103
FINANCIAL STATEMENTS
The risk
Our response
Going concern The risk compared to the prior year is unchanged Refer to page 97 (Director’s Report) and page 115 (Note 1.1, financial statement disclosures) that sets out the assessment undertaken by the Board and the rationale for using the going concern assumption In particular that disclosure sets out that the Directors have considered a scenario where the company ceases to write new business and continues to trade in run-off. In a run off scenario, the going concern basis would continue to be applicable because the Group would be continuing to trade with its existing business.
Disclosure completeness The financial statements explain how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the Group and Parent Company. That judgement is based on an evaluation of the inherent risks to the Group’s and Company’s business model and how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over a period of at least a year from the date of approval of the financial statements. The Board’s assessment is based on future projections of the level of excess Solvency II capital over requirements, which includes judgments over the impact of regulatory requirements (whether known or subject to change), future economic conditions and future management actions, including raising new capital. There is a risk that the judgements included in the assessment are inappropriate and do not include appropriate allowances for adverse scenarios or the execution risk associated with future plans or do not take account of the potential actions of third parties, including the Prudential Regulation Authority (‘PRA’). There are also less predictable but realistic second order impacts, such as the impact of Brexit, which could result in a rapid reduction of available financial resources. The risk for our audit was whether or not those risks were such that they amounted to a material uncertainty that may have cast significant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed. Disclosure quality Clear and full disclosure of the assessment undertaken by the Board and the rationale for using the going concern assumption, represents a key financial statement disclosure requirement. There is a risk that insufficient details are disclosed to allow a full understanding of the assessment undertaken by the Board.
Our procedures included: Capital assessment: • We assessed the Group’s capital forecasts, which, as disclosed in note 1.1, are based on the forecast regulatory solvency position and include the impact of the PRA’s SS3/17 “Solvency II: Matching adjustment – illiquid unrated assets and equity release mortgages” and PS19/19 “Solvency II: Equity release mortgages – Part 2”. In doing so we considered a range of forecast scenarios with differing levels of new business, and the associated additional capital requirements. We also reviewed PRA correspondence and met with the PRA to assess their view as to the amount of Solvency II capital that is likely to be required by the Group. • We considered the terms of all the Group’s financing arrangements, including both committed and uncommitted facilities, and assessed the likelihood and impacts arising from future capital issuances that will be required to support the delivery of the Group’s business plans and how these had been factored into the forecasts. Benchmarking assumptions and our sector experience: • We also assessed the forecasts and underlying assumptions by reference to our knowledge of the business and general economic conditions and assessed the potential risk of management bias. Sensitivity analysis: • We challenged the Group’s sensitivities applied to the forecasts by taking into account how these may be affected by the achievability of the Board’s plans, including potential capital raising, general economic conditions, increased regulatory capital requirements and the potential effects of Brexit, for example on house prices and interest rates. In particular we considered the capital position of the Group under stress and without any capital issuances. Accounting analysis: • We considered the possible circumstance of the Group ceasing to write new business. We considered it against the accounting standards’ criteria for the non-going concern basis of accounting, being cessation of trading; and against generally accepted practice in such circumstances. Regulatory assessment: • We met the PRA to hear their views on the Group’s Solvency II capital forecasts and on the PRA’s regulatory approach to the Group, including its powers to require actions of the Group. Assessing transparency: • We assessed the completeness and accuracy of the matters covered in the going concern disclosures by reference to the key matters considered by our procedures set out above. Our results • We found the disclosure of the Board’s judgement that it was appropriate to adopt the going concern basis of preparation without any material uncertainty to be proportionate (2018: proportionate).
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