16 | BUSINESS REVIEW|
Our financial performance
Total return We view share price total return (including dividends) as a key performance measure. Our total shareholder return for the year ended 31 December 2011 was -18.6 per cent. In the same period, the total shareholder return on the FTSE 250 Index was -10.1 per cent. and the FTSE 100 Index was -2.2 per cent.
Strategic background 2011 comprised two very distinct periods for equity markets – in the first half of the year markets were relatively benign, with the FTSE 100 Index opening the year at 5,900 points and standing at 5,946 points at 30 June. However, the second half of 2011 saw extreme levels of volatility as concerns regarding the stability and continuation of the Eurozone, together with other macroeconomic and geopolitical factors, led to a deterioration in market sentiment. As a consequence, the FTSE 100 fell some 20 per cent. to 4,791 points before recovering to close the year at 5,572 points. One of the consequences of this volatility was a significant de-risking by wholesale asset allocators; a trend from which we were not immune.
Presentation of financial results International Financial Reporting Standards (IFRS) require our Financial Statements to consolidate the results of our Managed Pension Funds (MPF) business on a line-by-line basis, impacting the presentation of both our Income Statement and Statement of Financial Position. Our MPF business provides certain clients with asset management services inside an insurance product wrapper. The requirement to consolidate this business has a significant effect on the financial investments and investment contract liabilities captions included in our Statement of Financial Position, the risks and rewards of which are substantially borne by the clients of this business. In addition, our Statement of Financial Position includes some £28m of cash also attributable to policyholders of this business and which is not available for corporate purposes.
Thames River acquisition While the purchase of Thames River completed on 1 September 2010, its acquisition had a significant impact on our reported financial results for 2011. Under the terms of the acquisition agreement, we paid an initial cash consideration of £33.6m for the business and, at 31 December 2010, had provided for a further estimated amount of cash consideration payable of £7.5m as a result of the net assets of the acquired entities exceeding specified targets. The majority of that additional consideration, some £7.4m, was paid in cash during 2011, with the remainder released to the Income Statement.
In addition to the consideration amounts set out above, the Group agreed further potential payments to the vendors, members and employees of Thames River. These amounts are generally dependent on the post-acquisition financial performance of Thames River and, given they are acquisition related, have been excluded from underlying earnings.
Firstly, the Group established a Management Retention Plan (MRP) to retain and incentivise certain key individuals within Thames River.
Under this plan some 21.7 million F&C shares were awarded, which will be issued and vest to employees in September 2013. At the date of announcing the acquisition, these share awards had a value of some £15.0m. The value of the share awards at the date of grant is treated as an expense over the vesting period and a cost of £4.7m under this plan has been recognised in the 2011 results.
Secondly, the Group also established a Management Incentive Plan (MIP), under which a maximum of some 29 million shares, with a value of £20m at the date of announcing the acquisition, may be issued to certain key individuals within Thames River. To date, awards over 14.2 million shares have been issued. The vesting of these awards is dependent on the achievement of three performance conditions; a profit target measured at 31 December 2011, a further profit target measured at 30 June 2012 and the cumulative profitability of Thames River over the 48 months ending 31 March 2014.
The 31 December 2011 profit target was not met, and the Group does not expect that the 30 June 2012 or 31 March 2014 profit targets will be met. As a consequence, we do not believe any shares will be issued under the MIP and previously recognised accounting charges of £0.1m in respect of the MIP have reversed during 2011 and are recognised as a credit in the Income Statement.
Thirdly, the acquisition agreement provided that the Group would pay additional consideration to the vendors of Thames River based on achievement of the same 31 December 2011 and 30 June 2012 profits targets as for the MIP. At 31 December 2010, the Group had estimated that £7.5m may be payable and had provided for this amount in the year end Statement of Financial Position. As the 31 December 2011 profit target has not been met and the Group does not expect the 30 June 2012 profit target will be met, the Board does not expect that any shares will be issued to the vendors. This liability has therefore been released, in accordance with IFRS, to the 2011 Income Statement.
At the time of the acquisition, the Group entered into agreements (the Commutation Arrangements) with the Individual Members of the Thames River Limited Partnerships. Under the Commutation Arrangements, the Group agreed, under certain circumstances, to purchase part of the Individual Members’ profit share in the partnerships by issuing F&C shares in consideration. As the Commutation Arrangements can only be exercised by members who are still actively involved in the Thames River business and those members must continue in the business for a further two years to receive the full amount of their consideration, IFRS requires the estimated value of the shares which may be issued under the Commutation Arrangements to be treated as an expense, recognised between the date of award and the expiry of the period in which the member must remain in the business. The Commutation Arrangements can be split into two parts.
Under the first commutation, an investment team which has positive fund flows in the 12 months prior to the commutation date can require the Group to purchase a proportion of their profit share. This
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