Acquisition On 29 June 2009, Liberty announced that it would acquire a group of businesses that specialise in the consolidation and management of closed life and pension funds, referred to in the Annual Report & Accounts 2009 as the “Pearl businesses”. The acquisition completed on 2 September 2009* when Liberty became the ultimate parent of the Pearl businesses.
 Financial and operational stability remain our near-term focus following the acquisition and restructuring in September.
“ Despite the market volatility of the past 18 months, the Group produced a resilient performance in 2009.”
We were also pleased to announce the appointment of Mike Merrick and Chris Samuel as Chief Executives for our Phoenix Life and Ignis Asset Management businesses respectively. In their new positions, Mike and Chris will assist me in delivering the strategic objectives of these businesses and the Group as a whole. Specifically Mike will continue to integrate the Group’s closed life businesses and Chris will continue to build Ignis Asset Management’s third party offering.
In arriving at this dividend the Board has taken into account the conditions contained in the Group’s credit agreements which include provisions restricting the distribution of profits by the Group. The dividend declaration reflects the maximum permitted pro-rated dividend payment in respect of 2009. Over time, we anticipate the Group’s dividend policy to be more closely aligned with the underlying cash generation of our operating businesses.
Strategies Implement single life company structure – Enhance Group-wide risk and – capital management Grow – third party asset management franchise
Goals Goals Goals 14 Phoenix Group Holdings Annual Report & Accounts 2009
– Launched employee share save scheme 2010 priorities Embed recently announced people values – Implement and further develop action – plans from 2009 engagement survey Strengthen Group succession planning – process Expand the leadership development – programme
18 Key performance indicators 22 Group performance 23 Cash generation 25 Group performance – MCEV 32 Group operating profit – IFRS 36 Capital management 40 Risk management
With profit 20 With profit where internal capital support provided 30 Non profit and unitlinked 201 Longer term return on owners’ funds 17 Management services 17 Phoenix Life operating profit before tax2 285
Non-recurring items Non-recurring items include: A charge of £ – 78 million related to the court approved Guaranteed Annuity Option Compromise scheme for Phoenix & London Assurance. This removed longevity risk from the business whist providing policyholder benefit enhancements. This is higher than the charge recognised under MCEV due to the more prudent reserving basis. It is expected that this loss will unwind in future periods as margins of prudence in reserving for liabilities unwind
The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group to achieve the objectives under a range of stress conditions. The policies are defined with reference to policyholder security, creditor obligations, owner dividend policy and regulatory capital requirements.
AuM at 1 Includes third party market movements of £0.7 billion and life companies market movements of £3.7 billion.
There are other closed fund consolidators as well as a number of other potential purchasers. While the prices of closed fund life companies and portfolios may have decreased due to recent market conditions, there can be no assurance that prices will not increase if markets continue to recover. Moreover, the Group may face difficulties in obtaining additional third party financing for any acquisitions.
Reward programme We believe it is important that our employees have the opportunity to align their interests, through share ownership with those of our owners. An employee Sharesave Scheme launched at the beginning of 2010 provided eligible employees the opportunity to join an Inland Revenue (Her Majesty’s Revenue and Customs (“HMRC”)) approved scheme. 64 percent of eligible employees elected to join the scheme, which exceeded expectations. We also launched a formal flexible benefits scheme in 2009, “Flexit”, which provides eligible employees the opportunity to select, within defined parameters, benefits that suit their lifestyle and personal circumstances.
Isabel Hudson (age 50) Non-Executive Director Isabel Hudson is a former Executive Director of Prudential Assurance Company Limited. She was also Chief Financial Officer at Eureko BV. Ms Hudson is a Non-Executive Director of QBE Insurance and The Pensions Regulator and a member of the With Profits Committee of Standard Life. Ms Hudson is Chairman of the business development Board of Scope, a UK charity, and has 29 years’ experience in the insurance industry in the UK and mainland Europe. She was appointed to the Board of Directors of the Company on 18 February 2010 and is a member of the Board Risk and Board Remuneration Committees.
Business review The audited IFRS financial statements for the year ended 31 December 2009 are set out on pages 76 to 157.
The Board has followed the UK Financial Reporting Council’s guidance “Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009” when performing their going concern assessment. As part of their comprehensive assessment of whether the Group and the Company is a going concern, the Board has undertaken a review of the valuation and liquidity of its investments as at the date of preparation of the statement of consolidated financial position. The Board has also reviewed solvency and cash flow projections under both normal and stressed conditions. The cash and solvency projections include the potential impact of the contingent liabilities stated in note 46 to the IFRS financial statements.
Led by the Senior Independent Director, the Non-Executive Directors will meet, without the Chairman present, to appraise the Chairman’s performance, after taking into account the views of Executive Directors.
The Audit Committee is responsible for making recommendations to the Board on such matters as the appointment of the external auditors and their terms of engagement and for reviewing the performance, objectivity and independence of the external auditors. The Audit Committee is also responsible for assessing the effectiveness of the internal audit function. The Audit Committee receives and reviews the Annual Report & Accounts and other related financial disclosures, the ultimate responsibility for these matters remaining with the Board. It monitors the overall integrity of the financial reporting by the Company and its subsidiaries and reviews compliance with legal and regulatory requirements and the effectiveness of the Group’s internal controls. The terms of reference of the Audit Committee state that it shall meet the external auditor at least once a year without management being present.
Remuneration Committee Ian Cormack is the Chairman of the Remuneration Committee. The other members are David Barnes and Isabel Hudson. The composition of the Committee is in accordance with the requirements of the Combined Code, that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee was established on 18 February 2010 following the appointment of additional independent Non-Executive Directors to the Board. The Remuneration Committee is scheduled to meet twice in 2010.
The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business and Strategy and Performance sections on pages 10 to 43: The financial position of the Group, its cash flows and liquidity position are described in the financial statements and notes.
Ian Ashken (appointed 2 September 2009) 33,333 – – 33,333 René-Pierre Azria (appointed 2 September 2009) 33,333 – – 33,333 David Barnes (appointed 2 September 2009) 36,66716 – – 36,667 Nicolas Berggruen (resigned 2 September 2009) – – – – Ian Cormack (appointed 2 September 2009) 62,71016 – – 62,710 Tom Cross Brown (appointed 24 September 2009) 62,59916 – – 62,599 Manjit Dale (appointed 2 September 2009) 5,38513 – – 5,385 Jonathan Evans (appointed 2 September 2009, resigned 22 October 2009) 24,38016 – – 24,380 Martin Franklin (resigned 2 September 2009) – – – – Dimitri Goulandris (resigned 2 September 2009) – – – – Hugh Osmond (appointed 2 September 2009) 5,38514 – – 5,385 Miguel Paes do Amaral (resigned 2 September 2009) – – – – Ashley Silverton (resigned 2 September 2009) 571,77515 – – 571,775 9 Remuneration shown is only for the period that the Director was in office. 10 Benefits include car allowance, private medical insurance, income protection and life assurance, as applicable. 11 Relates to payments made in respect of the multiplier and personal performance ratings as part of the 2009 Annual bonus scheme. 12 Relates to additional payments awarded for the successful achievement of a wide range of strategic and operational activities, as referred to on page 70, contingent upon the
Net investment income 7 1,032 33 Total revenue, net of reinsurance payable 1,647 33
Consolidated income statement for the year ended 31 December 2009 78 Phoenix Group Holdings Annual Report & Accounts 2009
Insurance contract liabilities for non participating business are calculated using either a net premium or gross premium method. Where a gross premium method is used, the liability includes allowance for prudent lapses. Negative policy values are allowed for individual policies: – where there are no guaranteed surrender values; or – in the periods where guaranteed surrender values do not apply even though guaranteed surrender values are applicable after a specified period of time. The principal assumptions are given in note 42.
Finance costs Interest paid is recognised in the consolidated income statement as it accrues and is calculated by using the effective interest method. Accrued interest is included within the carrying value of the interest-bearing financial liability.
(aa) General business The general insurance businesses have been closed to new business for a number of years and are in run off. The results are included in other operating income within the consolidated income statement. Provisions are made for the estimated cost of claims, including claims incurred but not reported after taking into account handling costs, anticipated inflation and settlement trends. Any difference between the estimated provision and subsequent settlement is included in the consolidated income statement in later years.
– Annual Improvements 2008. This makes a number of improvements to existing standards.
For management purposes, the Group is organised into business units based on their products and services and has two reportable segments as follows: – Phoenix Life – this segment manages a range of whole life, term assurance and pension products; and – Ignis Asset Management – this segment provides investment management services to the life companies within the Group and to third parties, covering both retail and institutional investors.
Net premiums written from: External customers 514 – – – 514 Other segment – – – – –
Deferred tax on actuarial gains of defined benefit schemes 31 –
Profit for the year 135 31 Share of result attributable to non-controlling interests (40) – Profit attributable to owners 95 31
24. Derivatives (continued) Royal London warrants On 2 September 2009, the Company issued 12.36 million warrants (2 million transferable and 10.36 million nontransferable ) over its shares to Royal London as part consideration for acquiring the benefit of £250 million of the PIK notes and facility outstanding (comprising principal and capitalised interest). These warrants entitle the holder to purchase one ‘B’ ordinary share at a price of €11 per share, subject to adjustment. Following the achievement of a premium listing of the ordinary shares on the LSE, the Royal London warrants will be over ordinary shares rather than ‘B’ ordinary shares.
The Company can issue a like number of ordinary shares instead of ‘B’ ordinary shares. This is effective from the earlier of: – the date the ordinary shares are listed and traded on the LSE; and – 1 July 2010.
25. Obligations for repayments of collateral received 2009 £m 2008 £m
Included in other provisions is £9 million in respect of investment contracts representing the excess of future costs over future charges on the Group’s unit linked business, assessed at a product level. The discount rate used in calculating the provision is 4.00% and the provision is expected to run off over the remaining life of the business, estimated at 30 years. The remainder of the balance includes litigation and onerous contract provisions.
Fair value of scheme assets 1,126 – Present value of defined benefit obligation (1,130) – Deficit (4) –
33. Intangible assets (continued) Customer relationships The customer relationships intangible includes an intangible representing vesting pension premiums which captures the new business arising from policies in force at the acquisition date, specifically top-ups made to existing policies and annuities vested from matured pension policies. The total value of this customer relationship intangible at acquisition was £297 million and has been allocated to the Phoenix Life segment. This intangible is being amortised over a 20 year period.
Bank and cash balances 2,223 2 Short-term deposits (including demand and time deposits) 3,858 –
Regulatory capital position statement The purpose of the capital position statement is to set out the capital resources of the Phoenix Life segment of the Group and to provide an analysis of the disposition and constraints over the availability of capital to meet risks and regulatory requirements. The capital position statement also provides a reconciliation of owners’ funds to regulatory capital and an analysis of the regulatory capital between the Group’s with profit funds, non participating business, life business owners’ funds and its other activities.
Management actions Investment strategy – – – – – 276 – – 276 Proceeds from issue of subordinated debt – – – – – – – 250 250 Dividends paid by Phoenix Life – – – – – – – (406) (406) New business and other factors
Assets backing unit linked business have not been analysed in these tables as the credit risk on such financial assets is borne by the policyholders. However, these assets have been included as a separate column in these tables to reconcile the information to the primary financial statements. Shareholder credit exposure on unit linked assets is limited to the level of asset manager fee which is dependent on the underlying assets. In certain circumstances the shareholder funds may be used to re-establish unit linked assets in line with regulatory and policyholder expectations.
42.3.3 Liquidity risk Liquidity risk is defined as the failure of the Group to maintain adequate levels of financial resources to enable it to meet its obligations as they fall due. The Group has exposure to liquidity risk as a result of servicing its external debt and equity investors, and from the operating requirements of its subsidiaries. The Group’s subsidiaries have exposure to liquidity risk as a result of normal business activities, specifically the risk arising from an inability to meet short term cash flow requirements.
Net asset value attributable to unit holders 946 – – – 946 Obligations for repayment of collateral received 3,054 158 412 484 4,108 Reinsurance payables 17 – – – 17 Payables related to direct insurance contracts 693 66 – – 759 Accruals and deferred income 174 3 – – 177 1 year or less or on demand £m 1–5 years £m
(e) Insurance risk Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The Phoenix Life segment contracts include the following sources of insurance risk: Mortality – Higher than expected number of death claims on assurance products and occurrence of one or more large claims; Longevity – Faster than expected improvements in life expectancy on immediate and deferred annuity products; Morbidity – Higher than expected number of serious illness claims or more sickness claims which last longer on income protection policies; Expenses – Policies cost more to administer than expected; Lapses – The numbers of policies terminating early is different to that expected in a way which increases expected claims costs or expenses or reduces future profits; and Options – Unanticipated changes in policyholder option exercise rates giving rise to increased claims costs.
Lapse and surrender rates (persistency) The assumed rates for surrender and voluntary premium discontinuance depend on the length of time a policy has been in force and the relevant company. Surrender or voluntary premium discontinuances are only assumed for realistic basis companies. Withdrawal rates used in the valuation of with profit policies are based on observed experience and adjusted when it is considered that future policyholder behaviour will be influenced by different considerations than in the past. In particular, it is assumed that withdrawal rates for unitised with profit contracts will be higher on policy anniversaries on which Market Value Adjustments do not apply.
Non profit funds Deferred annuities – with guarantees 117 – 59 – Deferred annuities – without guarantees 1,012 5 474 – Immediate annuities 8,073 – 704 –
With profit Fund (Unitised and Traditional) The Group operates a number of with profit funds in the UK in which the with profit policyholders benefit from a discretionary annual bonus (guaranteed once added in most cases) and a discretionary final bonus. Non profit business is also written in some of the with profit funds and some of the funds may include immediate annuities and deferred annuities with Guaranteed Annuity Rates (“GAR”).
45. Related party transactions The Group has related party transactions with its pension schemes, its Directors and entities where its Directors are deemed to have significant influence.
As part of Phoenix Group Holdings’ acquisition of the Pearl businesses, fees of £202 million were paid to the banks as consideration to facilitate the transaction. The consideration was in the form of equity issued to the lenders by Phoenix Group Holdings and therefore resulted in a corresponding increase in capital. Under IFRS these debt issue costs are taken into account in determining the cost of acquisition of the Pearl businesses.
Pro forma Group MCEV analysis of earnings For the year ended 31 December 2009
Pro forma Group MCEV at 1 January 2009 4,081 122 34 (3,193) 1,044
MCEV VIF calculations. 2 Investments carried at amortised cost under IFRS are revalued at market value. 3 The pension scheme surplus removed is the economic surplus of the PGL scheme, as described in note 32 to the IFRS consolidated financial statements, after tax.
The Group MCEV allows for methodology changes from previously published embedded values. The methodology changes have been implemented to better align the Group’s MCEV methodology with the CFO Forum principles. Details of the methodology changes and a reconciliation to the Group MCEV at 31 December 2008, as published in the proxy statement of 3 July 2009, are provided in note 8.
(a) Free surplus and required capital Free surplus and required capital together comprise the net worth of the life insurance business.
For the Group, required capital is defined as the greater of: – The amount of capital required to meet the FSA capital adequacy requirements, consisting of the greater of Pillar 1 and Pillar 2 capital requirements where: – Under Pillar 1, the life companies are required to maintain excess capital in excess of policy liabilities calculated using a basis specified by the FSA; and – Under Pillar 2, the life companies are required to carry out and submit their own assessment of capital requirements by assessing the major risks they are running and the capital they need to ensure that they remain able to meet their liabilities to policyholders in all but the most extreme circumstances; T – he capital required under the Group’s capital management policy.
Other operating variances (14) 35 21 Operating Life MCEV earnings 443 (170) 273
5. Maturity profile of business This note sets out how the PVFP is expected to emerge into net worth over future years. Surpluses are projected on a certainty equivalent basis with allowance for liquidity premiums as appropriate and are discounted at risk‑free rates.
ABS Asset Backed Securities – A collateralised security whose value and income payments are derived from a specified pool of underlying assets.
Asset Management A structured approach that guides the act of acquiring and disposing of assets to maximise shareholder and policyholder investment returns.
MCEV Market Consistent Embedded Value – A measure of the consolidated value of shareholders’ interests calculated using the Group’s MCEV methodology as described in the note 1 of the MCEV supplementary information.
A type of company or a fund in the UK that is structured to invest in other companies with the ability to adjust constantly its investment criteria and fund size.