It is very important to us that our policyholders are well looked after and their returns maximised. The only new business that we write is annuities, which we offer to our existing pension policyholders when they reach retirement. The recent Budget proposals in respect of pensions are likely to have a widespread impact on the annuity market in the UK which may lead to a fundamental shift for the industry. However, writing annuities generates a relatively small proportion of our IFRS and MCEV operating profits each year and we do not expect the proposals to have a material impact on the Group’s financial targets.
At the time of announcing the capital raising and debt re-terming, we announced a 27% increase in the 2012 final dividend to 26.7p per share, and rebased it to a level which the Board considered to be sustainable. The Board has decided to recommend a final dividend for 2013 of 26.7p per share, in line with this rebased level, bringing the total dividend for the financial year to 53.4p per share.
We remain focused on our strategy to deliver shareholder value and develop our business model to further improve the financial and operational efficiency of the Group’s underlying businesses. Phoenix Life and Ignis Asset Management have sustained good levels of customer service and investment returns and we remain dedicated to working with our outsource partners to improve our proposition for policyholders.
Ignis generates revenues from managing the investments of the Group’s life companies as well as third party clients.
– Value generated by Phoenix Life and Ignis is distributed to the holding companies in the form of cash. The holding companies use this cash to fund group expenses, pension contributions, debt interest and repayments and shareholder dividends.
GROUP FUNCTIONS At Group level, Phoenix operates centralised functions that provide Group-wide and corporate-level services and manage corporate activity. These functions include Group Finance, Treasury, Group Tax, Group Actuarial, Group Risk, Legal Services, HR, Corporate Communications, Strategy and Corporate Development, Investor Relations, Company Secretariat and Internal Audit. The Group functions are based in Juxon House, London, and are led by the Group Chief Executive Officer, Clive Bannister.
With offices in Cheapside, London and Bothwell Street, Glasgow, Ignis has investment capabilities across multiple asset classes organised into four investment business units; Fixed Income & Solutions, Equities, Real Estate, and Advisors – Ignis’s fund of fund business. Alongside its investment capabilities Ignis has a series of investments in former joint ventures.
Ignis Advisors – Fund of Hedge Funds – Fund of Private Equity – Fund of Real Estate – Retail Multi Manager
We also continue to focus on simplifying our capital structure while addressing the diverse needs of various stakeholders, including policyholders, shareholders, lending banks and regulators.
In order to drive value there are a number of life company management actions planned and undertaken which release capital, accelerate cash flows or enhance MCEV. These actions are undertaken across four areas: restructuring, risk management, operational management and outsourcing. By improving the efficiency of operational management through the standardisation and streamlining of key processes across the Group, this will in turn reduce costs, improve performance and drive value.
For further details of our cash and MCEV KPIs Turn to pages 28 and 31
The Board has recommended a final dividend of 26.7p per share bringing the total dividend for the year to 53.4p per share. The final dividend is due to be paid on 2 May 2014, subject to compliance with the processes set out in the Group’s main loan facilities and shareholder approval at the Company’s AGM.
£500 million to £550 million of these targeted cash flows are expected to be generated in 2014 in addition to the proceeds expected from the divestment of Ignis.
RECONCILIATION OF GROUP MCEV OPERATING EARNINGS TO GROUP MCEV EARNINGS Group MCEV operating earnings are reconciled to Group MCEV earnings, as follows: Year ended 31 £m
Capital and dividend flows in 2013 mainly comprise ordinary share capital issued of £232 million (£250 million proceeds from the equity raise net of associated fees and commissions of £18 million) less external dividend payments of £120 million.
GROUP IFRS OPERATING PROFIT The Group has generated an IFRS operating profit of £439 million (2012 restated: £429 million).
– To ensure sufficient liquidity to meet obligations to policyholders and other creditors
The key drivers of the change in solvency position in the year are: – dividend payments, debt financing and repayments of £0.6 billion, including a £0.2 billion reduction in relation to the reterming of the Impala loan facility, net of the proceeds from the equity raise; partly offset by
The Group is working with the PRA during the pre-application period of our Internal Model and expects to make an application to the PRA to apply certain of the transitional measures once additional guidance is obtained from EIOPA and the PRA on their practical application. Provided the Solvency II Regulations operate as expected, it is the Group’s view that the solvency position of the Group will be largely unchanged and that Group solvency will continue to be measured at PLHL under the new regime.
EXTERNAL COMMUNICATION AND STAKEHOLDER MANAGEMENT The Group has a number of internal and external stakeholders, each of whom has an active interest in the Group’s performance, including how risks are managed. Significant effort is made to ensure that our stakeholders have appropriate, timely and accurate information to support them in forming views of the Group.
MANAGEMENT INFORMATION Overall monitoring and reporting against the risk universe takes place in business unit management and executive committees and Boards. This is then reported to the Executive Committee, PLHL Board and the Group Board via regular risk reporting.
James McConville was appointed to the Board of Directors of the Company as Group Finance Director on 28 June 2012. Between April 2010 and December 2011, he was Chief Financial Officer of Northern Rock plc. Prior to that, between 1988 and 2010, he worked for Lloyds Banking Group plc (formerly Lloyds TSB Group plc) in a number of senior finance and strategy related roles, latterly as Finance Director of Scottish Widows Group plc and Director of Finance for the Insurance and Investments Division. Mr McConville qualified as a Chartered Accountant whilst at Coopers and Lybrand.
Alastair Barbour has over 30 years’ audit experience from KPMG where he worked across a full spectrum of financial services clients from large general insurers and reinsurers to the life assurance and investment management sector, working on a range of operational and strategic issues. Mr Barbour is the former Head of Financial Services, Scotland for KPMG. He retired from KPMG in 2011 to build a non-executive career. He is a Director and the audit committee Chairman of RSA Insurance Group plc, Standard Life European Private Equity Trust plc and Liontrust Asset Management plc (all London Stock Exchange listed companies). He is also a Director and audit committee Chairman of CATCo Reinsurance Opportunities Fund Ltd, a Bermuda-based investment company listed on the London Stock Exchange and of The Bank of N.T. Butterfield & Son Limited, a company listed in Bermuda. Mr Barbour was appointed to the Board of Directors of the Company on 1 October 2013 and is Chairman of the Board Audit Committee.
The Board (and its subsidiary company boards) monitor internal controls on a continual basis, in particular through Audit and Risk Committees. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period covered by this report and up to the date of approval of the Annual Report and Accounts for 2013, in accordance with the ‘Internal Control: Guidance to Directors’ published by the Financial Reporting Council.
− Part B: how the policy has been implemented in the year ended 31 December 2013 (the Annual Implementation Report).
At our 2014 AGM we will be holding two votes on remuneration matters: 1) a vote on the Directors’ Remuneration Policy as set out in Part A of this Remuneration Report; and 2) a vote on the Remuneration Report (excluding the Directors’ Remuneration Policy).
− Where appropriate, the Company will meet certain costs relating to Executive Director relocations
− AIP outcomes are paid in cash in one tranche (less the deferred share award)
− The maximum annual incentive level for an Executive Director is 150% of base salary per annum
− Awards under the LTIP may be in any of the standard forms of awards to receive shares for nil-cost (as described for DBSS above), forfeitable awards of shares or in the form of cash-based ‘phantom’ awards
− The fees paid to the Chairman and the fees of the other Non-Executive Directors are set to be competitive with other listed companies of equivalent size and complexity (both relevant insurance companies and the FTSE 31-100 as a whole)
If a leaver is deemed to be a ‘good leaver’; i.e. leaving through redundancy, serious ill health or death or otherwise at the discretion of the Remuneration Committee
Profits distributed by way of dividend (% change +25%)1 Overall expenditure on pay (% change +10%)2
3 2011 and 2012 LTIP awards were increased as a result of the placing and open offer of 50,000,000 shares on 21 February 2013. The increases were made on the basis of the standard formula of share plan adjustments on such event. The aggregate figure shown in the column ‘As at 31 Dec 2013’ reflects this increase in awards.
Target range between cumulative net cash generation of £1.330 billion and cash generation of £1.830 billion
For the 2012 award the performance period was commenced on grant. For the 2013 award (and future awards) the performance period was aligned to the period of financial years applying to the 2 financial measures
QUANTITATIVE REMUNERATION DISCLOSURE The Group is required to disclose aggregate quantitative remuneration information for its Code Staff.
There were 27 Code Staff that have been classified as Group and 14 as Ignis. Aggregate remuneration expenditure is broken down as follows: Number of staff £m
RE-APPOINTMENT OF THE AUDITORS Ernst & Young Accountants LLP has indicated its willingness to continue in office and a resolution that it is re-appointed will be proposed at the AGM. There is a liability cap in place in relation to audit work that is carried out by Ernst & Young Accountants LLP (Netherlands) on the consolidated IFRS financial statements, consistent with audit practice in the Netherlands. For the MCEV supplementary information and the Group’s UK subsidiaries’ individual financial statements, which are audited by Ernst & Young LLP (UK), there is no cap on auditor liability.
REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements 2013 of Phoenix Group Holdings, Cayman Islands, (the ‘Group’) (as set out on pages 102 to 207). The financial statements include the Group’s consolidated financial statements and the parent company financial statements. The consolidated financial statements comprise the statement of consolidated financial position as at 31 December 2013, the consolidated income statement, the statement of consolidated comprehensive income, the pro forma reconciliation of Group operating profit to result attributable to owners, the statement of consolidated changes in equity, the statement of consolidated cash flows for the year then ended and the related notes 1 to 45. The parent company financial statements comprise the statement of comprehensive income, the statement of changes in equity, the statement of cash flows for the year then ended, the statement of financial position as at 31 December 2013 and the related notes A to T.
Finance costs attributable to owners (126) (111) Profit before the tax attributable to owners 5.2 217 309
Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (‘IFRS’) and also in accordance with Part 9, Book 2, of the Dutch Civil Code.
−Government Loans (Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards) (2013).
3. CHANGE IN ACCOUNTING POLICIES This note details the impacts on the consolidated financial statements as a result of changes in accounting policies during the year. All changes reflect the adoption of new or revised IFRS accounting standards which have become effective for the first time.
Previously, the Group determined interest income on scheme assets based on their long-term rate of expected return and all changes in the provision for tax on the economic surplus available as a refund and in the minimum funding requirement obligation were recognised in other comprehensive income.
Statement of consolidated comprehensive income: Decrease in remeasurements of net defined benefit asset/liability (5) (14) Increase in tax effects on remeasurements of net defined benefit asset/liability 1 3
Net decrease in remeasurements of net defined benefit asset/liability (4) (11)
4. ASSETS AND LIABILITIES HELD FOR SALE This note provides details of the assets and liabilities held for sale at the year end and the disposal of a subsidiary undertaking. The principle accounting policies adopted in the preparation of this note are detailed in notes 1(a), 1(aa) and 1(cc).
It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to reinsurance transactions usually in the form of cash or marketable financial instruments. The accounting policy adopted in the preparation of this note is detailed in note 1(i).
Audit-related assurance services 0.7 1.8 Reporting accountant assurance services 1.0 1.6 Total fee for assurance services 4.9 7.0
Attributable to: – policyholders 104 104 13. TAX (CREDIT)/CHARGE This note analyses the Group’s tax credit and explains the factors that affect it. The accounting policy adopted in the preparation of this note is detailed in note 1(l).
The following information was relevant in the determination of the fair value of the 2010 SAYE, 2011 SAYE, 2012 SAYE and 2013 SAYE awards in the year: Share price (p) 630.0 524.5 669.5 650.0 Exercise price (£) 5.60 4.66 5.58 5.49 Expected life (years) 3.25 and 5.25 3.25 and 5.25 3.25 and 5.25 3.25 and 5.25 Risk-free rate (%) – based on UK government gilts commensurate with the expected term of the award 0.4 (for 3.25 year scheme) and 0.8 (for 5.25 year scheme)
At 1 January 2012, 31 December 2012 and 31 December 2013 8,169,868 5,000,000 12,360,000
Impact on the defined benefit obligation 1,366 (51) 56 42 (38) 45 (42)
PLHL ICA The Group undertakes a further group solvency calculation, the ‘PLHL ICA’, at the same level at which the IGD calculation is performed. This involves an assessment, on an economic basis, of the capital resources and requirements arising from the obligations and risks which exist outside of the life companies.
39.1 RISK AND CAPITAL MANAGEMENT OBJECTIVES The risk management objectives and policies of the Group are based on the requirement to protect the Group’s regulatory capital position, thereby safeguarding policyholders’ guaranteed benefits whilst also ensuring the Group can meet its various cash flow requirements. Subject to this, the Group seeks to use available capital to achieve increased returns, balancing risk and reward, to generate additional value for policyholders and shareholders.
A 100 basis point widening of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £84 million (2012: £51 million).
Fixed and variable rate income securities 35,151 – – – – 111 35,262 Reinsurers’ share of insurance contract liabilities 2,851 – – – – – 2,851 Reinsurance receivables 34 – – – – – 34 Prepayments and accrued income 460 – – – – – 460 Other receivables 739 – – – – – 739 Cash and cash equivalents 9,105 – – – – 119 9,224
The Group is also exposed to concentration risk with outsource partners. This is due to the nature of the outsourced services market. The Group operates a policy to manage outsourcer service counterparty exposures and the impact from default is reviewed regularly by Executive committees and measured though the ICA stress and scenario testing.
STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2013 £m £m
The analysis of the asset portfolio provided below comprises the assets held by the Group’s life companies including stock lending collateral. It excludes other Group assets such as cash held in the holding and service companies and Ignis; the assets held by the non-controlling interest in collective investment schemes and UK Commercial Property Trust Limited (‘UKCPT’); and are net of derivative liabilities.
The earnings on life business are calculated on a post-tax basis and are grossed up at the effective rate of shareholder tax for presentation in the income statement. The tax rate used is the UK corporate tax rate of 23.25% (2012: 24.5%).
Other comprehensive income – – – (16) (16) Capital and dividend flows – internal (591) 2 (14) 603 – Capital and dividend flows – external – – – 110 110 1 Comprises the Group holding companies that do not form part of the Phoenix Life and Ignis Asset Management divisions.
NOTES TO THE MCEV FINANCIAL STATEMENTS CONTINUED 1. BASIS OF PREPARATION CONTINUED Solvency II aims to introduce a new capital regime for insurers. No allowance has been made within the Group’s MCEV information for the impact of this developing regime.
Present value of future profits (PVFP) 1-5 £m £m £m 20+ £m
NON-PROFIT FUND A fund which is not a with-profit fund (see page 240), where risks and rewards of the fund fall wholly to shareholders
SCRIP ISSUE The issue of new shares to existing shareholders in lieu of a cash dividend