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Annual Report & Financial Statements 2015

Police Mutual Annual Report & Financial Statements 2015

Company No. 727F

ContentsChairman’s Statement 1

Chief Executive’s Statement 2

Report of the Committee of Management 6

Audit Committee Report 10

Independent Auditors’ Report 12

Consolidated Technical Account – Long-Term Business 17

Society Technical Account – Long-Term Business 18

Consolidated Balance Sheet 19

Society Balance Sheet 21

Notes to the Financial Statements 23

1

Chairman’s Statement2015 represented the concluding year of the current 3 year plan and so I would like to take this opportunity to reflect on the progress of the last 3 years and to outline the exciting ways in which we are planning to provide valuable services and benefits to all of the members we serve in the coming 3 year plan.

The last 3 years have been focussed on growing the business by developing the products and services we deliver to meet your needs in a competitive and increasingly digital age whilst helping prove the value of our not for profit mutual model. Our model is underpinned by good financial performance and the strength that comes from a much more diversified and growing business. As part of that growth we also entered the military market through the acquisition of Forces Financial. This has enabled us to diversify the business further and significantly increase our scale of operations, which has enabled us to reduce our costs per product and increase the range of things that we do. An example of this is the mortgage advice market where we finished the year with a team of 29 advisers available to serve both the Police and Military, making us the largest provider of mortgage advice to those markets.

During the period we have seen digital services increase significantly. Visits to our website have risen by over 107% in the last 3 years and we are now able to offer our Members access to a secure on-line account area. This has recently been integrated with our new Options ISA launch that enables full on-line transactions and servicing to be available and offers a range of choices to meet our Members’ ISA needs.

Other products and services launched in the last 3 years include the trial and now full launch of a personal lending offering, extension of our healthcare offering into the military market and specialist cover available for those renting property. I also know that there are several ideas at advanced stages of development that I expect you to see in the near future. For those

who use our services the ratings we get are extraordinary with customer satisfaction scores of over 80% and net promoter scores of 35.6. These are levels that other organisations do not even dream of.

Having great products and services is only part of the story and unless our affinities know what is available then we could consign ourselves to being a great secret. As a result, another area we have been working on has been to increase awareness in our affinities of who we are and what we stand for. The effect of this is that our levels of unprompted awareness have increased by 2.4% and has enabled us to attract over 18,000 new Members, which has supported a meaningful growth in member numbers to a new record high of some 200,000.

To deliver the service experience you expect requires a team of dedicated colleagues with the right tools to do the job. Over the last 3 years we have seen our headcount increase from 267 to 460 supported by an investment of over £15m in technology. The dedication of our colleagues comes from the culture established within the business and to test our progress in that we entered the assessment process used by the Time Top 100 Companies. In order to feature on their rating scale, levels of engagement need to be good with the ratings scale encompassing “one to watch” to 1 star - very good, 2 stars - outstanding, or 3 stars - extraordinary. In 2014, our first year, we were rated as one to watch and for 2015 we have progressed to being a 1 star organisation. Our aim in the next 3 year plan is to become a 3 star organisation as demonstration of the highly engaged people serving you. In the most recent survey some 96% of our colleagues said that we could be trusted by our members.

These operational achievements require an underpinning strong financial base that supports it, and I am pleased to confirm that the capital strength of Police Mutual continues to allow us to invest in the services you want and provide the

capital strength to allow the investment freedom to deliver the returns that are so important to many of you. Despite the volatility of the last 12 months in investment markets we have been able to maintain payouts, which means that a typical 10 year savings plan, maturing in January 2016, would receive an annual return of circa 4% pa after all charges and the benefit of life cover throughout the policy.

This capital strength is matched by having income and expenses aligned to provide a sustainable business platform to deliver the wider purpose of Police Mutual. This includes as examples over 1,140 financial education courses for our affinities, 173 respite breaks, 4,300 health screenings and access for 32,600 to our wellbeing zone to enable individuals to manage their own health and wellbeing. It has also enabled us to commit to supporting major policing events such as a further three year support to the Police Bravery Awards. When combining these types of activities with the excellent value for money products we offer, we believe that this is real evidence of a thriving not-for profit mutual in action.

The foundations laid over the last few years give us confidence to continue to move forward to deliver our purpose in greater volume and to be proud to say that we exist to improve the lives of the Police family and that we offer this to the Military, others who lay their lives on the line and those who support them. With the plans we have in place we believe we are well positioned to deliver our vision of a better tomorrow for those who protect us today by making their lives easier, happier and longer.

To all who have made this possible whether in our volunteer Authorised and Force Authorised Officers, our colleagues and our Board and Committee of Management, I give my personal thanks and I look forward to an even more exciting 2016.


2

Chief Executive’s Statement

2015 Strategic and Operational Review2015 sees the completion of my 2nd 3 year strategic plan and represents an opportune time to reflect on the way the Group has developed for the benefit of our members and customers.

The plan for 2010 to 2012 was primarily focussed on building firm financial foundations and on re-establishing financial security by getting costs and income back into balance, rebuilding our capital strength, establishing an appropriate investment strategy and modernising our brand reputation within the Police Service. As we moved into the period 2013 to 2015 the focus moved to accelerating growth within the business underpinned by a strong belief in demonstrating the value of a modern mutual model. As a result we have continued to create benefits from this growth, expand the diversification of what we do, and achieve some scale economies that enable us to meet a wider range of the needs of our members and customers and to support a material investment in modernising our operation. The following slides draw out some of the key features of this last strategic period:

Income growth and diversification:

323028262422201816141210

86420

2010 201320122011 2014 2015

Total allowances 2010-2015

Military Group allowances

Total other allowances

Total GI allowances

Total life allowances

£m

16

14

12

10

8

6

4

2

02012

Life New Business – Annual Premium Equivalent (APE)

Life – Single Premium** Single Premium business APE is 1/10th of premium Life – Regular Premium

Life APE £m

20142013 2015

2

1

0

-1

-2

-3

-4

Overrun/Underrun Progression

Total

BAU

Ove

rru

n

£m

Un

der

run

2010 2011 2012 2013 2014 2015

50

45

40

35

30

25

20

15

10

5

02012 2013 2014 2015

General Insurance – Major Product Categories (GWP)

Home Motor Kit PA Travel

GWP £m

500

450

400

350

300

250

200

150

100

50

02010 2011 20132012 2014 2015

Growth in headcount

Av.

No

of E

mpl

oyee

s

15%

10%

5%

0%

-5%

-10%

Investment Return

Life Fund Base Rate FTSE 100

Ove

rru

n

£m

Un

der

run

-2.5%

31/12/2011

01/01/2011

31/12/2012

01/01/2012

31/12/2013

01/01/2013

31/12/2014

01/01/2014

31/12/2015

01/01/2015

11.0% 9.3% 8.1%

1.5%

Feb

09

Jun

09

Oct

09

Feb

10

Jun

10

Oct

10

Feb

11

Jun

11

Oct

11

Feb

12

Jun

12

Oct

12

Feb

13

Jun

13

Oct

13

Feb

14

Jun

14

Oct

14

Feb

15

Jun

15

Oct

15

Payout 5yr ISA return

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

323028262422201816141210

86420

2010 201320122011 2014 2015




Total GI allowances


£m

16

14

12

10

8

6

4

2

02012



Life APE £m

20142013 2015

2

1

0

-1

-2

-3

-4


Total

BAU

Ove

rru

n

£m

Un

der

run

2010 2011 2012 2013 2014 2015

50

45

40

35

30

25

20

15

10

5

02012 2013 2014 2015



GWP £m

500

450

400

350

300

250

200

150

100

50

02010 2011 20132012 2014 2015

Growth in headcount

Av.

No

of E

mpl

oyee

s

15%

10%

5%

0%

-5%

-10%

Investment Return


Ove

rru

n

£m

Un

der

run

-2.5%

31/12/2011

01/01/2011

31/12/2012

01/01/2012

31/12/2013

01/01/2013

31/12/2014

01/01/2014

31/12/2015

01/01/2015

11.0% 9.3% 8.1%

1.5%

Feb

09

Jun

09

Oct

09

Feb

10

Jun

10

Oct

10

Feb

11

Jun

11

Oct

11

Feb

12

Jun

12

Oct

12

Feb

13

Jun

13

Oct

13

Feb

14

Jun

14

Oct

14

Feb

15

Jun

15

Oct

15


5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

In the 6 year period the income has been doubled with the majority of growth having been in areas other than the traditional life savings area, which itself has also grown. The effect has been to diversify the Group significantly which improves the ability of the Group to withstand unexpected shocks. As a result we have a much more resilient business and a greater ability to ensure that we can continue to deliver our core proposition for members and the Police sustainably.

This pattern of growing through controlled diversification is a theme that we carry into the next 3 year strategy period with the added focus on how we use this stable base to deliver more in improving the lives of the affinities we serve.

GWP= Gross Written Premium

32302826242220181614121086420

2010 201320122011 2014 2015




Total GI allowances


£m

16

14

12

10

8

6

4

2

02012



Life APE £m

20142013 2015

2

1

0

-1

-2

-3

-4


Total

BAU

Ove

rru

n

£m

Un

der

run

2010 2011 2012 2013 2014 2015

50

45

40

35

30

25

20

15

10

5

02012 2013 2014 2015



GWP £m

500

450

400

350

300

250

200

150

100

50

02010 2011 20132012 2014 2015

Growth in headcount

Av.

No

of E

mpl

oyee

s

15%

10%

5%

0%

-5%

-10%

Investment Return


Ove

rru

n

£m

Un

der

run

-2.5%

31/12/2011

01/01/2011

31/12/2012

01/01/2012

31/12/2013

01/01/2013

31/12/2014

01/01/2014

31/12/2015

01/01/2015

11.0% 9.3% 8.1%

1.5%

Feb

09

Jun

09

Oct

09

Feb

10

Jun

10

Oct

10

Feb

11

Jun

11

Oct

11

Feb

12

Jun

12

Oct

12

Feb

13

Jun

13

Oct

13

Feb

14

Jun

14

Oct

14

Feb

15

Jun

15

Oct

15


5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

3

Chief Executive’s Statement (continued)

To be self-sustaining it is critical that the Group can keep the income and expense in balance and that is a position we have now reached. We do not seek to maximise income in line with our not for profit philosophy but it was never the less a key milestone in March last year when we were able to ask the Committee of Management to advise us on how to use the income that was greater than our costs for the benefit of our members. The position we have now reached also provides us the platform to seek to further improve the value of our products and services in line with the not-for profit mutual ethos that drives us.

Income v Expenses

Investment

BAU = business as usual

323028262422201816141210

86420

2010 201320122011 2014 2015




Total GI allowances


£m

16

14

12

10

8

6

4

2

02012



Life APE £m

20142013 2015

2

1

0

-1

-2

-3

-4


Total

BAU

Ove

rru

n

£m

Un

der

run

2010 2011 2012 2013 2014 2015

50

45

40

35

30

25

20

15

10

5

02012 2013 2014 2015



GWP £m

500

450

400

350

300

250

200

150

100

50

02010 2011 20132012 2014 2015

Growth in headcount

Av.

No

of E

mpl

oyee

s

15%

10%

5%

0%

-5%

-10%

Investment Return


Ove

rru

n

£m

Un

der

run

-2.5%

31/12/2011

01/01/2011

31/12/2012

01/01/2012

31/12/2013

01/01/2013

31/12/2014

01/01/2014

31/12/2015

01/01/2015

11.0% 9.3% 8.1%

1.5%

Feb

09

Jun

09

Oct

09

Feb

10

Jun

10

Oct

10

Feb

11

Jun

11

Oct

11

Feb

12

Jun

12

Oct

12

Feb

13

Jun

13

Oct

13

Feb

14

Jun

14

Oct

14

Feb

15

Jun

15

Oct

15


5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

CapitalThe Group seeks to maintain sufficient capital to ensure that the continued delivery of the purpose we were created for can continue to be fulfilled. The UK regulators have in January 2016 implemented a new regime, known as Solvency II, to assess the capital strength of all UK insurance companies. I am pleased to confirm that we continue to meet these new standards and will seek to ensure that we manage the capital to deliver the maximum benefits for all of our members.

323028262422201816141210

86420

2010 201320122011 2014 2015




Total GI allowances


£m

16

14

12

10

8

6

4

2

02012



Life APE £m

20142013 2015

2

1

0

-1

-2

-3

-4


Total

BAU

Ove

rru

n

£m

Un

der

run

2010 2011 2012 2013 2014 2015

50

45

40

35

30

25

20

15

10

5

02012 2013 2014 2015



GWP £m

500

450

400

350

300

250

200

150

100

50

02010 2011 20132012 2014 2015

Growth in headcount

Av.

No

of E

mpl

oyee

s

15%

10%

5%

0%

-5%

-10%

Investment Return


Ove

rru

n

£m

Un

der

run

-2.5%

31/12/2011

01/01/2011

31/12/2012

01/01/2012

31/12/2013

01/01/2013

31/12/2014

01/01/2014

31/12/2015

01/01/2015

11.0% 9.3% 8.1%

1.5%

Feb

09

Jun

09

Oct

09

Feb

10

Jun

10

Oct

10

Feb

11

Jun

11

Oct

11

Feb

12

Jun

12

Oct

12

Feb

13

Jun

13

Oct

13

Feb

14

Jun

14

Oct

14

Feb

15

Jun

15

Oct

15


5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

The investment strategy was substantially revised in the middle of 2011 with the aim of improving the stability of investment returns so that we could deliver stable returns on our savings products. The performance in the last 5 years when compared to either Bank Base Rate or FTSE returns shows how our approach has fared.

When combined with the expenses point made earlier this has enabled payouts to be steadily improved to a point where the return for a typical savings plan is currently 3.9%pa, which compares very favourably with alternative savings choices available to our members, especially with the comfort provided by the presence of the product guarantees.

32302826242220181614121086420

2010 201320122011 2014 2015




Total GI allowances


£m

16

14

12

10

8

6

4

2

02012



Life APE £m

20142013 2015

2

1

0

-1

-2

-3

-4


Total

BAU

Ove

rru

n

£m

Un

der

run

2010 2011 2012 2013 2014 2015

50

45

40

35

30

25

20

15

10

5

02012 2013 2014 2015



GWP £m

500

450

400

350

300

250

200

150

100

50

02010 2011 20132012 2014 2015

Growth in headcount

Av.

No

of E

mpl

oyee

s

15%

10%

5%

0%

-5%

-10%

Investment Return


Ove

rru

n

£m

Un

der

run

-2.5%

31/12/2011

01/01/2011

31/12/2012

01/01/2012

31/12/2013

01/01/2013

31/12/2014

01/01/2014

31/12/2015

01/01/2015

11.0% 9.3% 8.1%

1.5%

Feb

09

Jun

09

Oct

09

Feb

10

Jun

10

Oct

10

Feb

11

Jun

11

Oct

11

Feb

12

Jun

12

Oct

12

Feb

13

Jun

13

Oct

13

Feb

14

Jun

14

Oct

14

Feb

15

Jun

15

Oct

15


5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%


4

Chief Executive’s Statement (continued)

Operational DevelopmentsWe continue to seek to improve the way in which we are able to service our members and during 2015 some significant milestones have been achieved. These have included the launch of the My Account service that provides online access to member product information, the launch of a very competitive online personal loan service and most recently the launch of the new Options ISA range. To deliver these developments has required us to invest significantly to further enhance the IT systems and infrastructure. The processes have also been materially improved with us involving members extensively in designing solutions that meet member needs and enhance the quality of the experience we can deliver.

Against this backdrop it has been very disappointing to find that the FCA have commenced an investigation into the practices of Police Mutual along with 5 other firms to assess whether we have failed to meet the regulator’s standards and without informing us of the basis of this investigation or being given the opportunity to respond before announcing it. This investigation relates to products that we no longer market and is a very small proportion of our policies. In the words of the regulator:

‘These investigations have been commenced in order to enable the FCA to establish the reasons for the practices within firms; whether customers have suffered detriment as a result and how widespread any practices are within the six firms. No conclusion has been reached as to whether there have been any breaches of regulatory requirements. The commencement of investigations should therefore not be taken to indicate that they will necessarily result in disciplinary action against the firms involved nor does it indicate that a penalty will inevitably be imposed or that redress will be payable.’

We will obviously fully cooperate with the regulator and have also commenced our own independent review and the numbers affected should be immaterial in my view. In addition I have made clear in an open letter to all members:

‘At Police Mutual, we set ourselves high standards. If we have fallen short in any way, I am certain that this would have been unintentional, but that would not be an excuse. Most importantly, I promise that none of our members should suffer if they have lost out as a result.’

People DevelopmentTo deliver great outcomes for members requires us to combine together the appropriate product designs, processes and technology and deliver the right service through our people. It is the people that truly make a business different and we continue to invest heavily in developing the culture to focus around our core values:

Be the best

We set our own standards. We are not judged by anyone else’s. Every day we relentlessly challenge ourselves to be better. Better than we were yesterday. Better than others who seek to serve our members and customers.

Think commercial. Act commercial

We mean business. Being great at business is the best way to support each of our members and customers. It is our job to find ways to help them today, tomorrow, forever.

Wired to care

A deep understanding of those we serve and work with is second nature to us. It’s intuitive. We know how to best serve, support and help our members, customers and colleagues.

All of us are better than one of us

By working together, we do more for our members, our customers and our colleagues, helping all of us to do the right thing more often.

To benchmark our progress in embedding the culture and having a highly engaged and motivated workforce is an important way of tracking our progress. To do this we subscribe to the Best Company Survey and I’m pleased to report that having gained an entry score that placed us as “One to Watch” we have now improved that score to be rated a 1* company, which the survey provider advises us that this is an extremely positive shift in a 12 month period.

5

My aim is to continue the successful development of an organisation that is focussed on creating a better tomorrow for those who protect us today by making their lives easier, happier and longer. The last few years have seen material progress towards creating the not-for-profit modern mutual and the next exciting phase can demonstrate our ongoing commitment to improving the lives of those that we serve. Over 90% of colleagues tell me that they are proud to work for Police Mutual and of what we do. I hope you will see even more benefits of this in future years.

323028262422201816141210

86420

2010 201320122011 2014 2015




Total GI allowances


£m

16

14

12

10

8

6

4

2

02012



Life APE £m

20142013 2015

2

1

0

-1

-2

-3

-4


Total

BAU

Ove

rru

n

£m

Un

der

run

2010 2011 2012 2013 2014 2015

50

45

40

35

30

25

20

15

10

5

02012 2013 2014 2015



GWP £m

500

450

400

350

300

250

200

150

100

50

02010 2011 20132012 2014 2015

Growth in headcount

Av.

No

of E

mpl

oyee

s

15%

10%

5%

0%

-5%

-10%

Investment Return


Ove

rru

n

£m

Un

der

run

-2.5%

31/12/2011

01/01/2011

31/12/2012

01/01/2012

31/12/2013

01/01/2013

31/12/2014

01/01/2014

31/12/2015

01/01/2015

11.0% 9.3% 8.1%

1.5%

Feb

09

Jun

09

Oct

09

Feb

10

Jun

10

Oct

10

Feb

11

Jun

11

Oct

11

Feb

12

Jun

12

Oct

12

Feb

13

Jun

13

Oct

13

Feb

14

Jun

14

Oct

14

Feb

15

Jun

15

Oct

15


5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

This result improvement is even more impressive when we see the growth on the Group headcount.


6

Report of the Committee of ManagementThe members of the Committee of Management present their report and Group financial statements for the year ended 31 December 2015. The financial statements have been prepared in accordance with the presentation and disclosure requirements of The Friendly Societies (Accounts and Related Provisions) Regulations 1994.

Business Objectives and Activities of the SocietyThe Society is an incorporated friendly society. Its core business objective continues to be the provision of financial services products to members and retired members of the Police Service and the Military and their immediate families. The membership of the Society as at 31 December 2015 was 202,000 (2014: 189,000). The Society has not undertaken any activities during the year which are outside of its powers.

Details of the Society’s subsidiaries are included in note 14 to the financial statements.

Results of the SocietyDetails of the Society’s operating performance are set out in the technical accounts and related notes. All business included in the financial statements relates to continuing operations. Earned premiums for the year were £115.4m (2014: £112.1m) with total technical income (including total investment returns) of £167.6m for the year (2014: £204.1m). Total technical charges before the transfer to the Fund for Future Appropriations were £189.0m (2014: £217.5m). A transfer of £18.7m was made from the Fund for Future Appropriations (2014: £13.4m from the Fund for Future Appropriations).

SolvencyAs at 31 December 2015, the Group maintained its required margin of solvency as prescribed in regulations made under the Prudential Sourcebook for Insurers. The management of solvency and the inherited estate is included in the Principles and Practices of Financial Management. This sets out the purposes for which it may be used. Note 19 to the financial statements gives details of the total available capital resources, the method of calculation and the reconciliation between 2014 and 2015.

Police Mutual constantly aims to optimise its capital position to enable strategic projects to be undertaken. The Working Capital Ratio as detailed in the annual PRA Return is 16.2% (2014: 16.2%).

Donations and sponsorshipsPolice Mutual takes very seriously its commitment to mutuality and working for the interests of the Police Family. Direct support was given in the form of donations and sponsorships to charity of £400,000 (2014: £165,000).

Key Risks and uncertaintiesDetails of the key generic risks to the Society and its approach to risk management are set out in note 16 to the financial statements. These comprise insurance risk, market risk, credit risk, liquidity risk, operational risk and strategy, brand and reputation risks.

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Report of the Committee of Management (continued)

Committee of Management Membership, Directors and OfficersDetails of the Committee of Management, directors and officers who were in office as at the date of signing of the report and financial statements are as follows:

Committee of Management

President

Sir Hugh Orde OBE QPM, formerly President, Association of Chief Police Officers

Vice Presidents

Mike Cunningham QPM, Her Majesty’s Inspectorate of Constabulary Justine Curran QPM, Chief Constable, Humberside Police Sir Peter Fahy QPM MA, formerly Chief Constable, Greater Manchester Police Sir Jon Murphy QPM LLB (Hons), Chief Constable, Merseyside Police Neil Richardson OBE QPM BA MBA FCMI, Deputy Chief Constable, Police Scotland Chris Sims OBE, QPM MA (Oxon) MBA, formerly Chief Constable, West Midlands Police

Chairman

Julie Spence OBE QPM BEd LLB MA MBA, formerly Chief Constable, Cambridgeshire Constabulary Claire Beck, Cambridgeshire Constabulary David Campbell MSc, West Yorkshire Police Richard Coates BSc (Econ) FCA Chief Inspector Deirdre Dent, Hertfordshire Constabulary Julie Hopes MBA ACIB Constable Robin Hardiman, Lancashire Constabulary Steve Jackson, formerly Hampshire Constabulary Kirsty Norman, Derbyshire Constabulary Barry Sanjana MA Graham Smillie, Police Scotland Mike Urmston BA FIA Detective Sergeant Ieuan Watkins, Gwent Police

Chief Executive

Stephen Mann LLB APMI FIoD

Directors and Officers

Executive Directors

Ian Cordwell BA FCA, Finance Director Dave Wright BA MBA, Marketing & Sales Director

Company Secretary

Rachel Kirwan BSc ACIS

Life Vice Presidents

Mick Foster QPM, formerly Chairman Peter Sharpe MBE FCII, formerly Chief Executive

No members of the Committee of Management, directors or officers have an interest in the shares of the Society’s subsidiary undertakings.

The following individual stood down as members of the Committee of Management during the year:

Ian Geden BSc (Hons) FCII retired on 1 May 2015

Directors’ RemunerationDetails regarding statutory directors’ remuneration are set out in note 9 of the financial statements.

A remuneration report for Managing Board members including the directors’ remuneration policy can be found on our website www.policemutual.co.uk/about-us/corporate-governance.


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Total tax contributions (unaudited)The following tax contributions were generated by the activities of the Group.

2015£’m

2014£’m

Corporation Tax and Income Tax borne - -

Irrecoverable Value Added Tax 1.1 1.1

Employment taxes borne – Employer NIC 1.6 1.4

Total taxes borne 2.7 2.5

Insurance Premium Tax generated 2.2 1.9

Employment taxes collected – Employee PAYE and NIC 3.9 3.5

Total tax contributions 8.8 7.9

Payments totalling £246,000 (2014: £305,000) were made to local authorities in regard to business rates.

No corporation tax or income tax was borne during the current and prior year as allowable expenses exceeded income taxed under UK income tax rules. All investment gains made during the year taxable under capital gains tax were offset against investment losses brought forward from previous years.

Corporate GovernancePolice Mutual is committed to maintaining high standards of corporate governance and adheres to the 2012 UK Annotated Corporate Governance Code for Mutual Insurers (the Code). In applying the Code we consider its requirements and try to put them into practice in a way that reflects our business, culture and values and which helps to support the following:

• Transparency; giving our members the information they need to judge whether the Executive team, Board and Committee of Management are doing a good job on their behalf

• Effective decision-making, risk management and control• A proper balance between Executive and non-executive directors and• Keeping the interests of Police Mutual’s members aligned with, and at the front of the mind of, the people responsible for running the business

The Committee of Management considers the 2015 Annual Report & Financial Statements taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s performance, business model and strategy.

Our complete Corporate Governance report can be found on our website www.policemutual.co.uk/about-us/corporate-governance.

Going Concern StatementThe Directors have at the time of approving the financial statements, a reasonable expectation that the Group and the Society have adequate resources to continue in operational existence for the foreseeable future. Therefore they continue to adopt the going concern basis of preparing the financial accounts.

The Directors’ have made this assessment following review of the Group’s performance and the latest forecasts for a period of twelve months from the date of signing the financial statements.

Viability statementThe strategic developments and risk outlook sections in the Chief Executive’s statement give details of the Group’s business activities, together with the factors likely to affect its future development, performance and position. Notes 16 and 19 to the financial statements give details on the groups objectives, policies and processes for managing its risks and its capital base.

The Directors confirm that they have a reasonable expectation that the Group will continue to operate and meets its liabilities, as they fall due, for the next three years. The Directors’ assessment has been made with reference to the Group’s current position and prospects, the Group’s strategy, the Board’s risk appetite and the Group’s principal risks and how these are managed.

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Viability statement (continued)The Group’s strategy and associated principal risks underpin the Group’s three year plan and stress testing, which the Directors review at least annually. The three year plan is built on a product by product basis using a bottom up model. The plan makes certain assumptions about the external environment, the development of the business, pricing and cost management. Proactive assessment of risks to successful delivery of our strategy and goals is essential for Police Mutual to remain resilient and viable for the long term. To ensure risks are considered on an enterprise wide basis, the assessment involves a top-down as well as bottom-up approach. The process which includes testing our evolving business model through scenario and stress analysis is a well established part of Police Mutual’s Enterprise Risk Management (ERM) framework. The framework itself is integral to our strategy and capital management process. This integrated process is the foundation of Police Mutual’s Own Risk and Solvency Assessment (ORSA) required under the new Solvency II regime. Taking into consideration the external risk landscape and its impact on our business model, the Managing Board has assessed the risks to our strategy and business goals over the planning horizon. This top-down view from the Managing Board has been sense-checked against the bottom-up view for completeness. This process identified nine principal risks which the Managing Board has identified for close monitoring on its ‘strategic/top risk’ register.

Our risk assessments are complemented by a set of scenario analyses which include a ‘reverse stress testing’ process. The process is important for helping us identify extreme but plausible events that could ‘break our business model’ in order to test our risk management and contingency plans for successful delivery of our business plan and adequacy of our capital. The scenarios recognise appropriately our evolving business model. The key drivers of which include our affinities with the police and military family, in particular, those political and economic risks facing our affinities, uncertain financial market conditions and reputation damage arising from a catastrophic operational event or bad strategic decisions. The three year plan review is underpinned by the regular Board briefings provided by the business unit heads and the discussion of any new strategies undertaken by the Board in its normal course of business.

The Directors believe that the Group is well placed to manage its business risks successfully, having taken into account the current economic outlook. Accordingly, the Board believes that, taking into account the Group’s current position, and the principal risks faced by the business, the Group will be able to continue in operation for the current three-year strategic planning period.

Statement of Responsibility in Respect of the Financial StatementsThe Friendly Societies Act 1992 requires the Committee of Management to prepare financial statements for each financial year which conform with the requirements of Section 70 of the Act and regulations made under it. The Act requires that the accounts shall give a true and fair view of the state of affairs of the Society and the Group at the end of the financial year, and of the results of the Society and the Group for that financial year.

In preparing the annual financial statements the Committee of Management is required to:• select suitable accounting policies and apply them consistently;• make judgements and estimates that are reasonable and prudent;• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial

statements; and• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Society will continue

in business.The Committee of Management is responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Society and the Group and which enable them to ensure that the accounts comply with the Friendly Societies Act 1992 and regulations made under the Act. It is also responsible for safeguarding the assets of the Group and Society and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Committee of Management confirms that, in its view, it has complied with the above requirements in preparing the financial statements.

Statement of Disclosure of Information to AuditorsEach of the persons who is a director at the date of this report confirms that:

• so far as each of them is aware, there is no information relevant to the audit of the Group’s financial statements for the period ended 31 December 2015 of which the auditors are unaware; and

• they have taken all 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 always aware of that information.

Rachel Kirwan

Company Secretary

23 March 2016


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Audit Committee ReportThe Audit Committee is a sub-committee of the Managing Board, which in turn is a sub-committee of the Committee of Management. A full description of the work of the Committee of Management and all of its sub-committees is set out in the separate Annual Governance and Directors’ Remuneration Reports.

MembershipRichard Coates (Chairman) Barry Sanjana Ian Geden (until his retirement on 1st May 2015) Mike Urmston

SecretaryRachel Kirwan

RoleThe main role, responsibilities and authority of the Audit Committee, as delegated to it by the Managing Board, are set out in its terms of reference, which are available on the Police Mutual website and summarised below:

• Reviewing the adequacy and effectiveness of internal systems of governance, financial and other controls, and risk management• Reviewing procedures for detecting fraud• Monitoring the integrity of financial statements• Reviewing significant financial reporting issues and judgements• Overseeing the relationship with and appointment of the external and internal auditors, including their remuneration and terms of engagement• Reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the external audit process• Developing and implementing the policy on the engagement of the external auditor to supply non-audit services• Considering the adequacy and scope of external and internal audits and compliance plans• Reporting to the Managing Board on how it has discharged its responsibilities• Identifying matters & making recommendations where it considers action or improvement is needed• Reviewing the arrangements by which employees may, in confidence, raise concerns about possible wrongdoing in financial reporting or other

matters and ensuring arrangements are in place for investigation

How the Audit Committee has discharged its responsibilitiesIn 2015 the Audit Committee met four times and met the Annotated Corporate Governance Code requirement to have at least three independent non-executive directors. The Managing Board is satisfied that Richard Coates brings recent and relevant financial expertise, augmented by the financial expertise and experience of the other members of the Audit Committee.

The Audit Committee annually schedules time, without any executive directors or senior management present, to discuss issues with the Heads of Internal Audit and Compliance and External Auditors. The Chairman of the Audit Committee meets the Head of Internal Audit and Head of Compliance to review current issues before each Audit Committee meeting.

Financial Reporting

During 2015 the Audit Committee considered in detail the financial statement preparation process and the matters of judgement to be applied. Reports from the external auditor were received before and after the annual statutory audit.

A summary of the significant issues the Audit Committee considered in relation to the 2015 financial statements and how these issues were addressed, together with judgements made and sources of assurance and other evidence used to satisfy itself of the appropriateness of the conclusions reached is as follows:

• Transition to the new UK GAAP accounting framework, FRS 102 and FRS 103

The Audit Committee considered the accounting policy choices, measurement changes and the disclosure implications of the transition to the new UK accounting standards. The external auditor, PwC, was also engaged to carry out an assessment of the impact on the Group’s financial statements. The Committee reviewed both its findings and management responses and concluded that the accounting policy choices are appropriate and that the effect of the transition has been correctly reflected in the financial statements. The impact of the transition is fully disclosed in note 28.

• Going concern

The Audit Committee considers a detailed assessment of the Society and subsidiaries’ going concern position at the date of signing the accounts as part of their oversight of the financial statements. The Committee have made this assessment following review of the Group’s performance and the latest forecasts for a period of twelve months from the date of signing the financial statements, which has included the current strategy and business plan and Own Risk Solvency Assessment (ORSA) information The Committee has concluded that there is a reasonable expectation that the Group and the Society have adequate resources to continue in operational existence for the foreseeable future and therefore it is appropriate to continue to prepare the financial statements on a going concern basis. A going concern and viability statement is included in the Report of the Committee of Management.

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Audit Committee Report (continued)•Valuation of goodwill and carrying value of investment in subsidiaries

The Audit Committee considers many factors in assessing the valuation of subsidiaries. As there is no external data to compare the carrying value with recent sales of similar businesses, the Audit Committee assesses the appropriateness of the assumptions used by management in the valuation model compared to previous years, including how the future cashflows have been determined if there are any deviations from the current Managing Board approved business plan.

The Audit Committee considers the possible range of outcomes for the valuations by reference to sensitivity analysis performed on all key drivers of the models. The Audit Committee also considers PwC’s views on the appropriateness of the models, methodologies and assumptions used.

• Valuation of long term business provisionThis area is particularly material for Police Mutual and involves multiple complex and subjective judgements. The Actuarial Function Holder advises on the methodologies and assumptions to be used and these are reviewed and approved or adjusted by the Audit Committee on behalf of the Managing Board. The Actuarial Function Holder presents the results of those investigations and calculations which include a range of validation measures. The Audit Committee also considers PwC’s views on the appropriateness of the models, methodologies and assumptions used.

• Deferred Taxation

The Audit Committee considers the key assumption in the recognition of deferred tax which is the extent to which it is probable that any assets will be recovered against the reversal of deferred tax liabilities or other future taxable profits. The methodology for recognising the deferred tax asset is assessed and management has confirmed it is in line with FRS102.33 (“Income Tax”). The justification for the recognition period is assessed and any movements in the recognised and unrecognised portion in the year are presented for discussion.

As part of the Audit Committee’s reporting to the Managing Board, it considers whether the annual report and financial statements taken as a whole are fair, balanced and understandable and provides the information necessary for members to assess Police Mutual’s position and performance, business model and strategy.

The independence and objectivity of the external auditor are considered on a regular basis. The external auditor’s appointment is subject to regular review and the lead partner is rotated every seven years. A tender process for the external audit was last conducted in 2009.

The level of non-audit fees paid to the external auditor is subject to a formal policy to safeguard their independence and objectivity.

In 2015 the external auditor was engaged to provide due diligence in respect of potential acquisition activity. Before agreeing to the engagement the Audit Committee followed its formal policy and considered the external auditor’s independence and safeguards in place to protect it based on written assurances from the external auditor. The Audit Committee concluded that to the extent that safeguards were required, these were adequate and therefore external auditor independence had not been impaired.

Total fees paid to PricewaterhouseCoopers LLP in 2015 were £433,000 excluding VAT of which £190,000 related to non-audit services.

In 2015 a review of the external auditor’s effectiveness was conducted by means of a desk-based review undertaken by key stakeholders within Police Mutual as part of the year end planning process. Having considered the results of the review the Audit Committee concluded that the external auditor provided a satisfactory service and that they should continue in the role. The Managing Board supported this conclusion.

Richard CoatesChairman23 March 2016


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Independent Auditors Report to the Members of the Police Mutual Assurance Society Limited

Report on the financial statementsOur opinion

In our opinion, Police Mutual Assurance Society’s Group financial statements and Society financial statements (the “financial statements”):• give a true and fair view of the state of the Group’s and of the Society’s affairs as at 31 December 2015 and of the Group’s and the Society’s

profit for the year then ended;• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and• have been prepared in accordance with the Friendly Societies Act 1992.

What we have audited

The financial statements included within the Annual Report and Financial Statements (the ‘Annual Report’), comprise:• the consolidated and society balance sheets as at 31/12/2015;• the consolidated and society technical accounts for the year then ended; and• the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.

Certain disclosures required by the financial reporting framework have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.

The financial reporting framework that has been applied in the preparation of the financial statements is United Kingdom Accounting Standards comprising FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ and applicable law (United Kingdom Generally Accepted Accounting Practice).

Our audit approach

Overview

Materiality

Audit scope

Areas of focus

Materiality

• Overall materiality: £8.2 million which represents 1% of the Fund for Future Appropriation plus other liabilities to members.

Audit Scope

• The Group comprises the Society and a number of subsidiaries which provide distinct revenue streams and support functions. Our audit procedures covered 96% of the Group’s gross assets and 95% of its total technical income.

Areas of focus

• The valuation of investments in subsidiary undertakings.

• Carrying value of goodwill arising on the acquisition of subsidiaries.

• Valuation of the goodwill in the consolidated balance sheet.

• The valuation of the long term business provision.

• The recoverability of deferred tax asset.

The scope of our audit and our areas of focusWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”).

We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the Committee of Management made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Committee of Management that represented a risk of material misstatement due to fraud.

The risk of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, identified as an “area of focus” in the table below. We have also set out how we tailored our audit to address this specific area in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit.

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Area of focus How our audit addressed the area of focus

Valuation of investments in subsidiary undertakings

The Society’s investments in subsidiary undertakings £59.6m (2014: £55.9m) are held at fair value. This is based on an internal model which is subject to significant judgment in its valuation model calculations. Areas of particular focus and subjectivity include the likely future trading performance of the subsidiaries, the discount rate used to calculate the present value of the estimated future cash flows and the terminal rate of growth assumed.

In evaluating the carrying value in the Society’s balance sheet of its investment in subsidiary undertakings, our audit work involved the following:• We assessed the appropriateness of the assumptions used by management in the valuation

model (the model) as described more fully below,• We assessed management’s future cash flow forecasts and the process by which they were

drawn up, and• We tested data input into the model by agreeing its extraction from the Society’s underlying

systems and re-performed the calculation performed within the model.We assessed the key assumptions and challenged management’s forecast growth rates (including the terminal growth rate) by comparing them to economic and industry forecasts. We also assessed managements historic forecasting accuracy by reviewing the extent to which management have achieved prior year forecasts.We assessed the discount rate by estimating the effective cost of capital for the Society and comparing this to similar organisations.We additionally performed sensitivity analyses around these assumptions. In carrying out our sensitivities, we considered the following to represent a reasonable range of potential changes:– Changes to the discount rate of +/- 0.75%,– Movements in forecast profit after tax of +/- 10%, and– Changes to the growth assumptions of +/- 1%.Although uncertainties always exist with regards to profit forecasts and the associated key assumptions, we determined that, based on the evidence obtained, management’s valuation of the investments in subsidiaries has been calculated by reference to assumptions that are within an acceptable range.

Carrying value of goodwill arising on acquisition of subsidiaries

Goodwill arising on the acquisition of subsidiary undertakings of £12.0m (2014: £14.8m) is held in the Group’s balance sheet.We focussed on this area because the assessment of whether there has been any impairment in the value of goodwill is subject to significant judgment in its calculation. This includes assumptions over the likely future trading performance of the subsidiaries.

Our approach to assessing whether there had been any evidence of impairment of goodwill was consistent with our work on the carrying value of the Society’s investments in subsidiary undertakings.However, we also performed sensitivity analysis around the key drivers of the cash flow forecasts, in particular the assumptions on likely future trading performance of the subsidiaries (as described above), in order to determine the extent of change in those assumptions that either individually or collectively would be required for the goodwill to be impaired; we also considered the likelihood of such a movement in those key assumptions arising.Although uncertainties always exist with regard to profit forecasts and the associated key assumptions, based on the procedures set out above, no evidence of impairment was identified.

Independent Auditors Report to the Members of the Police Mutual Assurance Society Limited (continued)


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Area of focus How our audit addressed the area of focus

The valuation of the long term business provisionThe Group financial statements include a long term business provision of £679.6m (2014: £672.8m) which represents the estimated cost of settling benefits and claims associated with life products. See note 18 for further details.We focused on this area because of the significance of these amounts in deriving the Group’s results, and because of the use of a suite of economic and demographic data and assumptions, which can be highly subjective. In particular, we focussed on the assumption around policyholder behaviour (persistency) as this is an area of particular sensitivity.

In assessing the valuation of the long term business provision, we performed the following procedures:• Understanding and testing the operational effectiveness of key internal controls in place to

determine the long term business provision, • Testing the completeness, consistency and accuracy of underlying data, • Comparing the methodology, models and assumptions used against recognised actuarial

practices, and• Assessing the extent to which the assumptions used (in particular, in respect of persistency) were

consistent with the Group’s actual experience.We also performed an independent annual benchmarking survey which allowed us to further challenge the assumption setting process by comparing certain assumptions used relative to the Group’s industry peers.Based on the work performed we found that the assumptions used were supported by the evidence we obtained.

The recoverability of the deferred tax assetAt 31 December 2015, the deferred tax asset recognised in the Society’s accounts was £9.5m (2014:£11.6m). See note 22 and 28 for further details.We focussed on this area, because management use a model that relies on economic assumptions around future investment returns on equity investments, and the underlying growth of assets, the proportion of future gains subject to tax and inflation. By nature, these assumptions are subjective and could have a material impact on the recoverability of the asset recognised.

We tested the recoverability of the deferred tax asset by assessing the model used by management to calculate utilisation of losses in future years. This involved the following:• We assessed the consistency of the economic assumptions used in the model with the assumptions

used to calculate the long term business provision, and• We compared the recovery period used in the model with the range of recovery periods used

across the industry.We also performed sensitivity analyses to assess the impact of changing the principal variables used in the model, in particular the expected total investment returns and underlying growth of the investment assets, the proportion of the future gains subject to tax, and the assumed rate of inflation. We assessed the extent of change in those assumptions that either individually or collectively would be required for the deferred tax asset to be materially misstated and considered the likelihood of such a movement in those key assumptions arising.Based on the work performed, although uncertainties always exist with regards to future economic performance and associated key assumptions, we concluded that there was no evidence at this time to indicate that the deferred tax asset would not be recoverable.

How we tailored the audit scopeWe tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Society, the accounting processes and controls, and the industry in which the Society operates.

The Group’s core business is providing insurance and other financial services products to members and retired members of the Police Service and UK Armed Forces, and their immediate families in the UK.

The Society, together with its regulated subsidiary entities, operates along four core lines of business being long term insurance, investments, general insurance and other financial services products, and each represents a reporting unit for the purposes of our scoping assessment. For each of the Group’s regulated subsidiaries, numbering 6, we performed an audit of its complete financial information.

These entities accounted for 96% of the Group’s gross assets and 95% of its total technical income. For the remaining subsidiaries, no audit procedures were performed as they, individually and collectively are not material to the Group.

MaterialityThe scope of our audit is influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Overall group materiality £ 8.2 million (2014: £ 8.2 million ).

How we determined it 1% of The Fund for Future Appropriation (“FFA”) plus other liabilities to members

Rationale for benchmark applied We considered the FFA plus other liabilities to members to be the most relevant benchmark for determining materiality, as it reflects the underlying interest of the members of the society.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £ 0.4 million (2014: £ 0.4 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.


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Going concern Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the Committee of Management’s statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to.As noted in the Committee of Management’s statement, the Committee of Management has concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Society has adequate resources to remain in operation, and that the Committee of Management intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Committee of Management’s use of the going concern basis is appropriate.However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Society’s ability to continue as a going concern.

Other required reporting

Consistency of other information

Friendly Societies Act 1992 opinionIn our opinion, the Committee of Management’s Report for the financial year for which the financial statements are prepared is consistent with the financial statements and has been prepared in accordance with the Friendly Societies Act 1992 and the regulations made under it.

ISAs (UK & Ireland) reporting

The Committee of Management complies with the UK Corporate Governance Code – An annotated version for Mutual Insurers (‘the Code’). Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:

Information in the Annual Report is:– Materially inconsistent with the information in the audited financial statements; or– Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Society

acquired in the course of performing our audit; or– Otherwise misleading.

We have no exceptions to report arising from this responsibility.

The statement given by the Committee of Management on page 6 in accordance with provision C.1.1 of the Code, that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Society’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Society acquired in the course of performing our audit;


The sction of the Annual Report on page 10, as required by provision C.3.8 of the Code describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.


The Committee of Management’s assessment of the prospects of the Society and of the principal risks that

would threaten the solvency or liquidity of the Society

As the Committee of Management complies with the Code, under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:

The Committee of Management’s confirmation in the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the Society, including those that would threaten its business model, future performance, solvency or liquidity.

We have nothing material to add or draw attention to.

The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.


The Committee of Management’s explanation in the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Society, over what period they have done so and why they have a reasonable expectation that the Society will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualification or assumptions.


Propriety of accounting records and information and explanations receivedUnder the Friendly Societies Act 1992 we are required to report to you if, in our opinion:

• we have not received all the information and explanations we require for our audit; or• proper accounting records have not been kept by the Society, or• the financial statements are not in agreement with the accounting records.



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Other voluntary reporting

Matter on which we have agreed to report by exception

Corporate governance statementIn accordance with our instructions from the Society we review the parts of the Corporate Governance Statement relating to the Society’s compliance with ten further provisions of the Code specified for auditor review by the Association of Financial Mutuals. We have nothing to report having performed our review.

Responsibilities for the financial statements and the auditOur responsibilities and those of the Committee of ManagementAs explained more fully in the Committee of Management’s Responsibilities Statement, the Committee of Management is responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.This report, including the opinions, has been prepared for and only for the Society’s members as a body in accordance with Section 73 of the Friendly Societies Act 1992 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What an audit of financial statements involvesAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:

• whether the accounting policies are appropriate to the Society’s circumstances and have been consistently applied and adequately disclosed; • the reasonableness of significant accounting estimates made by the Committee of Management; and • the overall presentation of the financial statements.

We primarily focus our work in these areas by assessing the Committee of Management’s judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

David Roper (Senior Statutory Auditor)for and on behalf of PricewaterhouseCoopers LLPChartered Accountants and Statutory AuditorsLondon25 March 2016

Notes:1. The maintenance and integrity of the Police Mutual Assurance Society Limited website is the responsibility of the Committee of Management; the work carried out by the

auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

17

Consolidated Technical Account

Long-Term Business for the Year Ended 31 December 2015

Note2015 £’000

2014 £’000

Earned Premiums, Net of Reinsurance 2 115,433 112,065

Investment Income 3 40,815 37,198

Unrealised (losses)/gains on Investments (18,984) 26,153

Other Technical Income 4 30,313 28,655

Total Technical Income 167,577 204,071

Claims Paid - Gross Amount 114,684 126,516

- Reinsurers’ Share (1,898) (1,676)

Change in Provision for Claims - Gross Amount 1,101 260

- Reinsurers’ Share (131) (265)

Claims Incurred, Net of Reinsurance 113,756 124,835

Change in Long-Term Business Provision 6 4,146 25,306

Change in Technical Provision for Linked Liabilities 1,272 3,671

Change in Other Technical Provisions, Net of Reinsurance 5,418 28,977

Net Operating Expenses 7 16,832 18,485

Investment Expenses and Charges 3 13,853 10,318

Other Charges 30,685 28,803

Other Technical Charges 35,983 28,140

Taxation Attributable to Long-Term Business 11 2,094 3,565

Actuarial (gain)/loss on Pension Scheme 25 (1,631) 3,166

Transfer from the Fund for Future Appropriations (18,728) (13,415)

Total Technical Charges 167,577 204,071

Balance on the Technical Account - -

The inclusion of unrealised gains and losses in the technical account to reflect the marking to market of interests carried in the balance sheet is deemed not to be a departure from the unmodified historical cost basis of accounting. Accordingly, a separate note of historical costs profits and losses is not given.

The Group has no recognised gains or losses other than those included in the technical account for the year.

All the results arise from continuing operations.


18

Society Technical Account

Long-Term Business for the Year Ended 31 December 2015

Note2015 £’000

2014 £’000

Earned Premiums, Net of Reinsurance 2 115,433 112,065

Investment Income 3 40,798 36,551

Unrealised (losses)/gains on Investments (15,231) 32,504

Other Technical Income 4 972 793

Total Technical Income 141,972 181,913

Claims Paid - Gross Amount 114,684 126,516

- Reinsurers’ Share (1,897) (1,676)

Change in Provision for Claims - Gross Amount 1,101 260

- Reinsurers’ Share (131) (265)

Claims Incurred, Net of Reinsurance 113,757 124,835

Change in Long-Term Business Provision 6 4,146 25,306

Change in Technical Provision for Linked Liabilities 1,271 3,671

Change in Other Technical Provisions, Net of Reinsurance 5,417 28,977

Net Operating Expenses 13,400 15,327

Investment Expenses and Charges 3 13,845 10,263

Other Charges 27,245 25,590

Taxation Attributable to Long-Term Business 11 2,094 2,926

Actuarial (gain)/loss on Pension Scheme 25 (1,631) 3,166

Transfer from the Fund for Future Appropriations (4,910) (3,581)

Total Technical Charges 141,972 181,913

Balance on the Technical Account - -

The inclusion of unrealised gains and losses in the technical account to reflect the marking to market of interests carried in the balance sheet is deemed not to be a departure from the unmodified historical cost basis of accounting. Accordingly, a separate note of historical costs profits and losses is not given.

The Society has no recognised gains or losses other than those included in the technical account for the year.

All the results arise from continuing operations.

19

Consolidated Balance Sheet as at 31 December 2015Note

2015 £’000

2014 £’000

Assets

Intangible Assets

Goodwill 13 12,077 14,870

Other 13 1,973 2,613

14,050 17,483

Investments

Other Financial Investments 15 702,512 687,146

Present Value of Future Profits on Non-Participating Business 2,231 2,465

Assets Held to Cover Linked Liabilities 18(B) 71,007 67,236

Reinsurers’ Share of Technical Provisions

Long-Term Business Provision 18(A) 8,635 8,449

Claims Outstanding 18(A) 654 522

9,289 8,971

Debtors

Debtors Arising Out of Direct Insurance Operations 1,699 2,015

Other Debtors 20 18,628 17,479

20,327 19,494

Other Assets

Tangible Assets 17 8,478 7,789

Cash at Bank and In Hand 31,309 48,816

Deferred Tax 22 8,958 11,105

48,745 67,710

Prepayments and Accrued Income

Accrued Interest 3,268 3,012

Other Accrued Investment Income 49 49

Other Prepayments and Accrued Income 3,355 662

6,672 3,723

Total Assets 874,833 874,228


20

Consolidated Balance Sheet as at 31 December 2015 (continued)

Note2015 £’000

2014 £’000

Liabilities

Fund for Future Appropriations 12 75,372 94,101

Technical Provisions


Claims Outstanding 18(A) 5,610 4,508

685,215 677,278

Technical Provisions for Linked Liabilities 18(B) 71,007 67,236

Creditors

Creditors Arising out of Direct Insurance Operations 551 833

Corporation Tax 39 39

Other Creditors Including Social Security 21 37,808 28,083

38,398 28,955

Total Liabilities excluding Pension Scheme Liabilities 869,992 867,570

Net Pension Scheme Liability 25 4,841 6,658

Total Liabilities 874,833 874,228

The financial statements on pages 17 to 60 were approved by the Committee of Management on 23 March 2016 and signed on its behalf by:-

Julie Spence

Chairman

Rachel Kirwan

Company Secretary

21

Society Balance Sheet as at 31 December 2015

Note2015 £’000

2014 £’000

Assets

Investments

Investments In Subsidiary Undertakings 14 59,663 55,910

Other Financial Investments 15 702,512 687,146

762,175 743,056

Present Value of Future Profits on Non-Participating Business 2,231 2,465

Assets Held to Cover Linked Liabilities 18(B) 71,007 67,236



Claims Outstanding 18(A) 654 522

9,289 8,971

Debtors

Debtors Arising out of Direct Insurance Operations 1,674 1,989

Other Debtors 20 22,936 23,655

24,610 25,644

Other Assets

Tangible Assets 17 5,330 4,960

Cash at Bank and In Hand 21,179 38,023

Deferred Tax 22 9,454 11,601

35,963 54,584


Accrued Interest 3,268 3,012

Other Accrued Investment Income 88 49

Other Prepayments and Accrued Income 2,592 281

5,948 3,342

Total Assets 911,223 905,298


22

Society Balance Sheet as at 31 December 2015 (continued)

Note2015 £’000

2014 £’000

Liabilities

Fund for Future Appropriations 12 141,191 146,099



Claims Outstanding 19(A) 5,610 4,508

685,215 677,278

Technical Provisions for Linked Liabilities 19(B) 71,007 67,236

Creditors – All Payable Within a Period of One Year

Creditors Arising out of Direct Insurance Operations 204 474

Corporation Tax 39 39

Other Creditors Including Social Security 22 8,726 7,514

8,969 8,027

Total Liabilities excluding Pension Scheme Liabilities 906,382 898,640

Net Pension Scheme Liability 25 4,841 6,658

Total Liabilities 911,223 905,298

The financial statements on pages 17 to 60 were approved by the Committee of Management on 23 March 2016 and signed on its behalf by:-

Julie Spence

Chairman

Rachel Kirwan

Company Secretary

23

Notes to the Financial Statements for the year ended 31 December 2015

1 Accounting Policies

(A) Basis of Presentation

The financial statements have been prepared in compliance with the special provisions relating to friendly societies as set out in The Friendly Societies (Accounts and Related Provisions) Regulations 1994. Applicable United Kingdom accounting standards, including the Financial Reporting Standard 102 – ‘The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland’ (‘FRS 102’) and Financial Reporting Standard 103 – ‘Insurance Contracts’ (‘FRS 103’) have been adopted where those recommendations do not contradict the 1994 regulations.

This is the first year in which the financial statements have been prepared under FRS 102 and FRS 103, an explanation of the transition is given in note 28.

The principal accounting policies used in preparing the financial statements are set out below and are in accordance with applicable accounting standards in the United Kingdom with one exception. A requirement of the Friendly Societies Regulations 1994 is to depreciate all properties, however no depreciation has been provided. All of the properties held by the society are owner occupied which therefore do not satisfy the definition of investment properties in FRS 102, Section 16, and therefore are not exempt from the requirement that they are depreciated. The justification for not applying depreciation however is set out in M below.

As a mutual life assurance society, under Financial Reporting Standard 102, Section 7, Police Mutual is exempt from the requirement to prepare a cash flow statement.

(B) Basis of Consolidation

The consolidated financial statements incorporate the assets, liabilities and results of Police Mutual Assurance Society Limited and its subsidiary undertakings drawn up to 31 December each year. All intra-group transactions, balances, income and expenses are eliminated on consolidation. The financial statements also include the results of Pinkerton segregated account as the activities are conducted on behalf of the Group according to its specific business needs.

(C) Contract ClassificationThe Society issues contracts that transfer insurance risk or financial risk or both.

Insurance contracts are liabilities with a significant element of insurance risk. The Society has defined a significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event that is at least 10% more than the benefits payable if the event did not occur. A contract that is classified as an insurance contract continues to be treated as such until all rights and obligations under the contract expire.

Contracts that are not classified as insurance contracts are investment contracts. Investment contracts are those contracts that transfer financial risk with no significant insurance risk. Unit linked contracts, where the liability under the contract is dependent on the value of the underlying financial assets, are classified as investment contracts unless the contracts also contain features that transfer significant insurance risk. The Child Trust Fund, Stakeholder Pension contracts and the Fixed Term Options ISA are categorised as investment contracts.

All with-profits contracts contain a discretionary participation feature which entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses. These are likely to be a significant portion of the total contractual benefits where the amount or timing is contractually at the discretion of the Society. They will be contractually based on the performance of specified contracts, realised and/or unrealised investment returns on a specified pool of assets held by the Society or the surplus or deficit of the Society.

The Group seeks to reduce its exposure to potential losses by reinsuring certain levels of risk with a reinsurance company. These reinsurance contracts meet the classification requirements for insurance contracts and hence are classified as reinsurance contracts held.

With-profits contracts are classified as insurance contracts or investment contracts with discretionary participation features. All non unit linked non with-profits contracts issued are insurance contracts.

(D) Premium Receipts – Earned Premiums

Premiums received and reinsurance paid relating to insurance contracts are accounted for as follows:• Regular premium income is accounted for when due;• Single premium income is accounted for when received; and• Reinsurance premiums are charged when they become payable

(E) Payments on Investment Contracts and Investment Contracts with Discretionary Participation Features

Payments received in relation to investment contracts and investment contracts with discretionary participation features are accounted for when received. Payments relating to investment contracts with discretionary participation features are accounted for as earned premiums with movements in the liabilities on such contracts included within technical provisions. Payments on investment contracts are treated as deposits and are included in the balance sheet as liabilities.


24

Notes to the Financial Statements for the year ended 31 December 2015 (continued)

1 Accounting Policies (continued)

(F) Investment Return

Investment return comprises all investment income, realised investment gains and losses, net of investment expenses, charges and interest payable on financial liabilities carried at amortised cost.

Dividends are included as investment income on the date that the shares are quoted ex-dividend and include the imputed tax credits. Interest and expenses are included on an accruals basis.

Realised gains and losses on investments carried at fair value are calculated as the difference between net sales proceeds and purchase price.

Movements in unrealised gains and losses on investments represent the difference between the fair value at the balance sheet date and their purchase price, if acquired in the current period and their fair value at the last balance sheet date, together with the reversal of unrealised gains and losses recognised in respect of investment disposals in the current period.

(G) Other Technical Income and Other Technical Charges

Other technical income and other technical charges in the Consolidated Technical Account represent the income and expenditure, recognised on an accruals basis, in respect of subsidiary companies before Group charges and tax. In the Society Technical Account, other technical income also represents the recharge made by the Society to its subsidiaries for management services provided. From 2014 these management services were provided by the Group service company, PM Central Services PLC.

Management fees arising from investment contracts are recorded in Other Technical Income in the period in which the services are provided.

Income from commission is taken into account on an accruals basis. Commissions earned are subject to claw-back in the event that a policy lapses and the Group is no longer entitled to the commission. Provision is made based on commission earned.

(H) Claims

Claims paid and reinsurance recoverable shown in the Consolidated Technical Account and Society Technical Account relate to insurance contracts and investment contracts with discretionary participation features. Investment contract claims are included within the movement on liabilities shown on the balance sheet and are not treated as a claim expense in the technical account.

Death claims are recorded on the basis of notifications received. Maturities and annuity payments are recorded when due. Surrenders are recorded on the earlier of the date paid or when the policy ceased to be included within the technical provisions or technical provision for linked liabilities. Claims on participating business include bonuses payable. Claims payable include the direct costs of settlement. Reinsurance recoveries are credited to match the relevant gross amounts.

The provision for outstanding claims represents the total estimated ultimate cost to the Society of settling all incurred insurance contract claims arising from notified events that have occurred up to the end of the financial year, less amounts already paid in respect of such claims.

(I) Business Combinations and Goodwill

Business combinations are accounted for by applying the purchase method. The cost of a business combination is the fair value of the consideration given, liabilities incurred or assumed and of equity instruments issued plus the costs directly attributable to the business combination. Contingent consideration is initially recognised at estimated amount where the consideration is probable and can be measured reliably.

On acquisition of a business, fair values are attributed to the identifiable assets, liabilities and contingent liabilities unless the fair value cannot be measured reliably, in which case the value is incorporated in goodwill. Where the fair value of contingent liabilities cannot be reliably measured they are disclosed on the same basis as other contingent liabilities.

Goodwill recognised represents the excess of the fair value and directly attributable costs of the purchase consideration over the fair values attributed to the Group’s interest in the identifiable net assets, liabilities and contingent liabilities acquired.

Goodwill is amortised over its expected useful life up to a maximum of 20 years. Goodwill is assessed for impairment when there are indicators of impairment and, to the extent that the carrying amount exceeds the recoverable amount, that is the higher of the realisable value and value in use, goodwill is written down to its recoverable amount.

The value in use is determined from estimated discounted future net cash flows. Any impairment is recognised immediately in the technical account and is not subsequently reversed.

25



(J) Financial Instruments

Financial Instruments consist of investments quoted in active markets, units in unit trusts, open-ended investment companies and other pooled funds, loans, derivatives and deposits with credit institutions.

All financial investments are recognised at trade date and are designated as follows: derivatives are designated as ‘held for trading’; shares and other variable yield securities are designated upon initial recognition as at fair value through profit and loss (FVTPL); and debt and other fixed income securities are designated upon initial recognition as FVTPL.

A financial asset is classified into this category at inception if it is acquired principally for the purpose of selling in the short term, if it forms part of a portfolio of financial assets in which there is evidence of short-term profit-taking, or if so designated by management to minimise any measurement or recognition inconsistency with the associated liabilities.

Financial liabilities that are held for trading are measured at fair value with all changes in those fair values recognised immediately in the technical account. Derivatives are the only financial liabilities that management designate in this category.

All other financial liabilities are measured at amortised cost. The amortised cost of these financial liabilities is equivalent to the amount payable on demand without penalty.

ClassificationFinancial assets designated as at FVTPL at inception are those that are managed and whose performance is evaluated on a fair value basis.

Measurement

The fair values of financial instruments traded in active markets are based on quoted bid prices on the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Financial instruments not traded in an active market are held at cost.

Investments in subsidiary and quasi subsidiary undertakings within the Society’s financial statements are valued at current value. Directors determine current value using valuation techniques which have a prudent regard to their likely realisable value. This may include, but is not limited to, discounted cash flow techniques and underlying net asset value.

Net gains or losses arising from changes in the fair value of financial investments at FVTPL are presented in the technical account within unrealised gains or losses on investments in the period in which they arise.

Loans on policies and deposits with credit institutions designated as loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. When a financial asset is recognised initially it is measured at fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset. Loans and receivables are subsequently measured at amortised cost.

Receivables arising from insurance contracts are also classified in this category and are reviewed for impairment as part of the impairment review of loans and receivables. The impairment review is viewed by the directors as having prudent regard to the likely realisable value.

(K) Intangible assets

Intangible assets are stated at cost less accumulated amortisation and any accumulated impairment losses. Amortisation is calculated, using the straight line method, to allocate the depreciable amount of the assets to their residual values over their estimated useful lives as follows:

Customer lists – 5 years

The assets are reviewed for impairment if any factors come to light that indicate that the carrying value may be impaired.


26



(L) Impairment of Assets

For financial assets not at FVTPL, the Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Group’s grading process that considers asset type, industry, geographical location, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the issuer’s ability to pay all amounts due under the contractual terms of the debt instrument being evaluated.

If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as improved credit rating), the previously recognised impairment loss is reversed through the technical account for the period.

(M) Tangible Assets and Depreciation

Tangible assets are stated in the balance sheet at cost less accumulated depreciation. Cost comprises the purchase price and costs directly incurred in bringing the asset into use. Depreciation is charged on a straight line basis so as to write off the cost of fixed assets over their estimated useful lives or to reduce their carrying value to estimated realisable amount on disposal. The estimated useful lives are:

Office furniture and equipment: Between 3 and 10 years Plant and machinery: 25% reducing balance basisComputer equipment: Between 3 and 6 years Motor vehicles: 4 years

All property held is freehold and occupied by the Society. Land and buildings are held at fair value. A full external valuation of the Society’s property was carried out during 2014 by Kingstons, Chartered Surveyors on an existing use basis as at 31 December 2014. A director’s valuation has been carried out in 2015. No depreciation has been provided on property as it is considered that the useful lives and residual values are such that depreciation is immaterial.

The carrying value of all assets is reviewed annually to ensure that there has been no change in their expected useful lives. Where necessary additional provisions are made to reflect shortened asset lives. Where expenditure is incurred on computers, both hardware and software are capitalised, as are the costs of material related licences.

(N) Surpluses from Long-Term Business and the Fund for Future Appropriations

Surpluses arising from the Society’s long-term business, as a result of the annual actuarial valuations of the related assets and liabilities, are subject to appropriation by the Managing Board.

The Fund for Future Appropriations represents the part of the fund where the allocation has not been determined by the end of the financial year.

(O) Long-Term Business Provision

For with-profits contracts, the provision is calculated in accordance with the Prudential Regulation Authority’s ‘realistic’ capital regime. In particular, provision is made for all bonus payments (declared and future, regular and final and planned enhancements) estimated, where necessary, in a manner consistent with the Principles and Practices of Financial Management. The liability includes an allowance for the time and intrinsic value of options and guarantees granted to policy holders. No allowance is made for future management actions.

The realistic liabilities are based on the aggregate value of policy asset shares reflecting the premiums, investment return, expenses and charges applied to each policy.

Value of In-Force Business

The fund for future appropriations includes the value of future profits on non with-profits business written in the with-profits fund. Since it is not possible to apportion the future profits on this non with-profits business between the amount relating to policy holder liabilities and the amount relating to the fund for future appropriations, the present value of future profits on this business is recognised as an asset on the balance sheet.

27



Options and Guarantees

Some with-profits policies contain options and guarantees that can increase the benefits payable to the policy holder. A market consistent stochastic model is used to determine the potential liability for the following options and guarantees:

• Unitised with-profits policies containing a guaranteed increase in the unit price or a guarantee that the unit price will not fall; and• The sum assured and declared regular bonuses on conventional with-profits policies.

Non with-profits BusinessFor conventional non with-profits business, a gross premium valuation method is used, which brings into account the full premiums receivable under contracts written by the Society, estimated renewal and maintenance costs and contractually guaranteed benefits.

For unit linked liabilities, the provision is based on fund value.

(P) Taxation

In accordance with Financial Reporting Standard 102, Section 29 deferred tax is recognised in respect of all material timing differences that have been originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax.

Deferred tax assets are recognised only to the extent that the Group considers that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Deferred tax is calculated at the rates at which it is expected that the tax will arise and discounted to take into account the likely timing of payments and the pattern of the expected realisation of investments in the period when the liability is settled or the asset is realised. The discount rates used are the post tax yields to maturity that could be obtained at the balance sheet date on government bonds with maturity dates similar to those of the deferred tax assets or liabilities.

(Q) Foreign Currencies

The primary economic environment in which the Group and Society operates is the United Kingdom. Hence the functional currency is pounds sterling.

Transactions in foreign currencies are recorded at the rates of exchange prevailing on the dates of the transactions. Assets and liabilities held in foreign currencies are translated to sterling at rates of exchange ruling at the end of the year. Income and expenditure denominated in foreign currencies is translated at the appropriate rates prevailing during the year. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the technical account for the period.

(R) Staff Pensions

The Group operates both defined benefit and defined contribution pension schemes. In respect of the defined benefit pension scheme, the pension liability recognised in the balance sheet is the value of the scheme’s assets less the present value of the scheme’s liabilities.

The pension cost for the scheme is analysed between past service cost and net return on the pension scheme. Past service costs, relating to employee service in prior periods arising in the current period as a result of the introduction of, or improvement to, retirement benefits, are recognised in the technical account on a straight line basis over the period in which the increase in benefits vest.

Net expected return on the pension liability comprises the expected return on the pension scheme assets less interest on scheme liabilities.

The actuarial gains or losses which arise from a valuation, or from updating the latest actuarial valuation to reflect conditions at the balance sheet date, are included as a separate line in the technical account for the period.

In respect of the defined contribution schemes operated by the Group, payments made into these schemes are accounted for when due. The assets of the schemes are held separately from the Group and Society in independently administered funds.


28



(S) Operating Leases

Operating leases are leases in which a significant portion of the risks and rewards of ownership are retained by the lessor. Rentals payable under operating leases are charged to the technical account on a straight line basis over the period of the lease.

(T) Acquisition Expenses

Acquisition costs comprise costs of obtaining and processing new business. For business written within the with-profits fund acquisition costs are not deferred.

2 Premium Analysis

Group and Society

All business is written in the United Kingdom in respect of continuing operations and relates exclusively to individual policy holders. In the opinion of the directors, the Group provides financial services products to UK affinities

(A) Earned Premiums

2015 2014

Gross £’000

Reinsurance £’000

Net £’000

Gross £’000

Reinsurance £’000

Net £’000

Regular premiums

Insurance contracts 73,256 (2,242) 71,014 79,533 (2,414) 77,119

Investment contracts with discretionary participation features

3,714 - 3,714 2,486 - 2,486

76,970 (2,242) 74,728 82,019 (2,414) 79,605

Single premiums

Investment contracts with discretionary participation features

40,705 - 40,705 32,460 - 32,460

Total earned premiums 117,675 (2,242) 115,433 114,479 (2,414) 112,065

As set out in Note 1(E) the Group and Society does not account for premiums received on investment contracts (other than those with discretionary participation features) as premium income. These contracts have been accounted for as deposits and added to the value of investment contract liabilities in the balance sheet. Earned premiums on investment contracts during the year were £6,117,000 (2014: £5,380,000).

(B) Gross New Business Premiums (Annualised)

Regular premiums are those where there is a contractual obligation or reasonable expectation to pay on a regular basis. Single premiums are those relating to products issued by the Society which provide for the payment of one premium only.The table below includes the annual premium equivalent for all new regular premiums as well as all single premiums received during the year, including investment contracts.

2015 £’000

2014 £’000

Regular Premiums

Insurance contracts 9,386 9,342

Investment contracts 779 801

Single Premiums

Investment contracts 2,231 1,214

Investment contracts with discretionary participation features 37,968 32,460

50,364 43,817

29


3 Investment Income and ExpensesGroup Society

2015 £’000

2014 £’000

2015 £’000

2014 £’000

Investment income:

– Income from financial investments 14,574 13,656 14,557 13,009

– Gains on the realisation of investments 26,241 23,542 26,241 23,542

40,815 37,198 40,798 36,551

Investment expenses and charges:

– Investment management expenses 3,797 2,127 3,789 2,072

– Losses on the realisation of investments 10,056 8,191 10,056 8,191

13,853 10,318 13,845 10,263

Net investment income 26,962 26,880 26,954 26,288

4 Other Technical Income

Group

Other Technical Income consists of income which does not relate to long term insurance products. This includes fee income on investment contracts, income from the sale and underwriting of general insurance products and income generated from other financial services provided.

5 ClaimsAs set out in note 1(H) the Group and Society does not account for the amounts paid out on investment contracts as a claim expense in the technical account. These amounts have been accounted for as deposits repaid and have been deducted from the value of investment contract liabilities in the balance sheet. Claims paid out on investment contracts during the year were £2,810,000 (2014: £1,174,000).

6 Long-Term Business Provision

Group and Society

The table below shows the changes in the long-term business provision in the year.

2015 £’000

2014 £’000

Change in insurance contracts and investment contracts with discretionary participation features liabilities

Gross amount* 4,332 23,452

Reinsurers’ share (186) 1,854

4,146 25,306

*Included in the gross amount is a decrease of £234,000 (2014: £333,000) being the movement on the present value of future profits on non-participating business written in the life fund.


30


7 Net Operating ExpensesGroup

2015 £’000

2014 £’000

Acquisition costs 3,808 6,216

Goodwill and intangible asset amortisation 3,433 3,051

Administration expenses 6,759 7,203

Information Technology infrastructure 2,834 2,017

Reinsurance commission and profit participation (2) (2)

16,832 18,485

Included in net operating expenses are profits and losses on the disposal of tangible assets, and operating lease costs. The Group made a loss on the sale of tangible assets of £17,000 (2014: loss of £45,000), and incurred operating lease costs of £558,000 (2014: £438,000).

Society

Costs are recharged to the society via a management recharge from a group entity.

8 Staff CostsGroup

2015 £’000

2014 £’000

Wages and salaries 16,570 15,014

Social security costs 1,615 1,518

Other pension costs 947 727

19,132 17,259

Society

On 1 April 2014, all employees and their costs were transferred to PM Central Services PLC, a fellow subsidiary company. From this date onwards employee costs are recharged from PM Central Services PLC to the company and other group entities.

The average number of employees of the Group (including executive directors) during the year was as follows:

Group

By activity: 2015 No.

2014 No.

Senior management 9 12

Sales and customer services 269 252

Support services 182 145

460 409

31


9 Directors’ emolumentsGroup

The directors’ aggregate remuneration in respect of qualifying services were: 2015 £’000

2014 £’000

Aggregate fees 239 229

Aggregate emoluments 540 509

779 738

The highest paid director’s remuneration was aggregate emoluments of £540,000 (2014: £509,000).

The highest paid director waived £25,000 of bonus, due in the year.

Society

The directors receive emoluments from PM Central Services PLC for services rendered in respect of all Group entities, however, none of the directors receive remuneration specific to the directorship of this Society (2014: £nil).

Fees paid to directors were paid by the society

10 Auditors’ RemunerationDuring the year the Group obtained the following services from the Society’s auditor at costs as detailed below:

2015 £’000

2014 £’000

Audit Services:

Fees payable to the Society’s auditors for the audit of the Society and Consolidated Financial Statements 159 155

Audit of the Society’s subsidiaries 92 71

251 226

Non Audit Services:

Fees payable to the Society’s auditor for other services:

Other services supplied pursuant to legislation, including the audit of the regulatory return 12 12

Services relating to corporate finance transactions 134 136

Taxation 20 -

Other 16 -

182 148

433 374


32


11 Taxation Attributable to Long-Term Business

Group Society

2015 £’000

2014 £’000

2015 £’000

2014 £’000

UK corporation tax:

Current tax on income for the year - - - -

Adjustment in respect of prior years (53) (256) (53) -

Total current tax (53) (256) (53) -

Deferred tax:

Origination and reversal of timing differences 2,147 3,821 2,147 3,933

Total deferred tax 2,147 3,821 2,147 3,933

Total tax attributable to long-term business 2,094 3,565 2,094 3,933

UK corporation tax in the technical account has been calculated at a rate of 20% (2014: 20%) in accordance with rates applicable to the long-term business of a long-term insurance company.

12 Fund for Future AppropriationsGroup Society

2015 £’000

2014 £’000

2015 £’000

2014 £’000

Fund for future appropriations excluding pension liability 80,213 100,759 146,032 152,757

Pension liability (4,841) (6,658) (4,841) (6,658)

Fund for future appropriations 75,372 94,101 141,191 146,099

13 Intangible AssetsGroup

Goodwill £’000

Customer List

£’000

Total £’000

Cost:

At 1 January 2015 19,865 3,200 23,065

At 31 December 2015 19,865 3,200 23,065

Amortisation:

At 1 January 2015 4,995 587 5,582

Charge for the year 2,793 640 3,433

At 31 December 2015 7,788 1,227 9,015

Net book value:

At 31 December 2015 12,077 1,973 14,050

At 31 December 2014 14,870 2,613 17,483

The directors have assessed the useful economic life of the goodwill arising on the acquisition of PMGI Limited (formerly Roland Smith Limited), Police Housing Fund Limited and PMHC Limited (formerly The Police Healthcare Services Limited) as being 20 years. For the R3: Financial Services Group Limited this has been assessed as being five years. The useful economic life of the customer list acquired as part of the R3: Financial Services Group Limited has also been assessed as being five years. This is based on the period over which the value of the underlying business acquired is expected to exceed the values of the acquired identifiable net assets.

33


14 Investments in Subsidiary UndertakingsSociety

Shares in Group undertaking

£’000

At 1 January 2015 55,910

Net revaluation gain 3,753

At 31 December 2015 59,663

Set out below are the Society’s investments in subsidiary undertakings as at 31 December 2015, all of which are included in the consolidation. PM Holdings Limited was incorporated on 8th December 2015 and wholly owns PM Advisory Limited and PMGI Limited. Police Housing Fund Limited and Police Mutual Financial Services Limited are wholly owned by PM Advisory Limited. PMHC Limited and R3: Financial Services Group Limited are wholly owned by Police Housing Fund Limited. Pinkerton segregated account (within Kane SAC Limited) is an investment of Police Housing Fund Limited which is consolidated in accordance with FRS 102, paragraph 9.11 (“Consolidated and Separate Financial Statements”). Mortgage Excellence PLC, R3: Affinity Alliance Limited, Stuart Harvey Insurance Brokers Limited and Harrison Beaumont Insurance Services Limited are all wholly owned by R3: Financial Services Group Limited.

Name of undertaking Principal activities

Country of incorporation/ Principle place of business

Basis for Consolidation

PM Holdings Limited (Company number: 09908006)

Provider of support services to certain Group companies. United Kingdom Wholly owned

subsidiary

Police Mutual Investment Services Limited (Company number: 03459376)

Provider of financial services. The company became dormant on 1 January 2011. United Kingdom Wholly owned

subsidiary

PMGI Limited (Company number: 01073408)

Arranges general insurance policies and acts as an introducer of third party products. United Kingdom Wholly owned

subsidiary

PM Central Services PLC (Company number: 08752809) Service company for the Group. United Kingdom Wholly owned

subsidiary

Police Mutual Insurance and Financial Services Limited (Company number: 04560462)

Offers independent financial advice and also acts as an introducer for the Police Mutual Investment Choice platform.

United Kingdom Wholly owned subsidiary

Police Mutual Financial Services Limited (Company number: 04956444)

Provider of financial services. The company became dormant on 1 January 2011. United Kingdom Wholly owned

subsidiary

Police Housing Fund Limited (Company number: 05069158)

Administrator for an affordable housing scheme for the Police as well as also advising on, and arranging mortgages and life assurance.

United Kingdom Wholly owned subsidiary

PMHC Limited (Company number: 03018474)

Provider of discretionary health insurance products to the Police Family. United Kingdom Wholly owned

subsidiary

Pinkerton segregated account (within Kane SAC Limited)

Reinsurance of general insurance policies that were arranged by Group companies. Bermuda Investment

R3: Financial Services Group Limited (Company number: 04153083)

Provider of support services to certain Group companies. United Kingdom Wholly owned

subsidiary

Mortgage Excellence PLC (Company number: 03527577)

Provider of mortgage placement and related financial services. United Kingdom Wholly owned

subsidiary

R3: Affinity Alliance Limited (Company number: 03821275) Travel agency. United Kingdom Wholly owned

subsidiary

Stuart Harvey Insurance Brokers Limited (Company number: 04224318)

Acts as an intermediary for a variety of financial services and products. United Kingdom Wholly owned

subsidiary

Harrison Beaumont Insurance Services Limited (Company number: 04582221)

Provision of insurance brokering services. United Kingdom Wholly owned subsidiary


34


14 Investments in Subsidiary Undertakings (continued)PM Advisory Limited, PMGI Limited, Mortgage Excellence PLC, Stuart Harvey Insurance Brokers Limited and Harrison Beaumont Insurance Services Limited are all regulated by the Financial Conduct Authority.

Police Housing Fund Limited, PMHC Limited, R3: Financial Services Group Limited and R3: Affinity Alliance Limited have all taken the 479A audit exemption for a subsidiary company with the Society providing the parental guarantee.

Summary financial information is provided below in relation to Pinkerton segregated account (within Kane SAC Limited) showing each main heading in the primary statements for which there is a material item included within the Group Financial Statements.

Profit and loss account Balance Sheet

2015 £’000

2015 £’000

Net premium earned 3,897 Current assets 6,201

Net profit 3,160 Net assets 5,759

There are no other gains and losses occurring in the current period. A dividend of £4,000,000 was paid to Police Housing Fund Limited, the immediate parent undertaking, during the period.

Included within current assets is £5,319,000 of cash.

15 Financial InvestmentsDue to the nature of the Group and Society, financial investments are held in order to be able to meet obligations to policy holders in the future. All such investments are classified as held as at FVTPL where fair value is equal to the assets’ carrying value with gains or losses being reflected in the technical account. In this way these gains and losses will be matched with changes in the related liabilities to policy holders, which are also reflected in the technical account.

(A) Financial Investments

Group2015 2014

Carrying Value £’000

Historical Cost

£’000


Historical Cost

£’000Financial investments at FVTPL

Derivatives (note 15(B) – held for trading)

- Forward currency 170 - 1,315 -

- Listed Options 1,419 2,783 - -

Financial investments designated upon initial recognition as at FVTPL

Shares and other variable yield securities:

- United Kingdom 175,810 175,991 150,520 153,878

- Overseas 232,534 206,276 235,950 200,038

Debt and other fixed income securities:

- United Kingdom 167,815 163,591 163,459 152,035

Total financial investments held at FVTPL 577,748 548,641 551,244 505,951

Loans and receivables at amortised cost

Loans on policies 2,977 2,977 2,923 2,923

Deposits with credit institutions 121,787 121,787 132,979 132,979

Total financial investments 702,512 673,405 687,146 641,853

35


15 Financial Investments (continued)

Society2015 2014


Historical Cost

£’000


Historical Cost

£’000Financial investments at FVTPL

Derivatives (note 15(B) – held for trading)

- Forward currency 170 - 1,315 -

- Listed Options 1,419 2,783 - -


Shares and other variable yield securities:

- United Kingdom 175,810 175,991 150,520 153,878

- Overseas 232,534 206,276 235,950 200,038

Debt and other fixed income securities:

- United Kingdom 167,815 163,591 163,459 152,035

Total financial investments held at FVTPL 577,748 548,641 551,244 505,951

Loans and receivables at amortised cost

Loans on policies 2,977 2,977 2,923 2,923

Deposits with credit institutions 121,787 121,787 132,979 132,979

Total financial investments 702,512 673,405 687,146 641,853

All United Kingdom shares and securities are listed on the London Stock Exchange or other recognised investment exchanges. Overseas investments are listed on recognised investment exchanges within the relevant domicile country. Loans and receivables at amortised cost are disclosed at carrying value which is a reasonable approximation of fair value.

(B) Derivative Financial Instruments

The Society currently uses derivative financial instruments for efficient portfolio management. The derivatives used are ‘exchange-traded’ (regulated by an exchange) forward currency contracts with a market quoted price. These derivatives are financial contracts obligating the buyer to purchase a financial instrument at a predetermined future date and price.

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value are recognised immediately in the technical account. Fair values are obtained from quoted market prices in active markets, including recent market transactions. All derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e. the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. The fair value of derivatives held at 31 December 2015 was £1,589,000 (2014: £1,315,000), commission payable on purchase was £nil (2014: £nil).

(C) Collateral

At the balance sheet date the Group and Society had pledged £103,000 (2014: £115,000) of cash margin collateral in respect of futures. The net cash margin pledged is included within cash on the face of the balance sheets of the Group and Society.


36


16 Risk ManagementThe Managing Board has over the course of 2015 maintained robust governance and oversight of the principal risks facing Police Mutual that cover reputation, financial, regulation, operational as well as strategic risks. This is a process that is supported by an established enterprise-wide risk management framework. To summarise, in 2015 the Managing Board:

– reviewed and confirmed as appropriate its risk appetite policy for accepting and avoiding risks; – discussed and agreed the principal risks as well as the scenarios that could threaten the viability of the business model and successful delivery

of the annual business plan and strategy, which covers a 3 year horizon; – critically considered the on-going suitability of the investment strategy as aligned to the long term goals of the business that include the interests

of all our members; – approved the soundness of the bases for evaluating the solvency and capital requirements; – ratified key risk policies as appropriate for governance of risks and smooth running of the business; – monitored through regular reports on sound management of the principal risks, changes in the risk profile of the business as well as any material

issues that may have occurred, and progress of mitigation actions. The Managing Board is supported by the work of its sub-committees that include:

– the Investment Committee for oversight and delivery of the Board approved investment strategy; – the Audit Committee whose duties include the effectiveness of the system of risk management and internal control across a three lines of

defence model; – the Solvency II Technical Sub-Committee which supports the Board’s oversight of the appropriate implementation of the EU Solvency II Directive

for risk and capital management from a technical perspective.

In 2015 a Group Risk Management Committee was established to support the Managing Board in their risk oversight by monitoring the sound application of the Board’s risk appetite, assessments of current and potential future risk exposures of the Police Mutual Group particularly in a growth environment. The new Committee will also provide critical review the robustness of the Group’s ERM policies and risk mitigation.

The three lines of defence control model operates with day-to day management of risks by the business in the front line that is complemented by functions such as Actuarial, Risk and Compliance in the second line of defence and independent and objective assurance by the third line of defence over the effectiveness of the Group’s system of control. In particular, the Finance and Actuarial teams assist the Board in its continual assessment of Police Mutual’s risk-based capital requirement and the Risk team is responsible for maintaining the risk management framework and supporting the Board’s risk governance process by facilitating risk discussions and preparing formal risk reports.

In summary, the risk management framework incorporates the governance structures, operating policies as well as systems of control for identifying, assessing, monitoring and timely mitigation of risks across the group in accordance with the Managing Board’s risk tolerances and appetite, which are reviewed annually. Managing risks at Police Mutual is a process that is integral to the strategic planning and capital management. The joined-up approach ensures that balanced risk-reward decisions are made to manage risks within the Managing Board’s stated risk appetite as well as to spot opportunities for creating long term benefit and value for Police Mutual and its members. This includes, of paramount importance, maintaining our policy and system of control for ensuring fair outcome for our members.

Operating in a highly regulated environment merely reinforces the importance of this joined-up and holistic approach for managing our strategy, capital and risks. Our ability to recognise and understand risks in our external and internal operating environments through ‘horizon scanning’ is clearly also paramount for their effective management.

A description of the principal risks, mitigation plans or controls as considered and monitored by the Managing Board is provided in the table below. Where appropriate, details of the potential financial exposures for the risk types are set out after the table.

37


16 Risk Management (continued)

Risk types Ref. Key aspects of risks Key controls and risk mitigation activities

Insurance Risk

Risk of fluctuations in the timing, frequency and severity of insured events relative to the expectations at the time of underwriting or when set against the claims settled. Other risks include policyholder behaviour in claims and take up of options.

• Adverse movements in mortality, morbidity and persistency rates of policy holders

• The possibility that guarantees could acquire a value that adversely affects the finances of a firm and its ability to meet the expectations of policyholders and to treat them fairly

• Expense overruns relative to pricing or provisioning assumptions

• Exposure to mortality risk is limited through reinsurance in relation to term assurance business

• Appropriate assumption setting through annual reviews of past experience and statistical methods that are validated against industry data

• Financial risk assessment of options and guarantees at product design

• Annual review of guarantee charge

Credit Risk

Risk of loss arising from the default or failure of third parties to meet their financial obligations or variations in market values against expectations related to these risks.

See (A) below

• Exposures relating to holdings in corporate bonds and cash deposits

• Defaults in key strategic partners, counterparties and reinsurers

• Setting of clear limits and tolerances on exposures to a single counterparty, or groups of counterparties, and to geographical and industry segments

• Due diligence of third parties prior to any agreements and on-going monitoring and ‘healthchecks’

• Quarterly reporting on counterparty exposure to both the Investment Committee and Prudential Regulation Authority

Liquidity risk

Risk that a firm, whether solvent or not, either does not have available sufficient financial resources to meet its obligations as they fall due, or can secure them only at excessive cost.

See (B) below

• Mis-management of short term cash flow that typically arises from investment activity, policy premium receipts, maturities and surrenders and payments to suppliers and associates

• Cash flow is closely monitored across key transactions across the Group

• Investment management strategies including levels of liquid and readily marketable assets are closely monitored to allow for timely adjustments to match expected liabilities

Operational risk

Risk of direct or indirect loss resulting from inadequate or failed internal processes, systems or from people and external events that include impact of legislative or regulatory changes, third parties and competitor actions as well as adverse media.

See (C) below

• Breakdown in core internal processes and systems that impact on the reliability of our service to our customers and business partners

• Unfavourable legal and contractual arrangements

• Breaches in our information security, data protection as well as fraud defences

• Inability to maintain business continuity or recover after a significant disruption to our operations

• Mismanagement of outsourced arrangements or failure of outsource providers

• Failure to deliver strategic change on time and within budget

• Sudden or unplanned loss of key persons

• Setting of key policies and standards of operation across all core processes and key risks that include information security , business continuity and outsourced arrangement risks are monitored and reported

• Mandatory information security training and anti-financial crime training on an annual basis

• Methodical assessment of risks and scenario analysis through the established risk management process

• Clear ownership of risks and controls at executive and management levels

• Regular review of people competency and performance to strengthen our recruitment strategy, training and people development

• Annual assessment of the level of confidence and quality of assurance of all principal risks and core business processes in the value chain

• Change management framework and reporting to the Change Steering Group.

• Succession planning framework in place


38



Strategy, brand and reputation risks

Risk of loss of our brand value due to reputation damage and loss of confidence with our affinity, key strategic partners and regulators.

See (C) below

• Breakdown in core internal processes and systems that impact on the reliability of our service and fair outcomes to our customers and business partners

• Untimely or inappropriate responses to changes in the external environment including public spending, weight of regulation and consumer and competitor behaviour

• Uncoordinated development and delivery of strategies for the police and other new affinities eg military

• Capabilities are not aligned to delivery of the business strategy Misaligned processes to our strategy and purpose that lead to unfair customer outcomes

• Misaligned processes to our strategy and purpose that lead to unfair customer outcomes

• Role of the Committee of Management in expressing the aspirations of the members and providing a sounding board of plans and proposals that impact the long term interest of members

• Clear statement and active management of our low risk appetite for reputation risks

• Methodical assessment of risks, scenario analysis and root cause analyses through the established risk management process

• Statement of operating principles and responsibilities that include clear ownership of risks relating to our affinity, commercial business partners and regulator

• Regular monitoring, via the mutuality scorecard, of the benefits we deliver to our members and the police service

• Monitoring of affinity risks via the Affinity Risk Dashboards for the Police and the Military

• Organisation wide capabilities review

Market Risk (including currency risk)

Risk of fluctuations in values of, or income from, assets or in interest arising from fluctuations in interest rates, foreign currency exchange rates and other market rates which can affect the value of the Group’s investments and therefore the size of its assets and solvency position.

See (D)below

• Falls in equity values

• Increases/falls in bond values i.e. changes in fixed interest yields and the impact of interest rate risk

• Falls in property values

• Increases in the volatility of equity returns

• Increases in the volatility of bond returns

• Increases/falls in exchange rates of currencies which could impact on the value of income or expenses

• Setting of key policies and risk limits

• Diversified portfolio of assets and setting benchmark ranges for each asset type within which investment managers operate, which are closely monitored and reported to the Investment Committee

• Close monitoring of interest rates and capital values

• Holding most of the Group’s assets and all of its liabilities in sterling

• Currency hedging arrangements in place to control the majority of the exposure to currency risk

• Overseas investments are subject to the same controls as all other investments

39



(A) Credit Risk

The table below shows the assets of the Group and Society that are subject to credit risk and a reconciliation to the balance sheet carrying value for that asset. For derivatives the credit rating reflects the credit rating of the counterparty. Linked assets are not subject to credit risk as this risk is borne by the holders of the contracts concerned. The directors do not consider that there is any credit risk associated with Government gilts. Non-linked assets not subject to credit risk include shares and other variable yield securities that are subject to market risk.

Group 2015

AAA £’000

AA £’000

A £’000

BBB and below £’000

Not Rated £’000

Balance Sheet Carrying Value

£’000

Non-linked assets subject to credit risk

Financial investments

- debt and fixed income securities 1,338 6,456 27,086 95,253 - 130,133

Cash and cash equivalents 134,516 3,585 11,019 1,844 - 150,964

Reinsurers’ share of technical provisions - 8,635 - - - 8,635

Other assets - - - - - -

Linked assets not subject to credit risk 71,007

Non-linked assets not subject to credit risk 514,094

Total assets 874,833

Included in the assets in the tables above are £842,000 of securities which are defined as credit risk exempt organizations by INSPRU Rule 1.3.87 (2014: £851,000). Included in the AAA rated cash and cash equivalents are investments in liquidity cash funds.

The Society holds collateral with a fair value of £nil (2014: £nil) against the Government Bonds sold under the securities lending agreement. The Society does not recognise securities received as collateral under the securities lending agreement on the Society balance sheet.

The derivative investments require the Group and Society to pledge collateral for derivative liabilities and for third parties to pledge collateral for the derivative assets. To help protect against the credit risk, all collateral is held by an intermediary company and at the end of the year the Society had pledged £103,000 (2014: £115,000) in cash margin collateral in respect of derivative investments.

In addition to holding collateral, the intermediary company reduces Police Mutual’s exposure to credit risk by ensuring that the parties involved in the derivatives have sufficient resources to meet payment requirements. This is enhanced by the requirement for parties to provide the intermediary with an additional margin payment which provides further protection against default. The types of derivatives and the terms under which Police Mutual enters into arrangements are given in note 16(B).

No financial assets are past due or impaired at the reporting date and management expects no significant losses from non-performance by these counterparties. Other assets include premium debtors all of which are less than three months old. The Society has never experienced a significant loss arising from premium debtors because the Society maintains the right to cancel a policy if premiums are not paid when due. No provision is made for impairment of these assets (2014: £nil).

(B) Liquidity Risk

The analysis below provides a summary of the exposures we carry in respect of liquidity risks. The earliest contractual repayment date of investment contracts with discretionary participation features and unit linked investment contracts is on demand and therefore the undiscounted cash flows subject to liquidity risk are £192,907,000 (2014: £163,831,000) and £71,007,000 (2014: £67,236,000) respectively. Other financial liabilities are repayable between 0-5 years as follows:

Group Society

2015 £’000

2014 £’000

2015 £’000

2014 £’000

Other financial liabilities 36,898 27,455 8,969 8,027


40


16 Risk Management (continued)The tables below show the undiscounted expected maturity analysis of the Group’s and Society’s insurance contracts and investment contracts with discretionary participation features. These are the amounts that are guaranteed on maturity (or any earlier date where the surrender value is guaranteed).

Group and Society

2015

0-5 years £’000

5-10 years £’000

10-15 years £’000

15-20 years £’000

Over 20 years

£’000Total £’000

Liabilities subject to liquidity risk

Insurance contract liabilities

– guaranteed component 292,717 381,676 105,348 6,673 1,769 788,183

Investment contract with discretionary participation features liabilities

– guaranteed component 113,678 64,484 1,691 424 184 180,461

406,395 446,160 107,039 7,097 1,953 968,644

2014

0-5 years £’000

5-10 years £’000

10-15 years £’000

15-20 years £’000

Over 20 years

£’000Total £’000

Liabilities subject to liquidity risk


– guaranteed component 291,975 402,774 101,718 6,956 2,172 805,595

Investment contract with discretionary participation features liabilities

– guaranteed component 85,380 57,750 1,746 634 280 145,790

377,355 460,524 103,464 7,590 2,452 951,385

Amounts under unit linked contracts are generally repayable on demand and the Group is responsible for ensuring there is sufficient liquidity within the asset portfolio to enable liabilities to unit linked policy holders to be met as they fall due.

(C) Operational, Strategy, Brand and Reputation Risks

Unlike financial risks, the measurement of operational, strategic and reputation risks is largely based on scenario analyses and stress testing that include reverse stress testing carried out by subject experts from key parts of the organisation with the involvement of the Managing Board at appropriate stages. This approach is proportionate to the size and complexity of the business. Police Mutual uses scenario analysis and stress testing to help assess the likelihood and impact of risks on the evolving business model and strategic plans by considering The strength of systems of control and framing appropriate contingency plans and risk mitigating actions to reduce the exposure to within Police Mutual’s risk tolerances and appetite. The approach refers to industry and regulatory guidance which emphasises the use of data collected internally and external sources as applicable to Police Mutual.

41



(D) Currency Risk

The tables below show the split of denomination currencies and the extent to which there is an exposure to currency risk.

Assets

Group Society

2015 £’000

2014 £’000

2015 £’000

2014 £’000

Non-linked assets

Assets denominated in Sterling 636,604 654,579 672,994 685,666

Assets denominated in US Dollars 165,800 151,055 165,800 151,055

Assets denominated in other countries 1,422 1,358 1,422 1,341

Total non-linked assets 803,826 806,992 840,216 838,062

Linked assets not exposed to currency risk 71,007 67,236 71,007 67,236

Total assets 874,833 874,228 911,223 905,298

Fair value estimation

FRS 102, under paragraphs 11.41(a) and 11.41(d) requires for financial instruments held at fair value in the balance sheet, disclosure of fair value measurements by level of the following fair value measurement hierarchy:

• Quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1)• Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly

(that is, derived from prices) (Level 2)• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3)

The following table presents the Group’s assets that are measured at fair value at 31 December 2015.

Total £’000

Level 1 £’000

Level 2 £’000

Level 3 £’000

Derivatives

Forwards 170 170 - -

Shares and other variable yield securities: – United Kingdom 235,507 140,524 - 94,983

– Overseas 232,534 232,534 - -

Debt and other fixed income securities: – United Kingdom 292,509 163,203 129,306 -

760,720 536,431 129,306 94,983

The following table presents the Group’s assets that are measured at fair value at 31 December 2014.

Total £’000

Level 1 £’000

Level 2 £’000

Level 3 £’000

Derivatives

– Forwards 1,315 1,315 - -

Shares and other variable yield securities: – United Kingdom 209,678 143,570 - 66,108

– Overseas 235,950 235,950 - -

Debt and other fixed income securities: – United Kingdom 310,775 178,031 132,744 -

757,718 558,866 132,744 66,108


42


16 Risk Management (continued)The following table presents the Group’s assets held to cover linked liabilities that are measured at fair value at 31 December 2015.

Total £’000

Level 1 £’000

Level 2 £’000

Level 3 £’000


Shares and other variable yield securities: – United Kingdom 71,007 71,007 - -

The Group does not have any financial liabilities that are held for trading.

The fair value of financial instruments traded in active markets is based on quoted bid prices at the balance sheet date, as described in note 1(J) to the Financial Statements. These instruments are included in Level 1 and comprise primarily listed equity and debt instruments.

The Group closely monitors the valuation of assets in markets that have become less liquid. Determining whether a market is active requires the exercise of judgement and is determined based upon the facts and circumstances of the market for the instrument being measured. Where it is determined that there is no active market, fair value is established using a valuation technique. The techniques applied incorporate relevant information available and reflect appropriate adjustments for credit and liquidity risks. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. The relative weightings given to different sources of information and the determination of non-observable inputs to valuation models can require the exercise of significant judgement.

If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3.

Specific valuation techniques used to value financial instruments include:• The use of observable prices for recent arm’s length transactions;• Quoted market prices or dealer quotes for similar instruments. In particular, for corporate bonds for which there is no active market the fair

value is based on broker/dealer price quotations. Where possible the Group seeks at least two quotations for each bond and considers whether these are representative of fair value in light of current traded levels. Where this information is not available or where it is considered to be not representative of fair value, fair value has been estimated using quoted market prices for securities with similar credit, maturity and yield characteristics; and

• Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments.Note that all of the resulting fair value estimates are included in Level 2, except for certain asset backed securities which are included in Level 3.

The following table presents the changes in Level 3 financial instruments for the year ended 31 December 2015.

£’000

Opening Balance 66,108

Net additions 24,983

Unrealised losses included in the Technical Account 3,892

Closing Balance 94,983

The Group has investments in property funds. These have been classified as Level 3 as there is limited observable market data for the valuation of these assets. The fair value of the property funds is based on the net asset values supplied by underlying fund managers using independent firms of valuers. Management has applied a discount factor collated from portfolio managers based on their views of the secondary unlisted market to the net asset values.

43


17 Tangible assets

Group

Land and Buildings

£’000

Plant and machinery

£’000

Computer equipment

£’000

Office furniture

and equipment

£’000

Motor vehicles

£’000Total £’000

Cost:

At 1 January 2015 - - 2,348 397 561 3,306

Additions 6,768 111 3,281 1,094 585 11,839

Transfers - - 1,243 75 51 1,369

Disposals - (111) 77 34 - -

At 31 December 2015 - - (29) (72) (557) (658)

Depreciation: 6,768 - 4,572 1,131 79 12,550

At 1 January 2015

Charge for the year 1,808 32 1,587 374 249 4,050

Revaluation 49 - 618 100 38 805

Transfers (419) - - - - (419)

Eliminated on disposals - (32) 19 13 -

At 31 December 2015 - - (29) (72) (263) (364)

Net book value: 1,438 - 2,195 415 24 4,072

At 31 December 2015

5,330 - 2,377 716 55 8,478

At 31 December 2014

4,960 79 1,694 720 336 7,789

At the end of the year the Group had a tangible asset capital commitment of £62,000 (2014: £140,000).

All property included above is occupied by the Society.

All properties held at 31 December 2015 are freehold. A full external professional valuation of the Society’s properties was carried out during 2014 by Kingstons, Chartered Surveyors on an existing use basis as at 31 December 2014. The valuation in 2015 was a directors’ valuation.

Included in the net book value of land & buildings is £136,000 (2014: £185,000) relating to fixtures, fittings, plant and equipment. Depreciation is charged on these assets over a useful economic life of between three and ten years.


44


18 Technical Provisions and Technical Provisions for Linked Liabilities

(A) Technical Provisions

Group and Society

2015 2014

Gross £’000

Reinsurers’ Share £’000

Net £’000

Gross £’000

Reinsurers’ Share £’000

Net £’000


Participating insurance contracts 462,140 462,140 489,901 - 489,901

Non-participating insurance contracts

10,729 (8,635) 2,094 10,776 (8,449) 2,327

472,869 (8,635) 464,234 500,677 (8,449) 492,228

Investment contracts with discretionary participation features liabilities

203,892 - 203,892 172,093 - 172,093

Non-participating investment contracts

2,844 - 2,844 - - -

Long-term business provision 679,605 (8,635) 670,970 672,770 (8,449) 664,321

Claims outstanding 5,610 (654) 4,956 4,508 (522) 3,986

(B) Technical Provision for Linked Liabilities and Other Financial Liabilities

Group and Society

2015 £’000

2014 £’000

Non-participating investment contracts 71,007 67,236

Total technical provision for unit linked liabilities 71,007 67,236

Financial liabilities in respect of unit linked investment contracts are carried in the balance sheet at amortised cost.

Other financial liabilities of the Group including creditors payable within one year of £36,898,000 (2014: £27,455,000) are measured at amortised cost. The corresponding amounts for the Society are £8,969,000 (2014: £8,027,000).

The carrying value of unit linked investment contracts and other financial liabilities is a reasonable approximation of fair value.

45


18 Technical Provisions and Technical Provisions for Linked Liabilities (continued)

(C) Assumptions

Key assumptions used to determine insurance contract liabilities are set by the Managing Board based on advice given by the Actuarial Function Holder and are outlined below. These assumptions are updated at least at each reporting date to reflect latest estimates.

In calculating the realistic liabilities no account has been taken of future management actions.

i) Demographic

• Mortality

Mortality bases are reviewed periodically to ensure that the assumptions remain appropriate, taking into account recent company and industry experience for each class of business. The mortality rates used are given below.

Class of Business Mortality

2015 2014

Term assurance (smoker/non smoker differentiated) 55% TM/F00 / 110% TM/F00 55% TM/F00 / 110% TM/F00

Term assurance 75% TM/F00 75% TM/F00

Annuities 65% AM/F00 65% AM/F00

Whole of Life business 65% AM/F00 65% AM/F00

All other business 60% AM/F00 60% AM/F00

The mortality assumptions for 2015 are different from the 2014 assumptions reflecting a sustained reduction in actual mortality rates experienced.

If a lower mortality rate were assumed to apply, the long-term business provision would decrease in respect of assurances and increase in respect of annuities.

• Persistency

Persistency is the extent to which policies remain in force and are not for any reason lapsed, made paid-up, surrendered or transferred prior to maturity or expiry.

For with-profits business, an allowance has been made for lapse and withdrawal rates based on analysis of the most recent experience. The lapse rates used for 2015 are different from the 2014 assumptions reflecting variations in actual experience. For non-profit business, no allowance has been made for lapses.

To the extent that recurring single premiums are paid under a contract, provided the terms of the payment of those single premiums are not fixed contractually, no future allowance will be made.

An increase in lapses would reduce the cost of guarantees, as fewer policy holders remain to receive the guaranteed benefits.

ii) Expenses

Class of Business Expenses

2015 2014

Term assurance £9.00 pa £9.00 pa

Annuities 2% of annuity 2% of annuity

Top up pension £14.16 pa £14.16 pa

Platinum Bond, GIB, GISA, OISA, PG/NG £65.00 pa £65.00 pa

Stakeholder Pension, Child Trust Fund, Group Personal Pension, OISA FT/AA No assumption necessary No assumption necessary

All other business £13.50 pa £13.50 pa


46


18 Technical Provisions and Technical Provisions for Linked Liabilities (continued)

iii) Economic

For with-profits business, the majority of the liability is calculated as the aggregate asset share for the business in force. This is a retrospective calculation based on actual experience. Asset shares have been determined in line with our Principles and Practices of Financial Management (PPFM).

The values of financial options and guarantees and future deductions from asset shares are calculated using market consistent techniques. Market consistency is achieved by running a large number of economically credible scenarios through a stochastic valuation model. Each scenario is discounted at a rate consistent with the individual simulation. Economic scenarios achieve market consistency by calibration to observed market data.

Significant assumptions impacting the cost of options and guarantees are investment volatility and correlation. Asset expected returns and volatilities have been calibrated to ensure consistency with market values at an appropriate term for our anticipated liability profile. The cost of guarantees will be higher with higher investment volatility.

The present value of future profits on non with-profits business has been calculated by reference to a realistic gross premium reserve, using a risk discount rate.

For non-profit business, the long-term business provision is calculated using the gross premium valuation method. The valuation interest rate for any given product group is set by reference to the market value of and yields on assets chosen to support that product group. The valuation interest rates used reflect the allocation of assets to various lines of business and margins consistent with the statutory solvency basis of valuation.

Class of Business Interest Rates

2015 2014

Term assurance 1.8% 1.7%

Annuities 1.8% 1.7%

An increase in interest rates increases the impact of discounting on the long-term business provision. This results in a reduced provision.

19 Capital ManagementAll Police Mutual’s available capital resources are within the Life Fund. There are no shareholders’ funds and there are no borrowings.The Group and the regulated entities within it are subject to a number of regulatory capital tests. They have all met these requirements throughout the financial year. In reporting our financial strength, capital and solvency is measured using the regulations prescribed by the Prudential Regulation Authority (PRA). These regulatory capital tests are based upon required levels of solvency capital and a series of prudent assumptions in respect of the type of business written by the Company.The primary uses of Police Mutual’s capital are:

• to meet statutory solvency and internal capital requirements;• to give investment freedom for with-profits policyholders;• to provide working capital;• to provide capital support for guarantees;• to finance other business ventures including providing support for benevolent activities consistent with the Society’s purposes and for the

overall commercial benefit and/or protection of all current and future members recognising the support the Society receives from the Police;• to enable smoothing of investment returns and payouts;• to meet any excess of costs over charges for business other than conventional with-profits business; and• to meet exceptional costs in managing the business arising as a result of legislation, taxation or other circumstances which, in the opinion of the

Managing Board, should not be directly charged to policyholder benefits.Police Mutual manages its capital by any of the following or a combination of any of them: pursuing its business plan and attendant revenue and profit targets, amending investment strategy, amending charges and by controlling the addition of regular and final bonuses on with-profits policies, in order to ensure it is adequate to meet both the regulatory requirement and the internal assessment for capital as a buffer against adverse circumstances.Police Mutual’s intention is that the capital should be large enough to support the uses listed above and its risk appetite. However, it will not actively increase the amount of capital beyond the needs of ensuring it is adequate for this purpose.

47


19 Capital Management (continued)The table below shows the change in capital over the year compared to 2014:

2015 £’000

2014 £’000

Total available capital resources at 1 January 131,713 132,262

Investment variations – assets 1,351 3,732Investment variations – liabilities, plus one year ageing of policies 1,863 5,519Change in economic conditions and economic assumptions 2,180 (7,635)Change in value of subsidiaries 3,753 6,351Effect of demographic experience over the year (538) 463Expense variances (8,852) (6,504)Tax variances (267) 1,898Profits on non-profit business after reinsurance 1,022 717

New business (2,411) 417Change in current liabilities 1,076 (3,274)

Changes in management policy 0 (1,101)

Change in non-economic assumptions (1,697) 545

Other variances 242 (1,677)

Total available capital resources at 31 December 129,435 131,713

The first two items in the table are due to the investment return on the asset share assets exceeding risk free rates in 2015. They also include the investment return earned on the remaining assets.

The change in economic conditions and economic assumptions reflects changes in interest rates and asset volatility figures, together with any change in future equity backing ratio assumption. In addition, this item also includes the change in the impact of InsPru Rule 1.3.188 which is biting again this year, resulting in a minimum liability add-on of £(25,652,000) (2014: £(27,579,000)).

The change in the value of subsidiaries reflects the latest business plans for the subsidiaries.

The expense variances include items that the Managing Board agreed would be charged to the estate. It also includes the increase in the realistic expense reserve.

The change in current liabilities includes the non-cashflow item in respect of FRS17 deficit liabilities.

The change in capital from new business comes largely from the strain on writing significant volumes of lump sum unitised with-profits business.

There were no significant external developments during 2015 and consequently there is no impact on capital as a result of any regulatory requirements or other such external factors.

The available capital resources are made up from the fund for future appropriations of £141,191,000 (2014: £145,257,000) less an adjustment to assets of £11,756,000 (2014: £13,544,000) to reflect the capital resources requirements of the PRA. This adjustment includes the deferred tax asset of £9,455,000 (2014: £10,759,000) which is an inadmissible asset for capital solvency purposes.

Police Mutual has only one with-profits fund, the Life Fund. The available capital for that fund is determined in accordance with the ‘realistic balance sheet’ regime prescribed by the PRA regulations. Under this regime, the capital requirement for with-profits business is determined such that capital resources must be sufficient to cover the greater of the regulatory and realistic liability and capital requirements.

For Police Mutual, it is the realistic liability and capital requirements which are greater. In this assessment, liabilities to policy holders include both declared bonuses and the constructive obligation for future bonuses not yet declared. The available capital resources include the value of the estate. The estate represents the surplus in the fund that is in excess of any constructive obligation to policy holders. It represents capital resources of the Life Fund and is available to meet regulatory and other solvency requirements of the fund and, in certain circumstances, additional liabilities that may arise.

For non-participating business, the capital requirement is calculated on the regulatory basis, which is based on European Union directives.


48


19 Capital Management (continued)

Restrictions on available capital resources

Police Mutual is required to hold sufficient capital to meet the PRA capital requirements, based on the ‘Risk Capital Margin’ (RCM) determined in accordance with the PRA’s regulatory rules under its realistic capital regime, together with the Individual Capital Assessment (ICA) which considers certain business risks not reflected in the RCM. The determination of the RCM and ICA depends on various actuarial and other assumptions about potential changes in market prices, and the actions management would take in the event of particular adverse changes in market conditions.

Management intends to maintain surplus capital in excess of the RCM and ICA and to maintain an appropriate additional margin over this to absorb changes in both capital and capital requirements.

The available capital resources have reduced over the year by £2,277,000 (2014: reduced by £549,000). The items to have affected this are the investment performance over 2015, higher interest rates, changes in investment strategy resulting in a higher equity backing ratio, expense variances, profits on non-profit business after reinsurance, changes in assumptions used to measure liabilities, the subsidiaries revaluation, new business and other variances. These other variances include the effect of investment variations (in particular the investment return on those capital resources over the year) and differences between expected cashflows over the year and actual cashflows (for example expected claim, expense and tax payments compared to actual).

Capital resource sensitivities

The capital position is sensitive to changes in market conditions, due to both changes in the value of the assets and the effect that changes in investment conditions may have on the value of the liabilities. It is also sensitive to assumptions and experience relating to mortality, expenses and persistency.

The most significant sensitivity arises from the market risk in relation to the with-profits business, which would arise if adverse changes in the value of the assets supporting this business could not be reflected in payments to policy holders because of the effect of guarantees and options. The capital position of this business would also deteriorate if increases to the market cost of derivatives resulted in an increase in the liability for guarantees and options in the realistic balance sheet.

20 Other DebtorsGroup Society

2015 £’000

2014 £’000

2015 £’000

2014 £’000

Trade debtors 16,116 15,135 - 24

Other debtors 2,512 2,344 919 240

Amounts due from group undertakings - - 22,017 23,391

18,628 17,479 22,936 23,655

Included in amounts due from group undertakings is a subordinated loan of £434,000 (2014: £434,000) to PM Advisory Limited. The loan is not repayable for at least 24 months from the date of issue. No repayment notice was received as at the balance sheet date. Interest is payable quarterly in arrears at LIBOR plus 5.22%.

All other amounts due from group undertakings are unsecured, repayable on demand and subject to interest charged at Bank of England base rates. No impairment provision is required in either year against these balances.

49


21 Other CreditorsGroup Society

2015 £’000

2014 £’000

2015 £’000

2014 £’000

Tax and Social Security 454 390 1 2

Accruals and Deferred Income 5,131 5,374 411 605

Trade Creditors 19,625 18,507 126 96

Amounts due to group undertakings - - - 5,843

Unrealised foreign exchange positions 8,040 949 8,040 949

Other Creditors 4,558 2,863 148 19

37,808 28,083 8,726 7,514

Included within the Group balance is an amount of £1.5m (2014: £1.5m) which is payable after more than one year. This relates to the deferred consideration for the acquisition of PMHC Limited (formerly The Police Healthcare Scheme Limited), which took place in 2013.

22 Deferred TaxGroup Society

2015 £’000

2014 £’000

2015 £’000

2014 £’000

Deferred tax asset:

On acquisition costs 3,061 2,470 3,061 2,470

On Staff Pension 673 987 673 987

On unrealised losses on investments 5,720 7,748 5,720 7,748

On customer list (496) (496) - -

On management expenses - 396 - 396

8,958 11,105 9,454 11,601

Movements in deferred tax asset

Group Society

2015 £’000

2014 £’000

2015 £’000

2014 £’000

At 1 January 11,105 15,534 11,601 15,534

Deferred tax created on Acquisition (note 24) - (608) - -

Deferred tax charge in Technical Account (2,147) (3,821) (2,147) (3,933)

At 31 December 8,958 11,105 9,454 11,601

At 31 December 2015 the Society had an unrecognised deferred tax asset of £2.1m (2014: £nil).

23 Operating LeasesThe Group has commitments for the following future minimum lease payments under non-cancellable operating leases for each of the following periods:

Property, plant and equipment

2015 £’000

2014 £’000

Within one year 506 447

Between two and five years 1,317 1,407

After five years 1,150 1,437

2,973 3,291

The Society has no commitments for the future minimum lease payments under non-cancellable operating leases.


50


24 AcquisitionsOn 31 January 2014 a subsidiary company, Police Housing Fund Limited, acquired 100 per cent of the share capital of R3: Financial Services Group Limited for £15.9m. Deferred consideration is £9.25m, of which £8.25m has been issued under a guaranteed investment bond, taken out through the Society. Of this, £1m was paid on the first anniversary from the date of completion, £3m is payable on the third anniversary and £5.25m is payable on the fifth anniversary. The liability for the deferred consideration of the guaranteed investment bond forms part of the long term business provision within the financial statements of the Society.

In calculated goodwill arising on acquisition, the fair values of the net assets acquired have been assessed and no adjustments from book value were deemed necessary. The assets acquired are summarised in the following table:

Book Value £’000

Adjustments to fair value

£’000Fair Value

£’000

Tangible fixed assets 124 (32) 92

Intangible fixed assets 132 3,068 3,200

Cash 2,753 - 2,753

Debtors 892 - 892

Insurer funds 1,461 - 1,461

Creditors (3,061) - (3,061)

Clawback provisions (340) - (340)

Deferred Tax (608) (608)

Net assets acquired 1,961 2,428 4,389

Goodwill 11,552

Consideration 15,941

Cash consideration satisfied by:Deferred consideration 9,250

Cash 6,691

15,941

In its financial year to 31 December 2013, R3: Financial Services Group Limited made a profit after tax of £1.5m. For the period since that date to the date of the acquisition, R3: Financial Services Group Limited management accounts show a profit after tax of £0.1m.

The book values of the assets and liabilities have been taken from the management accounts of R3: Financial Services Group Limited at 31 January 2014 (the date of the acquisition at actual exchange rates on that date).

51


25 Pension CommitmentsThe Group and Society contribute to defined contribution schemes for employees. In 2015, this contribution amounted to £970,000 (2014: £688,000).

The Society also operates a funded defined benefit scheme called the Police Mutual Assurance Society Staff Pension Fund (‘The Scheme’). This provides defined pensions and lump sum benefits payable to members on their retirement or to their dependants on death before or after retirement. All members had been transferred to deferred status by 31 December 2011, and hence there were no active members for the year ended 31 December 2015.

The contributions to the Fund are determined with the advice of independent consulting actuaries, Barnett Waddingham, on the basis of triennial valuations using the projected unit method. The last full actuarial valuation was carried out in 2014 for the period to 31 December 2013.

The main assumptions used were:

2015 2014

Discount rate 4.0% 3.7%

RPI inflation 3.4% 3.4%

CPI inflation 2.4% 2.4%

LPI 5% pension increases 3.4% 3.4%

Revaluation in deferment 2.4% 2.4%

The actual return of the Fund’s assets during the year was 1.2% (2014: 9.5%).

The long-term expected rate of return on the Fund’s assets for the following year is 4.0% (2014: 3.7%).

The major categories of assets as a percentage of total assets and the expected long-term rate of return are as follows:

Asset Category 2015 Rate of return 2014 Rate of return

Equities 68% 4.0% 57% 3.7%

LDI 2015 (LDI 2014) 5% 4.0% 9% 3.7%

Bonds 22% 4.0% 23% 3.7%

Cash 5% 4.0% 11% 3.7%

Under FRS102, the expected return on assets is based on the discount rate used to value the liabilities (i.e. the returns available on high quality corporate bonds) with no allowance made for any outperformance expected from the Fund’s actual asset holding. The discount rate (and therefore expected return on assets) used was therefore 4.00% pa (2014: 3.70% pa). The assets do not include any investments in the Group or Society.

Amounts Recognised in the Balance Sheet at 31 December 2015

2015 £’000

2014 £’000

Growth assets 20,710 17,455

LDI 2015 (LDI 2014) 1,533 2,676

Bonds 6,923 6,874

Cash 1,424 3,392

Fair Value of assets 30,590 30,397

Present value of funded obligations (35,431) (37,055)

Deficit in the scheme (4,841) (6,658)


52


25 Pension Commitments (continued)

Reconciliation of Present Value of Scheme Liabilities

2015 £’000

2014 £’000

At 1 January 37,055 32,055

Past service cost - 25

Interest cost 1,360 1,487

Benefits paid (596) (882)

Actuarial (gain)/loss on liabilities (2,388) 4,370

At 31 December 35,431 37,055

Reconciliation of Fair Value of Scheme Assets

2015 £’000

2014 £’000

At 1 January 30,397 27,772

Return on scheme assets less interest (757) 1,286

Contributions 562 1,112

Benefits paid (596) (882)

Administration costs (138) (177)

Interest on assets 1,122 1,286

At 31 December 30,590 30,397

Analysis of the Amount Charged to Technical Account

2015 £’000

2014 £’000

Past service cost included in other charges - 25

Interest on assets (1,122) (1,368)

Interest on liabilities 1,360 1,487

Administration costs 138 177

Total 376 321

Remeasurements over the year

2015 £’000

2014 £’000

Loss / (gain) on Fund assets in excess of interest 757 (1,286)

Actuarial (gain)/ Loss on defined benefit obligation (2,388) 4,452

Changes in effect of asset ceiling - -

Total actuarial (gain)/loss 1,631 3,166

53


25 Pension Commitments (continued)

History of Experience of Gains and Losses

2015 £’000

2014 £’000

2012 £’000

2011 £’000

2010 £’000

Present value of defined benefit obligation (35,431) (37,055) (32055) (27,595) (26,213)

Fund assets 30,590 30,397 27,772 27,221 26,213

Deficit 4,841 6,658 4,283 374 -

Experience gains and losses on Fund liabilities - (237) - - 799

Changes in assumptions used to value Fund liabilities 2,388 (4,133) (3,627) (596) 111

Experience adjustments on Fund assets (757) 1,204 (237) 325 (811)

26 Related Party TransactionsPolice Mutual Assurance Society Limited is the ultimate holding company of the wholly owned subsidiaries as listed in note 14. It has, therefore, taken advantage of the exemption contained in Financial Reporting Standard 102, Section 33 - Related Party Disclosures and has not disclosed separately transactions or balances with those companies.

During the year members of the Committee of Management, Managing Board and their immediate families took out products offered by the Group. The annualised premium and claims paid during the year for such products are shown below:

2015 2014

Life:

Life products £’000 116 159

Number of members paying premiums in the year 15 19

Balance due to Group £’000 0 0

General Insurance:

General insurance products £’000 15 16

Number of members paying premiums in the year 11 11


Healthcare subscriptions:

Healthcare products £’000 5 5

Number of members paying subscriptions in the year 3 3


27 Post Balance Sheet EventOn 21 March 2016, PM Central Services Ltd, PM Holdings Ltd, PM Advisory Ltd, Police Housing Fund Ltd, PMGI Ltd and R3: Financial Services Group issued further share capital in the form of redeemable ordinary shares. The shares rank pari-passu with the existing ordinary shares and are repayable at the discretion of the issuer. The immediate parent company in each case subscribed for these shares.


54


28 Transition to FRS 102This is the first year that the Group has presented its results under FRS 102. The last financial statements prepared under the previous UK GAAP were for the year ended 31 December 2014. The date of transition to FRS 102 was 1 January 2014. Set out below are the changes in accounting policies which reconcile the Technical Account for the financial year ended 31 December 2014 and the Fund for Future Appropriations as at 1 January 2014 and 31 December 2014 between UK GAAP as previously reported and FRS 102.

Explanations – changes for FRS 102 adoption

A. Restatement of prior acquisitionsThe Group has elected not to restate any acquisitions prior to the transition date of 1 January 2014. The acquisition of 100 per cent of the share capital of R3: Financial Services Group on 31 January 2014 has been restated (note 24). An intangible asset of £3,200,000 representing the value of the customer list has been recognised, reducing the value of goodwill by £2,592,000 after allowing for deferred taxation. In 2014, amortisation of £587,000 has been recognised on the customer list and the goodwill amortisation charge has been reduced by £475,000 giving a net reduction in profit of £112,000. Overall net assets at 31 December 2014 have not been impacted.

B. Deferred taxationUnder previous UK GAAP, the deferred tax asset recognised was discounted whereas FRS 102 requires the asset to be undiscounted. The effect of this has been to increase the deferred tax asset as at 1 January 2014 by £1,848,000, increase the tax charge in 2014 by £1,006,000 and increase the net assets at 31 December 2014 by £842,000.

As a result of the adjustments in A above, we have recognised a deferred tax liability of £608,000 at 31 January 2014 relating to the intangible asset. This will be unwound in line with the amortisation profile of 5 years and has resulted in a reduction in the tax charge in 2014 of £111,000 and a decrease in net assets at 31 December 2014 of £497,000.

C. Other adjustments arising on transition to FRS 102In addition to the transition adjustments identified above which affect the result for the financial year, the following adjustments have arisen which have had no effect on the Fund for Future Appropriations or the Technical Account but which have either affected the presentation of these items on the balance sheet or the disclosure notes. The main items are:

(i) Investment propertyUnder FRS102 the Group’s owner occupied property do not qualify as investment property. The Group has reclassified Land and Buildings to Tangible Fixed Assets and have elected to carry the property at fair value.(ii) Deferred Tax on pensionsUnder FRS 102 the deferred tax asset at 1 January 2014 of £625,000, arising on the post employment benefit liability, is now included within deferred tax on the balance sheet. Under the previous UK GAAP, the deferred tax asset arising on the post employment liability was offset against the liability. (iii) Operating leasesThe operating lease commitment shown in note 23 has been amended to show the total commitment by year, rather than the annual commitment as required by the previous UK GAAP.

Society

The Society’s balance sheet has been impacted by the adjustments to deferred tax to remove the discounting and to reclassify the deferred tax asset on the post employment benefit liability. These have impacted the Fund for Future Appropriations by £842,000 and the Technical Account by £1,006,000.

55


Note 28: Transition to FRS 102 – reconciliations (continued)Consolidated Technical Account

Year ended 31 December 2014 Year ended 31 December 2013

Note As previously

stated

Effect of Transition

FRS102 (restated)

As previously

stated


FRS102 (restated)

£’000 £’000 £’000 £’000 £’000 £’000

Earned Premiums, Net of Reinsurance 112,065 112,065 101,285 101,285

Investment Income 37,198 37,198 59,439 59,439

Unrealised Gains on Investments 26,153 26,153 21,289 21,289

Other Technical Income 28,655 28,655 15,063 15,063

Total Technical Income 204,071 204,071 197,076 197,076

Claims Paid - Gross Amount 126,516 126,516 158,690 158,690

- Reinsurers’ Share (1,676) (1,676) (1,350) (1,350)

Change in Provision for Claims - Gross Amount 260 260 224 224

- Reinsurers’ Share (265) (265) 43 43

Claims Incurred, Net of Reinsurance 124,835 124,835 157,607 157,607

Change in Long-Term Business Provision 25,306 25,306 (13,335) (13,335)

Change in Technical Provision for Linked Liabilities 3,671 3,671 4,780 4,780

Change in Other Technical Provisions, Net of Reinsurance 28,977 28,977 (8,555) (8,555)

Net Operating Expenses A 18,374 111 18,485 17,641 17,641

Investment Expenses and Charges 10,318 10,318 16,242 16,242

Other Charges 28,692 111 28,803 33,883 33,883

Other Technical Charges 28,140 28,140 9,929 9,929

Taxation Attributable to Long-Term Business

B 2,670 895 3,565 72 (1,849) (1,777)

Actuarial loss on Pension Scheme 3,166 3,166 3,864 3,864

Transfer (from)/to the Fund for Future Appropriations (12,409) (1,006) (13,415) 276 1,849 2,125

Total Technical Charges 204,071 204,071 197,076 197,076

Balance on the Technical Account - - - -


56


Note 28: Transition to FRS 102 – reconciliations (continued)Society Technical Account

Year ended 31 December 2014 Year ended 31 December 2013

Note As previously

stated


FRS102 (restated)

As previously

stated


FRS102 (restated)

£’000 £’000 £’000 £’000 £’000 £’000

Earned Premiums, Net of Reinsurance 112,065 112,065 101,285 101,285

Investment Income 36,155 36,155 59,411 59,411

Unrealised Gains on Investments 32,504 32,504 39,794 39,794

Other Technical Income 793 793 4,732 4,732

Total Technical Income 181,913 181,913 205,222 197,076

Claims Paid - Gross Amount 126,516 126,516 158,690 158,690

- Reinsurers’ Share (1,676) (1,676) (1,350) (1,350)

Change in Provision for Claims - Gross Amount 260 260 224 224

- Reinsurers’ Share (265) (265) 43 43

Claims Incurred, Net of Reinsurance 124,835 124,835 157,607 157,607

Change in Long-Term Business Provision 25,306 25,306 (13,335) (13,335)

Change in Technical Provision for Linked Liabilities 3,671 3,671 4,780 4,780

Change in Other Technical Provisions, Net of Reinsurance 28,977 28,977 (8,555) (8,555)

Net Operating Expenses A 15,327 15,237 17,234 17,234

Investment Expenses and Charges 10,263 10,263 16,242 16,242

Other Charges 25,590 25,590 33,476 33,476

Taxation Attributable to Long-Term Business B 2,926 1,007 3,933 72 (1,849) (1,777)

Actuarial loss on Pension Scheme 3,166 3,166 3,864 3,864

Transfer (from)/to the Fund for Future Appropriations (3,581) (1,007) (4,588) 18,758 1,849 20,607

Total Technical Charges 181,913 181,913 205,222 197,076

Balance on the Technical Account - - - -

57


Note 28: Transition to FRS 102 – reconciliations (continued)Consolidated Balance Sheet

As at 31 December 2014 As at 31 December 2013

Note As previously

stated


FRS102 (restated)

As previously

stated


FRS102 (restated)

£’000 £’000 £’000 £’000 £’000 £’000

Intangible Assets

Goodwill A 16,986 (2,116) 14,870 5,782 5,782

Other A - 2,613 2,613

16,986 497 17,483 5,782 5,782

Investments

Land and Buildings C 4,960 (4,960) - 4,835 (4,835) -

Other Financial Investments 687,146 687,146 712,721 712,721

692,106 (4,960) 687,146 717,556 (4,835) 712,721

Present Value of Future Profits on Non-Participating Business

2,465 2,465 2,798 2,798

Assets Held to Cover Linked Liabilities

67,236 67,236 60,022 60,022


Long-Term Business Provision 8,449 8,449 10,303 10,303

Claims Outstanding 522 522 257 257

8,971 8,971 10,560 10,560

Debtors

Debtors Arising Out of Direct Insurance Operations

2,015 2,015 1,743 1,743

Other Debtors 17,479 17,479 17,682 17,682

19,494 19,494 19,425 19,425

Other Assets

Tangible Assets C 2,829 4,960 7,789 1,705 4,835 6,540

Cash at Bank and In Hand 48,816 48,816 10,157 10,157

Deferred Tax B 9,772 1,333 11,105 13,060 2,474 15,534

61,417 6,293 67,710 24,922 7,309 32,231


Accrued Interest 3,012 3,012 2,924 2,924

Other Accrued Investment Income 49 49 202 202

Other Prepayments and Accrued Income 662 662 732 732

3,723 3,723 3,858 3,858

Total Assets 872,398 1,830 874,228 844,923 2,474 847,397


58


Note 28: Transition to FRS 102 – reconciliations (continued)Consolidated Balance Sheet


Note As previously

stated


FRS102 (restated)

As previously

stated


FRS102 (restated)

£’000 £’000 £’000 £’000 £’000 £’000

Liabilities

Fund for Future Appropriations 93,258 843 94,101 105,667 1,849 107,516



Claims Outstanding 4,508 4,508 4,251 4,251

677,278 677,278 653,902 653,902

Technical Provisions for Linked Liabilities

67,236 67,236 60,022 60,022

Creditors

Creditors Arising out of Direct Insurance Operations 833 833 533 533

Corporation Tax 39 39 244 244

Other Creditors Including Social Security 28,083 28,083 20,897 20,897

28,955 28,955 21,674 21,674

Total Liabilities excluding Pension Scheme Liabilities

866,727 843 867,570 841,265 1,849 843,114

Pension Scheme Liability C 5,671 987 6,658 3,658 625 4,283

Total Liabilities 872,398 1,830 874,228 844,923 2,474 847,397

59


Note 28: Transition to FRS 102 – reconciliations (continued)Society Balance Sheet


Note As previously

stated


FRS102 (restated)

As previously

stated


FRS102 (restated)

£’000 £’000 £’000 £’000 £’000 £’000

Investments

Land and Buildings C 4,960 (4,960) - 4,835 (4,835) -

Investments in Subsidiary Undertakings 55,910 55,910 49,559 49,559

Other Financial Investments 687,146 687,146 709,911 709,911

748,016 (4,960) 743,056 764,305 (4,835) 759,470

Present Value of Future Profits on Non-Participating Business

2,465 2,465 2,798 2,798

Assets Held to Cover Linked Liabilities 67,236 67,236 60,022 60,022



Claims Outstanding 522 522 257 257

8,971 8,971 10,560 10,560

Debtors

Debtors Arising Out of Direct Insurance Operations 1,989 1,989 1,743 1,743

Other Debtors 23,655 23,655 11,018 11,018

25,644 25,644 12,761 12,761

Other Assets

Tangible Assets C - 4,960 4,960 1,512 4,835 6,347

Cash at Bank and In Hand 38,023 38,023 3,716 3,716

Deferred Tax B 9,772 1,829 11,601 13,060 2,474 15,534

47,795 6,789 54,584 18,288 7,309 25,597


Accrued Interest 3,012 3,012 2,924 2,924

Other Accrued Investment Income 49 49 202 202

Other Prepayments and Accrued Income 281 281 627 627

3,342 3,342 3,753 3,753

Total Assets 903,469 1,829 905,298 872,487 2,474 874,961


60


Note 28: Transition to FRS 102 – reconciliations (continued)Society Balance Sheet


Note As previously

stated


FRS102 (restated)

As previously

stated


FRS102 (restated)

£’000 £’000 £’000 £’000 £’000 £’000

Liabilities

Fund for Future Appropriations 145,257 842 146,099 148,838 1,849 150,687



Claims Outstanding 4,508 4,508 4,251 4,251

677,278 677,278 653,902 653,902

Technical Provisions for Linked Liabilities

67,236 67,236 60,022 60,022

Creditors

Creditors Arising out of Direct Insurance Operations 474 474 533 533

Corporation Tax 39 39 - -

Other Creditors Including Social Security 7,514 7,514 5,534 5,534

8,027 8,027 6,067 6,067

Total Liabilities excluding Pension Scheme Liabilities

897,798 842 898,640 868,829 1,849 870,678

Pension Scheme Liability C 5,671 987 6,658 3,658 625 4,283

Total Liabilities 903,469 1,829 905,298 872,487 2,474 874,961

RA2015

Police Mutual Assurance Society LimitedAlexandra House, Queen Street, Lichfield, Staffordshire WS13 6QS

0345 88 22 999 (Monday-Friday, 8.30am-5.30pm)

policemutual.co.uk

Police Mutual Assurance Society Limited (PMAS) is an incorporated friendly society authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (FCA register number 110050). The registered office of PMAS is: Alexandra House, Queen Street, Lichfield, Staffordshire WS13 6QS. For your security, all telephone calls are recorded and may be monitored. Calls provided by BT will be charged at up to 4 pence per minute at all times. A call set-up fee of up to 8 pence per call applies to calls from residential lines. Mobile and other providers’ charges may vary.

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