31 December 2021: GBPnil
The Business Simplification programme is anticipated to reduce operating costs by GBP45 million on a run-rate basis, with implementation costs expected to be GBP55 million. The Group continues to simplify its structures and organisation to support the two business segments. To date, the programme has delivered GBP23 million of annualised run-rate cost savings with an implementation cost of GBP17 million.
Restructuring costs following the disposal of Quilter Life Assurance - 31 December 2022: GBP3 million, 31 December 2021: GBP1 million
Following the sale of Quilter Life Assurance in 2019, the Group entered into a Transitional Service Agreement with the buyer, ReAssure. During the year ended 31 December 2022, the Group recognised GBP3 million for property exit costs following the conclusion of the Transitional Service Agreement.
Business separation costs following disposal of Quilter International - 31 December 2022: GBPnil, 31 December 2021: GBP19 million
The costs of business separation arise from the process to separate Quilter International's infrastructure, which is complex and covers a wide range of areas including people, IT systems, data and contracts facilities. A programme team has been established to ensure the transformation of these areas to the acquirer. These provisions have been based on external quotations and estimations, together with estimates of the time required for incremental resource costs to achieve the separation. The costs are predominantly expected to occur over a three-year period.
The Group has provided for the future restructuring costs arising due to the sale of Quilter International to Utmost Group on 30 November 2021, including the cost of migrating IT systems and data to the acquirer, as the Transitional Service Agreement with Utmost Group (the acquirer) runs off and the remaining Quilter business is restructured following the disposal.
Investment in business costs - 31 December 2022: GBP4 million, 31 December 2021: GBPnil
Investment in business costs of GBP4 million were incurred in 2022 as the Group continues to enable and support advisers and clients and improve productivity through better utilisation of technology.
5(b)(iii): Managed separation costs
For the year ended 31 December 2022, no managed separation costs were incurred (31 December 2021: GBP2 million ). In prior periods, these o ne-off costs related to the Group's separation from Old Mutual and were excluded from adjusted profit because they related to a fundamental restructuring of the Group and were not representative of the operating activity of the Group. No further costs associated with managed separation are anticipated.
5(b)(iv): Finance costs
The nature of much of the Group's operations means that, for management's decision-making and internal performance management, the effects of interest costs on external borrowings are removed when calculating adjusted profit. For the year ended 31 December 2022, finance costs were GBP10 million (31 December 2021: GBP10 million).
5(b)(v): Policyholder tax adjustments
For the year ended 31 December 2022, the total amount of policyholder tax adjustments to adjusted profit is GBP138 million charge (31 December 2021: GBP7 million credit). Adjustments to policyholder tax are made to remove distortions arising from market volatility that can, in turn, lead to volatility in the policyholder tax charge between periods. The recognition of the income received from policyholders (which is included within the Group's income) to fund the policyholder tax liability can vary in timing to the recognition of the corresponding tax expense, creating volatility in the Group's IFRS profit or loss before tax attributable to equity holders. Note 7(a) provides further information on the impact of markets on the policyholder tax charge. Adjustments are also made to remove policyholder tax distortions from other non-operating adjusting items.
5(b)(vi): Voluntary customer repayment
For the year ended 31 December 2022, these costs were GBP6 million (31 December 2021: GBPnil) and relate to a change in business policy. The voluntary repayments represent amounts to be paid to customers relating to revenue previously recognised in respect of Final Plan Closure receipts.
5(b)(vii): Other adjusting items
For the year ended 31 December 2022, these costs were GBP1 million (31 December 2021: GBPnil) and relate to the impairment of an indemnification asset.
5(b)(viii): Exchange rate gain (ZAR/GBP)
For the year ended 31 December 2022, income of GBP4 million was received (31 December 2021: GBPnil) and related to a foreign exchange gain on cash held in South African Rand in preparation for the capital return and final dividend payments in May 2022. Cash was converted to South African Rand upon announcement of the details of the capital return and dividend payment to provide an economic hedge for the Group. The foreign exchange gain is fully offset by an equal amount taken directly to retained earnings. See note 3 for further detail.
5(b)(ix): Customer remediation
Lighthouse pension transfer advice provision - 31 December 2022: net income GBP12 million, 31 December 2021: net expenses GBP7 million
In 2022, insurance proceeds in relation to claims in respect of legal liabilities arising in connection with Lighthouse's DB to DC pension transfer advice cases have been received, contributing GBP12 million to the Group's profit before tax. These have been excluded from adjusted profit on the basis that the advice activities to which the charge and benefit relate took place prior to the Group's acquisition of the business . The provision for the redress of British Steel Pension Scheme cases and other DB to DC pension transfer cases, excluding the impact of payments made, has decreased by a further GBP4 million in the year, which has been recognised in the income statement as a reduction of expenses (31 December 2021: GBP7 million expense). This decrease reflects the impact of the final redress calculations performed compared with the provision estimated, as part of the ongoing skilled person review, and an estimate for further customer redress following the skilled person's recommendation of a review of additional cases. During the year, GBP4 million of additional legal, consulting, and other costs were incurred. Further details of the provision are provided in note 16.
5(c): Reconciliation of IFRS income and expenses to "Total net fee revenue" and "Operating expenses" within adjusted profit
This reconciliation shows how each line of the Group's consolidated IFRS income statement is allocated to the Group's APMs: Net management fees, Total net fee revenue and Operating expenses. The IFRS income statement column in the table below, down to "Profit before tax attributable to equity holders from continuing operations", reconciles to each line of the Group's consolidated income statement. Allocations are determined by management and aim to show the Group's sources of profit (net of relevant directly attributable expenses). These allocations remain consistent from period to period to ensure comparability, unless otherwise stated.
GBPm
-------- ----------- ----------- ------------ -------- ------------ ------------
Adjusted
Net Total profit Consolidated
mgmt. Other net fee Operating before Consol. income
Year ended 31 December 2022 fees(1) revenue(1) revenue(1) expenses(1) tax of funds(2) statement
------------------------------ -------- ----------- ----------- ------------ -------- ------------ ------------
Income
Fee income and other income
from
service activities 548 95 643 - 643 (62) 581
Investment return - (4,292) (4,292) - (4,292) (357) (4,649)
Other income - 5 5 21 26 2 28
------------------------------ -------- ----------- ----------- ------------ -------- ------------ ------------
Total income 548 (4,192) (3,644) 21 (3,623) (417) (4,040)
Expenses
Change in investment contract
liabilities - 4,318 4,318 - 4,318 - 4,318
Fee and commission expenses,
and other acquisition costs (46) 1 (45) - (45) (9) (54)
Change in third-party
interests
in consolidated funds - - - - - 438 438
Other operating and
administrative
expenses (15) - (15) (557) (572) (12) (584)
Finance costs - - - (13) (13) - (13)
------------------------------ -------- ----------- ----------- ------------ -------- ------------ ------------
Total expenses (61) 4,319 4,258 (570) 3,688 417 4,105
Tax credit attributable to
policyholder
returns 134 - 134 - 134 - 134
------------------------------ -------- ----------- ----------- ------------ -------- ------------ ------------
Profit before tax attributable
to equity holders from
continuing
operations 621 127 748 (549) 199 - 199
------------ ------------
Adjusting items:
Impact of acquisition and
disposal-related
accounting - - - 42 42
Business transformation costs - - - 30 30
Voluntary customer repayments - - - 6 6
Other adjusting items - - - 1 1
Finance costs - - - 10 10
Exchange rate gain (ZAR/GBP) - (4) (4) - (4)
Customer remediation - - - (12) (12)
Policyholder tax adjustments (138) - (138) - (138)
------------------------------ -------- ----------- ----------- ------------ --------
Adjusting items (138) (4) (142) 77 (65)
------------------------------ -------- ----------- ----------- ------------ --------
Adjusted profit before tax -
continuing operations 483 123 606 (472) 134
------------------------------ -------- ----------- ----------- ------------ --------
(1) The APMs "Net Management Fees", "Other revenue", "Total net fee revenue" and "Operating expenses" are commented on within the Financial review.
(2) Consolidation of funds shows the grossing up impact to the Group's consolidated income statement as a result of the consolidation of funds requirements. This grossing up is excluded from the Group's adjusted profit.
GBPm
-------- ----------- ----------- ------------ -------- ------------ ------------
Adjusted
Net Total profit Consolidated
mgmt. Other net fee Operating before Consol. income
Year ended 31 December 2021 fees(1) revenue(1) revenue(1) expenses(1) tax of funds(2) statement
------------------------------ -------- ----------- ----------- ------------ -------- ------------ ------------
Income
Fee income and other income
from
service activities 633 111 744 - 744 (78) 666
Investment return - 3,294 3,294 - 3,294 708 4,002
Other income - 1 1 15 16 2 18
------------------------------ -------- ----------- ----------- ------------ -------- ------------ ------------
Total income 633 3,406 4,039 15 4,054 632 4,686
Expenses
Change in investment contract
liabilities - (3,293) (3,293) - (3,293) - (3,293)
Fee and commission expenses,
and other acquisition costs (52) 4 (48) - (48) (13) (61)
Change in third-party
interests
in consolidated funds - - - - - (599) (599)
Other operating and
administrative
expenses (15) 1 (14) (602) (616) (20) (636)
Finance costs - - - (14) (14) - (14)
------------------------------ -------- ----------- ----------- ------------ -------- ------------ ------------
Total expenses (67) (3,288) (3,355) (616) (3,971) (632) (4,603)
Profit on business disposal - 2 2 - 2 - 2
Tax expense attributable to
policyholder
returns (73) - (73) - (73) - (73)
------------------------------ -------- ----------- ----------- ------------ -------- ------------ ------------
Profit before tax attributable
to equity holders from
continuing
operations 493 120 613 (601) 12 - 12
------------ ------------
Adjusting items:
Impact of acquisition and
disposal-related
accounting - - - 41 41
Profit on business disposal - (2) (2) - (2)
Business transformation costs - - - 51 51
Managed separation costs - - - 2 2
Finance costs - - - 10 10
Customer remediation - - - 7 7
Policyholder tax adjustments 7 - 7 - 7
------------------------------ -------- ----------- ----------- ------------ --------
Adjusting items 7 (2) 5 111 116
------------------------------ -------- ----------- ----------- ------------ --------
Adjusted profit before tax
after
reallocation 500 118 618 (490) 128
Reallocation of Quilter
International
costs(3) - - - 10 10
------------------------------ -------- ----------- ----------- ------------ --------
Adjusted profit before tax -
continuing operations 500 118 618 (480) 138
------------------------------ -------- ----------- ----------- ------------ --------
(1) The APMs "Net Management Fees", "Other revenue", "Total net fee revenue" and "Operating expenses" are commented on within the Financial review.
(2) Consolidation of funds shows the grossing up impact to the Group's consolidated income statement as a result of the consolidation of funds requirements. This grossing up is excluded from the Group's adjusted profit.
(3) GBP10 million of Other operating and administrative expenses previously reported in Quilter International are presented within continuing operations, as costs of this nature did not transfer to Utmost Group (the acquirer) on disposal.
6: Segmental information
6(a): Segmental presentation
The Group's operating segments comprise High Net Worth and Affluent, which is consistent with the manner in which the Group is structured and managed. For all reporting periods, these segments have been classified as continuing operations in the consolidated income statement. Head Office includes certain revenues and central costs that are not allocated to the segments. There have been no changes to the basis of segmentation for the periods presented within these consolidated financial statements.
Adjusted profit before tax is an APM reported to the Group's management and Board. Management and the Board use additional performance indicators to assess the performance of each of the segments, including net client cash flows, assets under management and administration, total net fee revenue and operating margin.
Consistent with internal reporting, income and expenses that are not directly attributable to a particular segment are allocated between segments where appropriate. The Group accounts for inter-segment income and transfers as if the transactions were with third parties at current market prices. Intra-group recharges in respect of operating and administration expenses within businesses disclosed as discontinued operations are not adjusted for potential future changes to the level of remaining costs following the disposal of those businesses.
The segmental information in this note reflects the adjusted and IFRS profit measures for each operating segment as provided to management and the Board. Income is analysed in further detail for each operating segment in note 6 .
Continuing operations:
High Net Worth
This segment comprises Quilter Cheviot and Quilter Private Client Advisers.
Quilter Cheviot provides discretionary investment management predominantly in the United Kingdom with bespoke investment portfolios tailored to the individual needs of High Net Worth clients, charities, companies and institutions through a network of branches in London and the regions. Investment management services are also provided by operations in the Channel Islands and the Republic of Ireland.
Quilter Private Client Advisers provide financial advice for protection, mortgages, savings, investments and pensions predominantly to High Net Worth clients.
Affluent
This segment is comprised of Quilter Investment Platform, Quilter Investors and Quilter Financial Planning.
Quilter Investment Platform is a leading investment platform provider of advice-based wealth management products and services in the UK, which serves a largely Affluent client base through advised multi-channel distribution.
Quilter Investors is a leading provider of investment solutions in the UK multi-asset market. It develops and manages investment solutions in the form of funds for the Group and third-party clients. It has several fund ranges which vary in breadth of underlying asset class.
Quilter Financial Planning is a restricted and independent financial adviser network including Quilter Financial Advisers and Lighthouse, providing mortgage and financial planning advice and financial solutions for both individuals and businesses through a network of intermediaries. It operates across all markets, from wealth management and retirement planning advice through to dealing with property wealth and personal and business protection needs.
Head Office
In addition to the Group's two operating segments, Head Office comprises the investment return on centrally held assets, central support function expenses, central core structural borrowings and certain tax balances.
Discontinued operations
Quilter International is excluded from the segmental information for the year ended 31 December 2021 as it was sold on 30 November 2021. See note 4 for further details.
Quilter International was Quilter's cross-border business, focusing on High Net Worth and Affluent local clients and expatriates in the UK, Asia, the Middle East, Europe and Latin America.
6(b)(i): Adjusted profit statement - segmental information for the year ended 31 December 2022
The table below presents the Group's continuing operations split by operating segment, reconciling the segmented IFRS income statement (to "Profit/(loss) before tax attributable to equity holders from continuing operations") to adjusted profit before tax.
GBPm
-------- ---------- ------- --------------- ------------
Operating segments
Consolidated
High Head Consolidation income
Notes Affluent Net Worth Office adjustments(1) statement
-------------------------------------------- ---------- -------- ---------- ------- --------------- ------------
Income
Fee income and other income from service
activities 441 202 - (62) 581
Investment return (4,307) 9 8 (359) (4,649)
Other income 112 3 5 (92) 28
Segmental income (3,754) 214 13 (513) (4,040)
-------------------------------------------- ---------- -------- ---------- ------- --------------- ------------
Expenses
Change in investment contract liabilities 4,318 - - - 4,318
Fee and commission expenses, and other
acquisition costs (46) - - (8) (54)
Change in third-party interests in
consolidated
funds - - - 438 438
Other operating and administrative expenses (410) (202) (53) 81 (584)
Finance costs (3) - (12) 2 (13)
Segmental expenses 3,859 (202) (65) 513 4,105
-------------------------------------------- ---------- -------- ---------- ------- --------------- ------------
Profit/(loss) before tax from continuing
operations 105 12 (52) - 65
Tax credit attributable to policyholder
returns 134 - - - 134
-------------------------------------------- ---------- -------- ---------- ------- --------------- ------------
Profit/(loss) before tax attributable
to equity holders from continuing
operations 239 12 (52) - 199
-------------------------------------------- ---------- -------- ---------- ------- --------------- ------------
Adjusted for non-operating items: Impact of acquisition and disposal-related accounting 5(b)(i) 10 32 - - 42 Business transformation costs 5(b)(ii) - - 30 - 30 Finance costs 5(b)(iv) - - 10 - 10 Policyholder tax adjustments 5(b)(v) (138) - - - (138) Voluntary customer repayments 5(b)(vi) 6 - - - 6 Other adjusting items 5(b)(vii) - 1 - - 1 Exchange rate gain (ZAR/GBP) 5(b)(viii) - - (4) - (4) Customer remediation 5(b)(ix) (12) - - - (12) -------------------------------------------- ---------- -------- ---------- ------- --------------- ------------ Adjusting items before tax (134) 33 36 - (65) -------------------------------------------- ---------- -------- ---------- ------- --------------- ------------ Adjusted profit/(loss) before tax - continuing operations 105 45 (16) - 134 -------------------------------------------- ---------- -------- ---------- ------- --------------- ------------
(1) Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.
6(b)(ii): Adjusted profit statement - segmental information for the year ended 31 December 2021
GBPm
-------- ---------- ------- -------------- --------------- ------------
Operating segments
Reallocation
of Quilter Consolidated
High Head International Consolidation income
Notes Affluent Net Worth Office costs(1) adjustments(2) statement
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
Income
Fee income and other income
from
service activities 532 213 - - (79) 666
Investment return 3,293 - 1 - 708 4,002
Other income 110 - - - (92) 18
Segmental income 3,935 213 1 - 537 4,686
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
Expenses
Change in investment contract
liabilities (3,293) - - - - (3,293)
Fee and commission expenses,
and other acquisition costs (48) - - - (13) (61)
Change in third-party
interests
in consolidated funds - - - - (599) (599)
Other operating and
administrative
expenses (463) (187) (51) (10) 75 (636)
Finance costs (4) - (10) - - (14)
Segmental expenses (3,808) (187) (61) (10) (537) (4,603)
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
Profit on sale of subsidiary 2 - - - - 2
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
Profit/(loss) before tax from
continuing operations 129 26 (60) (10) - 85
Tax expense attributable to
policyholder
returns (73) - - - - (73)
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
Profit/(loss) before tax
attributable
to equity holders from
continuing
operations 56 26 (60) (10) - 12
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
Adjusted for non-operating
items:
Impact of acquisition and
disposal-related
accounting 5(b)(i) 11 30 - - - 41
Net profit on business
disposals
and acquisitions (2) - - - - (2)
Business transformation costs 5(b)(ii) 32 - 19 - - 51
Managed separation costs 5(b)(iii) - - 2 - - 2
Finance costs 5(b)(iv) - - 10 - - 10
Policyholder tax adjustments 5(b)(v) 7 - - - - 7
Customer remediation 5(b)(ix) 7 - - - - 7
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
Adjusting items before tax 55 30 31 - - 116
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
Adjusted profit/(loss) before
tax after reallocation 111 56 (29) (10) - 128
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
Reallocation of Quilter
International
costs 4(b) - - - 10 - 10
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
Adjusted profit/(loss) before
tax - continuing operations 111 56 (29) - - 138
----------------------------- --------- -------- ---------- ------- -------------- --------------- ------------
(1) GBP10 million of Other operating and administrative expenses previously reported in Quilter International are presented within continuing operations, as costs of this nature did not transfer to Utmost Group (the acquirer) on disposal.
(2) Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.
6(c) : Breakdown of income
This note analyses the Group's income into further detail based on the types of fees earned and split by operating segment, which is aligned to the Group's client base.
GBPm
-------- ---------- ------- ------------- -----------
Total
High Head Consolidation continuing
Year ended 31 December 2022 Affluent Net Worth Office adjustments operations
------------------------------------ -------- ---------- ------- ------------- -----------
Premium-based fees 75 21 - - 96
Fund-based fees (1) 356 181 - (62) 475
Fixed fees 2 - - - 2
Other fee and commission income 8 - - - 8
------------------------------------ -------- ---------- ------- ------------- -----------
Fee income and other income from
service activities 441 202 - (62) 581
------------------------------------ -------- ---------- ------- ------------- -----------
Investment return (4,307) 9 8 (359) (4,649)
Other income 112 3 5 (92) 28
Total income (3,754) 214 13 (513) (4,040)
------------------------------------ -------- ---------- ------- ------------- -----------
GBPm GBPm
-------- ---------- ------- ------------- ----------- ------------
Total
High Net Head Consolidation continuing Discontinued
Year ended 31 December 2021 Affluent Worth Office adjustments operations operations
------------------------------------ -------- ---------- ------- ------------- ----------- ------------
Premium-based fees 87 24 - - 111 45
Fund-based fees(1) 376 189 - (79) 486 81
Retrocessions received, intra-group - - - - - 6
Fixed fees 2 - - - 2 26
Exit fees - - - - - 11
Other fee and commission income 67 - - - 67 -
------------------------------------ -------- ---------- ------- ------------- ----------- ------------
Fee income and other income from
service activities 532 213 - (79) 666 169
------------------------------------ -------- ---------- ------- ------------- ----------- ------------
Investment return 3,293 - 1 708 4,002 1,816
Other income 110 - - (92) 18 1
Total income 3,935 213 1 537 4,686 1,986
------------------------------------ -------- ---------- ------- ------------- ----------- ------------
(1) Income from fiduciary activities is included within fund-based fees.
7: Tax
7(a): Tax charged to the income statement
GBPm
------------ ------------
Year ended Year ended
31 December 31 December
2022 2021
-------------------------------------------------------- ------------ ------------
Current tax
United Kingdom 12 36
Overseas tax 1 1
Total current tax charge 13 37
--------------------------------------------------------- ------------ ------------
Deferred tax
Origination and reversal of temporary differences (120) 36
Effect on deferred tax of changes in tax rates (1) (12)
Adjustments to deferred tax in respect of prior periods (2) 1
--------------------------------------------------------- ------------ ------------
Total deferred tax (credit)/charge (123) 25
--------------------------------------------------------- ------------ ------------
Total tax (credited)/charged to income statement
- continuing operations (110) 62
Total tax (credited)/charged to income statement (110) 62
--------------------------------------------------------- ------------ ------------
Attributable to policyholder returns - continuing
operations (134) 73
Attributable to equity holders - continuing operations 24 (11)
--------------------------------------------------------- ------------ ------------
Total tax (credited)/charged to income statement (110) 62
--------------------------------------------------------- ------------ ------------
Policyholder tax
Certain products are subject to tax on policyholders' investment returns. This "policyholder tax" is an element of total tax expense. To make the tax expense more meaningful, tax attributable to policyholder returns and tax attributable to equity holders' profits are shown separately in the income statement.
The tax attributable to policyholder returns is the amount payable in the year plus the movement of amounts expected to be payable in future years. The remainder of the tax expense is attributed to shareholders as tax attributable to equity holders.
The Group's income tax credit on continuing operations was GBP110 million for the year ended 31 December 2022, compared to a charge of GBP62 million for the prior year. This income tax credit can vary significantly year-on-year as a result of market volatility and the impact this has on policyholder tax. The recognition of the income received from policyholders to fund the policyholder tax liability (which is included within the Group's income) can vary in timing to the recognition of the corresponding policyholder tax expense, creating volatility in the Group's IFRS profit before tax attributable to equity holders. An adjustment is made to adjusted profit to remove these distortions, as explained further in note 5(b)(v).
Market movements during the year ended 31 December 2022 resulted in investment losses of GBP587 million on products subject to policyholder tax. The loss is a component of the total "investment return" loss of GBP4,649 million shown in the income statement. The impact of the GBP587 million investment return loss is the primary reason for the GBP134 million tax credit attributable to policyholder returns in respect of the continuing operations for the year ended 31 December 2022 (31 December 2021: GBP73 million expense in respect of continuing operations and GBPnil expense in respect of discontinued operations).
UK Corporation Tax rate
The main rate of Corporation Tax is 19% for the financial year 2022 (2021: 19%). The Corporation Tax rate will increase from 19% to 25%, effective from 1 April 2023. This change was substantively enacted in 2021 and the new rate has been used in recognising the Company's deferred tax assets and liabilities for reversals expected to take place on or after 1 April 2023.
The Company considers that future years' profits will be sufficient to utilise the tax asset carried forward.
7(b): Reconciliation of total income tax expense
The income tax credited or charged to profit or loss differs from the amount that would apply if all of the Group's profits from all the countries in which the Group operates had been taxed at the UK standard Corporation Tax rate. The difference in the effective rate is explained below :
GBPm
------------ ------------
Year ended Year ended
31 December 31 December
2022 2021
------------------------------------------------------ ------------ ------------
Profit before tax from continuing operations 65 85
Tax at UK standard rate of 19% (2021: 19%) 12 16
Different tax rate or basis on overseas operations - 1
Untaxed and low taxed income (6) -
Expenses not deductible for tax purposes 1 -
Net movements on unrecognised deferred tax assets (6) (4)
Effect on deferred tax of changes in tax rates (1) (12)
Adjustments to deferred tax in respect of prior years (2) 1
Income tax attributable to policyholder returns (net
of tax relief) (108) 60
Total tax (credited)/charged to income statement
- continuing operations (110) 62
Total tax (credited)/charged to income statement (110) 62
------------------------------------------------------- ------------ ------------
7(c): Reconciliation of income tax credit or expense in the income statement to income tax on adjusted profit
GBPm
------------ ------------
Year ended Year ended
31 December 31 December
Note 2022 2021
------------------------------------------------------- ------- ------------ ------------
Income tax (credit)/expense on continuing operations
(1) (110) 62
Tax on adjusting items
Impact of acquisition and disposal-related accounting 8 4
Business transformation costs 5 10
Finance costs 2 2
Exchange rate gain (ZAR/GBP) (1) -
Customer remediation - 1
Tax adjusting items
Policyholder tax adjustments 5(b)(v) 138 (7)
Other shareholder tax adjustments (2) (19) 7
------------------------------------------------------- ------- ------------ ------------ Tax on adjusting items - continuing operations 133 17 Less: tax attributable to policyholder returns within adjusted profit - continuing operations (3) (4) (66) ------------------------------------------------------- ------- ------------ ------------ Tax charged on adjusted profit - continuing operations 19 13 ------------------------------------------------------- ------- ------------ ------------ Tax charged on total adjusted profit 19 13 ------------------------------------------------------- ------- ------------ ------------
(1) Includes both tax attributable to policyholders and equity holders, in compliance with IFRS.
(2) Other shareholder tax adjustments comprise the reallocation of adjustments from policyholder tax as explained in note 5(b)(v) and shareholder tax adjustments for one-off items in line with the Group's adjusted profit policy.
(3) Adjusted profit treats policyholder tax as a pre-tax expense (this includes policyholder tax under IFRS and the policyholder tax adjustments) and is therefore removed from the tax charge on adjusted profit.
8: Earnings per share
The Group calculates earnings per share ("EPS") on a number of different bases. IFRS requires the calculation of basic and diluted EPS. Adjusted EPS reflects earnings that are consistent with the Group's adjusted profit measure and Headline earnings per share ("HEPS") is a requirement of the Johannesburg Stock Exchange.
Pence
------------ ------------
Year ended Year ended
31 December 31 December
Framework Notes 2022 2021
------------------------------------ -------------- ----- ------------ ------------
Basic earnings per share IFRS 8(b) 12.2 9.4
Diluted basic earnings per share IFRS 8(b) 12.0 9.2
Adjusted basic earnings per share Group policy 8(b) 8.0 10.7
Adjusted diluted earnings per share Group policy 8(b) 7.9 10.4
------------------------------------ -------------- ----- ------------ ------------
Headline basic earnings per share JSE Listing
(net of tax) Requirements 8(c) 11.7 3.9
Headline diluted earnings per share JSE Listing
(net of tax) Requirements 8(c) 11.5 3.8
------------------------------------ -------------- ----- ------------ ------------
8(a): Weighted average number of Ordinary Shares
The table below summarises the calculation of the weighted average number of Ordinary Shares for the purposes of calculating basic and diluted earnings per share for each profit measure (IFRS, adjusted and headline profit). Details of the impact on the number of shares from the Quilter share buyback scheme are detailed in note 14.
Million
------------ ------------
Year ended Year ended
31 December 31 December
2022 2021
------------------------------------------------------ ------------ ------------
Weighted average number of Ordinary Shares 1,496 1,721
Own shares including those held in consolidated funds
and EBTs (58) (77)
------------------------------------------------------- ------------ ------------
Basic weighted average number of Ordinary Shares 1,438 1,644
Adjustment for dilutive share awards and options 20 39
------------------------------------------------------- ------------ ------------
Diluted weighted average number of Ordinary Shares 1,458 1,683
------------------------------------------------------- ------------ ------------
8(b): Basic and diluted EPS (IFRS and adjusted profit)
GBPm
----------- ------------ ----- ----------- ------------ -----
Year ended 31 December Year ended 31 December
2022 2021
-------------------------------- --------------------------------
Continuing Discontinued Continuing Discontinued
Notes operations operations Total operations operations Total
-------------------------------------- ----- -----------
Profit after tax 175 - 175 23 131 154
Total adjusting items before tax 5(a) (65) - (65) 116 (71) 45
Tax on adjusting items 7(c) (133) - (133) (17) - (17)
Less: Policyholder tax adjustments 7(c) 138 - 138 (7) - (7)
Adjusted profit after tax after
reallocation 115 - 115 115 60 175
Reversal of:
Reallocation of Quilter International
costs (1) - - - 10 (10) -
Adjusted profit after tax 115 - 115 125 50 175
(1) Reallocation of Quilter International costs relate to costs that were previously reported as part of Quilter International which were presented within continuing operations in the prior year (31 December 2021: GBP10 million) as these did not transfer to Utmost Group (the acquirer) on disposal. There were no such costs in the year ended 31 December 2022. See note 4(b) for additional details.
Year ended 31 December Year ended 31 December
2022 2021
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
Post-tax
profit
measure
used Pence Pence Pence Pence Pence Pence
Basic EPS IFRS profit 12.2 - 12.2 1.4 8.0 9.4
Diluted EPS IFRS profit 12.0 - 12.0 1.4 7.8 9.2
Adjusted
Adjusted basic EPS profit 8.0 - 8.0 7.6 3.1 10.7
Adjusted
Adjusted diluted EPS profit 7.9 - 7.9 7.4 3.0 10.4
8(c): Headline earnings per share
+ + GBPm
Year ended Year ended
31 December 31 December
2022 2021
Net of Net of
Note Gross tax Gross tax
Profit attributable to equity holders 175 154
Adjusted for:
Profit on business disposals 4(a) - - (90) (90)
Impairment loss on property, plant and
equipment(1) - (7) - -
Headline earnings 168 64
Headline basic EPS (pence) 11.7 3.9
Headline diluted EPS (pence) 11.5 3.8
(1) Of the impairment, GBP3 million relates to right-of-use asset and GBP4 million relates to plant and equipment.
9: Goodwill and intangible assets
9(a): Analysis of goodwill and intangible assets
The table below shows the movements in cost and amortisation of goodwill and intangible assets.
GBPm
-------- ------------ ----------------
Software
development Other intangible
Goodwill costs assets Total
Gross amount
1 January 2021(1) 356 95 429 880
Disposal of interests in subsidiaries (50) - (4) (54)
Disposals(2) - (65) - (65)
31 December 2021(1) 306 30 425 761
31 December 2022 306 30 425 761
-------- ------------ ----------------
Amortisation and impairment losses
1 January 2021(1) - (85) (239) (324)
Amortisation charge for the year - (2) (45) (47)
Disposal of interests in subsidiaries - - 2 2
Disposals(2) - 65 - 65
31 December 2021(1) - (22) (282) (304)
Amortisation charge for the year - (2) (42) (44)
31 December 2022 - (24) (324) (348)
Carrying amount
31 December 2021 306 8 143 457
31 December 2022 306 6 101 413
-------- ------------ ----------------
(1) Following the completion of a number of strategic projects, including IT projects, the Group reviewed the fixed asset register. Assets related to software development costs with a cost of GBP10 million and an accumulated amortisation of GBP10 million (net book value: GBPnil) that had been fully amortised prior to January 2021 and that are no longer held by the Group or no longer in use have been removed from the register and are not recognised in the gross amount of software development costs as at 31 December 2022. Figures for prior periods have been restated to ensure comparability.
(2) Disposals of GBP65 million in the year ended 31 December 2021 relate to the write-off of fully amortised software in respect of the Platform Transformation Programme and following the final migration of client assets in February 2021, with all Quilter Investment Platform assets now live on the new platform.
9(b): Analysis of other intangible assets
GBPm
----------- ------------ -----------------
Average
31 December 31 December estimated Average
2022 2021 useful life period remaining
Net carrying value
Distribution channels - Quilter Financial
Planning 4 9 8 years 2 years
Customer relationships
Quilter Cheviot 59 86 10 years 2 years
Quilter Financial Planning 22 27 8 years 4 years
Quilter Private Client Advisers 14 18 8 years 4 years
Other 2 3 7 years 1 year
Total other intangible assets 101 143
9(c): Allocation of goodwill to cash-generating units ("CGUs") and impairment testing
Goodwill is monitored by management at the level of the Group's two operating segments: Affluent and High Net Worth, as disclosed in note 6(a). Both operating segments represent a group of CGUs. The allocation of goodwill to these segments was based on their individual value-in-use calculations relative to the combined total.
GBPm
-----------
31 December 31 December
2022 2021(1)
Goodwill (net carrying amount)
Affluent 223 223
High Net Worth 83 83
Total goodwill 306 306
(1) The prior year figures have been re-presented to correct a minor classification difference between the two segments. The amount attributable to Affluent has decreased by GBP2 million from the amount originally presented with a corresponding increase in High Net Worth.
Impairment review
In accordance with the requirements of IAS 36 Impairment of Assets, goodwill in both the Affluent and High Net Worth CGU groups is tested for impairment annually, or earlier if an indicator of impairment exists, by comparing the carrying value of the CGU group to which the goodwill relates to the recoverable value of that CGU group, being the higher of that CGU group's value-in-use or fair value less costs to sell. If applicable, an impairment charge is recognised when the recoverable amount is less than the carrying value. Goodwill impairment indicators include sudden stock market falls, the absence of positive Net Client Cash Flows ("NCCF"), significant falls in profits and significant increases in the discount rate.
The goodwill balance has been tested for impairment at 31 December 2022 and continues to demonstrate a surplus of the recoverable amount over the carrying value of the CGUs. As a result, no impairment is required.
The following table shows the percentage change required in each key assumption before the carrying value would exceed the recoverable amount, assuming all other variables remain the same. This highlights that further adverse movements in the key assumptions used in the CGU value-in-use calculation would be required before an impairment would need to be recognised.
High Net
Affluent Worth
Reduction in forecast cash flows 17% 47%
Percentage point increase in the discount rate 5% 20%
Forecast cash flows are impacted by movements in underlying assumptions, including equity market levels, revenue margins and NCCF. The Group considers that forecast cash flows are most sensitive to movements in equity markets because they have a direct impact on the level of the Group's fee income.
The principal sensitivity within equity market level assumptions relates to the estimated growth in equity market indices included in the three-year revenue forecasts. Management forecasts equity market growth for each business using estimated asset-specific growth rates that are supported by internal research, historical performance, Bank of England forecasts and other external estimates.
Value-in-use methodology
The value-in-use calculations are determined as the sum of net tangible assets and the expected cash flows from existing and expected future new business derived from the Business Plans. Future cash flow elements allow for the cost of capital needed to support the business.
The cash flows that have been used to determine the value-in-use of the CGUs are based on the most recent management approved three-year profit forecasts, which are contained in the Group's Business Plan. These profit forecasts incorporate anticipated equity market growth on the Group's future cash flows, and take into account climate-related risks and other responsible business considerations. These cash flows change at different rates because of the different strategies of the CGUs. In cases where the CGUs have made significant acquisitions in the recent past, the cash flows are forecast to grow faster than the more mature businesses. Post the three-year forecast period, the growth rate used to determine the terminal value of the CGUs in the annual assessment was 2.0% (2021: 2.0%), which is lower than the UK long-term growth rate. Market share and market growth information is also used to inform the expected volumes of future new business.
IAS 36 does not permit any cost savings linked to future restructuring activity to be included within the value-in-use calculation unless an associated restructuring provision has also been recognised. Consequently, for the purpose of the value-in-use calculation, a number of planned cost savings and the related implementation costs, primarily in relation to the Business Simplification programme, have been removed from the future cash flows.
The Group uses a single cost of capital of 11.4% (2021: 9.5%) to discount expected future cash flows across its two groups of CGUs because they are considered to present a similar level of risk. Capital is provided to the Group predominantly by shareholders with a relatively small amount of debt financing. The cost of capital is the weighted average of the cost of equity (return required by shareholders) and the cost of debt (return required by bondholders and owners of properties leased by the Group). When assessing the systematic risk (i.e. the beta value) within the calculation of the cost of equity, a triangulation approach is used that combines beta values obtained from historical data, a forward-looking view on the progression of beta values and the external views of investors.
10: Financial investments
The table below analyses the investments and securities that the Group invests in, either on its own proprietary behalf (shareholder funds) or on behalf of third parties (policyholder funds).
GBPm
----------- -----------
31 December 31 December
2022 2021
----------- -----------
Government and government-guaranteed securities 225 649
Other debt securities, preference shares and debentures 1,609 1,662
Equity securities 6,225 7,251
Pooled investments 35,557 38,002
Short-term funds and securities treated as investments 1 1
Total financial investments 43,617 47,565
----------- -----------
Recoverable within 12 months 43,617 47,565
Total financial investments 43,617 47,565
----------- -----------
The financial investments recoverability profile is based on the intention with which the financial assets are held. These assets are held to cover the liabilities for linked investment contracts, all of which can be withdrawn by policyholders on demand.
11: Categories of financial instruments
The analysis of financial assets and liabilities into their categories as defined in IFRS 9 Financial Instruments is set out in the following tables. Assets and liabilities of a non-financial nature, or financial assets and liabilities that are specifically excluded from the scope of IFRS 9, are reflected in the non-financial assets and liabilities category.
For information about the methods and assumptions used in determining fair value, refer to note 12. The Group's exposure to various risks associated with financial instruments is discussed in note 18.
31 December 2022
GBPm
Measurement basis Fair value
Non-financial
Mandatorily Designated Amortised assets
at FVTPL at FVTPL cost and liabilities Total
Assets
Investments in associated undertakings
(1) - - - 1 1
Loans and advances - - 34 - 34
Financial investments 43,617 - - - 43,617
Trade, other receivables and other
assets - - 261 42 303
Derivative assets 40 - - - 40
Cash and cash equivalents 1,112 - 670 - 1,782
Total assets that include financial
instruments 44,769 - 965 43 45,777
Total other non-financial assets - - - 640 640
Total assets 44,769 - 965 683 46,417
Liabilities
Investment contract liabilities - 38,186 - - 38,186
Third-party interests in consolidated
funds 5,843 - - - 5,843
Borrowings and lease liabilities - - 290 - 290
Trade, other payables and other
liabilities - - 358 78 436
Derivative liabilities 20 - - - 20
Total liabilities that include financial
instruments 5,863 38,186 648 78 44,775
Total other non-financial liabilities - - - 94 94
Total liabilities 5,863 38,186 648 172 44,869
(1) Investments in associated undertakings classified as non-financial assets and liabilities are equity accounted.
31 December 2021
GBPm
Measurement basis Fair value
Non-financial
Mandatorily Designated Amortised assets
at FVTPL at FVTPL cost and liabilities Total
Assets
Investments in associated undertakings
(1) - - - 2 2
Loans and advances - - 29 - 29
Financial investments 47,564 - - 1 47,565
Trade, other receivables and other
assets - - 325 56 381
Derivative assets 14 - - - 14
Cash and cash equivalents 1,216 - 848 - 2,064
Total assets that include financial
instruments 48,794 - 1,202 59 50,055
Total other non-financial assets - - - 685 685
Total assets 48,794 - 1,202 744 50,740
Liabilities
Investment contract liabilities - 41,071 - - 41,071
Third-party interests in consolidated
funds 6,898 - - - 6,898
Borrowings and lease liabilities - - 299 - 299
Trade, other payables and other
liabilities - - 370 114 484
Derivative liabilities 15 - - - 15
Total liabilities that include financial
instruments 6,913 41,071 669 114 48,767
Total other non-financial liabilities - - - 234 234
Total liabilities 6,913 41,071 669 348 49,001
(1) Investments in associated undertakings classified as non-financial assets and liabilities are equity accounted.
12: Fair value methodology
This section explains the judgements and estimates made in determining the fair values of financial instruments that are recognised and measured at fair value in the financial statements. Classifying financial instruments into the three levels of the fair value hierarchy (see note 12(b)), prescribed under IFRS, provides an indication about the reliability of inputs used in determining fair value.
12(a): Determination of fair value
The fair value of financial instruments that are actively traded in organised financial markets is determined by reference to quoted market exit prices for assets and offer prices for liabilities, at the close of business on the reporting date, without any deduction for transaction costs:
-- for units in unit trusts and shares in open-ended investment companies, fair value is determined by reference to published quoted prices representing exit values in an active market;
-- for equity and debt securities not actively traded in organised markets and where the price cannot be retrieved, the fair value is determined by reference to similar instruments for which market observable prices exist;
-- for assets that have been suspended from trading on an active market, the last published price is used. Many suspended assets are still regularly priced. At the reporting date, all suspended assets are assessed for impairment; and
-- where the assets are private company shares or within consolidated investment funds, the valuation is based on the latest available set of audited financial statements where available, or if more recent, financial statements for the fund or a statement of valuation provided by the management of the private company or fund.
There have been no significant changes in the valuation techniques applied when valuing financial instruments. Where assets are valued by the Group, the general principles applied to those instruments measured at fair value are outlined below:
Loans and advances
Loans and advances include certain loans to brokers at below-market interest rates which are measured at fair value. All other loans to brokers are stated at amortised cost.
Financial investments
Financial investments include government and government-guaranteed securities, listed and unlisted debt securities, preference shares and debentures, listed and unlisted equity securities, listed and unlisted pooled investments (see below), short-term funds and securities treated as investments and certain other securities.
Pooled investments represent the Group's holdings of shares/units in open-ended investment companies, unit trusts, mutual funds and similar investment vehicles. Pooled investments are recognised at fair value. The fair values of pooled investments are based on widely published prices that are regularly updated.
Other financial investments that are measured at fair value use observable market prices where available. In the absence of observable market prices, these investments and securities are fair valued utilising various approaches including discounted cash flows, the application of an earnings before interest, tax, depreciation and amortisation multiple or any other relevant technique.
Derivatives
The fair value of derivatives is determined with reference to the exchange-traded prices of the specific instruments. The fair value of over-the-counter forward foreign exchange contracts is determined by reference to the relevant exchange rates.
Investment contract liabilities
The fair value of the investment contract liabilities is determined with reference to the underlying funds that are held by the Group.
Third-party interests in consolidated funds
Third-party interests in consolidated funds are measured at the attributable net asset value of each fund.
12(b): Fair value hierarchy
Fair values are determined according to the following hierarchy:
Description of hierarchy Types of instruments classified
in the respective levels
Level 1 - quoted market prices: Listed equity securities, government
financial assets and liabilities securities and other listed debt
with quoted prices for identical securities and similar instruments
instruments in active markets. that are actively traded, actively
traded pooled investments, certain
quoted derivative assets and liabilities
and investment contract liabilities
directly linked to other Level 1
financial assets.
Level 2 - valuation techniques Unlisted equity and debt securities
using observable inputs: financial where the valuation is based on models
assets and liabilities with quoted involving no significant unobservable
prices for similar instruments in data.
active markets or quoted prices Over-the-counter ("OTC") derivatives,
for identical or similar instruments certain privately placed debt instruments
in inactive markets and financial and third-party interests in consolidated
assets and liabilities valued using funds which meet the definition of
models where all significant inputs Level 2 financial instruments.
are observable.
Level 3 - valuation techniques Unlisted equity and securities with
using significant unobservable inputs: significant unobservable inputs,
financial assets and liabilities securities where the market is not
valued using valuation techniques considered sufficiently active, including
where one or more significant inputs certain inactive pooled investments.
are unobservable.
The judgement as to whether a market is active may include, for example, consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. In inactive markets, obtaining assurance that the transaction price provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the asset or liability requires additional work during the valuation process.
The majority of valuation techniques employ only observable data and so the reliability of the fair value measurement is high. Certain financial assets and liabilities are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable and, for them, the derivation of fair value is more judgemental. A financial asset or liability in its entirety is classified as valued using significant unobservable inputs if a significant proportion of that asset or liability's carrying amount is driven by unobservable inputs.
In this context, 'unobservable' means that there is little or no current market data available from which to determine the price at which an arm's length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value. Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant unobservable data may be attributable to observable inputs.
12(c): Transfer between fair value hierarchies
The Group deems a transfer to have occurred between Level 1 and Level 2 or Level 3 when an active, traded primary market ceases to exist for that financial instrument. A transfer between Level 2 and Level 3 occurs when the majority of the significant inputs used to determine the fair value of the instrument become unobservable. Transfers from Levels 3 or 2 to Level 1 are also possible when assets become actively priced.
There were no transfers of financial investments from Level 1 to Level 2 during the year (31 December 2021: GBP16 million). There were no transfers of financial investments from Level 2 to Level 1 during the year (31 December 2021: GBP85 million). The movement in 2021 related to assets held by the Quilter International business and these movements were matched closely by transfers of investment contract liabilities. See note 12(e) for the reconciliation of Level 3 financial instruments.
12(d): Financial assets and liabilities measured at fair value, classified according to fair value hierarchy
The majority of the Group's financial assets are measured using quoted market prices for identical instruments in active markets (Level 1) and there have been no significant changes during the year.
The linked assets are held to cover the liabilities for linked investment contracts (net of reinsurance). The difference between linked assets and linked liabilities is principally due to short-term timing differences between policyholder premiums being received and invested in advance of policies being issued, and tax liabilities within funds which are reflected within the Group's tax liabilities.
Differences between assets and liabilities within the respective levels of the fair value hierarchy also arise due to the mix of underlying assets and liabilities within consolidated funds. In addition, third-party interests in consolidated funds are classified as Level 2.
The table below presents a summary of the Group's financial assets and liabilities that are measured at fair value in the consolidated statement of financial position according to their IFRS 9 classification (see note 11 for further details).
31 December 2022 31 December 2021
GBPm % GBPm %
Financial assets measured at fair value
Level 1 38,452 85.9% 41,996 86.0%
Level 2 6,288 14.0% 6,771 13.9%
Level 3 29 0.1% 27 0.1%
Total 44,769 100.0% 48,794 100.0%
Financial liabilities measured at fair
value
Level 1 38,161 86.6% 41,047 85.5%
Level 2 5,863 13.3% 6,913 14.4%
Level 3 25 0.1% 24 0.1%
Total 44,049 100.0% 47,984 100.0%
The tables below further analyse the Group's financial assets and liabilities measured at fair value by the fair value hierarchy described in note 12(b):
GBPm
------- ------- ------
31 December 2022 Level 1 Level 2 Level 3 Total
Financial assets measured at fair value
Mandatorily (fair value through profit
or loss) 38,452 6,288 29 44,769
------- ------- ------
Financial investments 37,340 6,248 29 43,617
Cash and cash equivalents 1,112 - - 1,112
Derivative assets - 40 - 40
------- -------
Total assets measured at fair value 38,452 6,288 29 44,769
------- ------- ------
Financial liabilities measured at fair
value
Mandatorily (fair value through profit
or loss) - 5,863 - 5,863
------- ------- ------
Third-party interests in consolidated
funds - 5,843 - 5,843
Derivative liabilities - 20 - 20
------- -------
Designated (fair value through profit
or loss) 38,161 - 25 38,186
------- ------- ------
Investment contract liabilities 38,161 - 25 38,186
Total liabilities measured at fair
value 38,161 5,863 25 44,049
------- ------- ------
GBPm
------- ------- ------
31 December 2021 Level 1 Level 2 Level 3 Total
Financial assets measured at fair value
Mandatorily (fair value through profit
or loss) 41,996 6,771 27 48,794
------- ------- ------
Financial investments 40,780 6,757 27 47,564
Cash and cash equivalents 1,216 - - 1,216
Derivative assets - 14 - 14
------- -------
Total assets measured at fair value 41,996 6,771 27 48,794
------- ------- ------
Financial liabilities measured at fair
value
Mandatorily (fair value through profit
or loss) - 6,913 - 6,913
------- ------- ------
Third-party interests in consolidated
funds - 6,898 - 6,898
Derivative liabilities - 15 - 15
------- -------
Designated (fair value through profit
or loss) 41,047 - 24 41,071
Investment contract liabilities 41,047 - 24 41,071
Total liabilities measured at fair
value 41,047 6,913 24 47,984
------- ------- ------
12(e): Level 3 fair value hierarchy disclosure
The majority of the assets classified as Level 3 are held within linked policyholder funds. Where this is the case, all of the investment risk associated with these assets is borne by policyholders and the value of these assets is exactly matched by a corresponding liability due to policyholders. The Group bears no risk from a change in the market value of these assets except to the extent that it has an impact on management fees earned.
Level 3 assets also include investments within consolidated funds. The Group bears no risk from a change in the market value of these assets except to the extent that it has an impact on fund management fee income. Any changes in market value are matched by a corresponding Level 2 liability within third-party interests in consolidated funds.
The table below reconciles the opening balance of Level 3 financial assets to the closing balance at each year end:
GBPm
2022 2021
At beginning of the year 27 1,822
Fair value losses charged to the income statement (5) (3)
Purchases - -
Sales (2) -
Transfers in 125 8
Transfers out (116) (393)
Disposal of subsidiaries(1) - (1,406)
Foreign exchange and other movements - (1)
----- -------
Total Level 3 financial assets at the end of the year 29 27
----- -------
Unrealised fair value losses charged to the income statement
relating to assets held at the year end (9) (4)
(1) During the year to 31 December 2021, Level 3 assets decreased by GBP1,406 million following the sale of Quilter International to Utmost Group.
Amounts shown as sales arise principally from the sale of private company shares, unlisted pooled investments and from distributions received in respect of holdings in property funds.
Transfers into Level 3 assets in the current year total GBP125 million (31 December 2021: GBP8 million). T his is mainly due to suspended funds previously shown within Level 1. Suspended funds are valued based on external valuation reports received from fund managers. Transfers out of Level 3 assets in the current year of GBP116 million (31 December 2021: GBP393 million) result from a transfer to Level 1 assets relating to assets that are now being actively repriced (that were previously stale) and where fund suspensions have been lifted .
The table below analyses the type of Level 3 financial assets held:
GBPm
----------- -----------
31 December 31 December
2022 2021
Pooled investments 29 26
Unlisted and stale price pooled investments - 1
Suspended funds 29 25
Private equity investments - 1
Total Level 3 financial assets 29 27
----------- -----------
As at 31 December 2022, the Group does not hold any private equity investments. As at 31 December 2021, Level 3 assets included GBP1 million of private equity investments, all within consolidated funds.
The table below reconciles the opening balance of Level 3 financial liabilities to the closing balance at each year end:
GBPm
2022 2021
At beginning of the year 24 1,820
Fair value losses charged to the income statement (2) (3)
Transfers in 119 5
Transfers out (116) (391)
Disposal of subsidiaries(1) - (1,406)
Foreign exchange and other movements - (1)
-----
Total Level 3 financial liabilities at the end of the
year 25 24
----- -------
Unrealised fair value losses charged to the income statement
relating to liabilities held at the year end (5) (4)
(1) During the year to 31 December 2021, Level 3 liabilities decreased by GBP1,406 million following the sale of Quilter International to Utmost Group.
All of the liabilities that are classified as Level 3 are investment contract liabilities which exactly match against the Level 3 assets held in linked policyholder funds.
12(f): Effect of changes in significant unobservable assumptions to reasonable alternatives
Details of the valuation techniques applied to the different categories of financial instruments can be found in note 12 (a) above, including the valuation techniques applied when significant unobservable assumptions are used to value Level 3 assets.
Private equity investments are valued at the value disclosed in the latest available set of audited financial statements or, if more recent information is available from investment managers or professional valuation experts at the value of the underlying assets of the private equity investment.
For Level 3 assets and liabilities, no reasonable alternative assumptions are applicable and the Group therefore performs a sensitivity test of an aggregate 10% change in the value of the financial asset or liability (31 December 2021: 10%), representing a reasonable alternative judgement in the context of the current macroeconomic environment in which the Group operates. It is therefore considered that the impact of this sensitivity will be in the range of GBP3 million to the reported fair value of Level 3 assets, both favourable and unfavourable (31 December 2021: GBP2 million).
As described in note 12(e), changes in the value of Level 3 assets held within linked policyholder funds are exactly matched by corresponding changes in the value of liabilities due to policyholders and therefore have no impact on the Group's net asset value or profit or loss, except to the extent that it has an impact on management fees earned.
12(g): Fair value hierarchy for assets and liabilities not measured at fair value
Certain financial instruments of the Group are not carried at fair value. The carrying values of these are considered reasonable approximations of their respective fair values, as they are either short term in nature or are repriced to current market rates at frequent intervals. Their classification within the fair value hierarchy would be as follows:
Financial assets within Trade, other receivables, and other assets Level 3 Financial liabilities within Trade, other payables, and other liabilities Level 3
Cash and cash equivalents (excluding money market funds) are held at amortised cost and therefore not carried at fair value. The cash and cash equivalents that are held at amortised cost would be classified as Level 1 in the fair value hierarchy.
The loans and advances not carried at fair value would be classified as Level 3 in the fair value hierarchy.
Borrowed funds are financial liabilities held at amortised cost and therefore not carried at fair value. Borrowed funds relate to subordinated liabilities and would be classified as Level 1 in the fair value hierarchy.
Lease liabilities valued under IFRS 16 are held at amortised cost and therefore not carried at fair value. They would be classified as Level 3 in the fair value hierarchy.
13: Cash and cash equivalents
13(a): Analysis of cash and cash equivalents
GBPm
----------- -----------
31 December 31 December
2022 2021
-------------------------------------------------
Cash at bank 406 559
Money market funds 1,112 1,216
Cash and cash equivalents in consolidated funds 264 289
----------- -----------
Total cash and cash equivalents per statement of
cash flows 1,782 2,064
The Group's management does not consider that the cash and cash equivalents balance arising due to consolidation of funds of GBP264 million (2021: GBP289 million) is available for use in the Group's day-to-day operations. The remainder of the Group's cash and cash equivalents balance of GBP1,518 million (2021: GBP1,775 million) is considered to be available for general use by the Group for the purposes of the disclosures required under IAS 7 Statement of Cash Flows. This balance includes policyholder cash as well as cash and cash equivalents held by regulated subsidiaries to meet their capital and liquidity requirements.
13(b): Analysis of net cash flows from operating activities:
GBPm
----------- -----------
31 December 31 December
Notes 2022 2021
-------------------------------------------------------- ----- ----------- -----------
Cash flows from operating activities
----------- -----------
Profit before tax from continuing operations 65 85
Profit before tax from discontinued operations 4(b) - 131
65 216
Adjustments for
Depreciation and impairment of property, plant and
equipment 22 16
Movement on contract costs (1) 18
Movement on contract liabilities and fee income
receivable - 10
Amortisation and impairment of intangibles 9 44 47
Fair value and other movements in financial assets 4,410 (5,102)
Fair value movements in investment contract liabilities 15 (4,878) 4,467
Other changes in investment contract liabilities 1,993 3,454
Profit on sale of subsidiaries 4(a) - (91)
Other movements 32 32
-----------
1,622 2,851
Net changes in working capital
(Increase)/decrease in net derivatives position (21) 24
(Increase)/decrease in loans and advances (5) 15
(Decrease)/increase in provisions 16 (24) 17
Movement in other assets/liabilities(1) 61 (20)
11 36
Taxation paid (22) (10)
----------- -----------
Net cash flows from operating activities 1,676 3,093
(1) Working capital changes in respect of other assets and liabilities primarily relate to consolidated funds.
14: Share capital, capital redemption reserve and merger reserve
Financial instruments issued are classified as equity when there is no contractual obligation to transfer cash, other financial assets or issue a variable number of own equity instruments. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. At 31 December 2022, the Company's equity capital comprises 1,404,105,498 Ordinary Shares of 8 1/6 pence each with an aggregated nominal value of GBP114,668,616 (31 December 2021: 1,655,827,217 Ordinary Shares of 7 pence each with an aggregated nominal value of GBP115,907,905). All Ordinary Shares have been called up and fully paid.
This note gives details of the Company's share capital, shows the movements during the year and also gives details of the merger reserve release of GBP124 million in the prior year and GBP25 million in the current year:
GBPm GBPm
Nominal
Number of value of
Ordinary Ordinary Ordinary
Shares Shares Share premium
At 1 January 2021 1,783,969,051 125 58
Shares cancelled through share buyback
programme (128,141,834) (9) -
At 31 December 2021 1,655,827,217 116 58
Shares cancelled through share buyback
programme (17,704,132) (1) -
Share Consolidation (including shares
cancelled)(1) (234,017,587) - -
At 31 December 2022 1,404,105,498 115 58
(1) To effect the Share Consolidation, four Ordinary Shares were cancelled so that the total Ordinary Shares were exactly divisible by seven.
14(a): Share capital
On 11 March 2020, the Company announced a share buyback programme to purchase shares up to a maximum value of GBP375 million, in order to return the net surplus proceeds to shareholders arising from the sale of Quilter Life Assurance which had the impact of reducing the share capital of the Company. The programme completed in January 2022.
On 9 March 2022, the Company announced a capital return of GBP328 million, equivalent to 20 pence per share, from the net surplus proceeds arising from the sale of Quilter International by way of a B Share Scheme. Following the return of capital, a Share Consolidation was completed so that comparability between the market price for Quilter plc's Ordinary Shares before and after the implementation of the B Share Scheme was maintained.
New Ordinary Shares were issued for existing Ordinary Shares in a ratio of six new shares of 8 1/6 pence each for seven existing shares of 7 pence each resulting in a reduction in the numbers of shares by 234,017,587.
At 31 December 2022, there is one class of share capital being the Ordinary Shares of 8 1/6 pence each. All shares issued carry equal voting rights. The holders of the Company's Ordinary Shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholder meetings of the Company.
14(b): Capital redemption reserve
Following the issue and redemption of the B preference shares as part of the B Share Scheme, the Company transferred GBP328 million from retained earnings to the capital redemption reserve, as required under the provisions of sections 688 and 733 of the Companies Act 2006, being an amount equal to the nominal value of the B shares redeemed in the year. The increase in the capital redemption reserve results from the UK company law requirement to maintain the company's capital when shares are redeemed out of the company's distributable profits.
14(c): Merger reserve
During the year ended 31 December 2021, a dividend was paid by Quilter Perimeter Holdings Limited up to its parent Quilter plc. The resulting decrease in Quilter Perimeter Holdings Limited's net asset value gave rise to a GBP124 million impairment of Quilter plc's investment in Quilter Perimeter Holdings Limited and an associated release of the merger reserve reducing it to GBP25 million.
In 2022, the remaining balance of the merger reserve recognised in the Group's statement of financial position was released in the creation of the B preference shares (the remainder of the B shares were created from retained earnings).
15: Investment contract liabilities
The following table provides a summary of the Group's investment contract liabilities:
GBPm
2022 2021
Carrying amount at 1 January 41,071 57,407
From continuing operations
Fair value movements (4,878) 2,821
Investment income 560 472
Movements arising from investment return (4,318) 3,293
From discontinued operations
Fair value movements - 1,646
Investment income - 172
Movements arising from investment return - 1,818
Contributions received 4,408 6,837
Withdrawals and surrenders (1) (2,759) (3,866)
Claims and benefits (219) (162)
Other movements 3 1
Change in liability (2,885) 7,921
Currency translation gain - (199)
Disposal of subsidiaries - (24,058)
Investment contract liabilities at end of the year 38,186 41,071
(1) Includes amounts previously presented as maturities of GBP406 million for the year to 31 December 2021.
For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
The benefits offered under the unit-linked investment contracts are based on the risk appetite of policyholders and the return on their selected investments and collective fund investments, whose underlying investments include equities, debt securities, property and derivatives. This investment mix is unique to individual policyholders.
For unit-linked business, the unit liabilities are determined as the value of units credited to policyholders. Since these liabilities are determined on a retrospective basis, no assumptions for future experience are required. Assumptions for future experience are required for unit-linked business in assessing whether the total of the contract costs asset and contract liability is greater than the present value of future profits expected to arise on the relevant blocks of business (the "recoverability test"). If this is the case, then the contract costs asset is restricted to the recoverable amount. For linked contracts, the assumptions are on a best estimate basis.
16: Provisions
GBPm
Clawback
Compensation Sale of Property and other
31 December 2022 provisions subsidiaries provisions provisions Total
Balance at beginning of the year 41 22 9 21 93
Charge to income statement 22 - 4 3 29
Utilised during the year (28) (7) (1) (2) (38)
Unused amounts reversed (12) - - (4) (16)
Reclassification within the statement
of financial position(3) - - - 1 1
Balance at 31 December 2022 23 15 12 19 69
GBPm
Clawback
Compensation Sale of Property and other
31 December 2021 provisions subsidiaries provisions provisions Total
Balance at beginning of the year 42 10 - 25 77
Charge to income statement(1) 23 17 7 2 49
Utilised during the year (12) (4) - (4) (20)
Unused amounts reversed (10) (1) - (5) (16)
Disposals(2) (2) - - - (2)
Reclassification within the statement
of financial position(4) - - 2 3 5
Balance at 31 December 2021 41 22 9 21 93
-------------
(1) Part of the charge to the income statement in 2021 was included within the discontinued operations income statement.
(2) The balance within "Disposals" relates to the provision balance within Quilter International at completion of the sale of the business on 30 November 2021.
(3) Clawback and other provisions related to the balancing premium payable for the bulk annuity purchased for the Quilter Cheviot Limited Retirement Benefits scheme were reclassified during the year to 31 December 2022 from accruals reflecting the uncertainty of the amounts to be settled.
(4) During the year to 31 December 2021, property provisions related to dilapidations and other provisions related to historical licence agreements were reclassified from lease liabilities and accruals respectively reflecting the uncertainty of the amounts to be settled.
Compensation provisions
Compensation provisions total GBP23 million (31 December 2021: GBP41 million) and the net reduction of GBP18 million during the year is due to additional charges to the income statement of GBP22 million, compensation payments made during the period of GBP28 million and the GBP12 million release of unused amounts during 2022 following further review work completed during the year. Compensation provisions are comprised of the following:
Lighthouse pension transfer advice provision of GBP5 million (31 December 2021: GBP29 million)
Lighthouse pension transfer advice provided to British Steel members of GBP4 million (31 December 2021: GBP21 million)
A total provision of GBP4 million (31 December 2021: GBP21 million) remains for the redress of British Steel Pension Scheme cases, including anticipated costs associated with the redress activity. This is comprised of two parts:
(a) Client redress provision of GBP3 million (31 December 2021: GBP19 million), comprised of GBP23 million (31 December 2021: GBP23 million) redress payable, less payments made to customers of GBP20 million, of which GBP16 million was paid in 2022 (31 December 2021: GBP4 million).
(b) Anticipated costs associated with redress activity of GBP1 million (31 December 2021: GBP2 million), comprised of GBP7 million costs payable (31 December 2021: GBP4 million), less payments made of GBP4 million during 2022 and GBP2 million during 2021. This provision is recognised in respect of the anticipated costs of legal and professional fees related to the cases and redress process, which includes the expected costs to review advice.
During the year to 31 December 2022, the skilled person completed their review of all British Steel Pension Scheme cases within the initial scope of the review, reflecting the outcome on suitability of the DB to DC pension transfer advice review for each case, and all remaining offers were made to customers who received unsuitable DB to DC pension transfer advice which caused them to sustain a loss.
Certain customers who have been included in the skilled person review work already undertaken have referred their case to the Financial Ombudsman Service, relating to cases where: (i) relevant DB to DC pension transfer advice was found to be suitable by the skilled person; or (ii) where relevant DB to DC pension transfer advice was found to be unsuitable by the skilled person, but the customer disagrees with the way in which their redress offer has been calculated by the skilled person. The Financial Ombudsman Service may uphold some or all of the challenges made.
In November 2022, the FCA published a policy statement containing the final rules for a redress scheme for former members of the British Steel Pension Scheme who received unsuitable advice (the "BSPS Redress Scheme"). The BSPS Redress Scheme will cover those persons who received advice between 26 May 2016 and 29 March 2018 to transfer out of the British Steel Pension Scheme. The final rules for the BSPS Redress Scheme set out how advisers must determine whether they gave unsuitable advice and whether they must pay redress. The Group may therefore face further costs of redress as a result of the BSPS Redress Scheme. The BSPS Redress Scheme will not cover individuals that have accepted redress for that advice, referred the matter to the Financial Ombudsman Service or received a final outcome following a suitability assessment of their case conducted through a skilled person review. Therefore, based on the final rules of the BSPS Redress Scheme, this process will not include Lighthouse cases that have already been reviewed by the skilled person where the customer received a final outcome. The Group is currently considering whether, based on the final rules for the BSPS Redress Scheme, there are any Lighthouse cases relating to British Steel Pension Scheme members that were subject to the skilled person review that may fall within the scope of the BSPS Redress Scheme.
An asset of GBP3 million representing an insurance recoverable in respect of British Steel pension transfer advice was included in the fair value of the acquired net assets of Lighthouse and presented on the statement of financial position as at 31 December 2021. During 2022, the insurers confirmed coverage and the Group received GBP15 million cash.
Lighthouse pension transfer advice provided to members of other schemes of GBP1 million (31 December 2021: GBP8 million)
During 2021, the skilled person review identified unsuitable DB to DC pension advice provided by Lighthouse advisers for pension schemes other than the British Steel Pension Scheme. The initial scope of the review concluded in 2022, with GBP3 million paid to customers and the remaining provision released to the income statement. Subject to FCA confirmation, we anticipate that the skilled person review will conclude during 2023.
In the second half of 2022, the skilled person recommended a potential review of a further sample of Lighthouse DB to DC pension transfer advice cases not relating to the British Steel Pension Scheme. In December 2022, the FCA confirmed to the Group that it agreed with the skilled person's recommendation. The FCA also confirmed that, given the cooperation of the Group in relation to the skilled person review and established past business review methodology and consistent with the recommendation made by the skilled person, this further sample should be reviewed under a Group managed past business review process with the current skilled person acting as expert. The FCA also agreed with the skilled person that the further sample should be selected on a risk-based approach and has set out to the Group the key risk factors to be used in determining the sample. The review of this sample may uncover some additional cases where customer redress is required. Until the relevant sample has been reviewed, uncertainty exists as to the number of cases where this will be required and the value of total redress which may be payable. A provision for redress relating to the review of this further sample of cases of GBP1 million has been established at 31 December 2022.
Compensation provisions (other) of GBP18 million (31 December 2021: GBP12 million)
Other compensation provisions of GBP18 million include amounts relating to the cost of correcting deficiencies in policy administration systems, including restatements, any associated litigation costs and the related costs to compensate previous or existing policyholders and customers. This provision represents management's best estimate of expected outcomes based upon previous experience, and a review of the details of each case. Due to the nature of the provision, the timing of the expected cash outflows is uncertain. The best estimate of the timing of outflows is that the majority of the balance is expected to be settled within 12 months.
A provision of GBP7 million, included within the balance, has been recognised at 31 December 2022 (31 December 2021: GBP6 million) relating to potentially unsuitable DB to DC pension transfer advice provided by advisers, including advice provided prior to Quilter's acquisition of the relevant advice businesses. Of this balance, GBP2 million (31 December 2021: GBP2 million) has been recognised for potentially unsuitable DB to DC pension transfer advice provided to British Steel Pension Scheme members by Quilter Financial Planning firms other than Lighthouse. This provision was recognised following the receipt of a "Dear CEO" letter from the FCA in December 2021, and subsequent establishment of the BSPS Redress Scheme. These British Steel Pension Scheme cases have yet to be reviewed for suitability and an estimate of the provision has been made based upon the Group's experience of the Lighthouse skilled person review.
A provision of GBP4 million, included within the balance, related to Final Plan Closure ("FPC") receipts previously recognised as revenue since 2013 for distributions the Group received from investments for clients who had previously closed their accounts. FPC receipts represent distributions, including tax gross ups where relevant, and rebates received after a customer has left the Quilter platform, which the Terms and Conditions of the pension and insured bonds legally entitled the Group to retain. A review this year has led to a change in business policy, and Quilter have made the decision to voluntarily return these amounts to those impacted clients backdated to inception, with an appropriate interest rate applied to the balances owed. A provision of GBP6 million was initially recognised, and payments of GBP2 million have been made to clients during the year. The remaining provision outstanding of GBP4 million is expected to be payable within one year.
The Group estimates a reasonably possible change of +/- GBP4 million from the GBP18 million balance, based upon a review of the cases and the range of potential outcomes for the customer redress payments.
Sale of subsidiaries
Sale of subsidiaries provisions total GBP15 million at 31 December 2022 (31 December 2021: GBP22 million), and include the following:
Provisions arising on the disposal of Quilter International of GBP11 million (31 December 2021: GBP16 million)
Quilter International was sold on 30 November 2021, resulting in provisions totalling GBP17 million being established in respect of costs related to the disposal including the costs of business separation and data migration activities.
The c osts of business separation arise from the process required to separate Quilter International's infrastructure, which is complex and covers a wide range of areas including people, IT systems, data, and contracts facilities. A programme team has been established to ensure the transition of these areas to the acquirer. These provisions have been based on external quotations and estimations, together with estimates of the incremental time and resource costs required to achieve the separation, which is expected to occur over a two-year period.
The most significant element of the provision is the cost of migration of IT systems and data to the acquirer. Calculation of the provision is based on management's best estimate of the work required, the time it is expected to take, the number and skills of the staff required and their cost, and the cost of related external IT services to support the work. In reaching these judgements and estimates, management has made use of its past experience of previous IT migrations following business disposals, including the migration of QLA. The Group estimates a provision sensitivity of +/-25% (GBP3 million), based upon a review of the range of time periods expected to complete the work required. The provision is expected to be fully utilised over three years from the sale, with GBP8 million forecast to be paid within one year.
During the year, GBP6 million (2021: GBP1 million) of the provision has been utilised.
Sale of Single Strategy Asset Management business provision of GBP4 million (31 December 2021: GBP4 million)
In 2018, a restructuring provision was recognised as a result of the sale of the Single Strategy Asset Management business (now known as Jupiter Investment Management ("Jupiter")) to enable the remaining Quilter Investors business to function as a standalone operation going forward. The remaining provision relates to various sale-related future commitments, the outcome of which was uncertain at the time of the sale and the most significant of which is in relation to the guarantee of revenues for the seller in future years arising from funds invested by customers of Quilter. In 2021, GBP2 million was settled relating to the 2020 measurement year. The balance has been adjusted for the latest estimate for the 2022 measurement year, which is the final measurement year required in the sale agreement.
The expected range of payments based upon the latest information received from Jupiter and the Group's reasonable expectations of AUM invested within Jupiter funds during the 2022 assessment period is between GBP4 million and GBP5 million.
The provision outstanding is estimated to be payable within one year, with expected final settlement due in the first half of 2023. Once finalised and settled, this will be the final amount payable under this arrangement with Jupiter.
Provisions arising on the disposal of Quilter Life Assurance of GBPnil (31 December 2021: GBP1 million)
Quilter Life Assurance was sold in 2019, resulting in provisions totalling GBP6 million being established in respect of the costs of disposing the business and the related costs of business separation.
During the year, GBP1 million of the provision has been utilised. These were the final costs incurred to complete and close the project.
Property provisions
Property provisions represent the discounted value of expected future costs of reinstating leased property to its original condition at the end of the lease term, and any onerous commitments which may arise in cases where a leased property is no longer being fully utilised by the Group. The estimate is based upon property location, size of property and an estimate of the charge per square foot. Property provisions are utilised or released when the reinstatement obligations have been fulfilled. The associated asset for the property provisions relating to the cost of reinstating property is included within "Property, plant and equipment".
Of the GBP12 million provision outstanding, GBP3 million (2021: GBP1 million) is estimated to be payable within one year. The majority of the balance relates to leased property which has a lease term maturity of more than five years.
Clawback and other provisions
Other provisions include amounts for the resolution of legal uncertainties and the settlement of other claims raised by contracting parties and indemnity commission provisions and now includes the balancing premium payable for the bulk annuity purchased for the Quilter Cheviot Limited Retirement Benefits scheme. Where material, provisions are discounted at discount rates specific to the risks inherent in the liability. The timing and final amounts of payments, particularly those in respect of litigation claims and similar actions against the Group, are uncertain and could result in adjustments to the amounts recorded.
Included within the balance at 31 December 2022 is GBP14 million (31 December 2021: GBP16 million) of clawback provisions in respect of potential refunds due to product providers on indemnity commission within the Quilter Financial Planning business. This provision, which is estimated and charged as a reduction of revenue on the income statement at the point of sale of each policy, is based upon assumptions determined from historical experience of the proportion of policyholders cancelling their policies, which requires Quilter to refund a portion of commission previously received. Reductions to the provision result from the payment of cash to product providers as refunds or the recognition of revenue where a portion is assessed as no longer payable. The provision has been assessed at the reporting date and adjusted for the latest cancellation information available. At 31 December 2022, an associated balance of GBP8 million recoverable from brokers is included within "Trade, other receivables and other assets" (31 December 2021: GBP9 million).
The Group estimates a reasonably possible change of +/- GBP3 million, based upon the potential range of outcomes for the proportion of cancelled policies within the clawback provision, and a detailed review of the other provisions.
Of the total GBP19 million provision outstanding, GBP8 million is estimated to be payable within one year (31 December 2021: GBP13 million).
17: Contingent liabilities
The Group, in the ordinary course of business, enters into transactions that expose it to tax, legal, regulatory and business risks. The Group recognises a provision when it has a present obligation as a result of past events, it is probable that a transfer of economic benefits will be required to settle the obligation and a reliable estimate of the amount can be made (see note 16). Possible obligations and known liabilities where no reliable estimate can be made or it is considered improbable that an outflow would result are reported as contingent liabilities in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
The Group routinely monitors and assesses contingent liabilities arising from matters such as business reviews, litigation, warranties and indemnities relating to past acquisitions and disposals.
Contingent liabilities - pension transfer advice redress
The skilled person review covered British Steel Pension Scheme DB to DC pension transfer advice activity undertaken by Lighthouse advisers, and a representative sample of other Lighthouse DB to DC pension transfer advice activity in the relevant period.
The skilled person review is largely complete, and the skilled person has recommended a potential review of a further sample of Lighthouse DB to DC pension transfer cases not relating to the British Steel Pension Scheme, and this further sample will be reviewed under a Group-managed past business review process with the skilled person acting as reviewer, as agreed with the FCA. Details of provisions for redress payable and payments made are included within Provisions as set out in note 16. Until the review has finalised, uncertainty exists as to the number of cases where this will be required and the value of total redress which will be payable. Subject to FCA confirmation, we anticipate that the skilled person review will conclude during 2023.
Customers have the legal right to challenge the result of the skilled person review in respect of their case via a complaint to the Financial Ombudsman Service. Certain customers have made such complaints. The skilled person is independent from the Group and has run a robust process, which has been overseen by the FCA. The Group does not consider any of the complaints to have merit and so the provision does not include any amounts in relation to such complaints. In particular, there is no provision for obligations that may arise in the event that any complaints to the Financial Ombudsman Service over the outcome of the skilled person review in respect of particular customers are upheld.
During 2020, the Group was also informed by the FCA that it is conducting an enforcement investigation into Lighthouse in respect of whether Lighthouse has breached certain FCA requirements in connection with advising on and arranging DB to DC pension transfers in the period from 1 April 2015 to 30 April 2019. This investigation is now at an advanced stage and the Group's current view is that it is likely to conclude before the end of the first half of the Group's current financial year on 30 June 2023. However, as the outcome of the enforcement investigation remains unknown, the provision does not include regulatory fines or penalties that could be imposed on Lighthouse in connection with DB to DC pension transfers prior to the Group's acquisition of Lighthouse.
It is possible that further material costs of redress, regulatory fines or penalties may be incurred in relation to the skilled person review, additional past business review and the BSPS Redress Scheme. Further customer redress costs may also be incurred for other potential unsuitable pension transfer advice provided across the Group.
Any further redress costs, and any differences between the provision and final payment to be made for any unsuitable DB to DC pension transfer cases, will be recognised as an expense or credit in the income statement.
Tax
The tax authorities in the countries in which the Group operates routinely review historical transactions undertaken and tax law interpretations made by the Group. The Group is committed to conducting its tax affairs in accordance with the tax legislation of the countries in which it operates. All interpretations made by the Group are made with reference to the specific facts and circumstances of the transaction and the relevant legislation.
There are occasions where the Group's interpretation of tax law may be challenged by the tax authorities. The financial statements include provisions that reflect the Group's assessment of liabilities which might reasonably be expected to materialise as part of their review. The Group is satisfied that adequate provisions have been made to cater for the resolution of tax uncertainties and that the resources available to fund such potential settlements are sufficient.
Due to the level of estimation required in determining tax provisions, amounts eventually payable may differ from the provision recognised.
Complaints, disputes and regulations
The Group is committed to treating customers fairly and supporting its customers in meeting their lifetime goals. During the normal course of business, from time to time, the Group receives complaints and claims from customers including, but not limited to, complaints to the Financial Ombudsman Service and legal proceedings related thereto, enters into commercial disputes with service providers, and is subject to discussions and reviews with regulators. The costs, including legal costs, of these issues as they arise can be significant and, where appropriate, provisions have been established in accordance with IAS 37.
18: Capital and financial risk management
18(a): Capital management
The Group manages its capital with a focus on capital efficiency and effective risk management. The capital management objectives are to maintain the Group's ability to continue as a going concern while supporting the optimisation of return relative to the risks. The Group ensures that it can meet its expected capital and financing needs at all times having regard to the Group's Business Plans, forecasts, strategic initiatives and the regulatory requirements applicable to Group entities.
The Group's overall capital risk appetite is set with reference to the requirements of the relevant stakeholders and seeks to:
-- maintain sufficient, but not excessive, financial strength to support stakeholder requirements;
-- optimise debt to equity structure to enhance shareholder returns; and
-- retain financial flexibility by maintaining liquidity including unutilised committed credit lines.
The primary sources of capital used by the Group are equity shareholders' funds of GBP1,548 million (31 December 2021: GBP1,739 million) and subordinated debt which was issued at GBP200 million in February 2018. Alternative resources are utilised where appropriate. Risk appetite has been defined for the level of capital, liquidity and debt within the Group. The risk appetite includes long-term targets, early warning thresholds and risk appetite limits. The dividend policy sets out the target dividend level in relation to profits.
The regulatory capital for the Group is assessed under Solvency II requirements.
18(a)(i): Regulatory capital (unaudited)
The Group is subject to Solvency II group supervision by the Prudential Regulation Authority. The Group is required to measure and monitor its capital resources under the Solvency II regulatory regime.
The Group's UK life insurance undertaking is included in the Group solvency calculation on a Solvency II basis. Other regulated entities are included in the Group solvency calculation according to the relevant sectoral rules. The Group's Solvency II surplus is the amount by which the Group's capital on a Solvency II basis (own funds) exceeds the Solvency II capital requirement (solvency capital requirement or "SCR").
The Group's Solvency II surplus is GBP820 million at 31 December 2022 (31 December 2021: GBP1,030 million) , representing a Solvency II ratio of 230% (31 December 2021: 275% ) calculated under the standard formula. The Solvency II regulatory position for the year ended 31 December 2022 allows for the impact of the recommended final dividend payment of GBP45 million (31 December 2021: GBP62 million).
The Solvency II results for the year ended 31 December 2022 (unaudited estimate) and 31 December 2021 were as follows:
GBPm
----------- -----------
31 December 31 December
2022(1) 2021(2)
Own funds 1,451 1,617
Solvency capital requirement 631 587
Solvency II surplus 820 1,030
----------- -----------
Solvency II coverage ratio 230% 275%
(1) Filing of annual regulatory reporting forms due by 19 May 2023.
(2) As reported in the Group Solvency and Financial Condition Report for the year ended 31 December 2021.
The Group's own funds include the Quilter plc issued subordinated debt security which qualifies as capital under Solvency II. The composition of own funds by tier is presented in the table below.
GBPm
----------- -----------
Group own funds 31 December 31 December
2022 2021
----------- -----------
Tier 1(1) 1,249 1,412
Tier 2(2) 202 205
----------- -----------
Total Group Solvency II own funds 1,451 1,617
(1) All Tier 1 capital is unrestricted for tiering purposes.
(2) Comprises a Solvency II compliant subordinated debt security in the form of a Tier 2 bond, which was issued at GBP200 million in February 2018.
18: Capital and financial risk management continued
18(a): Capital management continued
The Group's UK life insurance undertaking is also subject to Solvency II at entity level. Other regulated entities in the Group are subject to the locally applicable entity-level capital requirements in the countries in which they operate. In addition, the Group's asset management and advice businesses are subject to group supervision by the FCA under the UK Investment Firms Prudential Regime ("IFPR").
The capital requirements for the Group and its regulated subsidiaries are reported and monitored through regular Capital Management Forum meetings. Throughout 2022, the Group has complied with the regulatory requirements that apply at a consolidated level and Quilter's insurance undertakings and investment firms have complied with the regulatory capital requirements that apply at entity level.
18(a)(ii): Loan covenants
Under the terms of the revolving credit facility agreement, the Group is required to comply with the following financial covenant: the ratio of total net borrowings to consolidated equity shareholders' funds shall not exceed 0.5.
GBPm
-----------
31 December 31 December
2022 2021
Total external borrowings of the Company 200 199
Less: cash and cash equivalents of the Company (126) (503)
----------- -----------
Total net external borrowings of the Company 74 (304)
----------- -----------
Total shareholders' equity of the Group 1,548 1,739
Tier 2 bond 200 199
----------- -----------
Total Group equity (including Tier 2 bond) 1,748 1,938
----------- -----------
Ratio of Company net external borrowings to Group
equity 0.042 -0.157
The Group has complied with the covenant since the facility was created in 2018.
18(a)(iii): Own Risk and Solvency Assessment ("ORSA") and Internal Capital Adequacy and Risk Assessment ("ICARA")
The Group ORSA process is an ongoing cycle of risk and capital management processes which provides an overall assessment of the current and future risk profile of the Group and demonstrates the relationship between business strategy, risk appetite, risk profile and solvency needs. These assessments support strategic planning and risk-based decision making.
The underlying ORSA processes cover the Group and consider how risks and solvency needs may evolve over the planning period. The ORSA includes stress and scenario tests, which are performed to assess the financial and operational resilience of the Group.
The Group ORSA report is produced annually and summarises the analysis, insights and conclusions from the underlying risk and capital management processes in respect of the Group. The ORSA report is submitted to the PRA as part of the normal supervisory process and may be supplemented by ad hoc assessments where there is a material change in the risk profile of the Group outside the usual reporting cycle.
In addition to the Group ORSA process, an entity-level ORSA process is performed for Quilter Life & Pensions Limited.
The ICARA process is similar to the ORSA process and is performed at entity level for certain UK investment firms within the Group. A Group ICARA report is also produced annually and summarises the analysis, insights and conclusions from the underlying risk and capital management processes in respect of the IFPR prudential consolidation Group. The ICARA reports are submitted to the FCA as part of the normal supervisory process and may be supplemented by ad hoc assessments where there is a material change in risk profile outside the usual reporting cycle.
The conclusions of the ORSA and ICARA processes are reviewed by management and the Board throughout the year.
18(b): Credit risk
Overall exposure to credit risk
Credit risk is the risk of adverse movements in credit spreads (relative to the reference yield curve), credit ratings or default rates leading to a deterioration in the level or volatility of assets, liabilities or financial instruments resulting in loss of earnings or reduced solvency. This includes counterparty default risk, counterparty concentration risk and spread risk.
The Group has established a Credit Risk Framework that includes a Credit Risk Policy and Credit Risk Appetite Statement. This framework applies to all activities where the shareholder is exposed to credit risk, either directly or indirectly, ensuring appropriate identification, measurement, management, monitoring and reporting of the Group's credit risk exposures.
The credit risk arising from all exposures is mitigated by ensuring that the Group only enters into relationships with appropriately robust counterparties, adhering to the Group Credit Risk Policy. For each asset, consideration is given as to:
-- the credit rating of the counterparty, which is used to derive the probability of default; -- the loss given default; -- the potential recovery which may be made in the event of default; -- the extent of any collateral that the Group has in respect of the exposures; and
-- any second order risks that may arise where the Group has collateral against the credit risk exposure.
The credit risk exposures of the Group are monitored regularly to ensure that counterparties remain creditworthy, that there is appropriate diversification of counterparties and that exposures are within approved limits. At 31 December 2022, the Group's material credit exposures were to financial institutions (primarily through the investment of shareholder funds), corporate entities (including external fund managers) and individuals (primarily through fund management trade settlement activities).
There is no direct exposure to non-UK sovereign debt within the shareholder investments. The Group has no significant concentrations of credit risk exposure.
Other credit risks
The Group is exposed to financial adviser counterparty risk through a number of loans that it makes to its advisers and the payment of upfront commission on the sale of certain types of business. The risk of default by financial advisers is managed through monthly monitoring of loan and commission debt balances.
The Group is also exposed to the risk of default by fund management groups in respect of settlements and rebates of fund management charges on collective investments held for the benefit of policyholders. This risk is managed through the due diligence process which is completed before entering into any relationship with a fund group. Amounts due to and from fund groups are monitored for prompt settlement and appropriate action is taken where settlement is not timely.
Legal contracts are maintained where the Group enters into credit transactions with a counterparty.
Impact of credit risk on fair value
Due to the limited exposure that the Group has to credit risk, credit risk does not have a material impact on the fair value movement of financial instruments for the year under review. The fair value movements on these instruments are mainly due to changes in market conditions.
Maximum exposure to credit risk
The Group's maximum exposure to credit risk does not differ from the carrying value disclosed in the relevant notes to the financial statements.
Loans and advances subject to 12-month expected credit losses are GBP34 million (31 December 2021: GBP29 million) and other receivables subject to lifetime expected credit losses are GBP204 million (31 December 2021: GBP252 million). Those balances represent the pool of counterparties that do not require a rating. These counterparties individually generate no material credit exposure and this pool is highly diversified, monitored and subject to limits.
Exposure arising from financial instruments not recognised on the statement of financial position is measured as the maximum amount that the Group would have to pay, which may be significantly greater than the amount that would be recognised as a liability. The Group does not have any significant exposure arising from items not recognised on the statement of financial position.
The table below represents the Group's exposure to credit risk from cash and cash equivalents.
GBPm
Credit rating relating to cash and
cash equivalents that are neither
past due nor impaired
Carrying
31 December 2022 AAA AA A B <BBB Not rated(1) value
Cash at amortised cost, subject to
12-month ECL - 13 388 5 - 264 670
Money market funds at FVTPL 1,112 - - - - - 1,112
Total cash and cash equivalents 1,112 13 388 5 - 264 1,782
GBPm
Credit rating relating to cash and
cash equivalents that are neither
past due nor impaired
Carrying
31 December 2021 AAA AA A B <BBB Not rated(1) value
Cash at amortised cost, subject to
12-month ECL - 105 451 - 3 289 848
Money market funds at FVTPL 1,216 - - - - - 1,216
Total cash and cash equivalents 1,216 105 451 - 3 289 2,064
(1) Cash included in the consolidation of funds is not rated (see note 13(a)).
Impairment allowance
Assets that are measured and classified at amortised cost are monitored for any expected credit losses ("ECL") on either a 12-month or lifetime ECL model. The majority of such assets within the Group are measured on the lifetime ECL model, with the exception of some specific loans that are on the 12-month ECL model.
Impairment allowance GBPm Balance at 1 January 2021 (0.8) Change due to change in counterparty balance (0.4) 31 December 2021 (1.2) Change due to change in counterparty balance 0.1 31 December 2022 (1.1)
18(c): Market risk
Market risk is the risk of an adverse change in the level or volatility of market prices of assets, liabilities or financial instruments resulting in loss of earnings or reduced solvency. Market risk arises from changes in equity, bond and property prices, interest rates and foreign exchange rates. Market risk arises differently across the Group's businesses depending on the types of financial assets and liabilities held. The Group recognises that climate change can contribute to market risk.
The Group has a market risk policy which sets out the risk management framework, permitted and prohibited market risk exposures, maximum limits on market risk exposures, management information and stress testing requirements which are used to monitor and manage market risk. The policy is cascaded to the businesses across the Group, and Group-level governance and monitoring processes provide oversight of the management of market risk by the individual businesses.
The Group does not undertake any principal trading for its own account. The Group's revenue is however affected by the value of assets under management and consequently it has exposure to equity market levels and economic conditions. Scenario testing is undertaken to test the resilience of the business to severe but plausible events, including assessment of the potential implications of climate-related risks and opportunities, and to assist in the identification of management actions.
18(c)(i): Equity and property price risk
In accordance with the market risk policy, the Group does not generally invest shareholder assets in equity or property, or related collective investments, except where the exposure arises due to:
-- mismatches between unitised fund assets and liabilities. These mismatches are permitted, subject to maximum limits, to avoid excessive dealing costs; and
-- seed capital investments. Seed capital is invested within new unitised or other funds within the Group at the time when these funds are launched. The seed capital is then withdrawn from the funds as policyholders and customers invest in the funds.
The above exposures are not material to the Group.
The Group derives fees (e.g. annual management charges) and incurs costs (e.g. outsourced service provider and adviser fund-based renewal commissions) which are linked to the performance of the underlying assets. Therefore, future earnings will be affected by equity and property market performance.
Equity and property price sensitivity testing
A movement in equity and property prices would impact the fee income that is based on the market value of the investments held by or on behalf of customers. The sensitivity is applied as an instantaneous shock to equity and property prices at the start of the year. The sensitivity analysis is not limited to the unit-linked business and therefore reflects the sensitivity of the Group as a whole.
GBPm
----------- -----------
31 December 31 December
Impact on profit after tax and shareholders' equity 2022 2021
Impact of 10% increase in equity and property prices 30 34
Impact of 10% decrease in equity and property prices (30) (34)
18(c) (ii): Interest rate risk
Interest rate risk arises primarily from bank balances held with financial institutions. A small amount of the Group's assets is held in fixed interest UK Government bonds, which are exposed to fluctuations in interest rates.
Fixed interest UK Government bonds are mainly held to match liabilities by duration and so the exposure to interest rate risk is not material.
A rise in interest rates would also cause an immediate fall in the value of investments in fixed income securities within clients' investment funds, resulting in a fall in fund-based revenues.
Conversely, a reduction in interest rates would cause a rise in the value of investments in fixed income securities within clients' investment funds. It would also reduce the interest rate earned on bank balances and could potentially result in the Group incurring interest charges on these balances, if interest rates become negative.
Exposure of the income statement and statement of financial position to interest rates are summarised below.
Interest rate sensitivity testing
The impact of an increase and decrease in market interest rates of 1% is tested (e.g. if the current interest rate is 5%, the test allows for the effects of an instantaneous change to 4% and 6% from the start of the year). The test allows consistently for similar changes in investment returns and movements in the market value of any fixed interest assets backing the liabilities. The sensitivity of profit to changes in interest rates is provided.
GBPm
------------ ------------
Year ended Year ended
31 December 31 December
Impact on profit after tax and shareholders' equity 2022 2021
Impact of 1% increase in interest rates 7 11
Impact of 1% decrease in interest rates (7) -
------------
18(c)(iii): Currency translation risk
Currency translation risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group's functional currency is pounds sterling, which accounts for the majority of the Group's transactions. The Group has minor exposure to Euros, through the Group's Irish subsidiary and to the South African Rand, due to the listing on the Johannesburg Stock Exchange and the payment of a proportion of shareholder dividends in Rand. During 2022, the Group had limited exposure to foreign exchange risk in respect of other currencies due its non-UK operations and foreign currency transactions.
18(d): Liquidity risk
Liquidity risk is the risk that there are insufficient assets or that assets cannot be realised in order to settle financial obligations as they fall due or that market conditions preclude the ability of the Group to trade in illiquid assets in order to maintain its asset and liability matching ("ALM") profile. The Group manages liquidity on a daily basis through:
-- maintaining adequate high-quality liquid assets and banking facilities, the level of which is informed through appropriate liquidity stress testing;
-- continuously monitoring forecast and actual cash flows; and
-- monitoring a number of key risk indicators to help in the identification of a liquidity stress.
Individual businesses maintain and manage their local liquidity requirements according to their business needs within the overall Group Liquidity Risk Framework that includes a Group Liquidity Risk Policy and Group Liquidity Risk Appetite Statement. The Group framework is applied consistently across all businesses in the Group to identify, manage, measure, monitor and report on all liquidity risks that have a material impact on liquidity levels. This framework considers both short-term liquidity and cash management considerations and longer-term funding risk considerations.
Liquidity is monitored centrally by Group Treasury, with management actions taken at a business level to ensure each business has sufficient liquidity to cover its minimum liquidity requirement, with an appropriate buffer set in line with the Group Risk Appetite Statement.
Throughout the ongoing Ukraine crisis and market volatility during 2022, Quilter plc and its subsidiaries have operated above their individual liquidity targets and there were no material liquidity stresses identified over this period. Daily liquidity monitoring continues across the Group to enable timely identification of any emerging issues.
The Group maintains contingency funding arrangements to provide liquidity support to businesses in the event of liquidity stresses that are greater than their risk appetite. Contingency Funding Plans are in place for each individual business in order to set out the approach and management actions that would be taken should liquidity levels fall below minimum liquidity requirements. The plans undergo an annual review and testing cycle to ensure they are fit for purpose and can be relied upon during a liquidity stress.
Information on the nature of the investments and securities held is given in note 10.
The Group has a GBP125 million five-year Revolving Credit Facility with a five-bank club that provides a form of contingency liquidity for the Group. No drawdown on this facility has been made since inception. The Group has exercised the option to extend the facility for a further two-year period, to February 2025, and has continued to meet all the covenants attached to its financing arrangements.
The financing arrangements are considered sufficient to maintain the target liquidity levels of the Group and offer coverage for appropriate stress scenarios identified within the liquidity stress testing undertaken across the Group.
The Group does not have material liquidity exposure to special purpose entities or investment funds.
18(e): Insurance risk
18(e)(i): Overview
The definition of insurance risk set out in the policy covers risks arising under Quilter's unit-linked investment contracts which do not meet the IFRS definition of insurance contracts.
The Group's Enterprise Risk Management Framework defines insurance risk as the risk of a reduction in Solvency II own funds from adverse experience or change in assumptions relating to claims, policyholder behaviour, mortality, longevity or expenses, resulting in an adverse impact to earnings or reduced solvency.
The Group has implemented an insurance risk policy which sets out the Group's requirements for the management, measurement, monitoring and reporting of insurance risks. The Group has implemented the Technical Provisions Standard to support the insurance risk policy.
The sensitivity of the Group's earnings and capital position to insurance risks is monitored through the Group's capital management processes.
The Group manages its insurance risks through the following mechanisms:
-- Management of expense levels relative to approved budgets.
-- Analysis and monitoring of experience relative to the assumptions used to determine technical provisions.
Persistency
Persistency risk is the risk that the level of surrenders or withdrawals on products offered by Quilter Life & Pensions Limited occur at levels that are different to the levels assumed in the determination of technical provisions. Persistency statistics are monitored monthly and a detailed persistency analysis at a product group level is carried out on an annual basis. Management actions may be triggered if persistency statistics indicate significant adverse movement or emerging trends in experience.
Expenses
Expense risk is the risk that actual expenses and expense inflation differ from the levels assumed in the determination of technical provisions. Expense levels are monitored on a quarterly basis against budgets and forecasts. Expense drivers are used to allocate expenses to entities and products. Some product structures include maintenance charges. These charges are reviewed annually in light of changes in maintenance expense levels and the market rate of inflation. This review may result in changes in charge levels.
Mortality
Mortality risk is not material as the Group does not provide material mortality insurance on its products and mortality benefits are reinsured.
18(e)(ii): Sensitivity analysis
Sensitivity analysis has been performed by applying the following parameters to the statement of financial position and income statement for 2021 and 2022. Interest rate and equity and property price sensitivities are included within the Group market sensitivities above.
Expenses
The increase in expenses is assumed to apply to the costs associated with the maintenance and acquisition of contracts within the unit-linked business. It is assumed that these expenses are increased by 10% from the start of the year, so is applied as an expense shock rather than a gradual increase. The only administrative expenses that are deferrable are sales bonuses but as new business volumes are unchanged in this sensitivity, sales bonuses and the associated deferrals have not been increased. Administrative expenses have been allocated equally between life and pensions.
An increase in expenses of 10% would have decreased profit by GBP6 million after tax (2021: GBP6 million).
18(f): Operational risk
Operational risk is the risk of loss arising from inadequate or failed internal processes, or from personnel and systems, or from external events, resulting in an adverse impact to earnings or reduced solvency. Operational risk includes all risks resulting from operational activities, excluding the risks already described above and excluding strategic risks and risks resulting from being part of a wider group of companies.
Operational risk includes the effects of failure of administration processes, IT and Information Security maintenance and development processes, investment processes (including settlements with fund managers, fund pricing and matching and dealing), people and HR processes, product development and management processes, legal risks (e.g. risk of inadequate legal contracts with third parties), change delivery risks (including poorly managed responses to regulatory change), physical and certain transitional financial risks arising from climate change, risks relating to the relationship with third-party suppliers and outsourcers, and the consequences of financial crime and business interruption events.
In accordance with Group policies, management has primary responsibility for the identification, measurement, assessment, management and monitoring of risks, and the escalation and reporting on issues to Executive Management.
The Group's Executive Management has responsibility for implementing the Group Operational Risk Framework and for the development and implementation of action plans designed to manage risk levels within acceptable tolerances and to resolve issues identified.
18(g): Contractual maturity analysis
Investment contract policyholders have the option to terminate or transfer their contracts at any time and to receive the surrender or transfer value of their policies, and these liabilities are therefore classified as having a maturity of less than three months. Although these liabilities are payable on demand, the Group does not expect that all liabilities will be settled within a short time period.
19: Related party transactions
In the normal course of business, the Group enters into transactions with related parties. Loans to related parties are conducted on an arm's length basis and are not material to the Group's results. There were no transactions with related parties during the current year or the prior year which had a material effect on the results or financial position of the Group. Full details of transactions with related parties, including key management personnel compensation is included within note 39 of the financial statements within the Group's 2022 Annual report. The Group's interest in subsidiaries and related undertakings are set out in Appendix A of the financial statements within the Group's 2022 Annual report.
20: Events after the reporting date
In January 2023, the Group issued the GBP200,000,000 8.625% Fixed Rate Reset Subordinated Notes (due April 2033) and received net cash proceeds of GBP197 million. The Notes are now listed and regulated under the terms of the London Stock Exchange. On 28 February 2023, the Group repaid the existing GBP200,000,000 4.478% Fixed Rate Reset Subordinated Notes (due February 2028).
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END
FR FLFLAVAIDIIV
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March 08, 2023 02:00 ET (07:00 GMT)
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