In due course, we expect to grow further by acquisition. there are many hundreds of billions of pounds in closed or quasi-closed life funds, particularly in the with-profits sector. We are aware that current operators of those funds are reviewing whether they wish to continue to apply scarce capital to maintain this line of business and we expect that many will decide that they wish to exit.
Customer enhanced customer proposition – working with our outsource service partners to increase focus on qualitative measures
unlike open life businesses, we do not allocate significant capital to support the writing and distribution of new insurance products. this means that the capital requirements of our operating businesses decline as policies mature, thereby releasing excess capital as free cash flow. this emerging cash flow can be used to fund future acquisitions, reduce financial leverage and pay dividends to shareholders.
underpinning everything we do is attracting and retaining highly talented people who bring not only expertise and new thinking into our business and industry, but also have a passion for improving outcomes for our customers.
Competence Achieving high standards of performance and pioneering thought leadership through a highly skilled and motivated team
– Repatriated c.£5 billion of assets from external asset managers. – transferred over 4 million policies from legacy systems to improve service and contain future costs.
How we do it – Ensure we have the right people with the right skills. – Maintain recognition as a leader in our industry.
– Expand the leadership development programme. – Strengthen Group succession planning process. – Embed recently announced people values.
A number of our with-profits funds have surplus assets, which are used to provide a buffer against adverse events. Over the last year we have taken action to reduce the risks faced by our funds – and have therefore been able to reduce the surplus assets that have to be held back, without impacting the funds’ ability to withstand adverse effects. In addition, as the number of policyholders remaining in our funds falls, we have also been able to release a further percentage of this surplus.
Guarantees are valuable because they offer a degree of certainty. However, in order to provide that certainty, PAlAl has had to follow a cautious investment policy which constrains returns for most pension policies. the terms of the conversion offered a significant opportunity to receive a higher pension, albeit dependent on future performance.
1 Phoenix Group Holdings is subject to Cayman Islands Companies Law. under Cayman Islands Companies Law distributions can be made out of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group’s going concern assessment criteria.
Holding companies’ cash flows The statement of cash flows prepared in accordance with IFRS combines cash flows relating to policyholders and cash flows relating to owners, but the practical management of cash within the Group maintains a distinction between the two, as well as taking into account regulatory and other restrictions on availability and transferability of capital. For this reason, the following analysis of cash flows focuses on the Holding Companies’ cash flows, which reflect cash flows relating only to owners and which are therefore, more representative of the cash that could potentially be distributed to the Group’s owners, or used for the repayment of debt. This cash flow analysis reflects the cash paid by the operating subsidiaries to the Group’s Holding Companies, as well as the uses of the cash receipts.
Movements in capital requirements and policy include the benefits of value enhancing management actions relating to investment portfolio derisking, fund restructurings and the resolution of legacy tax issues.
Debt interest Debt servicing cash outflows were £123 million in 2010 comprising £96 million of interest on bank debt and associated swaps and £27 million in recurring coupons on the Tier 1 Bonds.
1 The Phoenix Group Market Consistent Embedded Value methodology (referred to herein and in the supplementary information as MCEV) is set out in note 1 in the MCEV supplementary information.
The asset management and management services businesses are included in the Group MCEV at the value of IFRS net assets and do not include the future earnings from their existing business.
Life MCEV operating earnings after tax Other than vesting annuities and increments to existing policies, the Group’s life companies are closed to new business. The principal underlying components of its operating earnings are therefore the expected existing business contribution together with non-economic experience variances and assumption changes.
mceV continued 1 Includes market movement on life companies’ assets of £5.3 million and market movements on third party assets of £0.2 million.
Group MCEV earnings after tax 255 551 – 551 4 The Group has moved to calculating the expected contribution on existing business using longer term expectations of investment returns.
Capital and dividend flows in 2010 mainly comprise external dividend payments in cash of £43 million partly offset by an issue of share capital of £33 million related to the 2009 deferred Tier 1 Bond coupon.
Operating profit before adjusting items 373 Investment return variances and economic assumption changes on long-term business 18 Variance on owners’ funds 19 Amortisation of acquired in-force business and other intangibles (150) Non-recurring items (139) Profit before finance costs attributable to owners 121 Finance costs attributable to owners (115) Profit before the tax attributable to owners 6 Tax credit attributable to owners 74 Profit for the period attributable to owners 80
Debt finance costs1 102 Other finance costs 13 Finance costs attributable to owners 115 1 Finance costs in respect of the Impala and Pearl facility agreements (and associated swap interest) and the Royal London PIK notes and facility.
The Group has two main credit agreements (the Pearl and Impala facilities), separately secured on the shares of two separate sets of companies. Although the current debt carries favourable interest rates and is tax efficient it is of relatively short duration and the covenants and structure can create some inflexibility in achieving the Group’s objectives.
Risk review functions The Group Chief Risk Officer manages the Group risk function and has responsibility for the implementation and oversight of the Group’s overall risk management framework. The Group risk function has responsibility for financial and operational risk, risk governance, FSA relationship management and regulatory risk. Risk review functions across the Group manage the framework in line with the Group standards. Their responsibilities include the evaluation of changes in the business operating environment and business processes, the assessment of the impact of these changes on risks to business and the monitoring of the mitigating actions. The risk functions also ensure that divisional risk committees are provided with meaningful risk reports and that there is appropriate information to assess risks.
C o r p o r a t e r e s p o n s Ib
Suppliers We make every effort to enter into responsible relationships with our suppliers and outsource service partners with the objective of achieving ‘win:win’ relationships. We aim to pay them promptly and to honour our commitments.
The rules about the appointment and replacement of Directors are contained in the Company’s Articles of Association (‘the Articles’). These state that a Director may be appointed by an ordinary resolution of the shareholders or by a resolution of the Directors. If appointed by a resolution of the Directors, the Director concerned holds office only until the conclusion of the next Annual General Meeting following their appointment.
Apart from the aforementioned, there are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts and joint venture agreements. None is considered to be significant in terms of their potential impact on the business of the Group as a whole.
1 This shareholding was disclosed in the Premium Listing Prospectus under Tarragona Trust. The information shown above has been notified to the Company.
dIRECTORS’ REPORT CONTINuEd employees The Company is committed to achieving equality of opportunity and the equal treatment of all our people and those applying to join us. To this end, all our people share an obligation to their colleagues, customers and business partners to provide a safe, fair and equitable working environment in which every individual can seek, obtain and continue employment without experiencing any unfair or unreasonable discrimination.
2 Jonathan Moss resigned from the Board on 7 February 2011.
5 Alastair Lyons was appointed to the Board on 29 March 2010.
The Nomination Committee is responsible for considering the size, composition and balance of the Board, the retirement and appointment of Directors and making recommendations to the Board on these matters. During 2010 the appointment of new Directors was considered by the whole Board, as the Nomination Committee was not established until 18 February 2010 following the appointment of additional independent Non-Executive Directors to the Board. In all cases, an external search consultancy was used to identify suitable candidates. The Nomination Committee will consider succession planning for Directors and other Senior Executives prior to its consideration by the Board.
Introduction Although not required by a non-uK incorporated company, this report has been prepared in accordance with the requirements of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how, following the switch to Premium Listing in July 2010, the Board has complied with the provisions set out in the Combined Code relating to remuneration matters. This report sets out the policy for the financial year just ended, for the forthcoming year and, subject to ongoing review, for subsequent years.
Annual incentives For 2010, annual incentive potential was capped at 150 percent of base salary for Executive Directors. Performance targets were based on the achievement of personal objectives and the application of a corporate multiplier of between 0, 1 (target) and 2 (maximum), which is derived from performance against targets based on the following: 60 percent – targeted improvements in market consistent embedded value; 20 percent – actual cost management performance versus budget; and 20 percent – the achievement of predetermined risk management targets.
Jonathan Moss left the role of Chief Executive Officer on 7 February 2011 and will leave the Group on 29 March 2011. He will receive a payment in lieu of notice of £690,000 in aggregate, reflecting both his base salary and benefits in line with his contractual entitlements. In addition, a contribution of £857,188 will be made to the Company’s employee benefit trust subject to a recommendation that it will be allocated to a sub-trust for the benefit of Jonathan Moss’ family in lieu of any annual incentive for 2010. Jonathan Moss will also receive £50,000 by way of compensation for loss of statutory employment rights and up to £30,000 in respect of his legal expenses and outplacement services. His long-term incentive awards will continue to vest until the normal vesting date (with performance conditions and time pro-rating applying for the 2010 LTIP awards) with the exception of his Bonus Share Plan awards, where the rules state that awards vest on cessation. Disclosure of the termination arrangements will also be provided in next year’s Remuneration Report.
5 In addition to the shares awarded under the LTIP presented above, participants received an additional number of shares (based on the number of LTIP awards which actually vest) to reflect the dividends paid during the vesting period. An additional number of shares were appointed on vesting for the benefit of the Simon Smith’s sub-trust to reflect the dividends paid prior to vesting of the BSP shares in accordance with the terms of his Compromise Agreement.
Board Responsibility Statement according to section 5:25c(2)(c) of the Dutch Financial Markets Supervision Act.
Some insurance and investment contracts contain a discretionary participation feature (‘DPF’). This feature entitles the policyholder to additional discretionary benefits as a supplement to guaranteed benefits. Investment contracts with a DPF are recognised, measured and presented as insurance contracts.
(i) Deposits from reinsurers It is the Group’s practice to obtain collateral to cover certain reinsurance transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a ‘financial asset’ and the collateral repayable is recognised as ‘deposits received from reinsurers’ within the statement of consolidated financial position.
Equities, fixed and variable rate income securities and collective investment schemes are designated at fair value through profit or loss and accordingly are stated in the statement of consolidated financial position at fair value. They are designated at fair value through profit or loss because they are managed and evaluated on a fair value basis in accordance with the Group’s stated risk management policies.
3. acquisition of the Pearl businesses With effect from 28 August 2009, the Company acquired 100% of the issued share capital of PGH (LCA) Limited, PGH (LCB) Limited, PGH (TC1) Limited, PGH (TC2) Limited and Opal Reassurance Limited, collectively the ‘Pearl businesses’, for a total consideration of £493 million. At the same time a third party’s interest in a 49.4% holding in IGNIS Investment Management Limited was purchased by Pearl Group Holdings (No. 2) Limited (‘PGH2’) for a consideration of £1. The Pearl businesses are involved in the management of various classes of insurance business and the provision of investment management services through their subsidiary companies.
Employee costs 158 65 Outsourcer expenses 147 58 Investment management expenses and transaction costs 142 73 Non-recurring administrative expenses 70 27 Operating expenses in respect of investment properties 4 11 Depreciation of property, plant and equipment 3 2
Shares in issue at 1 January 130,200,732 10,450 ‘B’ ordinary shares issued on conversion of warrants 2,085,123 177 ‘B’ ordinary shares issued to the Chairman 177,000 16 Ordinary shares issued on conversion of contingent rights over shares 32,400,000 2,677 Ordinary shares issued for scrip dividend (note 14) 1,567,416 138 Ordinary shares issued in connection with Alternative Coupon Satisfaction Mechanism 5,020,000 445 Other ordinary shares issued in the year 5,339 1 Shares in issue at 31 December 171,455,610 13,904
(j) On 14 May 2008, PGH (MC1) Limited issued PIK notes to the value of £154.5 million to Royal London and PGH (MC2) Limited obtained a £154.5 million PIK facility from Royal London. On 2 September 2009, £250 million in aggregate of the PIK notes and the facility outstanding (comprising principal and capitalised interest) was assigned to Phoenix Group Holdings in exchange for the issue of 1.5 million ‘B‘ ordinary shares and 12.36 million warrants. Interest accrues on the PIK notes and facility at LIBOR plus a margin of 2% unless an election is made by PGH (MC1) Limited or PGH (MC2) Limited to capitalise the interest, in which case the margin increases to 3.5%. During 2010, interest of £4 million (2009: £2 million) was capitalised on the PIK notes and facility. The final maturity date on the PIK notes and facility is 30 June 2019.
It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to derivative transactions, usually in the form of cash or marketable securities.
25. Obligations for repayment of collateral received £m £m carrying value and fair value: Amount due for settlement after 12 months 628 1,054 26. Financial liabilities carrying value Fair value £m £m £m £m
The restructuring provision relates principally to the anticipated redundancy costs associated with the closure of the Group’s Glasgow and Peterborough life operations. This provision is expected to be fully utilised within 12 months.
Fair value of scheme assets 1,725 1,684 Defined benefit obligation (1,802) (1,805)
32. Pension schemes (continued) 32.2 PGL Pension Scheme The PGL Pension Scheme comprises a final salary section and a defined contribution section.
Change in provision for tax on the economic surplus available as a refund (32) −
33. Intangible assets (continued) Acquired in-force business Acquired in-force business of £2,213 million was recognised upon the acquisition of the Pearl businesses and represents the difference between the fair value of the contractual rights acquired and obligations assumed under insurance and investment contracts with and without DPF and the liability measured in accordance with the Group’s accounting policies for such contracts.
Loans and receivables at amortised cost 2,293 1,081 Financial assets at fair value through profit or loss
Purchases and sales £m transfers (to)/ from level 1 and level 2 £m at 31 December 2010 £m
42. capital statement Capital Management Framework The Group’s Capital Management Framework is designed to achieve the following objectives: – provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary excess capital; – ensure sufficient liquidity to meet obligations to policyholders and other creditors; – optimise the overall debt to equity ratio to ensure an efficient capital base; and – meet the dividend expectations of owners as set by the Group’s dividend policy.
A further test is required under Pillar 1 in respect of with-profit funds which may result in an additional capital requirement referred to as the ‘with-profit insurance capital component’ (‘WPICC’).
Note 1: Regulatory adjustments to assets reflect adjustments to derecognise inadmissible assets such as intangibles and deferred tax assets as well as those adjustments that are necessary where asset and counterparty exposures exceed the prescribed regulatory limits.
Total available capital resources at 1 January 2009 − − − − − − − − − On acquisition of the Pearl businesses 850 738 634 357 619 427 659 1,902 6,186
The impact of non-government fixed and variable rate income securities and, inter alia, the change in market credit spreads during the year is fully reflected in the values shown in these financial statements. Similarly, the value of derivatives that the Group holds takes into account fully the changes in swap spreads.
Credit risk is managed by the monitoring of aggregate Group exposures to individual counterparties and by appropriate credit risk diversification. The Group manages the level of credit risk it accepts through divisional credit risk tolerances. In certain cases, protection against exposure to particular credit risk types may be achieved through the use of derivatives. The credit risk borne by the shareholder on with-profit policies is usually minimal unless the insurance fund is relying on shareholder support.
Credit ratings have not been disclosed in the above tables for equities. Whilst the Group is exposed to the impact of credit default on its equity holdings, this risk is not considered significant due to the spread of holdings. Non-equity based derivatives are included in the credit risk table above.
neither past due nor impaired £m less than 30 days £m 30−90 days £m
43. Risk management (continued) 43.3 Financial risk analysis (continued) 43.3.1 Credit risk (continued) Concentration of credit risk Concentration of credit risk might exist where the Group has significant exposure to an individual counterparty or a group of counterparties with similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. The Group has most of its counterparty risk within its life business and this is monitored by the counterparty limits contained within the investment guidelines and investment management agreements, overlaid by regulatory requirements.
An increase of 1% in interest rates, with all other variables held constant, would result in decreases in the profit after tax in respect of a full financial year and in equity of £103 million (2009: £61 million). A decrease of 1% in interest rates, with all other variables held constant, would result in an additional profit after tax in respect of a full financial year and an increase in equity of £78 million (2009: £89 million).
Liquidity and funding 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.
43.5.1 Assumptions Valuation of participating insurance and investment contracts For participating business, which is with-profit business (insurance and investment contracts), the insurance contract liability is calculated in accordance with the FSA’s realistic capital regime, adjusted to exclude the shareholders’ share of future bonuses and the associated tax liability as required by FRS 27 Life Assurance. This is a market consistent valuation, which involves placing a value on liabilities similar to the market value of assets with similar cash flow patterns.
Information on other transactions with the pension schemes is included in note 32.
Transactions with other related parties The following information is provided in accordance with the UKLA’s Listing Rule 11: Pursuant to the Placing referred to in note 16, TDR Capital Nominees Limited (‘TDR’) took up its contractual pre-emption rights and received 707,318 shares at 660 pence per share. The subscription by TDR and Hugh Osmond represented an aggregate allocation of approximately 20% of the Placing.
Insurance companies BA (GI) Limited (general insurance company) UK Ordinary shares of £0.05 London Life Limited UK Ordinary shares of £1 National Provident Life Limited UK Ordinary shares of £1 NPI Limited UK Ordinary shares of £1 Pearl Assurance Limited UK ‘A’ ordinary shares of £0.05
On 1 March 2011, the European Court of Justice ruled that insurance companies will, with effect from 21 December 2012, no longer be allowed to use gender as a basis for calculating premiums. At this time, the precise impact of this judgement is uncertain, and management is currently examining the implications. Consequently, it is not yet possible to determine with any certainty what the effect of this judgement may be on the Group.
Group MCEV earnings after tax 1 Based on 149 million shares (2009: 92 million) as set out in note 15 of the IFRS consolidated financial statements. 2 Based on 149 million shares (2009: 106 million), allowing for warrants in issue as set out in note 15 of the IFRS consolidated financial statements.
A gradual reduction in the UK corporation tax rate from 28% to 24% over the next 4 years was announced in the Emergency Budget of 22 June 2010 with a further 1% reduction being announced in the Budget of 23 March 2011. The Finance (No. 2) Act 2010 included the first of the 1% rate reductions with effect from April 2011, with subsequent reductions to be dealt with by future legislation. The 2010 MCEV includes the impact of the tax rate being reduced to 27%. The impact of the further 4% reduction of rate is not expected to be material.
For with-profits business the CNHR would increase the TVFOGs by £64 million (2009: £93 million).
1 Expected existing business contribution (reference rate) represents the expected return on the opening MCEV at the long term risk free rate. 2 Expected existing business contribution (in excess of reference rate) represents the additional expected return above the risk free rate arising from long term risk premiums on equities, property and corporate bonds.
The return assumed on corporate bond portfolios is the redemption yield for the portfolio less an allowance for credit risk.
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Pearl businesses PGH (LCA) Limited, PGH (LCB) Limited, PGH (TC1) Limited, PGH (TC2) Limited and Opal Reassurance Limited, together with their subsidiaries, being the five companies acquired by Phoenix Group Holdings on 2 September 2009.
The total return of a stock to an investor (capital gain plus dividends).