1 Annual Report & Financial Statements 2013 2 National Friendly Annual Report & Financial Statements 2013 Advisors Independent Auditors PricewaterhouseCoopers LLP, 31 Great George Street, Bristol, BS1 5QD Bankers HSBC, 62 George White Street, Cabot Circus, Bristol, BS1 3BA Custodians Northern Trust, 50 Bank Street, Canary Wharf, London, E14 5NT Internal Auditors Mazars LLP, Clifton Down House, Beaufort Buildings, Clifton, Bristol, BS8 4AN Investment Managers Equity and Fixed Income Fund Fidelity Investments Limited, 25 Cannon Street, London, EC4M 5TA Contact Details Unit Linked Fund Church House Investments, 3 Goldcroft, Head Office Yeovil, Somerset, BA21 4DQ 4-5 Worcester Road, Clifton, Bristol BS8 3JL Telephone 0117 973 9003 [email protected] Solicitors www.nationalfriendly.co.uk Thring Townsend Lee & Pembertons, The Paragon, Counterslip, Bristol, BS1 6BX Established 1868 – Registered and incorporated Friendly Society no. 369F. Beachcroft LLP, 100 Fetter Lane, London, EC4A 1BN Member of the Association of Financial Mutuals. Authorised by the Prudential Regulation Authority Lovells, Atlantic House, Holborn Viaduct, and regulated by the Financial Conduct Authority London, EC1A 2FG. and the Prudential Regulation Authority. Chief Executive Officer: Jonathan Long Surveyors Company Secretary: Sandy Richards Mellersh and Harding LLP, Kingsbury House, 15-17 King Street, London SW1 6QU With-Profit Actuary BWCI Limited, Albert House, South Esplanade, St Peter Port, Guernsey, GY1 1AW Chairman’s review 3 highlights Financial Strategic report Directors’ report Board report Audit committee report Contents Remuneration report Advisors & Contact details 2 Chairman’s Review 4 Auditors’ report Auditors’ Financial Highlights 5 Independent Strategic Report 6-19 The Directors’ Report 20-24 The Board Report 25-27 Audit Committee Report 28-29 Income statement Directors’ Remuneration Report 30-32 Independent Auditors’ Report 33-36 Income Statement 37 Balance Sheet 38-39 Balance sheet Statement of total recognised gains and losses 40 Notes to the Accounts 41-74 Gains and losses Notes the to accounts 4 National Friendly Annual Report & Financial Statements 2013 Chairman’s Review I am pleased to say that the Society has continued to restore capital in 2013 and, looking ahead, is strengthening further its capital base in 2014. This is a continuation of the trend seen in recent years and has come about through careful management of your Society’s assets and liabilities by your management team who continue to exercise great prudence in all areas of the business. To date, notwithstanding the progress made, it has not Furthermore, we have witnessed considerable progress been considered appropriate to launch new insurance in developing our business proposition at 425 Financial products because we want to be absolutely certain that Solutions, our direct selling business, as the product mix our strengthening balance sheet is utilised properly in is further broadened and strategic positioning refined. pursuit of clear product opportunities which fit our risk appetite. As further balance sheet strength accrues this Finally, after much consideration, I have made the will give us greater flexibility in product design. difficult decision to stand down as Chairman and Non-Executive Director of the Society due to personal In the meantime, we continue to pursue our interest in commitments, this being part of a wider exercise the later life care market and are undertaking extensive involving the re-arrangement of a number of current research to increase our awareness of the market and business interests. I have enjoyed the role immensely determine how we may best position ourselves to help. during my time with the Society and it is with regret One in three adults will have long term care needs in the that I have decided to leave. I am pleased to announce future and we will be seeking to help support people that the Board has appointed Tracy Morshead as my with products and services that may assist. Going successor as Chairman and I wish him every success in forward we are positioning ourselves as care experts the role. with the knowledge, products and relationships in place to support our policy holders in times of need. It has been a pleasure being involved with the Society and I am certain that it will continue with its ambition to build a profitable and sustainable future throughout 2014 and beyond. Alan Lewis, Chairman 31 March 2014 It is with honour that I take on the role of Chairman of the Society and I welcome the opportunity to guide your Board and management team in the forthcoming years as we establish ourselves as a key participator in later life care. In the short term our priority remains the restoration of capital and as this continues it will create a robust platform upon which we can build a long term sustainable business model. I should also like to take this opportunity to thank Alan for all of his hard work, dedication and commitment over the past five years and wish him well in the future. I look forward to a successful future as the Society continues to strengthen its financial position. Tracy Morshead, Non-Executive Director 31 March 2014 Chairman’s review 5 highlights Financial Highlights Financial Strategic report Total Assets 2009 £157.9m Our asset base has fallen during 2010 £157.9m Directors’ report the year due to policy maturities 2011 £152.2m and lapses coupled with increasing interest rates giving rise to a fall 2012 £150.3m in gilt values. 2013 £141.6m Board report Audit committee report Annual Premiums Earned 2009 £10.9m & Premium Income 2010 £16.7m Calculated using 10% of Single Premium Business 2011 £20.5m Premium income has reduced Remuneration 2012 £17.6m report due to policy maturities and lapses and the temporary 2013 £15.7m closure to new business. Auditors’ report Auditors’ Independent Independent Fund for Future 2009 £19.0m Income statement Appropriations 2010 £8.4m The Fund for Future Appropriations 2011 £10.5m has increased through a combination of reduced reserves due to policy 2012 £9.6m lapses and higher interest rates Balance sheet being offset by increased morbidity 2013 £10.2m and per policy expense assumptions. Gains and losses Notes the to accounts 6 National Friendly Annual Report & Financial Statements 2013 Strategic Report Our vision is to be a forward thinking trusted “mutual that evolves to meet the changing welfare needs of our policy holders and we retain our strong desire to re-open to new business as soon as capital and risk appetite permits.” Overall Strategy The Society’s fundamental strategy remains unchanged. Our vision is to be a forward thinking trusted mutual that evolves to meet the changing welfare needs of our policy holders and we retain our strong desire to re-open to new business as soon as capital and risk appetite permits. More explicitly our aim is to provide our policy holders with products and services that look after their welfare – to give certainty and control over their wellbeing both now and in the future. This will be delivered in a timely, personal and friendly manner using technology as appropriate. Business Performance Our focus throughout 2013 was on continuing to deliver our capital restoration plan, strengthening our risk management framework and seeking possible re-insurers to reduce our morbidity risk. In the course of the year our level of Pillar 1 free capital has increased from £1.4m at 31 December 2012 to £1.8m as at 31 December 2013. There are a number of contributing factors to this These increases have been offset by: continued restoration of capital. Increases to the capital position have been driven by: • Poorer than expected morbidity experience. • An increase in per policy expense as the policy • Interest rate rises causing an increase in valuation book reduces in size. discount rate and a reduction in overall liabilities. • The identification of an error embedded within one • Higher than anticipated healthcare lapses resulting in of our actuarial models that are used to determine a higher level of morbidity reserves being released. our future healthcare claims which, after correction, • Our decision to take advantage of a rising property reduced capital by £1.1m. market by selling the current head office building and relocating to the centre of Bristol into a property more suited to the Society’s current and future planned requirements. Chairman’s review 7 highlights Financial Critical Success Factors We determined three key areas of critical success for 2013 and set out below the progress made on each: Strategic report Capital To re-open to new 1 management 2 business 2013 saw our capital restoration plan successfully Capital continued to be restored in 2013 but had not Directors’ report delivering improvements to our position, albeit yet reached the level we have set to confidently progress has been slower than we desired. re-open to new business. Morbidity That said, we continued to develop our overall Extensive work has taken place during 2013 with proposition of meeting the evolving welfare needs of an objective to reduce our morbidity risk exposure. our policyholders and are still planning to expand our Board report We have also considered, and continue to do so, product offering in line with our distribution strategy in reinsurance financing and assessing options in respect marketing later life care products and services through of stop loss both at an aggregate and per policy level a combination of the Society, our subsidiary company of our existing healthcare policy book. 425 Financial Solutions (“425”) and carefully selected strategic partnerships. Solvency II Audit committee We are also preparing for Solvency II, the EU legislative We are also considering reinsurance as a way of report programme to provide improved consumer protection mitigating the risk of writing new business, ensuring and ensure a uniform and enhanced level of policyholder both that pricing is appropriate and minimising protection across the EU.