During 2011 we have continued to progress our AST project and have also set out a clear template to ensure that the Group’s 14 with-profit funds are managed in a consistent way. This work will continue in 2012.
As a result, the Group had 6 operating life companies at the end of 2011, consisting of 14 with-profit funds and 7 non-profit funds. Further transfers of business will be progressed during 2012. Simplifying the number of life companies within the Group through such business transfers both reduces complexity and releases capital.
The Phoenix Way characterises an approach and infrastructure for the efficient and effective structuring, integration and management of closed life funds and the investments held within them.
As part of its strategy to develop the Ignis brand as a third party asset manager in its own right, Ignis has renegotiated its joint venture agreement with Argonaut, which will provide the business with a greater level of independence. As with its existing partnerships with Castle Hill and Hexam, Ignis will retain a minority interest in Argonaut.
Commence ‘Use Test’ period running Solvency II comformant processes in advance of the Internal Model Application
Definition and calculation The IGD surplus is a regulatory capital measure which calculates surplus capital at the highest EEA level insurance group holding company, which is Phoenix Life Holdings Limited (‘PLHL’). IGD surplus is defined as group capital resources less the group capital resource requirement.
Definition and calculation Group assets under management represent life company assets (excluding collateral on stock‑lending arrangements), Holding Company cash, and third party assets managed by Ignis.
1 Including stock lending collateral managed by Ignis, Group assets under management were £82.9 billion (2010: £78.8 billion).
Movements in capital requirements and policy in 2011 include the inherent release of capital from the run‑off of the life funds as well as management actions, offset by an increase in capital requirements in annuity and other non‑profit funds due to falling interest rates in the second half of the year.
Expected existing business contribution 254 306 New business value 13 19 Non‑economic experience variances and assumption changes: Experience variances 181 264 Assumption changes (18) (38) Other operating variances (21) (5) Total non‑economic experience variances and assumption changes 142 221 Life MCEV operating earnings after tax 409 546
Third party1 29 29 Life fund revenue2 114 113 Other income 3 2 Total revenues 146 144 Staff costs (64) (59) Other operating expenses (36) (39) Total expenses (100) (98) Ignis Asset Management operating profit before tax 46 46 1 Includes performance fees of £1 million (2010: £nil).
Investment return variances and economic assumption changes on long‑term business Overall, the Phoenix Life business had unfavourable investment return variances and economic assumption changes of £338 million in 2011. This reflects the widening of credit spreads and the falling yield curve as the increase in liabilities calculated on a prudent basis was not fully offset by a corresponding increase in assets.
Life and Holding Companies’ assets increased by £1.4 billion to £63.5 billion in the year as positive market movements of £5.8 billion, driven by gilt holdings, offset the run‑off of the closed life business of £4.4 billion.
Risk management lies at the heart of what we do and is a source of value creation, making it a key component of the Group’s strategic agenda. The Board seeks to ensure that the Group identifies and manages all risks accordingly, either to create additional value for its stakeholders or to mitigate any potentially adverse effects. A summary of the principal risks and uncertainties facing the Group is provided on page 42.
These risks are monitored and reported across the organisation to ensure that they are adequately managed.
Technology and infrastructure The Group employs systems to support the assessment and reporting of the risks it faces as a business and to enable management to document its key risks and controls and evidence the assessment of them at a frequency appropriate to the operation of the control. The Group is continuing to assess the need for additional systems to further support the embedding of the RMF.
“ Corporate Responsibility at Phoenix Group is about doing the right thing and acting responsibly in everything we do. We wish to be seen as a company that prospective employees wish to join, investors wish to support, customers choose to remain with and at the same time create opportunities to forge links within our local community.”
The contribution we make to the communities in which we operate and our obligations to the broader society
Ian Ashken Non-Executive Director Ian Ashken is Vice Chairman and Chief Financial Officer of Jarden Corporation, a NYSE listed Fortune 500 US conglomerate. Mr Ashken has had extensive public company experience over the last 20 years, including as Chief Financial Officer of Benson Eyecare Corporation, Lumen Technologies and Bollé Inc. Mr Ashken is a Principal and Executive Officer of a number of private investment entities. He was appointed to the Board of Directors of the Company on 2 September 2009.
David Barnes Non-Executive Director David Barnes joined the RBS Group (then Williams & Glyn’s Bank) in 1973 and remained there in various roles until his early retirement in February 2009. His roles included Relationship Banker in the then newly established Corporate Division, Managing Director of the Financial Institutions Relationship Management team and member and subsequently Chairman of RBS’s Credit Committee. From 2005 he was responsible for all lending to financial institutions and for capital management for RBS’s Financial Institutions Group. Mr Barnes was appointed to the Board of Directors of the Company on 2 September 2009. He is a member of the Board Audit and Board Remuneration Committees.
David Woods Non-Executive Director David Woods is a Fellow of the Institute of Actuaries and a Non-Executive Director of Standard Life UK Smaller Companies Trust plc, Murray Income Trust plc and The Moller Centre for Continuing Education. He is also Chairman of the pension fund trustee companies responsible for the governance of all the UK pension schemes in the Steria Group and is a trustee of the Scottish Provident Pension Fund. Between 1988 and 2002, he was Group Managing Director of the Scottish Provident Group and was Non-Executive Chairman of Royal Liver Assurance from 2003 to 2011. He was appointed to the Board of Directors of the Company on 18 February 2010 and is Chairman of the Board Risk Committee.
Executive management of the Group is led by the Group Chief Executive Officer, Clive Bannister, who is supported by the Executive Management Committee (‘ExCo’). ExCo oversees matters relating to the implementation of the Group’s strategy.
– Ensure Phoenix Life deploys capital efficiently and effectively, with due regard to regulatory requirements.
Restrictions on transfer of shares The lock-up restrictions relating to 31,251,401 ordinary shares ended in July 2011. The orderly market arrangements which were entered into by certain shareholders and the Company on 22 June 2010 still apply. These arrangements prevent a disposal of any ordinary shares (that these shareholders held on 5 July 2010) for a period of 24 months from 5 July 2010 if the disposal would negatively affect the orderly market in ordinary shares. The Prospectus issued by the Company on 4 June 2010 provides further details of this and is available on the Company’s website at www.thephoenixgroup.com/investor-relations/archive/archive-key-documents.aspx.
Under the Articles, the Directors may in certain circumstances refuse to register transfers of shares. In particular, the Board of Directors may refuse to register the transfer of shares to a person who is a Non-Qualified Person (as defined in the Articles of Association).
Certain of the above shareholders also hold warrants (details of which are provided in note 24 to the IFRS financial statements) and contingent rights over shares (details of which are provided in note 15 to the IFRS financial statements).
The output from the Board and individual Director reviews informed the review of the Board composition and structure undertaken by the Board Nomination Committee in January 2012.
The Audit Committee has recent and relevant financial experience. The composition of the Committee is in accordance with the requirements of the Code that the Audit Committee should consist of at least three independent Non-Executive Directors of whom at least one has recent and relevant financial experience. The Audit Committee met seven times during 2011.
– Reviewed the engagement and remuneration of the external auditors, recommending their re-appointment to the Board and thence to shareholders
The composition of the Remuneration Committee accords with the requirements of the Code that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee met eight times during 2011.
Review of system of internal controls The Code requires Directors to review the effectiveness of the Company’s risk management and internal control systems which includes financial, operational and compliance controls. The Board has overall responsibility for the Group’s risk management and internal control systems and for reviewing their effectiveness. The Group’s systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Board’s review of the period covered by this report, which was undertaken with the assistance of the Audit and Risk Committees, was completed on 22 March 2012. Where any significant weaknesses were identified, the actions required to address them have been taken, or are being taken and monitored.
Additional FSA Disclosures Code Staff The Remuneration Committee has identified the Group’s asset management subsidiary, Ignis Asset Management, as a Code firm. By virtue of its influence over Ignis, the Committee has determined that Phoenix Group Holdings is also a Code firm. Both companies have been identified as Tier 4 Code firms. The Committee has determined that 23 staff within Ignis qualify as Code Staff. The Committee has also determined that a further 23 Group employees, who have sufficient supervisory responsibility over Ignis’ activities, qualify as Code Staff.
All incentive awards to Code Staff are subject to the review and support of the Committee.
Earnings per ordinary share Basic and diluted earnings per ordinary share 15 (76.2p) 20.1p
Acquired in-force business 1,882 2,016 Customer relationships 402 420 Present value of future profits 23 42
Insurance liabilities The insurance contract liability for non-participating non-linked business is calculated initially to comply with the requirements of the FSA Handbook for Insurers. The liability for insurance contracts in the non-profit fund is adjusted where necessary by removing excessively prudent margins required for statutory solvency purposes, together with general contingency reserves and those reserves required only under the Prudential Sourcebook for Insurers.
Where it is not possible to apportion the future profits on this non-participating business to policyholders, the PVFP on this business is recognised as an intangible asset and changes in its value are recorded as a separate item in the consolidated income statement.
Financial liabilities are designated upon initial recognition at fair value through profit or loss when doing so results in more meaningful information because either: – it eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or
Customer relationships Intangible assets include vesting pension premiums and investment management contracts as detailed in note 33. These are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reflected in the consolidated income statement in the year in which the expenditure is incurred.
(q) Investments in associates and joint ventures Investments in associates and joint ventures that are held for investment purposes are accounted for under IAS 39 Financial Instruments: Recognition and Measurement. These are measured at fair value through profit or loss. There are no investments in associates and joint ventures which are of a strategic nature.
Derivative financial instruments are classified as held for trading. They are recognised initially at fair value and subsequently are re-measured to fair value. Exchange-traded derivative assets are valued at the published bid price, or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. The gain or loss on re-measurement to fair value is recognised in the consolidated income statement.
(s) Reinsurance The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance providers. Reinsurers’ share of insurance contract liabilities is dependent on expected claims and benefits arising under the related reinsured policies.
In addition, the following standards, interpretations and amendments have been issued but are not currently relevant to the Group: – Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendments to IFRS 1) (2012).
Tax at standard UK1 rate of 26.5% (2010: 28%) (47) 2 Net tax losses on group restructuring not matched in accounts – (110) Untaxed income and gains (7) (61) Disallowable expenses 3 18 Adjustment to tax charge in respect of prior years (57) 16 Movement in non-profit surplus taxed at less than 26.5% (2010: 28%) 13 20 Movement on acquired in-force amortisation at less than 26.5% (2010: 28%) 3 1 Profits taxed at rates other than 26.5% (2010: 28%) 19 (3) Tax losses not previously valued (11) (8) Prior year deferred tax 20 12 Deferred tax rate change (41) (19) Current year losses not valued 3 41 Temporary differences not valued 27 11
The IPO warrants were not dilutive in either 2011 or 2010 due to the exercise price of the warrants being significantly higher than the share price of the Company. The Founders’ and Sponsors’ warrants were converted into ordinary shares during 2010.
Purchased in year – 10 Vested to employees in year (2) (4) Shares issued to group entity on conversion of contingent rights over ordinary shares – 3
IPO and Founders’ warrants The IPO and Founders’ warrants originally entitled the holder to purchase one ordinary share at a price of €7.00 per share, subject to adjustment, at any time commencing on the consummation of a business combination. On 2 September 2009 the exercise price was increased to €11. At 31 December 2011, the terms of the IPO warrants entitle the holder to purchase 1.0272 (2010: 1.009507) ordinary shares per IPO warrant, for an exercise price of €10.71 (2010: €10.90).
A gradual reduction in the UK corporation tax rate from 28% to 24% over four years was announced in the Emergency Budget of 22 June 2010 with further 1% reductions being announced in each of the Budgets of 23 March 2011 and 21 March 2012. The Finance (No. 2) Act 2010 included the first of the 1% rate reductions with effect from April 2011, a further 1% reduction was substantively enacted on 29 March 2011 under the Provisional Collection of Taxes Act 1968 and a further 1% reduction (effective from April 2012) was included in Finance Act 2011. Consequently a rate of 25% has been used for the purposes of providing deferred tax in these financial statements. Further reductions are to be introduced by future legislation. The benefit to the Group’s net assets arising from the further 3% reduction of rate is estimated as £64 million in total and will be recognised as the legislation is substantively enacted.
The change in the present value of the defined benefit obligation is as follows: £m
It has been assumed that post-retirement mortality is in line with standard tables PNA00 with a scaling factor of 105% being applied, allowing for future improvements in line with the long cohort improvement factors, subject to a minimum improvement from 2007 onwards of 1.25% p.a. and 0.75% p.a. for males and females respectively. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 31.2 years and 32.3 years for male and female members respectively.
The economic value of the PGL Pension Scheme assets as at 31 December 2011 amounted to £1,589 million (2010: £1,326 million) and the economic value of the surplus amounted to £355 million (2010: £133 million). For financial reporting purposes the carrying value of the insurance policies effected by the PGL Pension Scheme with the Group have been eliminated on consolidation, resulting in reported assets of the PGL Pension Scheme as at 31 December 2011 of £1,511 million (2010: £1,252 million) and a reported surplus of £277 million (2010: £59 million).
Current service cost 3 4 Interest cost 63 63 Past service cost (11) − Curtailment gain (7) − Actuarial losses 40 42 Benefits paid (47) (46)
Future cash flows have been valued using a discount rate of 10.0% (2010: 9.5%) for the Ignis Asset Management business and a discount rate of 6.7% (2010: 9.5%) for the management services business of the Phoenix Life segment.
Investment properties include £221 million (2010: £235 million) property reversions arising from sales of the NPI Extra Income Plan. The reversionary interest is valued as the NPI and NPLL proportion of the current market value, projected for the lifetime of the policyholder at the assumed future increase in house prices, then discounted back by the valuation rate of interest. The acquisition of these investment properties was financed by the Property Reversions loan as detailed in note 22.
37.4 Significant transfers of financial instruments between Level 1 and Level 2 2011
37.5 Movement in Level 3 financial instruments measured at fair value 2011
Phoenix Life – – – – – – – (585) (585) New business and other factors: Intragroup capital
An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £24 million (2010: £24 million).
The option provisions on GAR policies are particularly sensitive to downward movements in interest rates, increasing life expectancy and the proportion of customers exercising their option. Adverse movements in these factors could lead to a requirement to increase reserves which could adversely impact profit and potentially require additional capital. In order to address the interest rate risk (but not the risk of increasing life expectancy or changing customer behaviour with regard to exercise of the option), insurance subsidiaries within the Group have purchased derivatives that provide protection against an increase in liabilities and have thus reduced the sensitivity of profit to movements in interest rates.
44. Operating leases Operating lease rentals charged within administrative expenses amounted to £16 million (2010: £7 million).
PGH (TC2) Limited (holding company) UK ‘A’ ordinary shares of £1 and
The information disclosed above is only in respect of those undertakings which materially affect the figures shown in the Group’s accounts. There are a number of other subsidiaries and associated undertakings whose business does not materially affect the Group’s profits or the amount of its assets and particulars of these have been omitted in view of their excessive length.
Indirect exposure The £2,896 million shareholder exposure to financial institution corporate debt comprised £1,554 million bank debt and £1,342 million non-bank debt.
2. Components of the MCEV of covered business 2011 £m 2010 £m
Stochastic economic assumptions The time value of options and guarantees is calculated using an economic scenario generator. The model is calibrated to market conditions as at 31 December 2011. The scenario generator and calibration are consistent with those used for realistic balance sheet reporting.
Non-profit fund A fund which is not a with-profit fund (see below) Open Ended Investment Companies
PIK Payment-in-kind. Interest on a bond is paid other than in cash, most commonly by increasing the principal