In January 2013 we announced the re-terming of the Impala facility and an equity raising of £250 million. This refinancing brings the Group greater strategic and financial flexibility and better aligns our debt repayment profile to our longer-term cash flows. This transaction also provides us with greater flexibility over our dividend policy, allowing us to propose a significant increase in the dividend per share for 2012.
The amended Impala facility allows for increased dividends and the recommended 2012 final dividend of 26.7p per share is 27% higher than the 2011 final dividend.
2013 Outlook and prospects Financial targets Whilst financial markets continue to generate uncertainty, the Group’s cash flow and MCEV have remained resilient. Despite the challenging market conditions we are pleased to set an increased cash generation target for 2011 to 2016 of £3.5 billion.
As a result, the Group had three operating UK life companies at the end of 2012, being Phoenix Life Limited, Phoenix Life Assurance Limited and National Provident Life Limited. Together, they comprise 14 with-profit funds and two non-profit funds. Simplifying the number of life companies within the Group through such business transfers both reduces complexity and releases capital.
Engage people Building its reputation as an employer of choice, the Group specifically targets, recruits and develops top quality people.
Maintain strong cash flow delivery Achieved cash flow generation of £690 million – at the upper end of 2012 target
Complete formal transfer of annuity liabilities to Guardian Continue to progress the Actuarial Systems Transformation programme and regulatory change preparations to drive out efficiency improvements in financial reporting processes Complete BaNCS migration
The Board considers that Group IFRS operating profit is a more representative measure of performance than Group IFRS profit before tax as it provides long-term performance information unaffected by short-term economic volatility and gives an insight into the Group’s ability to generate cash flows to support dividends1: Group IFRS operating profit £410m 2011: £387m
Opening free surplus 93 750 IFRS operating profit 399 395 IFRS investment variances and nonrecurring items 105 (336) IFRS tax (14) (20) Movements in capital requirements 663 84 Valuation differences and other1 (71) (2) Free surplus generated in the period 1,082 121 Cash distributed to Holding Companies (661) (778) Closing free surplus 514 93 1 Includes differences between IFRS valuation of assets and liabilities and valuation for capital purposes.
Debt interest of £115 million (2011: £122 million) decreased, reflecting the lower opening value of the Group’s debt and repayments made in the period.
The new rules for the taxation of insurance companies effective from 1 January 2013 under the UK Finance Act 2012, are expected to increase Group IFRS net assets by £12 million.
Risk appetite The Group’s risk appetite framework consists of a set of statements and targets that articulate the level of risk the Group is willing to accept in pursuit of shareholder value and achievement of the Group’s strategic objectives. The statements encapsulate policyholder security, earnings volatility, liquidity, and the internal control environment as follows: – Capital – The Group and each life company will hold sufficient capital to meet regulatory requirements in a number of asset and liability stress scenarios
Risk policies The Group policy framework comprises a set of policies that support the delivery of the Group’s strategy by establishing operating principles and expectations for managing the key risks to our business. The policy set contains the minimum control standards that each business unit must adhere to and report compliance against through the operation of local processes/procedures. The policies define: – The individual risks the policy is intended to manage
Nomination Committee Howard Davies, Chairman (succeeded Ron Sandler who resigned as Chairman on 30 September 2012) Ian Cormack Tom Cross Brown
With regards to Board diversity, the statement by former Chairman Ron Sandler, released on the Phoenix Group website in October 2011 in response to the Lord Davies review of ‘Women on Boards’, concluded as follows: “As we already have a large Board of 14 Directors (including one female Director) and are unlikely to want to increase its size, it is difficult at this stage to commit to firm percentages regarding the number of women on our Board in 2013 and 2015. Nonetheless, we have set targets of two female Directors by 2013 and a further female Director by 2015. Our overriding aim remains the appointment of the most appropriate candidates to the Board.”
– Share ownership guidelines consistent with best practice. Executive Directors are required to build and maintain a specified shareholding in the Company (200% of salary for the Group Chief Executive Officer and 100% of salary for the Group Finance Director) through the retention of all post-tax shares which vest under the Annual Incentive Plan (‘AIP’) deferral and the LTIP until target holdings have been achieved.
The table below shows the independent Non-Executive Directors who served on the Committee during 2012 and their date of appointment: Member From To
Fixed pay elements plus threshold level of AIP and LTIP vesting
On-target performance is achieved, resulting in an AIP of 75% of base salary being earned
This results in 100% of the maximum AIP being awarded and 100% of the LTIP award vesting
The face value LTIP award is 200% of base salary for all Executive Directors.
Benefits received by Executive Directors comprise a car allowance, private medical insurance, relocation assistance and life assurance
Annual Incentive Plan To motivate employees and incentivise delivery of annual performance targets
The performance conditions for the 2012 LTIP awards are described on page 70. The Committee approved these performance metrics as they are directly linked to the objectives set out in the Group’s strategy, there is a direct link with shareholder value, and there is a clear line of sight for participants between performance and reward
For the 2012 LTIP awards, a third performance measure, Total Shareholder Return (‘TSR’) was introduced
One-third of any AIP amount will be deferred into shares for three years. The shares comprising the deferred element will vest three years from the date of award and will normally be forfeited if the individual leaves the Group prior to vesting (unless designated as a good leaver).
Ignis Asset Management The Committee is responsible for approving the remuneration practices within Ignis. In structuring remuneration arrangements within Ignis, the Committee applies similar overall principles to those applied to the rest of the Group, but relating these to an appropriate peer group of asset managers.
Jonathan Yates – – – – – 879,545 1 Benefits comprise car allowance, private medical insurance and, life assurance and for Jim McConville an allowance of £2,000 per month in respect of relocation payable until
Pensions Clive Bannister receives a Company contribution of 20% of base.
Clive Bannister LTIP1, 3 12 April 2011 657.5p 212,927 – – – 212,927 12 April 2014 212,927 247,131 – – 460,058 Jim McConville LTIP 23 August 2012 485.0p – 164,948 – – 164,948 23 August 2015 – 164,948 – – 164,948 1 The performance conditions for the 2011 award are: MCEV growth (50% of award) with 25% of the MCEV related component of the award will vest for MCEV growth in excess of the risk-free rate by 2.5% per annum rising on a pro rata basis until 100% vests for MCEV growth in excess of the risk-free rate by 6% per annum; cash generation (50% of award) 25% of the cash generation component of the award will vest for cumulative cash generation of £1.217 billion rising on a pro rata basis until 100% vests for cash generation of £1.517 billion; and the same debt underpin as the 2012 award as set out in the Remuneration policy.
4 Xercise2 Limited is controlled by affiliates of Sun Capital Partners, which comprises the following principals: Hugh Osmond, Matthew Allen, Edward Hawkes and Marc Jonas or, where the context requires, certain vehicles or entities controlled by or associated with such persons.
Governance Corporate responsibility (‘CR’) is sponsored at the highest level by the Group Chief Executive Officer. A ’CR Working Group’, including two Executive Committee members, meets quarterly to discuss CR activity from across the Group.
Staff at the Wythall office participated in BITC’s national day of employee volunteering, named ‘Give and Gain’, which involved 10,091 employees from 202 companies.
The launch of the renewed customer-facing website www.phoenixlife.co.uk has benefitted customers since they view the site as a channel where they can contact Phoenix when it suits them, in order to obtain information about products and services. It also provides customers with valuable information across some of the key lifecycle events, such as planning for retirement and saving, as well as providing downloadable ‘how to’ guides.
The Group treats all customer complaints seriously and aims to ensure fair and prompt treatment. Ownership of each complaint is clearly identifiable, with trust and confidence being built throughout the process.
Present value of future profits on non-participating business in the with-profit funds For UK with-profit life funds an amount may be recognised for the present value of future profits (‘PVFP’) on nonparticipating business written in a with-profit fund where the determination of the realistic value of liabilities in that withprofit fund takes account, directly or indirectly, of this value.
Liabilities classified as held for sale include the annuity liabilities reinsured to Guardian. Assets classified as held for sale include the associated reinsurers’ share of insurance contract liabilities and intangible assets.
5. Investment return variances and economic assumption changes The long-term nature of much of the Group’s operations means that, for internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. This note explains the methodology behind this.
Investment income Interest income on loans and receivables 40 49 Interest income on impaired financial assets 1 7 Interest income on financial assets designated at fair value through profit or loss on initial
Notes to the consolidated financial statements continued 11. Finance costs £m 2011 £m
Issued and fully paid: 174.6 million (2011: 174.5 million) ordinary shares of €0.0001 each 14,174 14,165
This reserve represents the value of the shares held by the Phoenix Group Holdings Employee Benefit Trust (‘PGH EBT’) to satisfy awards granted to employees under the Group’s share-based payment schemes and shares issued to Phoenix Life Assurance Limited (formerly Pearl Assurance Limited) following the restructuring of the contingent rights over ordinary shares of the Company which occurred during 2010. During the year 18,146 (2011: 306,250) shares were awarded to employees, 229,370 (2011: nil) were sold to meet the Group’s obligation under the deferred cash plan (note 17) and 47,349 (2011: 86,828) shares were received as scrip dividends. The number of shares held by the PGH EBT at 31 December 2012 was 1,045,342 (2011: 1,245,509).
Save As You Earn (‘SAYE’) The SAYE scheme allows participating employees to save up to £250 each month over a period of either 3 or 5 years.
The weighted average remaining contractual life for the rewards outstanding as at 31 December 2012 is 1.6 years (2011: 2.0 years).
If PGH1 opts to defer a coupon payment, then PGH1 has the option to either leave the coupon outstanding or satisfy the deferred coupon payment by the issue of securities (‘ACSM instruments’) by either PGH1 or a special purpose subsidiary of PGH1 established for the purpose of issuing ACSM instruments and which are guaranteed by PGH1. The obligations of PGH1 in respect of such securities will be subordinated to and rank or be expressed to rank junior to the Notes as to rights to payments of interest and participation in the assets of PGH1 in a winding-up and shall comply with the then current requirements of the FSA in relation to Tier 1 capital. ACSM instruments will in the first instance be offered to related parties (as defined in the Terms and Conditions of the Notes as amended by the Supplemental Trust Deed dated 30 July 2008) and to third parties if not purchased by related parties. In the event that neither such related parties nor third parties will purchase the required ACSM instruments then PGH2 is required to use its best endeavours to raise such funds as are deemed necessary to purchase the required amounts of ACSM instruments.
18.2 UK Commercial Property Trust Limited UK Commercial Property Trust Limited (‘UKCPT’) is a property investment subsidiary which is domiciled in Guernsey and is admitted to the Official List of the UK Listing Authority and to trading on the LSE.
d. On 19 May 2011, UKCPT entered into a £150 million investment term loan facility agreement. The £150 million investment term loan facility agreement accrues interest at LIBOR plus a variable margin of 1.60% to 2.00% per annum. The lender holds security over the assets of UK Commercial Property Estates Holdings Limited and UK Commercial Property Estates Limited, both of which are subsidiaries of UKCPT. The repayment date for this facility is 19 May 2018. As at 31 December 2012 the facility was fully drawn down (2011: £60 million).
All outstanding warrants may be redeemed at the option of the Company at any time after they become exercisable and prior to their expiration at a price of €0.01 per warrant, provided that the last closing bid price of the ordinary shares is equal to or exceeds €16.50 on each of 20 consecutive trading days. At 31 December 2012 the threshold was reduced to €16.05 (2011: €16.06) following an issue of ordinary shares by the Company under a scrip dividend. The Company must give not less than 30 days’ notice of the redemption date. Each warrant may then be exercised by the warrant holder (in whole or any part) at its option.
Payables relating to direct insurance contracts include claims outstanding on general insurance and life assurance. The general insurance element amounts to £42 million (2011: £240 million) which is included within liabilities held for sale.
The cumulative net actuarial (losses)/gains recognised in other comprehensive income amount to £(104) million (2011: £148 million).
Irrecoverable amount of deficit reduction contributions (83) – – – Provision for tax on the economic surplus available as a refund – (19) – –
Depreciation and impairment At 1 January (16) (5) Charge for the year (3) (3) Disposals 1 –
3 Of the £645 million (2011: £645 million) subordinated debt attributed to the Phoenix Life segment of the Group £445 million (2011: £445 million) is internal to the Group, comprising £250 million (2011: £250 million) provided to Phoenix Life Assurance Limited and £195 million (2011: £195 million) provided to Phoenix & London Assurance Limited which was transferred to PLL on 1 January 2011 following a Part VII transfer. The remaining £200 million (2011: £200 million) is external subordinated debt, see note 21 for details.
There is an exposure to spread changes affecting the prices of corporate bonds and derivatives. This exposure applies to with-profit funds, non-profit funds (where risks and rewards fall wholly to shareholders), shareholders’ funds and to unit–linked funds to the extent of management fees generated by the Group.
A 10% increase in equity prices, with all other variables held constant, would result in an decrease in the profit after tax in respect of a full financial year, and in equity, of £12 million (2011: a decrease of £16 million).
Some pensions contracts include guaranteed annuity options (see deferred annuities in section 42.5.2 for details). The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £2,054 million (2011: £2,248 million) and £31 million (2011: £59 million) respectively.
45. Related party transactions The Group has related party transactions with its pension schemes and its key management personnel.
Salary and other short-term benefits 3.7 4.8 Equity compensation plans 2.2 2.2 Termination payments – 0.7
Pearl Life Holdings Limited (holding company) UK Ordinary shares of £1 Pearl Group Services Limited (management services company) UK Ordinary shares of £1
For each of the life companies’ significant financial institution counterparties, industry and other data has been used to assess the exposure of the individual counterparties to Peripheral Eurozone markets. As part of the Group’s risk appetite framework and analysis of shareholder exposure to a potential worsening of the Eurozone situation, this assessment has been used to identify counterparties considered to be most at risk from Peripheral Eurozone sovereign defaults. The financial impact on these counterparties, and the contagion impact on the rest of the shareholder corporate bond portfolio, is assessed under various Eurozone scenarios and assumptions. This analysis is regularly reviewed to reflect the latest Eurozone outlook, economic data and changes to asset portfolios. The results are used to inform the Group’s views on whether any management actions are required.
Participating non-supported £m Unit-linked £m Total £m 97% of rated securities were investment grade at 31 December 2012 (2011: 97%). The percentage of rated securities that were investment grade in relation to the shareholder and policyholders’ funds were 94% and 99% respectively (2011: 95% and 99% respectively).
Independent Auditor’s report to the Directors of Phoenix Group Holdings on the consolidated Phoenix Group MCEV
For other business the cost would be £127 million (2011: £130 million). This equates to an equivalent average cost of capital charge of 1.5% (2011: 1.2%). The level of capital assumed in this calculation is determined based on a 99.5% confidence level over a one year time horizon, consistent with the ICA methodology. Allowance is made for diversification benefits between non-hedgeable risks, but not between hedgeable and non-hedgeable risks.
Best estimate levels of volatility are assumed for directly held property. The model implied volatility for 2012 is 15% (2011: 15%).
The modelling of corporate bonds allows for credit transitions and defaults, calibrated to historic data, with an additional allowance for the credit risk premium, derived from current markets.
Unlisted debt has been included at face value: Face value £m
Embedded value The value to equity shareholders of the net assets and expected future profits of a life company
Current period differences between the actual experience incurred and the assumptions used in the calculation of MCEV or IFRS insurance liabilities
Tier 1 Notes £500 million Perpetual Reset Capital Securities issued by Pearl Group Holdings (No. 1) Limited. Following amendments to the Notes in 2010, the principal amount outstanding now is £425 million