Auditors’ Report

Report on the financial statements

Opinion

In our opinion, Exeter Friendly Society Limited’s group financial statements and Society financial statements (the “financial statements”):

We have audited the financial statements, included within the Annual Report, which comprise: the Consolidated Statement of Financial Position which includes the group and Society Statements of Financial Position as at 31 December 2017; the Consolidated Statement of Comprehensive Income which includes the group and Society Statements of Comprehensive Income, and the Consolidated Statement of Cash Flows which includes the group and Society Statements of Cash Flows for the year then ended; and the notes to the financial statements.

Our opinion is consistent with our reporting to the Audit Committee.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard as applicable to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

During the period, we identified that we had provided a prohibited tax compliance service to the Society in breach of paragraph 5.167R (a) of the FRC’s Ethical Standard. Total fees billed in the period in respect of the service were trivial in nature (less than £500). We confirm that, based on our assessment of this breach, and the subsequent actions taken, we have not, in our view, compromised our independence. To the best of our knowledge and belief, we declare that no other non-audit services prohibited by the FRC’s Ethical Standard were provided to the group or the Society.

Other than those disclosed in note 11 to the financial statements, we have provided no non-audit services to the group or Society in the period from 1 January 2017 to 31 December 2017.

Our audit approach

Context

This year Exeter Friendly Society Limited aligned its long-term insurance contract liabilities to a Solvency II basis. This has resulted in a prior year restatement as the change was assessed as a change in accounting policy. There have been no other significant changes to the business or its financial reporting which have impacted the scope of our audit.

Overview

Materiality

Overall group materiality: £1,991,000 (2016: £2,076,000) based on 1% of the group’s Unallocated Divisible Surplus (‘UDS’).

Overall Society materiality: £1,891,000 (2016: £2,076,000) based on 1% of the Society’s Unallocated Divisible Surplus (‘UDS’), restricted to 95% of the group's overall materiality.

Audit scope

The group consists of one financially significant component, being Exeter Friendly Society Limited (the 'Society'). This reporting unit was therefore subject to an audit of its complete financial information.

Key audit matters

Morbidity and lapse assumptions used in the valuation of the long term business insurance contracts (Group and Society).

The scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.

We gained an understanding of the legal and regulatory framework applicable to the group and the industry in which it operates, and considered the risk of acts by the group which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at group and significant component level to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. We focused on laws and regulations that could give rise to a material misstatement in the group and Society financial statements, including, but not limited to, the Friendly Societies Act 1992 legislation, the Prudential Regulation Authority’s regulations and the UK Corporate Governance Code – An Annotated version for mutual insurers. Our tests included, but were not limited to, review of the financial statement disclosures to underlying supporting documentation, review of correspondence with the regulators, review of policyholder complaints, enquiries of management and review of internal audit reports in so far as they relate to the financial statements. There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.

We did not identify any key audit matters relating to irregularities, including fraud. 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 directors that represented a risk of material misstatement due to fraud.

Key audit matters

Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.

Key audit matter

How our audit addressed the key audit matter

Morbidity and lapse assumptions used in the valuation of the long term business insurance contracts (Group and Society)

Refer to page 28 (Audit Committee Report), page 58 (accounting policies) and note 23 to the financial statements.

The group and Society financial statements include long term insurance contracts for the estimated cost of settling claims associated with income protection. This year the directors have aligned their methodology in valuing these insurance contracts to a Solvency II basis. The impact of this accounting policy change on the accounts has resulted in a significant adjustment to their valuation which are in a net asset position. This is because the future premiums to be received are expected to exceed future claim and expense payments.

We focused on this area because of the significance of these amounts in deriving the group’s and Society’s result and because of the use of a suite of economic and demographic data and assumptions used which are often highly subjective. In particular, we focused on the morbidity and lapse assumptions to which the valuation is most sensitive. The directors derive these assumptions with reference to historical experience and the application of actuarial judgement.

Our work to address the valuation of the long term insurance contracts on a Solvency II basis was supported by our in-house actuarial specialists and included the following procedures:

● We tested the underlying data used in the year-end valuation and experience analysis which supports management’s judgements in setting the morbidity and lapse assumptions.
● We tested the accuracy of the calculations used in the experience analysis.
● We compared the methodology used to set the assumptions against recognised actuarial practices and assessed the reasonableness of any expert judgements in arriving at the final assumptions by applying our industry knowledge and experience.

Through the procedures detailed above, we have found the morbidity and lapse assumptions used to value the long term insurance contracts were supported by the evidence obtained.

How we tailored the audit scope

We 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 group and the Society, the accounting processes and controls, and the industry in which it operates.

The group consists of one financially significant component, being Exeter Friendly Society Limited (the 'Society'). This reporting component is the ultimate parent company in the group and required an audit of its complete financial information which was performed by the group engagement team. This accounted for over 95% of the Unallocated Divisible Surplus ('UDS') at a group level enabling us to conclude that sufficient appropriate audit evidence had been obtained for the group opinion.

The group has one other trading company, a holding company and three dormant entities. None of these reporting units were material to the audit of the group financial statements and therefore were not subject to specific audit procedures.

There is a centralised finance function which oversees all reporting units within the group. In addition to the head office in Exeter, we visited one other location where our testing primarily focused on the recording and processing of Private Medical Insurance ('PMI') claims at the Society.

Materiality

The scope of our audit was 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:

Group financial statements

Society financial statements

Overall materiality

£1,991,000 (2016: £2,076,000).

£1,891,000 (2016: £2,076,000).

How we determined it

1% of the group's Unallocated Divisible Surplus ('UDS').

1% of the Society's Unallocated Divisible Surplus ('UDS'), restricted to 95% of the group's overall materiality.

Rationale for benchmark applied

We consider the UDS to be the most relevant measure to apply as this represents the value of the members’ interests in the group.

We consider the UDS to be the most relevant measure to apply as this represents the value of the members’ interests in the Society. Materiality for the Society has been restricted to 95% of the group’s materiality. This is to reduce the level of aggregation risk for the group audit.

For the one component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The materiality allocated to this component was £1,891,000.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £99,000 (Group audit) (2016: £103,000) and £94,000 (Society audit) (2016: £103,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

Going concern

In accordance with ISAs (UK) we report as follows:

Reporting obligation

Outcome

We are required to report if we have anything material to add or draw attention to in respect of the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the group’s and the Society’s ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements.

We have nothing material to add or to draw attention to. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s and Society’s ability to continue as a going concern

Reporting on other information

The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.

With respect to the Director’s Report, we also considered whether it had been prepared in accordance the Friendly Societies Act 1992 and the regulations made under it.

Based on the responsibilities described above and our work undertaken in the course of the audit, the Friendly Societies Act 1992, (FSA92) and ISAs (UK) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated).

Directors report

In our opinion, based on the work undertaken in the course of the audit, the information given in the Directors’ 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. (FSA92)
In light of the knowledge and understanding of the group and the Society and their environment obtained in the course of the audit, we did not identify any material misstatements in the Directors’ Report. (FSA92)

The directors’ assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the group

As a result of the directors’ reporting on how they have applied the UK Corporate Governance Code – An Annotated version for mutual insurers (the “Code”), we are required to report to you if we have anything material to add or draw attention to regarding:

• The directors’ confirmation on page 18 of the Annual Report that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The directors’ explanation on page 20 of the Annual Report as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group 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 qualifications or assumptions.

We have nothing to report in respect of this responsibility.

Other Code Provisions

As a result of the directors’ reporting on how they have applied the Code, we are required to report to you if, in our opinion:

• The statement given by the directors, on page 23, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the group’s and Society’s position and performance, business model and strategy is materially inconsistent with our knowledge of the group and Society obtained in the course of performing our audit.
• The section of the Annual Report on page 28 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
• The directors’ statement relating to the Society’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, by the Association of Financial Mutuals, for review by the auditors.

We have nothing to report in respect of this responsibility.