ANNUAL REPORT AND AUDITED GROUP FINANCIAL STATEMENTS 2013

Transcription

1 RELIANCE MUTUAL INSURANCE SOCIETY LIMITED ANNUAL REPORT AND AUDITED GROUP FINANCIAL STATEMENTS 2013 Registered in England No:

2 CONTENTS Page Board of Directors, Senior Management, Auditors, Bankers and Registered office 2 Board of Directors 3 4 Chairman s Statement 5 6 Chief Executive s Report 7 8 Group Strategic Report 9 13 Report of the Directors Corporate Governance Audit and Risk Committee Report Remuneration Report Reports to With Profits Policyholders Bonus Declaration 32 Independent Auditors Report to the Members of Reliance Mutual Insurance Society Limited Consolidated Profit and Loss Account 37 Balance Sheets Notes to the Financial Statements

3 Directors S Creedon FIA, CERA, MAAA, FSAI Chairman W Au MSc FCMA Resigned 31/7/2013 M Goodale BA FIA O Johnson MA Appointed 5/7/2013 C J Lerpiniere BSc ACII C K Mills FFA S O Connor MA FCA Appointed 11/9/2013 R P J Randall BSc FIA Resigned 31/1/2014 F B Sanjana MA FCII N A Sherry ACII Senior Management M Goodale BA FIA C R Allison FIA R E Cuming C J Lerpiniere BSc ACII C K Mills FFA C A Whatford BSc FCA Chief Executive Head of Member Recruitment Investment Manager Head of Operations Chief Actuary and Head of Risk and Compliance Financial Controller and Head of Human Resources Company Secretary A R Field ACIS Independent Auditors PricewaterhouseCoopers LLP 7 More London Riverside London SE1 2RT Bankers Barclays Bank plc 8 Calverley Road Tunbridge Wells Kent TN1 2TB Registered and Administrative Office Reliance House 6 Vale Avenue Tunbridge Wells Kent TN1 1RG 2

4 BOARD OF DIRECTORS The directors of the company who were in office during the year and up to the date of signing the financial statements were: Mr Seamus Creedon FIA CERA MAAA FSAI (age 62) Chairman (appointed 11/03/2008). Seamus is an Actuary. He is a management consultant and was a partner at KPMG where he led the UK actuarial practice from 2000 to 2003 and was the deputy leader globally. Previously he was Chief Executive of Bank of Ireland s life assurance business and also at Abbey Life Ireland. He is a member of the insurance stakeholder group of the European Insurance and Occupational Pension Authority and is a NonExecutive Director of Baillie Gifford Life, RGA International, VHI Healthcare and MetLife. Mr Mark Goodale BA FIA (age 58) Chief Executive (appointed 01/07/2006). Mark is an Actuary. Prior to joining the Society he was a Director and the General Manager of Ecclesiastical Life Limited and prior to that, Chief Financial Officer of Manulife (UK). Mark is Chairman of the Association of Financial Mutuals having served on that Board for over five years. Mr Barry Sanjana MA FCII (age 58) NonExecutive Director (appointed 01/07/2004) and Chair of the Investment Committee. Barry Sanjana spent 25 years working for the investment management subsidiaries of Royal Insurance, Commercial Union, CGU and Friends Provident. He was Chief Investment Officer in both the CGU and Friends Provident Group. He is also a NonExecutive Director of Police Mutual and is the Chair of their Investment Committee. Mr Nigel Sherry ACII (age 56) NonExecutive Director (appointed 24/03/2009), Senior Independent Director (SID), Chair of the Fair Member Benefits Committee and Chair of the Remuneration Committee. Nigel has almost 35 years experience in the financial services industry. He held senior positions at Pearl Assurance; NPI; Prudential UK; and as Chief Operating Officer and acting Chief Executive of MGM Assurance. In addition to being a NonExecutive Director, Nigel undertakes interim management assignments in the Financial Services sector. He was appointed as SID following Jim Randall s retirement in January Mr Chris Lerpiniere BSc ACII (age 55) Executive Director (appointed 28/09/2012). Chris is a Chartered Insurer. He joined the Society in April 2008 and, as Head of Operations, he is responsible for the service our clients receive and also for our information technology. Prior to joining Reliance Mutual he held senior management positions at Fidelity and GAN Life and Pensions. Mr Cameron Mills FFA (age 50) Executive Director (appointed 28/09/2012). Cameron joined the Society in September As Chief Actuary and Head of Risk and Compliance he is responsible for all the Society s actuarial functions including the pricing of products and the Society s risk management systems. Prior to Reliance Mutual, he was Interim Chief Actuary at Baroda L&G Life Insurance Company supporting Legal & General in their joint startup in Mumbai. He has also served three years at Resolution Life and 21 years at Standard Life. 3

5 Mrs Sophie O Connor FCA (age 43) NonExecutive Director (appointed 11/09/2013) and Chair of the Audit and Risk Committee. Sophie is currently a Trustee of the Mineworkers Pension Scheme and a Member of its Risk and Operations Sub Committee; a Trustee of Caparo Pension Scheme; and a NonExecutive Director of the Habinteg Housing Association. Previously, she worked for Merrill Lynch (now Bank of America Merrill Lynch) for 15 years and Ernst & Young. Mr Oliver Johnson MA (age 58) NonExecutive Director (appointed 05/07/2013). Oliver is currently CEO of Durrell Wildlife Conservation Trust, and Chairman of the Bowls Development Alliance for Sport England. Between 2004 and 2011 he was Chief Executive of The Wine Society which is owned by and sells to its members. Previously he worked in marketing and commercial roles for MercedesBenz, Volvo, BAT and Reckitts; he also has experience as a nonexecutive director for a number of organisations, including The Childrens Mutual. 4

6 CHAIRMAN S STATEMENT The year 2013 was, for the Society, a period of profound transition. Management and board concentrated on preparing to attract new members consistently with the wishes of our membership as expressed in the 2012 vote. The welfare gap A combination of economic adversity and complex financial services regulation have had the effect that fewer families have been buying insurance cover against risks of death or serious illness or disability. At the same time government has been narrowing entitlement to public welfare benefits. The upshot is that families, and particularly children in families, are to a degree unprecedented in a generation at risk of lifechanging loss in the event that a breadwinner is no longer able to provide. Reliance Mutual Insurance Society exists so that its members can protect their personal financial security and that of their families against life s hazards. We have been enabling members to arrange insurance cover since the early years of the last century, before Britain became committed to public benefits for the sick or unemployed. We believe that what we can do for members is just as important to them today as it has been throughout our history. As regards welfare later in life, we are digesting the change of policy course announced by the present Government in March. We support the stated intention to afford individuals greater flexibility to manage their financial affairs to suit their particular circumstances. Importance of mutuality Your Board is very aware that we are stewards of the running of the Society on behalf of the members who collectively own the Society. We are responsible for the secure management of the Society s affairs, but perhaps an even more important responsibility is to assure fairness for members collectively and individually. Unlike many household name insurance firms, we can concentrate exclusively on the interests of our members. We aim to provide reliable life and morbidity coverage on fair terms to as many members as wish to join us. Our chief executive, Mark Goodale, also serves as chairman of the Association of Financial Mutuals (AFM). We believe that mutual societies such as ours play a uniquely valuable role in serving the public, and we could wish that that this role were more explicitly recognized, particularly by our twin regulators, the Financial Conduct Authority and the Prudential Regulation Authority. We strongly support the work of the AFM in the interests of our members. Serving members A principal item on the Board agenda has been the developing plan to renew sustained recruitment of members, consistent with what members supported in the 2012 vote. Our responsibility in this context is to optimise the balance as between present and future members, just as is the case for any form of association. We are satisfied with plans as they have evolved to date and will continue to monitor developments very closely. For existing members, our Fair Member Benefits Committee has had an active year implementing the 2012 Scheme. Following completion of the Scheme and the increased certainty of surplus, the terminal bonus rates in WPSF1 were significantly increased from March WPSF6 also saw large increases in terminal bonus rates in the year. All bonus rate changes continue to be made with the aim of ensuring the Society treats with profits policyholders fairly and in accordance with the Society s established Principles and Practices of Financial Management. The Scheme identified that with profits members in RMWPSF/WPSF1 who had left the Society in the period 1 January 2010 to the date of the Scheme had an interest in the capital available for distribution as at that date. During 2013 the Society has paid out 9.7m of a total of 10.8m identified as additional terminal bonus payments due to these policyholders in respect of this interest. 5

7 Investment Markets Financial markets remain in rather uncharted territory as central banks maintain unprecedentedly low levels of shortterm interest rates and continue to hold substantial amounts of assets purchased under quantitative easing programmes. Attention has switched to how or when quantitative easing can be exited and interest rates restored to more normal levels. Equity markets enjoyed a good year on both sides of the Atlantic, helped by low interest rates and perhaps consideration of chances of some increase in inflation in the medium term saw a definite steepening of the yield curve, which was bad news for longer UK gilts although losses have been partially reversed in early Although our linked funds benefited from equity exposures, I have to remind members that low levels of interest rates are not good for their interests. The Board has been actively considering what options are open to it to improve riskadjusted yields and this will remain very much on our agenda in Board Changes 2013 and the first part of 2014 has seen changes to the membership of your Board. Wai Au, the previous chair of the Audit and Risk Committee, resigned on 31 July 2013 and Jim Randall, who was the Senior Independent Director, resigned on 31 January I am glad to take this opportunity to thank them both for their contribution to the Board and the Society. The vacant nonexecutive positions have been filled by Oliver Johnson and Sophie O Connor. As their biographies on page 4 detail, they are both bringing a wealth of experience to the Society and I welcome them to your Board. Governance Since joining the Board in March 2008 (and becoming Chairman on 1 June 2008), I have always been impressed by the Board s commitment to a high standard of corporate governance and, most importantly, how this is balanced within the organisation without being overly cumbersome or expensive. We continued to apply the relevant provisions of the revised Annotated Combined Code on Corporate Governance for Mutual Insurers during 2013 and have also engaged our auditors to audit and comment on our adherence during the year. The Board recognises that it is accountable to members for good governance to facilitate efficient and effective management in order to deliver value over the long term, within appropriately established risk parameters. The Directors, both individually and collectively, take governance seriously and I am satisfied that our Board operates effectively, is properly engaged on critical matters and that all Directors set aside the time required to fulfil their duties. Further details are set out in the corporate governance section. S Creedon Chairman 31 March

8 CHIEF EXECUTIVE S REPORT 2013 has been an exceptional year for the Society as we developed our new member recruitment strategy and planned the infrastructure to operate it. The scale of the project should not be underestimated and both our staff and those that we have brought in to help us temporarily have performed to a very high standard throughout the year to either progress the project or help to ensure that we continue to look after our existing members to the standard that they expect from us. New Member Recruitment Strategy More about this can be found in the strategic report, but it is safe to say that this is one of the most important developments in the Society s recent history. WindUp of WPSF3 and WPSF5 During 2011, the fund size of WPSF3 fell below the 5m threshold where under the original Scheme of Transfer the Society may cease to operate a separate fund and may merge the assets and liabilities of the subfund with RM WPSF. The Society chose not to exercise that option until the 2012 Scheme of Arrangement had been completed. This meant that WPSF3 remained as a separate fund until September 2013 at which point it was wound up. The original Scheme of Transfer which established WPSF5 set a threshold of 5m of with profits liabilities below which the fund could be wound up. The 2012 Scheme of Arrangement rebased this level to 10m and as a result WPSF5 fell below this revised threshold. The Society also wound up this fund at the end of September Assets and liabilities of both funds were merged into the Ordinary Sub Fund (OSF) and all with profits policies were converted to non profit plans, with bonus expectations converted to guaranteed benefits. Funeral Plans During the year the Society entered into an agreement with the National Association of Funeral Directors to provide the life insurance policy required when their member Funeral Directors sell a pre paid funeral plan. This has proved to be a very successful source of premiums to the Society and we hope to build similar partnerships in the future. Ecclesiastical Financial Advisory Services Ltd provides marketing and administration services for this arrangement. Over 50 s plan We were pleased to launch an Over 50 s Whole of Life plan in the year. This plan has been developed with simplicity and clarity in mind. We have purposely not copied the marketing strategies followed by others selling this product. This has enabled the Society to develop its skills in digital marketing and online execution only sales. Investment Performance The past performance of our unit linked funds can be found on our website at: The withprofit performance of the Reliance Mutual main fund (previously RMWPSF now WPSF1) as presented by Money Management magazine can also be found on our website at the same address as above. Staff We appreciate that it is our staff that make us the Society that we are. During the year we conducted a staff survey to test views on a number of aspects of the Society. Engagement has continued with feedback meetings, and whilst most measures show strong staff satisfaction, management has committed to respond to areas of concern. In support of the member recruitment strategy we are developing, we also launched a Culture Change Programme in late 2013, which will build on the input from the staff survey, with a focus on developing the future culture of the Society. All staff will be providing input through a series of workshops. Management values its engagement with staff, and I d like to take this opportunity to thank all staff for their hard work and contribution to the Society in

9 Major achievements in the year Apart from the significant amount of time and resource put into the new member recruitment strategy in the year we have also completed several projects. These projects may have been of a regulatory nature, such as HMRC s requirement for Real Time Information or AutoEnrolment, or to improve efficiency within the Society. A further project related to moving and upgrading our disaster recovery site. Its move to a different part of the county increases the resilience of the Society. Training on a newer, more dynamic project management technique has been given to all management and staff who are involved in projects (the AGILE approach) during the latter part of This involves significant cultural change in the approach to managing projects, and is expected to improve the Society s delivery of projects within time and budget, as well as adaptability to changing priorities. Future The Board have approved a framework for the refocusing and regeneration of the Society was dominated by planning for this, and 2014 will see the roll out. This will create a stronger Society which will provide a positive environment for both staff and our growing member base. I look forward to reporting on our progress in next year s report. M Goodale Chief Executive 31 March

10 GROUP STRATEGIC REPORT The directors present their strategic report on the group for the year ended 31 December In 2012 the Society saw the endorsement by policyholders of the Scheme of Arrangement and a growth strategy, which is now underway. This includes refocusing the vision, mission and strategic objectives of the Society around a new plan which is likely to see significant development during Strategy for member recruitment The strategy has identified target audiences and an approach that we believe will interest them. During 2013 work was undertaken to ensure that the Society had the organisation and the infrastructure to deal with the additional demands. This has seen a modest headcount increase, and more staff will join over the next few years to continue to support the growth strategy. As a foundation for the next leg of the Society s journey to expand by bringing in new members a vision has been adopted to be the first choice of customers who want to protect their family life from the unexpected. The mission statement is to grow membership through trust in our life insurance products and services. Guiding principles in the renewed expansion of the Society are that: Unit costs do not grow in real terms; Diseconomies of scale are avoided by ensuring policies added exceed policies going off; The solvency margin is appropriate; Excess surplus is distributed to with profit policyholders in accordance with the Scheme of Arrangement approved by policyholders on 31 May 2012; Business developments are funded by the Ordinary Sub Fund (OSF) in accordance with the Scheme of Arrangement; and Most of the profits from OSF are reinvested into the business, but if sufficient surplus builds up, this may be distributed to all policyholders. Focus on core activities As part of its strategy the Group is simplifying its structure and removing noncore operations so that attention can be focused on growth. The Reliance Fire and Accident Insurance Corporation Limited The Reliance Fire and Accident Corporation, a small specialist subsidiary, is not considered core to the business. The Society, as its parent, is actively seeking to sell its shares. The corporation is not material to the results of the Group. Windup for WPSF3 and WPSF5 As mentioned in the Chief Executive s Report, 2013 saw a reduction in the number of subfunds managed by the Society when WPSF3 and WPSF5 fell below their threshold size level and were transferred into the much larger OSF fund. British Life Unit Trust The Group has operated a unit trust, The British Life Unit Trust, via Reliance Unit Managers, a subsidiary of the Group, for over 50 years. The Society has been the principal investor, holding approximately 98% of the units in issue on 31 December The Board of the Society has decided that this approach to investing the UK equity portion of the Society s assets restricts flexibility, so the Society is actively disinvesting its holdings in the Trust and reinvesting in other assets. It is expected that the windup of the Trust will commence on 30 April Acquisitions Acquisitions will continue to be important to the Society and can assist in enhancing the scale of the organisation. Several discussions took place with potential vendors in 2013 but no transactions took place during the year. 9

11 Key Performance Indicators Financial Key Performance Indicators (KPIs) Crucial for fair member treatment in a mutual is ensuring costs per member are carefully controlled. These unit costs are affected by the levels of new business, expenses and asset values. The value of new business is measured by calculating the Annual Premium Equivalent (APE) figure, which is the total of new regular premiums plus 10% of single premiums (including amounts in respect of investment contracts) Levels of new business have been volatile in recent years, as competition has become more intense in the enhanced annuity market. In 2013 this has been partially offset by sales of whole of life assurance policies associated with prepaid funeral plans. Operating expenses increased in 2013 as the infrastructure was strengthened as part of the growth strategy development. This also includes increased commission costs resulting from the sale of policies associated with prepaid funeral plans. 10

12 Despite the trend in recent years of claims exceeding new premiums, the total assets managed by the Society grew in 2012 as markets recovered, then fell slightly in 2013 as bond markets faltered. We have no choice but to hold bonds to match some of the Society s policies. The Fund for Future Appropriations represents the capital in the Society available to cover solvency requirements and provide security to members. This has shown steady growth over recent years as the business matures, and prudent reserving margins are released. 11

13 The regulatory solvency ratio continues to improve as the business matures and prudent reserving margins are released. Resource KPIs Staff numbers and levels at the end of the past 2 years are as follows: Male Female Total Male Female Total Senior Managers Managers Employees Total These are headcount numbers as opposed to full time equivalents. Management figures include both people and technical managers. Staff numbers have increased modestly to support the growth strategy. Of 13 new starters in 2013, 8 were recruited to fill existing vacancies. The remaining 5 filled new roles. Principal Risks and Uncertainties Risk management within the Group is addressed by means of a comprehensive strategy and enterprise risk management framework. The Group is committed to maintaining a systematic approach to the identification, assessment, monitoring, management and reporting of risk. Risk management is embedded throughout the organisation; from the Board considering strategic risks and risk appetite at least annually through to individual staff members discussing risks (and controls) with their line managers. The Audit and Risk Committee provide oversight of the enterprise risk management framework and associated control environment and reviews the Society s principal risk exposures at every meeting. The Group uses this framework to assess the impact of risks on economic capital. The process is risk based and uses internal capital assessment principles to quantify capital requirements and to ensure that the Group has adequate capital to meet the requirements of policyholders and regulators, and to support the growth of the business. Member numbers The principal risk facing the Society is the falling number of members. As the number of members falls the fixed costs of running the Society become a higher proportion of the Society s overall expenses. The Board has addressed this risk by embarking on a new strategy for member recruitment. Implementing this strategy is not 12

14 without risk itself and the Board is actively engaged in monitoring the development and implementation of the strategy. As with any projected expenses there are uncertainties around the costs of the new member recruitment strategy. These expenses are being carefully monitored by the Board and management. The impact of these expenses and the current and projected levels of members on the unit costs of the Society are also being closely assessed. Credit risk The Society invests a significant proportion of its assets in corporate bonds resulting in a significant exposure to credit risk. The Society mitigates this risk by managing a diversified portfolio of assets with minimal exposure to overseas stocks and the portfolio is monitored by the Investment Committee on a continuous basis. The Society is also exploring investment in alternative assets which would provide a similar risk adjusted return but which would provide greater diversification of risk. Regulation The regulatory environment in the UK changed during 2013 with the Financial Services Authority being replaced by the Prudential Regulation Authority and the Financial Conduct Authority. The Society maintains a regular dialogue with the two new regulators in order to ensure that the Society complies with the increasing requirements of these regulators at the same time as trying to ensure that the costs of regulation can be contained. Further changes to the regulatory environment are expected in 2016 when Solvency II is implemented across Europe. The Society has started its preparations for Solvency II which will unfortunately increase the Society s operational costs Budget The impact of all the March 2014 Budget changes which were recently announced by the Chancellor, especially in relation to annuities, are currently being reviewed by the Society. The Society is addressing the impact at both an operational and strategic level. It should however be noted that the future strategy of the Society is not annuity based. The Group s assessment of uncertainties is set out in note 1b to the financial statements and details of financial risk management can be found in note 2 to the financial statements. 13

15 REPORT OF THE DIRECTORS The directors present their report and the audited consolidated financial statements for the year ended 31 December The registered number of Reliance Mutual Insurance Society Limited ( the Society ) is Principal Activities The principal activity of the Group continues to be the transaction of long term insurance business. Business Review The results of the Group for the year, as set out on page 36, show a transfer to the fund for future appropriations of 4.9m (2012: transfer to the fund of 10.7m). The total assets of the Group are 1,743.3m (2012: 1,775.0m). The results of the Group in the year reflect various factors. Significant rises in interest rates have led to a decrease in technical provisions, while the narrowing credit spreads and increases in equity markets have led to an increase in technical provisions. The change in approach to reserving for expenses resulted in a significant increase in technical provisions which was largely offset by the reduction in technical provisions due to weakening of longevity assumptions and the runoff of the membership. The overall net impact of all the above factors was a decrease in technical provisions compared to For more about the key information for the Society, please refer to the Group Strategic Report on page 9. Principal Risks and Uncertainties The Group s assessment of uncertainties is set out in note 1b to the financial statements and details of financial risk management can be found in note 2 to the financial statements. More about the principal risks affecting the Society can be found in the Group Strategic Report on page 12. Actuarial Valuation and Bonus Declaration An investigation of the longterm liabilities at 31 December 2013 has been carried out. The directors have determined appropriate provisions for the longterm business liabilities which have been included in the financial statements. Rates of bonus for the main classes of policy declared by the directors are set out on page 32. Directors The directors listed on page 2 held office throughout the year, unless otherwise stated. To improve the accountability of the Board to its members, the Society has adopted best practice so that each director stand for reelection annually at the Annual General Meeting. All directors, with the exception of Mrs O Connor, are members and policyholders of Reliance Mutual Insurance Society Limited. Messrs Goodale, Creedon and Sherry have shareholdings in the subsidiary companies as nominees of the Society. No director has any beneficial interest in the subsidiary companies. Liability Insurance During the year the Society purchased and maintained liability insurance for its directors and officers as permitted by the Companies Act Employees The directors recognise the importance of employee involvement to the Society. This is maintained by effective communications, circulars and meetings. In addition, employees have been kept informed through the Staff Consultative Committee, which is regularly consulted on matters relating to employees pay and benefits. The Society continues to give full and fair consideration to applications for employment made by disabled people. 14

16 Wherever possible it will continue the employment of, and provide appropriate training for, members of staff who become disabled. Pensions The Society operated a defined benefit scheme for employees for many years. This scheme closed to future accruals for all but two members in June This has reduced to one member as at 31 December In its place, the Society offers a defined contribution scheme, which meets the requirements of autoenrolment. See note 27 to the financial statements for further details. Corporate Social Responsibility As a mutual, the Society s principal focus is on its members and policyholders. However, the importance of having responsible policies for staff, customers and the community is recognised and the potential impact of key social responsibility issues is considered as a matter of course within the overall running of the organisation. Examples of proportionate and cost effective work in this area includes a recycling policy, support of staff fund raising events and a commitment to Tunbridge Wells as the Society s registered and administrative office. Statement of Directors Responsibilities The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Society and the Group and of the profit or loss of the Society and Group for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Society will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Society s transactions and disclose with reasonable accuracy at any time the financial position of the Society and the Group and enable them to ensure that the financial statements comply with the Companies Act They are also responsible for safeguarding the assets of the Society and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Group s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Statement of disclosure of information to auditors The directors in office at the time this report is approved, confirm: so far as each director is aware, there is no relevant audit information of which the Group s auditors are unaware; and each director has taken all the steps that they ought to have taken in their duty as a director in order to make themselves aware of any relevant audit information and to establish that the Group s auditors are aware of the information. 15

17 Financial Risk Management The Group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and policyholder liabilities. The key components of this financial risk are market risk, credit risk and liquidity risk. These are discussed further in note 2 to the financial statements. Independent Auditors The auditors, PricewaterhouseCoopers LLP, have indicated their willingness to continue in office and a resolution that they be reappointed will be proposed at the annual general meeting. By order of the Board A R Field Company Secretary 31 March

18 CORPORATE GOVERNANCE Compliance with the Code A version of The Combined Code on Corporate Governance was first produced for mutual insurers in July This was revised in February 2008 and in October 2010 the Association of Financial Mutuals published a new annotated version ( the Code ) based on The UK Corporate Governance Code which had begun to apply to all companies with a Premium Listing of equity shares in June The Code attempts to promote better board behaviour by refocusing attention on principles. While the Code does not demand compliance with a rigid set of rules, it does require companies to apply the Main Principles and report on how they have done so. The principles are the core of the Code and the way in which they are applied should be the central question for a board as it determines how it is to operate according to the Code. The Board of Reliance Mutual is committed to a high standard of corporate governance. The Board considers that it has applied the relevant principles and complied with the relevant provisions of the Code throughout this reporting year unless the contrary is stated below. The Board The Board takes overall responsibility for the management of the Group, determining: Strategic principles and objectives, annual plans and budgets (and any material changes to them), performance monitoring and corrective action; Risk management processes including risk appetite; Organisational and group structure; and Pension and remuneration policies. The Board authorises all strategic transactions, major contracts and items of major capital expenditure, not in the ordinary course of business, except those defined in its Delegated Authorities Schedule. It approves significant changes to investment strategy. It determines the basis to be used for the valuation of liabilities; declares annual and final bonuses; and ensures that the Actuarial Function Holder and the With Profits Actuary have access to the information they require to discharge their respective duties. The Board approves the annual regulatory return; the Principles and Practices of Financial Management (PPFM); and Individual Capital Adequacy Standards(ICAS), and accompanying risk profiles, including ICAS quantification to the Prudential Regulation Authority (PRA). The Board ensures that the Society complies with the rules and requirements of the regulators; the Code and all applicable legislation; and directs the work carried out on the requirements for Treating Customers Fairly. It approves the Society s new business and acquisition strategy; new product launches; targets and monitors performance against forecasts; and also approves acquisitions and decisions to cease to operate all or any material part of the Society s business. The Board approves the Society s operational policy in relation to the overall administration of business and has responsibility for the Society s system of internal control and the systems used to identify, mitigate and monitor risks. During the year the Board complement was: the Chairman; three Executive Directors; and five NonExecutive Directors. Details of each Director are shown on pages 3 and 4. The Board considers that each of its NonExecutive Directors is independent in character and judgement and is satisfied that no one Director holds unfettered powers of decision. Evaluation took account of the two NonExecutive Directors who continue to serve beyond their sixth year to ensure that their experience within the Board s operations continues to provide benefit to the Group in a suitably independent manner. Barry Sanjana s continued appointment has been subject to careful consideration and the Board is satisfied that he remains independent from the daytoday operations and management of the Society. Mr Sanjana has not been in the Society s employ and his experience both within the investment and insurance industries in general and also within the economic cycles important to the work of the Investment Committee provides significant benefit to the Group. Jim Randall retired on 31 January 2014 following the appointment of Oliver Johnson. Mr Johnson was appointed as NonExecutive Director on 5 July 2013 and Sophie O Connor was appointed on 11 September 2013 both following regulatory approval. The Board usually has six regular meetings in the year as well as two strategy review meetings. Other meetings are convened as required. In 2013 there were four additional meetings held reflecting the careful deliberation that went 17

19 into decisions regarding the development of the Society s new business product lines. The Board delegates authority to Subcommittees when particular tasks require. Subcommittees were appointed on three occasions during the year to sign the 2012 Annual Report, to drive a communication process on a regulatory matter and to consider particular aspects of a potential acquisition. An agenda is prepared for all meetings and appropriate papers are provided to the Directors in advance of each meeting. Attendance at the Board and Committee meetings during 2013 was as follows: Board Investment Committee Audit & Risk Committee Fair Member Benefits Committee Nomination Committee Remuneration Committee Meetings held S Creedon 12/12 3/3 3/3 M Goodale 12/12 7/7 5/5 3/3 RPJ Randall 12/12 9/9 5/5 3/3 3/3 F B Sanjana 11/12 7/7 8/9 4/5 3/3 2/3 N A Sherry 12/12 9/9 5/5 3/3 3/3 C J Lerpiniere 12/12 3/3 C K Mills 12/12 3/3 O W Johnson1 5/5 3/3 2/2 1/2 1/1 S J O Connor2 3/4 2/2 1/1 1/1 W Au3 6/7 7/7 2/2 2/2 Directors have full access to the services of the Company Secretary and may take independent professional advice at the Group s expense if they judge it necessary to discharge their responsibilities. Tony Field, a Chartered Secretary, was appointed as Company Secretary from 1 May The Society holds appropriate insurance cover in respect of legal action against its Directors. The division of responsibilities between the Chairman and the Chief Executive is set out in writing and evaluation has determined that the Chairman has no commitments that impinge on his responsibilities as Chairman and the Chief Executive has no commitments that impinge on his responsibilities as Chief Executive. All Directors stand for reappointment at the Annual General Meeting (AGM). The letter of appointment for Non Executive Directors makes it clear that standard service would be expected to be two terms of three years, with the possibility of a third term if that appears suitable. A specimen letter of appointment is available on request and on the Group s website. The Board is satisfied that the Annual Report and Accounts present a fair, balanced and understandable assessment of the company s position and prospects. 1 Appointed on 5 July Appointed on 11 September Retired on 31 July

20 Internal controls The Board of the Society is ultimately responsible for maintaining the system of internal control and monitoring its effectiveness. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The key features of the system of internal control are: A detailed Board Governance process, setting out a clear organisational structure, roles and responsibilities, authorities and matters reserved for each Board Subcommittee; A strategic plan process which sets a mediumterm strategy based on a clear understanding of the risk inherent in the environment in which it operates; A planning and budget process that delivers detailed annual budgets and forecasts for Board approval; Management information systems enabling the Board to receive comprehensive reporting of financial and operational performance; A Risk Management function which maintains the risk management framework and facilitates management s regular identification, assessment and reporting of the key risks; A set of formal policies which govern the management, control and oversight of the key risks faced by the Society; A detailed annual capital assessment on a realistic basis, resulting in a greater understanding of the financial consequences of the risks faced by the business, and enabling effective capital management; An Internal Audit function which reports directly to the Audit and Risk Committee on the effectiveness of internal controls in relation to the key risks identified; and A Compliance function, which also reports directly to the Audit and Risk Committee, and which identifies and monitors the control of our compliance risks and monitors compliance with regulatory requirements. The Board considers that the controls effective during 2013 were appropriate to the needs of the Society. Certain Group subsidiaries are regulated entities, and as such are subject to the supervision of the PRA and the Financial Conduct Authority (FCA) as appropriate, including their systems of business control. Business model More information regarding the business model can be found in the Group Strategic Report. Board Committees Audit and Risk Committee The Directors who served on the Committee during the year were Wai Au (as Chair until her retirement on 31 July 2013), Jim Randall, Barry Sanjana, Nigel Sherry and Oliver Johnson (from 5 July 2013). Sophie O Connor (from 11 September 2013) was appointed Chair of the Audit and Risk Committee as recommended by the Nomination Committee following her specific recruitment for the role. The Committee meets at least four times a year and at one meeting meets with the auditors in the absence of management. The Committee s terms of reference are available on request and on the Group s website. Further details about the work of the Committee can be found in the Audit and Risk Committee Report on page 22. Nomination Committee During this year, the Committee comprised the full Board. The Committee s terms of reference are available on request and on the Group s website. During 2013 the Committee oversaw the recruitment and selection of the two new NonExecutive Directors Oliver Johnson and Sophie O Connor. The external search consultancy used extensively in the process was First Flight NonExecutive Directors Limited. The Committee has confirmed that the external search consultancy has no other connection with the Group. The Board believes that having a diverse workforce is vital to the success of the business. The same principle is applied to the composition of the Board, which strives to cultivate the value that is brought to debate and decisionmaking by Directors with diverse backgrounds, experience, expertise and outlook. 19

21 The Board s diversity policy sets out the principle to make Board appointments based on merit and overall suitability for the role and explains that, subject to this principle, and to the availability of appropriate candidates, the aim is to increase the percentage of female representation on the Board, considering the recommendations of the Davies Review, and in the context of the relatively small size of the Board and the tenure of the existing Directors. Remuneration Committee During the year, this Committee comprised only NonExecutive Directors and the Chairman of the Board. The Committee was chaired by the Senior Independent Director. The terms of reference for the Committee are available on request and on the Group s website. Details regarding Directors pay can be found in the Remuneration Report on page 26. Remuneration packages do not include any longterm incentive schemes, but the Committee ensures that performancerelated elements of remuneration are designed to align the interests of Executive Directors with those of members, to promote the longterm success of the Group and provide keen incentives to perform at the highest level. There are no notice periods in excess of one year for Executive Directors was the fifth year that a resolution was put to the AGM to provide members with an opportunity for an advisory vote regarding the Remuneration Report. The result of the fifth vote echoed previous votes, with over 90% voting in favour of the report. To further the Board s approach to providing members with a strong say on the running of their Society, a close eye is being kept on how quoted companies implement binding votes on directors pay and, even though the legislation does not directly apply to mutuals, the Board s intention remains voluntarily to abide by the approach set out in the legislation so far as is practicable and as soon as sufficient empirical evidence of a method of implementation appropriate to the Society has been obtained. Information is required to be disclosed in relation to holdings of securities in the Society, particularly those carrying special voting rights and rights with regard to control of the Society. There are no securities in issue by the Society. Seven Directors hold one of the Society s policies. These policies do not have any different voting rights or controlling effects than those of all other members holding similar policies. No remuneration consultants were appointed in relation to the workings of the Remuneration Committee in Investment Committee Mr Sanjana is Chairman of this Committee. The other Director who is a member of this Committee is Mr Goodale the other permanent member is Mr Cuming, the Head of Investments. The terms of reference of the Committee are available on request and on the Group s website. More details of the Investment Committee s role can be found in Note 2 to the financial statements. All members of the Board receive copies of Committee papers and minutes. Fair Member Benefits Committee (incorporating the With Profits Committee) This Committee was established in November Its role is to make recommendations to the Board to ensure that all members, both with profits and nonprofit, are treated fairly when financial management decisions are made. The Committee comprises four members, three of whom were Independent Directors of the Society and one of whom, Nigel Sherry, acts as the Chairman. The Chief Executive is a member of the Committee representing the views of management. The With Profits Actuary attends all meetings. The Actuarial Function Holder also normally attends meetings at the invitation of the Committee. The terms of reference of the Committee are available on request and on the Group s website. Member relations The Board is committed to developing member dialogue and involvement. The member relations strategy is available on request and in the members section of the Group s website. In 2013, voting members received at least 20 working days notice of the AGM. All Directors and Senior Managers attended the AGM and facilities were provided afterwards to enable members to question them further and meet other members. Not all information recommended by the Code was provided with the AGM notice. The information was detailed in the notice and then sent to members on request. A good degree of the member relations activity in 2013 was focused on ensuring that Board deliberations regarding new product development were properly informed on the subject of the product needs of potential new members. 20

22 Quantitative and qualitative customer research was engaged in by the Board, resulting in well informed debates and decisions regarding the development of an innovative new product proposition that will help achieve one of the aims of the 2012 vote for the Society to expand by bringing in new members. The 2013 AGM was held in May at the Charing Cross Hotel in Central London. 36 members attended and their contribution to the day, including discussions with Directors, management, staff and fellow members both before and after the meeting was active and greatly appreciated. In order to maintain engagement with members online voting was available again. 7,561 members took the opportunity of voting by proxy, 11% of those eligible to receive the notice of the meeting. Of those 753 took advantage of the online voting facility. Under the Code, the Senior Independent Director (SID) provides an alternative point of contact to the Chairman and Chief Executive for members who have concerns that cannot be addressed through normal channels. Jim Randall was the Society s SID for the period. Nigel Sherry was appointed to the position following the retirement of Jim Randall on 31 January He can be written to at the Group s registered office or contacted directly on SID@reliancemutual.co.uk. Mr Sherry received a tailored induction in relation to the role and attended the Group s Head Office in order to maintain his understanding of the daytoday concerns raised by members. Going concern After making enquiries and considering the uncertainties disclosed in Note 1b, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. The Board continues to make preparations for the implementation of Solvency II in The Board continues to monitor the finalisation of the technical framework in respect of Solvency II and is proceeding on the basis that Solvency II capital requirements can be accommodated by management of the Balance Sheet. 21