The Group’s strength is derived from the intelligent combination and leverage of both the Phoenix Life and IGNIS Asset Management businesses.
Our mission To improve returns for Phoenix policyholders and IGNIS customers and deliver value for shareholders.
Key financial OBJecTiVes In 2010 the Phoenix Group performed at the top of its target range for its key financial objectives.
Gearing ratio £100m Contribution to MCEV from management actions per annum until 2014
Officer’s report 12 Our business 13 Operating structure 15 Management team 16 Our strategy 26 Basis of preparation 27 Key performance indicators 31 Cash generation 34 Group MCEV 39 IFRS operating profit 42 Capital management 45 Risk management 47 Principal risks and uncertainties facing the Group 50 Corporate responsibility 51 Approach 51 Workplace 52 External stakeholders 55 Community 55 Environment 58 Board of Directors 62 Directors’ report 67 Corporate governance report 74 Remuneration report 88 Statement of Directors’ responsibilities 89 Independent Auditor’s report 90 Consolidated IFRS financial statements 97 Notes to the consolidated IFRS financial statements 172 Statement of Directors’ responsibilities 173 Independent Auditor’s report 174 MCEV financial statements 178 Notes to the MCEV
financial statements 190 Shareholder information 193 Glossary 01 Phoenix Group Holdings Annual Report and Accounts 2010
Phoenix Group has enjoyed a year of considerable progress, both strategically and financially. We met all our key financial objectives; exceeded the top of our range for the generation of cash and cash equivalents; saw the integration of our two asset management businesses under the IGNIS brand; delivered our targets for management actions; simplified the Group’s capital structure and achieved a Premium listing on the lSE with subsequent FtSE 250 Index inclusion. these achievements create an excellent platform for further development in 2011 and beyond.
the Phoenix business model, and the investment proposition that it delivers, rest on cash generation. It is the scale and predictability of the Group’s cash flows that give us confidence in our long-term financial stability and the consistency of our financial performance. the investments we are making in the Phoenix operating platform underpin our cash flows and deliver opportunities to enhance and accelerate these. Our debt structure, whilst low cost, includes various constraints and we are in dialogue with our lenders to find ways of removing some of these burdens but they will only be pursued if they represent good value for our shareholders.
the Board wishes to express its thanks to Jonathan Moss and Simon Smith, former Group CEO and Group FD respectively. With skill and resilience, they led the Group through challenging times and brought us to the position of opportunity that we enjoy today. We are very grateful to Jonathan and Simon for their service to Phoenix Group and wish them both well for the future.
I am excited by the quality of the operating platform that has already been constructed by my colleagues and by the opportunities to develop it further in the years ahead. this applies both to our capacity to structure and manage closed life funds in Phoenix life as well as to the potential for IGNIS to deliver outstanding performance in the management of policyholder, shareholder and third party assets.
People Phoenix Group is very fortunate in the quality of its people. the Group has assembled true ‘centres of expertise’ in Phoenix life and IGNIS as well as within its Group functions. We are well placed to deliver outstanding investment returns and to integrate and manage closed funds. I am grateful to my colleagues who have made me welcome and who have given me great support.
that the Group comprises a highly talented and motivated team is a tribute to our Human Resources professionals who have done an exceptional job in recruitment, learning and development and employee engagement initiatives as demonstrated by some industryleading scores in our employee surveys.
Group highlights Phoenix Group started the year with its main listing on the NySE Euronext, with a capital structure that included dilutive instruments equivalent to around 80 percent of the issued shares and tier 1 Bonds on which a coupon had been deferred. the year ended with dilutive instruments at less than 20 percent of the issued shares, our tier 1 Bond coupons fully up to date, a £33 million placing of new shares completed, a Premium listing on the lSE and membership of the FtSE 250 Index.
In 2010, the Phoenix Group performed at the top of its target range for all its financial objectives. In particular, the operating companies delivered £734 million of cash and cash equivalents to the Holding Companies. this very strong performance, exceeding our target of £625 million to £725 million, enabled us to meet all our financial commitments and allowed us to pre-pay £122 million of our bank debt. the total net bank debt stands at £2.3 billion (2009: £2.7 billion).
Cash is the most important financial measure for a closed life business. this year, Phoenix Group has again demonstrated the cash generative strength of our business model. We have now increased our cash generation target for the five year period from 2010 to 2014 by £0.3 billion to £3.0 billion and published a revised target for 2011 of £750 million to £850 million.
the Phoenix Group business model will naturally release capital to shareholders as policies run off and, without new business strain or risk, that release of cash becomes increasingly reliable and predictable. Although market dislocation does have the power to disrupt emerging cash flows temporarily, the embedded value in the business remains substantial and ready to be released when temporary factors recede.
Phoenix Life highlights Phoenix life, led by Chief Executive Officer Mike Merrick, contributed MCEV operating earnings after tax of £560 million, an increase of 39 percent on the comparative period (on a consistent basis). Our ability to grow MCEV, even from an existing book of business that is in run-off, is a particular feature of the Phoenix business model. We have the operating platform, the skills and the experience to make this performance repeatable as and when we make accretive acquisitions.
grOup cHief execuTiVe Officer’s repOrT cOnTinued 06 Phoenix Group Holdings Annual Report and Accounts 2010
the approach of the introduction of Solvency II and Basel III, combined with very low levels of net new business in the with-profit sector and the prospect of ever-increasing costs as with-profits funds run-off, will, we believe, lead to opportunities for Phoenix and IGNIS to grow earnings by accretive acquisitions in the coming years.
Generating shareholder value the Phoenix Group is committed to delivering improved shareholder value. this will be achieved by applying ‘the Phoenix Way’ to all that we do in the closed life business and leveraging the specialist investment management skills of IGNIS. We are committed to ensuring that there is a better market understanding of the robustness of our business model in 2011 and hope to see shareholders rewarded accordingly. It is our task to ensure that the capital which is in the business is used to best effect to improve policyholder outcomes and shareholder returns.
Phoenix life has improved its customer proposition by taking a more qualitative approach to our requirements for our outsource service partners and the number of complaints has fallen by 24 percent. We expect to make further progress in 2011 with the introduction of an in-house team to deal with those complaints which customers feel have not been dealt with to their satisfaction.
I am a firm believer in the power of brands. Both IGNIS and Phoenix have customer bases that present opportunity for business development through the leverage of those brands. Over the next few months, I intend to review our brands and their commercial potential. We will construct and implement plans which will maximise value from brand development and consequential revenue generation.
Conclusion I look forward to 2011 with great enthusiasm for all the opportunities that lie in front of us, to serve our customers and make a difference to their lives; to build and deliver value for shareholders; to develop great brands; and to grow our business.
As Phoenix Group makes that journey, it is essential that we have values to steer us. I believe that this business needs to be action orientated, professional, reliable and to have complete integrity in the way it acts if it is to continue to be successful.
Whether we succeed or fail in our objectives rests on the efforts of all of our colleagues. As Phoenix Group moves into the future, I know how fortunate I am in the quality of the teams we have in IGNIS, in Phoenix life and in Group. I have every confidence that Phoenix Group is well-equipped for a fulfilling and rewarding journey for all our stakeholders.
Clive Bannister Group Chief Executive Officer 2011 Outlook and prospects Developing ‘The Phoenix Way’ ‘the Phoenix Way’ characterises an approach and infrastructure, which is unique in the industry for the integration and management of closed funds. By applying a consistent framework, the Phoenix Way reduces risk, complexity and cost; improves investment performance; improves customer service through effectively working with our outsourcers; enhances MCEV and releases capital to shareholders.
In 2011, continued development of the Phoenix Way will be delivered by our actuarial system transformation, intra group mergers of regulated businesses and the further transformation of our outsource service proposition from legacy systems onto modern platforms. For IGNIS, this means the strengthening of its capacity to deliver sustained investment performance.
We have identified a number of areas for further management actions that will deliver accelerated cash flows and enhance MCEV and I hope to be able to report on these in the course of the year.
grOup cHief execuTiVe Officer’s repOrT cOnTinued 08 Phoenix Group Holdings Annual Report and Accounts 2010
Financial £734 million operating companies’ cash generation – exceeded target range of £625-£725 million
Arranged for transfer of business from one outsource service partner (uISl) to another (Diligenta) to enhance and protect customer service and to provide a path to further policy transformation
Our business brings together complementary skills to deliver improved performance for our life company and asset management customers. With a simple mission and a clear vision we are well positioned to capitalise on opportunities as they arise in the future.
in this section 12 Our business 13 Operating structure 15 Management team 16 Our strategy
Our businesses provide us with a unique base from which to improve performance for our customers and in turn deliver shareholder value.
to implement our model we invest heavily in our employees, infrastructure and outsourcer partnerships. As a result we now have a scalable platform into which we can integrate acquired funds and maximise synergy benefits. this is key for the sustainability of our business, providing security and the opportunity to improve both asset performance for customers and the profitability of the business.
In operating this way the Group’s management is able to focus its attention on enhancing customer outcomes, financial control, investment management and risk management.
Our Business 12 Phoenix Group Holdings Annual Report and Accounts 2010 the markets in which we operate continue to be subject to considerable pressures that we believe will present us with significant opportunities in the future.
Our structure is aligned to the market sectors in which we operate. the Group has two core segments: life assurance – Phoenix life; and asset management – IGNIS. In addition, our Group functions provide support and coordination for the delivery of the Group’s strategic initiatives.
Superior investment performance, client service and operational efficiency 13 Phoenix Group Holdings Annual Report and Accounts 2010
Phoenix Life Phoenix life is responsible for the customer, financial and operational management of the closed life funds. Phoenix life is led by its Chief Executive Officer, Mike Merrick.
Phoenix life provides specialist skills with the proven ability to deliver improved customer outcomes from the innovative management of closed funds and annuities which in turn delivers significant value to shareholders. It has a track record of successfully integrating businesses and is developing a leading-edge model and infrastructure into which future acquired funds can be incorporated.
the business comprises seven regulated life companies including well-known brands such as Phoenix, Pearl, Scottish Mutual, london life and NPI that have been acquired over a number of years. the Group is currently undertaking a programme of activity to further integrate its life companies in order to optimise economies of scale and capital allocation.
Although the life companies are closed and do not generally write new business, they do accept additional policyholder contributions on in-force policies and allow certain policies, such as pension savings plans, to be reinvested at maturity into annuities. Writing annuities offers the Group a further opportunity to increase its embedded value through incremental investment returns.
the Group wrote c.£800 million of new annuity business in 2010.
Management service companies deliver all administrative services required by the life companies thereby ensuring they benefit from economies of scale, established outsourcer relationships and an innovative integrated technology infrastructure.
OperaTing sTrucTure cOnTinued 14 Phoenix Group Holdings Annual Report and Accounts 2010
Chris Samuel Chief Executive Officer, IGNIS Asset Management – Maximise the value of IGNIS by delivering top quartile investment performance and a profitable service to all managed clients (including Phoenix life). – lead the development and delivery of the IGNIS business strategy, generating net new money from third party clients. – Ensure that the activities of IGNIS are undertaken with due regard to regulatory requirements.
alan Jones Group Human Resources Director – Deliver high quality Human Resources services to the Group Board, ExCo and operating companies. – lead in the implementation of the Group’s Employee Strategy in order to recruit, retain, motivate and develop employees. – Provide guidance and support on HR matters to the Group Chief Executive Officer, ExCo and the Group Board.
Jane MacLeod General Counsel – lead the provision of legal advice to the Group Board, ExCo and other Group Company Boards and senior management. – Oversee and co-ordinate the maintenance of and adherence to appropriate corporate governance procedures across the Group. – Oversee statutory administration of Group Companies, ensuring compliance by Companies and staff with relevant legal obligations.
Jean Park Chief Risk Officer – lead the Group’s risk management function, embracing changes in best practice and regulation including Solvency II.
Simple mission, focused vision Our strategy framework continues to build on plans first put in place in 2009.
Our mission is simple: to improve returns for Phoenix policyholders and IGNIS customers, and deliver value for shareholders. Our vision is focused: to be recognised as the ‘industry solution’ for the safe, innovative and profitable decommissioning of closed life funds and as a specialised asset manager. Our mission and vision are based on three pillars: ‘structure’, ‘manage’ and ‘acquire’, underpinned by trust and competence. this powerful combination of simplicity and focus sets us apart from the crowd.
Creating the platform for growth the Group has made considerable progress during 2010 in creating a more stable and simplified business. Results to date, both financial and non-financial, have sown the seeds of a convincing track record.
Structure Building and maintaining efficient capital structures releasing cash to shareholders, increasing security and identifying opportunities to improve customer returns
Manage Applying proven Phoenix standards to deliver operational efficiency and drive consistently strong performance acquire Growing through acquisition of additional funds offering increased opportunities for shareholder and customer value
Trust Inspiring confidence in customers, vendors, regulators, investors and other key stakeholders by demonstrating we can be trusted to deliver
How we do it – Deliver reliable financial performance. – Seek value enhancing performance. – Manage risk in line with our stated appetite. – Build efficient, effective and scalable operations.
What we said we would do in 2010 – Maintain strong financial position. – Achieve Premium listing on lSE. – Achieve all Solvency II programme 2010 milestones. – Complete IGNIS Asset Management operational integration.
What we actually did – Reduced dilutive instruments to <20 percent ahead of our Premium listing on lSE and FtSE 250 Index inclusion.
– Restructured National Provident life, strengthening the capital position and increasing flexibility.
– Resolved a number of legacy tax issues allowing the release of over £20 million of provisions in addition to a £30 million capital strengthening as a result of closing down a tax exposure.
What we said we would do in 2010 – Drive further cash flow acceleration.
– Create value within Phoenix life. – Increase third party asset management business. – Enhance the Group-wide risk and capital management frameworks. – Continue life company and outsourcer transformation programmes.
– Increased IGNIS operating profit by 35 percent to £46 million. – Enhanced the Group Risk Framework. – Strengthened IGNIS management and investment teams. – transferred Phoenix life operations in Peterborough to Wythall with no service deterioration.
What we plan to do next – Examine opportunities to refinance and/or restructure existing Group debt arrangements.
– Further reduction in tax risks and resolution of legacy tax issues. – Optimisation of life company capital through further transfers of business.
What we plan to do next – Maintain strong cash flow delivery. – Grow third party sales and revenue in IGNIS. – Further strengthen risk capabilities. – Achieve all Solvency II programme critical milestones.
What we said we would do in 2010 – We stated that acquisitions were not a priority for our business in 2010 and, as planned, there has been limited activity.
– Develop with-profits ‘Model Fund’ investment strategy. – Enhance complaint handling capability. – Increase IGNIS brand recognition.
What we actually did – Increased employee engagement within Group Functions and Phoenix life to 77 percent against industry benchmark of 70 percent.
What we said we would do in 2010 – Implement and further develop action plans from 2009 engagement survey.
NB: IGNIS data is not included in these results. IGNIS introduced the survey in 2010 and will be integrated in the Group process in due course.
throughout 2010 several cross-company focus groups met to explore issues and propose actions. these included: – launching new values – Communicating the Group strategy in different ways – 360 degree feedback exercise for senior management – A variety of employee social, sport and charity events – Improvements to performance management, development opportunities and career coaching – local management visibility initiatives – A new leadership behavioural framework – Employee involvement forums for key business changes
In addition, we launched a flexible benefits scheme and our Premium listing has also enabled us to introduce a Sharesave scheme.
Its success was due in no small part to the commitment and dedication of our employees, a high percentage of whom (over 40 percent) relocated with the work. they were supported throughout the move by a range of initiatives that included familiarisation visits to Wythall, a permanent relocation information room, support from leading relocation specialists and a comprehensive relocation package.
More than 80 percent of those surveyed cited a positive relocation experience. the redundancy support exceeded statutory requirements and included enhanced terms, counselling assistance and the opportunity for career management planning through our award-nominated Next Steps programme.
the move to a Premium listing owes much to the commitment and expertise of a wide range of individuals from across the Group, who worked hard to prepare the accounts on an IFRS basis, reduce our dilutive instruments from around 80 percent of the issued share capital to below 20 percent, and to publish the prospectus.
listening to our customers and acting on their feedback lies at the heart of our new Customer Proposition. During the year we again strengthened our Customer Research Programme to improve the quality of our information and ensure that customers get the most out of their relationship with us. the customer feedback tools we have employed in recent years – such as telephone surveys and participation in the ABI Customer Impact Scheme – have now been complemented by a new range of initiatives. these include refreshing our telephone surveys and also engaging third party specialists to carry out in-depth customer interviews as well as an automated survey. In 2010, some 24,000 customers took part in these surveys, with very positive results.
“ Everyone that I have spoken to knows what’s what and have been able to answer my queries”
Maximising business performance and value the IGNIS Sterling and Euro liquidity funds surpassed revenue expectations for 2010, thanks to a combination of exceptional investment performance and a successful drive from the sales team to expand the institutional client base. By the end of 2010 the Sterling Fund had achieved excellent growth, doubling in size and maintaining its performance at the top end of the market. this fund was a top 5 performer throughout 2010 and ended the year in 2nd position overall.
IGNIS Sterling Liquidity Fund 1 Month Average % IMMFA Sterling Average % AUM (£bn)
the excess surplus we were able to distribute during 2010 has meant that payouts in the Pearl With-Profits Fund in the second half of the year were around 7 percent higher than would otherwise have been achieved. Although higher payouts cannot be guaranteed in the future, we will keep working hard to realise potential wherever possible.
Policyholders could opt out and have their policy and investment strategy remain unchanged – however only 5 percent chose to do so. Around 50,000 policies were converted at the start of the year. Whilst future returns are unknown, 2010 saw both the new equity and property investments performing well.
The Group has delivered strong performance across all areas of its business. Impressive cash generation by the operating subsidiaries and embedded value growth from value enhancing management actions exceeded the Group’s targets for 2010.
In this section 26 Basis of preparation 27 Key performance indicators 31 Group performance 31 – Cash generation 34 – MCEV 39 – IFRS operating profit 42 Capital management 45 Risk management 47 Principal risks and uncertainties 24 Phoenix Group Holdings Annual Report and Accounts 2010
The Group performance section provides a review of the Group’s development and performance for the year and of its financial position at the year end on both an MCEV and IFRS basis.
Phoenix Group Holdings listed on Euronext Amsterdam in February 2008 as a non-operating special purpose acquisition company. In the third quarter of 2009 it acquired a group of businesses that specialise in the consolidation and management of closed life and pension funds referred to as the Pearl businesses.1 The results of the Pearl businesses are included in the consolidated IFRS results of Phoenix Group
Pro forma information is separately referenced throughout the Annual Report and is predominantly located within the following Group performance section and the MCEV supplementary information.
Basis of PreParation 1 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 date the acquisition completed.
The Group’s financial key performance indicators (’KPIs’) are those that demonstrate the financial performance and strength of the Group as a whole.
These KPIs comprise: operating companies’ cash generation £734m (2009 pro forma: £716 million)
Gearing ratio * For the four month period from the date of acquisition of the Pearl businesses to 31 December 2009.
The Board’s intention is to develop a progressive dividend policy subject to restrictions in the Group’s credit agreements. The Board seeks to achieve this through maintaining strong cash flow delivery: analysis: Continued strong cash generation by the Group’s operating subsidiaries of £492 million enabled the Group to achieve the upper end of its target for cash generation, before value enhancing management actions.
Management actions have generated additional cash flows of £242 million in 2010, exceeding the target of £225 million.
Quantified target: The target cash flows for 2011 to 2016 are £3.2 billion.
Insurance Groups’ Directive (’IGD’) surplus is the regulatory assessment of capital adequacy on a Group-wide basis: analysis: The decrease in the IGD surplus from 2009 reflects the payment of dividends, pension contributions and debt servicing and repayment costs partially offset by the strong performance of the non-profit funds. The surplus of £1.0 billion represents headroom of £0.1 billion over the Group’s new IGD capital policy as set out below and in the Capital management section on page 43.
The court sanctioned funds transfer of the PALAL business into PLL was effective from 1 January 2011 and increased the headroom to £0.2 billion as at 1 January 2011.
IGD Excess Capital includes the total capital available to the Group (both policyholder and shareholder) in excess of capital requirements. It is a measure of the capital strength of the Group and the capital available to protect policyholders and shareholders from adverse events as demonstrated by the insensitive nature of the IGD surplus to market stresses.
The Group manages its capital on this basis in order to maximise shareholder and policyholder value.
Definition and calculation: AuM represents all assets actively managed or administered by the asset management operations of the Group excluding the cash collateral managed through stock lending arrangements.
The gearing ratio is the Group’s measure of its level of debt compared to its equity on an MCEV basis.
This is a measure of owner return. The Board’s intention is to develop a progressive dividend policy subject to restrictions in the Group’s two main credit agreements: analysis: The Board has recommended a final dividend of 21 pence per share. This brings the total dividend for the year to 42 pence. This dividend is due to be paid on 17 May 2011, subject to shareholder approval at the Company’s AGM. A scrip dividend option will be available to shareholders.
asset management IfrS operating profit £46m (2009 pro forma: £34 million)
1 For the four month period from the date of acquisition of the Pearl businesses to 31 December 2009.
2 Including stock lending collateral now managed by IGNIS, assets under management were £76.7 billion.
GrouP Performance Cash generation 1 Restated to include the cash flows of Phoenix Group Holdings.
2 Includes cash equivalents of £39 million (2009: £194 million). Cash equivalents are defined by management as investments that can readily be converted into cash.
4 Closing balance at 31 December 2010 includes required prudential cash buffer of £150 million (2009: £114 million).
The Group’s cash flows are generated from the interest earned on capital, the release of excess capital as the life funds run down, policyholder charges and management fees earned on assets under management. The Group’s closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to owners and for repayment of outstanding debt. Although investment returns are less predictable, some of the investment risk is borne by policyholders.
Total non-recurring outflows 79 438 Total uses of cash 450 600 Cash and cash equivalents at 31 December4 486 202 £734m Operating companies’ cash generation 31 Phoenix Group Holdings Annual Report and Accounts 2010
cash Generation continued 1 Represents differences between IFRS valuation of assets and liabilities and valuation for capital purposes.
The chart above analyses the movement in free surplus of Phoenix Life which represents the life companies’ free surplus plus the IFRS net assets of the service companies.
The life companies’ free surplus is the excess of the net worth over the required capital reflected in the MCEV and represents capital in excess of what is required under the life companies’ capital policies.
Pension scheme contributions The Group operates two main staff pension schemes, the PGL Pension Scheme and the Pearl Group Staff Pension Scheme. The triennial valuation of the PGL Pension Scheme completed in the second half of 2010 and a new funding arrangement has been agreed. The new funding arrangement will result in additional contributions of £160 million being paid to the scheme over an 8-year period from 2010. Additional contributions in 2010 of £45 million were largely recovered from certain of the Group’s with-profits funds in line with the indemnity provided in 2005 and are not, therefore, reflected in this cash flow analysis. The additional contributions of £115 million from 2011 will be funded by the Holding Companies. There have been no changes to the underlying funding arrangements for the Pearl Group Staff Pension Scheme; however, completion of the 2009 triennial valuation has enabled the Trustee to establish the payments due between 2020 and 2027 under the 2009 funding agreement. Information on these payments is included in note 32 of the IFRS financial statements.
Other operating expenses Other operating expenses include Group functions’ costs. The increase in operating expenses in 2010 reflects the ongoing costs from having a Premium Listing and the reallocation of certain functional costs from operating companies to Group.
Free surplus at 31 December 2010 32 Phoenix Group Holdings Annual Report and Accounts 2010
The 2010 Tier 1 coupon of £33 million was paid in April 2010. £6 million of this coupon payment is non-recurring due to the subsequent 15 percent reduction in the face value of the Bonds and the purchase of Bonds from an external party. The 2009 deferred Tier 1 coupon was paid through funds raised from the placing of 5 million Phoenix Group Holdings shares and is not therefore reflected in the cash flow analysis.
Shareholder dividend The shareholder dividend of £43 million comprises the payment of the 2009 final and 2010 interim dividend.
Debt prepayment £122 million voluntary debt prepayments were made in respect of one of the Group’s main credit facilities in 2010. Scheduled repayments of the Group’s main facilities commence in 2011.
IT and other business transformation costs The Group’s Holding Companies incurred IT and other business transformation costs of £30 million in 2010, including costs associated with the Group’s transformation programme with its outsourcers. Business transformation costs are expected to reduce going forward as the investment programmes complete.
Transaction and restructuring costs Transaction and restructuring costs include cash payments related to the Premium Listing, Tier 1 Bond restructuring and consent fees paid to the lending banks for various internal restructurings and corporate activity.
Base case 6-year projections 3.2 20% fall in equity markets 3.0 15% fall in property values 3.1 75 bps increase in yields 3.2 Credit spreads widening3 2.9 Combined stress of 25% fall in equity markets, 20% fall in property, 75 bps increase in yields and credit spreads widening3 2.3 3 10 year term: AAA – 48bps, AA – 77bps, A – 108bps, BBB – 162bps.
Adjustment to move to a longer term rate of return3 £m year ended
Life MCEV operating earnings2 758 380 164 544 Management services operating profit 20 14 – 14 IGNIS Asset Management operating profit 46 34 – 34
Expected existing business contribution 306 95 New business value 19 22 Non-economic experience variances and assumption changes
Total non-economic experience variances and assumption changes 221 156 Life MCEV operating earnings after tax 546 273
Expected existing business contribution The Group uses long-term investment returns in calculating the expected existing business contribution. From 2010, the Group has moved to calculating the expected contribution using a long-term risk-free rate (15-year gilt rate plus 10 basis points) plus long-term expectations of excess investment returns. The Group considers that an average return over the remaining term of the in-force business is more appropriate than a short-term rate and more consistent with its expectation of longer term rates of return.
This change in assumption only affects the analysis of movement and does not impact the total calculated embedded value. The pro forma expected contribution in 2009 would have been £118 million higher if it had been calculated using expectations of longer term rates of return but economic variances within the analysis of Group MCEV earnings would have been reduced by the same amount.
The expected contribution in 2010 of £306 million after tax is £93 million higher than the contribution in 2009 (2009 pro forma: £213 million on a consistent basis) largely due to the increase in the long-term risk-free rate and the higher opening MCEV.
New business value New business profits generated from vesting annuities during 2010 were £19 million after tax (2009 pro forma: £22 million).
The new business margin is 5 percent after tax (2009 pro forma: 5 percent) and represents the ratio of the net of tax new business value to the amount received as new single premiums.
Non-economic experience variances and assumption changes Non-economic experience variances and assumption changes increased the MCEV by £221 million after tax in 2010, the main driver being positive experience variances.
Experience variances include a benefit of £139 million from the restructuring of a £1.2 billion portfolio of corporate loans, primarily from the liquidity premium expected to be earned following this restructuring. Experience variances also include £78 million from converting intragroup debt into listed Eurobonds, which are exempt from uK withholding tax, and other benefits from managing the back book. Negative assumption changes were driven by a reduction in assumed surrender rates in funds with valuable policyholder guarantees.
Management services generated an operating profit before tax of £20 million in 2010 compared to a pro forma operating profit of £14 million in 2009.
Group MCEV operating earnings after tax 543 269 118 387 Economic variances on covered business5 101 701 (164) 537 Economic variances on non-covered business (38) (245) – (245) Other nonoperating variances on covered business (54) 9 – 9 Non-recurring items (75) (87) – (87) Gain on debt refinancing – 491 – 491 Finance costs attributable to owners (168) (390) – (390) Tax on non-
5 Covered business includes all long term insurance business written by the Group, but excludes the asset management and management service companies.
Economic variances on covered business Positive economic variances reflect changes in interest rate yields, favourable equity movements and strong returns on hedge funds.
Other non‑operating variances on covered business Other non-operating variances on covered business include regulatory change and systems transformation costs and the costs of a risk transfer payment which brings the two service companies’ outsourcing models more in line with each other. These costs were partly offset by a gain on finalising the revised asset shares in the PALAL with-profit fund as a result of a guaranteed annuity option compromise scheme last year which reduced longevity risk for the Group whilst providing policyholder benefit enhancements.
Non‑recurring items Overall non-recurring items reduced embedded value by £75 million before tax (2009 pro forma: £87 million before tax). Non-recurring items primarily relate to Premium Listing and other restructuring costs, including site rationalisation and outsourcer transformation.
The Group paid the 2010 coupon on the Tier 1 Bonds on 26 April 2010. The 2009 deferred Tier 1 Bond coupon of £33 million was paid in November 2010 through funds raised from the placing of 5 million Phoenix Group Holdings shares.
Capital and dividend flows (5) 290 Group MCEV at 31 December 2,104 1,827
Exchange differences on translating foreign operations have not occurred in 2010 as Phoenix Group Holdings changed its functional currency to sterling in the second half of 2009.
Phoenix Life Operating profit for Phoenix Life is based on expected investment returns on financial investments backing owners’ and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities (being the release of prudential margins and the interest cost of unwinding the discount on the liabilities). The principal assumptions underlying the calculation of the longer term investment return are set out in note 5 to the IFRS consolidated financial statements.
December 2009 pro forma £m with-profit 55 49 with-profit where internal capital support provided (7) 20 Non-profit and unit-linked 278 331 Longer term return on owners’ funds 42 55 Management services 20 14 Phoenix Life operating profit before tax 388 469
The with-profit funds where internal capital support has been provided experienced an operating loss of £7 million (2009 pro forma: £20 million operating profit). The 2010 result was negatively impacted by a reduction in assumed surrender rates in funds with valuable policyholder guarantees.
The operating profit on non-profit and unitlinked funds was £278 million (2009 pro forma: £331 million). This includes margin emergence of £168 million (2009 pro forma: £154 million), return on surplus assets of £18 million (2009 pro forma: £9 million) and new business from vesting annuities of £22 million (2009 pro forma: £35 million). The 2009 pro forma result also benefited from positive longevity assumption changes of £139 million.
£373m IFRS operating profit 39 Phoenix Group Holdings Annual Report and Accounts 2010
IfrS profit after tax IFRS profit after tax is reconciled to operating profit, as follows1: Year ended £m
1 Pro forma comparatives are not provided on the basis that it is inappropriate to pro forma acquisition balance sheet adjustments, for example, amortisation of acquired in-force business and other intangibles and debt finance costs following the associated debt restructure.
The acquired in-force business is being amortised in line with the run-off of the acquired businesses. Amortisation of acquired in-force business during the period totalled £132 million. Amortisation of other intangible assets totalled £18 million in the period.
The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group to achieve these 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.
The capital policy of the Group Holding Companies ensures sufficient liquidity to meet creditor obligations and dividend expectations. This is monitored at both executive and Board level.
Targets are established in relation to regulatory capital requirements, liquidity and debt ratios and are used in managing capital in accordance with the Group’s risk appetite and the interests of its stakeholders.
regulatory capital requirements Each uK life company must maintain sufficient capital at all times to meet the regulatory capital requirements mandated by the FSA1. These measures are aggregated under the European union Insurance Groups’ Directive (’IGD’) as implemented by the FSA, to calculate regulatory capital adequacy at a Group level.
Group capital resources (’GCR’) 5.3 5.0 Group capital resource requirement (’GCRR’) (4.3) (3.8) IGD surplus (estimated) 1.0 1.2 Coverage percentage 123% 132%
The policy was revised in 2010 from the previous policy of maintaining 125 percent of the capital resource requirement, to mitigate the anomalies of market movements on the wPICC. The headroom over the new policy is £0.1 billion (2009: £0.4 billion).
Sensitivity and scenario analysis As part of the Group’s internal risk management processes the estimated IGD surplus is tested against a number of financial and non-financial scenarios to ensure it remains in excess of our target in a range of reasonably foreseeable circumstances. The results of that stress testing are provided below: IGD surplus £bn
Estimated IGD surplus/ Excess Capital: 1.0 2.8 Following a 20% fall in equity markets 1.0 2.4 Following a 15% fall in property values 1.0 2.7 Following a 75 bps parallel increase in yields 1.0 2.8 Following a 75 bps parallel decrease in yields 0.9 2.7 Following credit spread widening1 0.9 2.5 Following a combined 25% fall in equity markets, 20% fall in property, 75 bps increase in yields and credit spreads widening1 0.9 1.8 1 AAA – 100bps, AA – 113bps, A – 120bps, BBB – 153bps, BB – 370bps, B – 613bps.
IGD surplus is relatively insensitive to market movements 43 Phoenix Group Holdings Annual Report and Accounts 2010
The Group has a well established Solvency II programme and has continued to progress development towards meeting the Solvency II requirements. The Group remains on track to deliver an approved partial Group internal model and has been accepted into the FSA internal model pre-application process following the submission of the pre-application process qualifying criteria (’PAQC’) template in 2010. The Group’s actuarial IT systems transformation project will deliver a single actuarial modelling platform across the business, transforming modelling capability and efficiency and underpinning development of the Solvency II internal model and Own Risk and Solvency Assessment (’ORSA’).
Between July and November 2010, the European Commission undertook Quantitative Impact Study 5 (’QIS5’), a European-wide exercise supporting development of the Solvency II level 2 implementing measures. The Group participated fully in this exercise recognising it as an important step in assessing the Group’s readiness for Solvency II.
The Group has net shareholder debt of £2,733 million (2009: £3,080 million). The gearing ratio1 is 52% (2009: 58%) based on IGNIS PVFP of £0.4 billion (2009: £0.4 billion).
Three Lines of Defence The Group operates a Three Lines of Defence model: −first line: management of risk is delegated from the Group Board to the Group Chief Executive, PLHL Board and its ExCo members and through to divisional business managers. −Second line: risk oversight is provided by the Group and divisional risk and compliance functions and established oversight committees, including the Board Risk Committee. −Third line: independent verification of the adequacy and effectiveness of the internal risk and control management systems is provided by Board Audit Committees. The Board Audit Committees are supported by the Group Internal Audit function.
Risk appetite The Phoenix Group risk appetite framework consists of a set of statements and targets that articulate the risk appetite of the Group Board with respect to policyholder security, earnings volatility, liquidity and regulatory compliance.
By the end of the year the Group had strengthened this framework to include appetite statements and targets for individual risks against which assurance and capacity reporting will be provided to the relevant Boards in 2011.
Risk management is a core component of the Group’s strategic agenda. The Board seeks to ensure that the Group identifies and manages all risks accordingly; to either create additional value for its stakeholders or to mitigate any potentially adverse effects.
A Group-wide risk framework is in place which seeks to establish a coherent and interactive set of risk management arrangements comprising formal committees, risk review functions, risk management policies and risk assessment processes. The framework provides assurance that risks are being appropriately identified and managed and that an independent assessment of management’s approach to risk management is being performed. A summary of the key risks and uncertainties facing the Group is provided on page 47.
risk culture, oversight and governance Overall responsibility for approving, establishing and maintaining the risk framework rests with the Group Board. The Board recognises the critical importance of having efficient and effective risk management systems and appropriate oversight of their output. A clear organisation structure with documented, delegated authorities and responsibilities from the Phoenix Group Holdings Board to the Board of PLHL and the PLHL ExCo is in place.
Risk policies and categorisation A policy framework exists, which sets out the high level risk appetite of the Group, together with risk management, internal control and business conduct standards for the Group’s operating units. During the course of the year work has been undertaken to enhance the Group’s existing policy suite and update the policy framework in support of the broader enhancements to the Risk Management Framework.
Each policy is the responsibility of a member of the PLHL ExCo who is charged with overseeing compliance with the policy throughout the Group.
Risk assessment processes The Group has a standardised assessment framework for the identification and assessment of the different types of risk it may be exposed to and how much capital should be held in relation to those exposures. This framework is applicable across the Group as a whole and establishes a basis not only for the approach to risk assessment, management and reporting processes but also for determining and embedding capital management at all levels of the Group.
The Group has ongoing obligations to meet payments to creditors which are funded by the release of capital and profits from the underlying operating companies. The emerging cash flows of the Group may be impacted during periods of extreme market turbulence by the need to maintain appropriate levels of regulatory capital. The impact of market turbulence may also result in a material adverse impact on the Group’s embedded value, financial condition and prospects.
The implementation of directives and other legislative changes such as Solvency II could have this effect and may therefore have a material adverse effect on the Group’s results, financial condition and cash flows, including the exercise by the external finance providers of their security rights over Group companies.
The Group puts considerable efforts into managing relationships with its regulators so that it is able to maintain a forward view regarding potential changes in the regulatory landscape. The Group assesses the risks of regulatory change and their impact on our operations and lobbies where appropriate.
Competition and the ability to finance acquisitions may make it difficult for the Group to grow.
Introduction At Phoenix Group, responsible behaviour is embedded into our culture. We manage £67.5 billion of assets and have over six million customers relying on us to look after their money and to be there when they need us. We recognise the difference that we can make to people’s lives and we seek to inspire confidence among all our stakeholders.
We also recognise that a responsible approach to stakeholders including the way we provide customer service, build employee engagement and develop investor and media relations will directly enhance our ability to succeed. Investment in corporate responsibility is an opportunity for our business, creating value by enhancing trust.
In the workplace itself, our Corporate Responsibility approach defines how we behave towards our people and how we prioritise their development.
Our approach extends to the way we deal with governance and risk management issues, and how we manage our relationships with customers, shareholders and other investors or suppliers of capital, outsource and other business partners and suppliers of goods and services, regulators, legislators and the media.
Staff Turnover (employees choosing to leave voluntarily) 9.9% 3.8% 5.8% Annual New Starter Turnover (number of employees leaving voluntarily within 12 months of starting) 13.0% 7.3% 10.3% Percentage of days lost through sickness 1.3% 1.6% 1.5% Percentage of employees sponsored on a professional qualification 17.4% 21.1% N/A
We believe that an engaged workforce delivers improved customer experience and drives strong business performance which delivers shareholder value. One way we measure employee engagement is through our annual staff survey. In 2010 we extended this survey to employees within IGNIS. 93 percent of those working in Phoenix Life and Group and 76 percent of those in IGNIS completed the survey. Key themes arising from the survey included: −The Phoenix Life and Group employee engagement survey returned a score of 77 percent on the overall Employee Engagement Index (‘EEI’), significantly higher than the 2010 target (70 percent). This is also a significant increase from the 60 percent score in the first employee engagement survey, which was carried out in June 2009. −In this group, in 12 of the key engagement questions we scored higher than any other company in the Financial Services benchmark, and of the 43 questions contained within the survey, 37 scored higher than the Financial Services benchmark score (compared with 22 out of 46 in the 2009 survey). There were significant gains in the perception of the leadership team and understanding of the Group strategy.
There is a Group-wide, cross-functional working group, which makes recommendations on the discretionary activities that it believes will have the biggest impact on our stakeholders. Members of the working group are individually accountable for the delivery of specific activities and for reporting.
Workplace The Group employs around 1300 staff, split across Phoenix Life, IGNIS and Group.
At least 13 percent of our workforce is of ‘non-white British’ origin. This supports our aim to be a ‘best place to work’ with a reputation for giving real effect to our wide ranging equal opportunity policies.
“ Our aim is to create a fulfilling working environment – based on our ethos of learning, innovation, fairness and commitment – in which every individual can excel and make a real difference.”
external stakeholders Customers The Group recognises the responsibility we have to our six million customers, as both custodian of their financial assets and supplier of their pension needs and life cover. Our Treating Customers Fairly (‘TCF’) Strategy is at the heart of our business, and all staff, regardless of where they work, are fully aware of the importance of TCF. The Group is committed to the highest standards of compliance and has robust risk management and governance architectures in place. The TCF models and reporting are well established and Group-wide with positive interaction between the Group and the FSA.
Treating Customers Fairly Our TCF proposition is: −To offer our customers security and opportunities for growth.
Our ability to attract and retain the best and most talented people represents a key non-financial risk for the Group. We have therefore developed a wide range of HR policies and data reporting disciplines to help mitigate any risk.
−Transparent remuneration benchmarking and reward programmes. −Clear anti-discrimination and anti-bullying policies.
“ The reason we come to work in the mornings is to provide the best possible outcomes for our customers. Our aim is to provide a safe home for customers’ policies – with great care and intelligence applied to protecting and enhancing value wherever possible.”
Mike Merrick, Chief Executive, Phoenix Life 52 Phoenix Group Holdings Annual Report and Accounts 2010
We have continued to support the ABI and industry-backed Origo ‘Options’ service, originally launched in 2008, to speed up the processing and payment of Open Market Options, and Immediately vesting Personal Pension transfers. Our Phoenix, Pearl, NPI and London Life books of business started to be included in this initiative from April 2009. We are pleased to report that our processing times have significantly reduced since going live with this process, following a number of internal initiatives to utilise fully the ‘Options’ capability. Across the Group, and for the second half of 2010, the average elapsed time for receipt of funds by receiving providers was around 9.5 calendar days. This is in line with the industry average of those providers who are also signed up to using the ‘Options’ service. During 2011, we aim to review and further improve the time taken to make a claim and process transfers, building on the ‘Options’ service success. In addition we are hoping to include non-maturing Pension-to-Pension transfers under the ‘Options’ mechanism.
We developed an enhanced ‘customer proposition’ in 2010, which takes into account industry best practice, and the needs of all our stakeholders internal and external. We wanted to ensure that our customer offering is high quality in terms of the service we provide, the products we offer, and the policy returns that are generated from a closed life book. Our customer retention activity has been extended to involve a larger proportion of our customer base. We carefully select and work closely with third party providers to offer our customers products and services which we don’t offer and that meet their needs.
The Group participated in the Association of British Insurers’ (‘ABI’) Customer Impact Scheme for the fifth year. A copy of our 2010 report on customer impact will shortly be available on our website www. thephoenixgroup.com/customer-support.
Our commitment to customer service, which included a focus on improving customer outcomes, has resulted in even higher scores on our customer satisfaction survey than in 2009 .
Responsible Investment We take our responsibility as an investor seriously. IGNIS Asset Management adheres to the uK Financial Reporting Council’s Stewardship Code in making its investment decisions. We take our responsibilities as a shareholder of the companies in which we invest seriously, working to promote best practice in company management whilst always seeking to act in the best interests of clients.
As part of our stock picking process, we take into account any factor that might have a bearing on performance, including socially responsible investment issues.
In February 2011 we published complaint handling results for the second half of 2010, on our Group website, for our Financial Services Authority (‘FSA’) regulated life companies. This is the second report we have published for this type of information, and we are keen to support the financial services industry’s desire to provide customers with better access to information. Over the course of 2010, we received around 17,000 complaints. This equates to around 1.12 complaints per 1,000 customers. Reports for the first and second half of 2010 can be viewed on our website www. thephoenixgroup.com/customer-support.
Whilst low in volume relative to our number of transactions, we will continue to review our complaints process and, based on customer feedback, are looking to introduce a more personalised service during 2011.
We recognise that, with over six million customers and several million transactions every year, on occasion things can go wrong. We aim to fix any mistakes fully and meet our customers’ expectations as quickly as we can. The ‘number of complaints closed within 8 weeks’ was 97 percent, which reflects our desire to close complaints quickly, to our customers’ satisfaction.
We have introduced a target for the quality of complaint handling, which is to be at or below the industry average for Financial Ombudsman Service (‘FOS’) ‘overturns’ – where the Ombudsman finds in favour of the customer.
Community Sponsorship We are committed to playing an active role in our wider community through supporting local initiatives. 2010 was the 14th successive year that IGNIS Asset Management was the title sponsor of the annual Women’s 10k Road Race in Glasgow, with approximately 12,000 women involved, raising money for numerous charitable causes.
Our London office, which is a shared-use building, has been awarded a ‘Gold Award’ certificate, for the 2010 Clean City Awards Scheme, relating to achievements in waste management, waste minimisation, re-use and recycling initiatives.
Community We are committed to playing an active role in the wider community through supporting local initiatives and making charitable donations. We believe this commitment leads to greater employee engagement and is also attractive to potential employees, suppliers and customers.
The Group supports charitable causes in a number of different ways. In 2010 this included donations in recognition of employees giving their time to volunteer for charities, matching funds raised through employee fundraising efforts, as well as several small donations in response to requests – with priority given to charities based close to Group sites.
Other community activity during the year included a team of employee volunteers helping to set up a new baby hospice, and maintaining links with local schools.
Employee fundraising Through fundraising activities organised at our offices, during the year our employees raised over £47,000 for their chosen charities.
Staff in our life companies organised a series of monthly charitable activities which encouraged team building and helped create a fun environment in which to work. Charity events included managers being sponsored to sleep rough, nearly 200 employees running a mile for Sports Relief and employees buying Christmas presents for patients at Birmingham Children’s Hospital.
In this section 58 Board of Directors 62 Directors’ report 67 Corporate governance report 74 Remuneration report 57 Phoenix Group Holdings Annual Report and Accounts 2010
Clive bannister Group Chief Executive Officer Clive Bannister joined the Group in February 2011 as Group Chief Executive Officer. Prior to this, he was Group Managing Director of Insurance and Asset Management at HSBC. Clive joined HSBC in 1994 and held various leadership roles in Planning and Strategy in the Investment Bank (uSA) and was Group General Manager and CEO HSBC Group Private Banking. He started his career at First National Bank of Boston and prior to working at HSBC was a partner in Booz Allen Hamilton in the Financial Service Practice providing strategic support to financial institutions including leading insurance companies, banks and investment banks. Throughout his career he has lived and worked internationally. Mr Bannister was appointed to the Board of Directors of the Company on 28 March 2011.
Charles Clarke Non-Executive Director Charles Clarke is a Jersey-resident graduate Chartered Accountant who spent some 30 years with KPMG. Having trained and qualified in London he was a financial sector audit partner in London, Kuala Lumpur and Jersey. He was also senior partner of the KPMG Channel Island firm for seven years and, during his final year, Chairman of the grouping of KPMG member firms in offshore jurisdictions. Since retiring from KPMG at the end of 2005 he has established an offshore governance consultancy and Non-Executive Director (NED) recruitment service as well as accepting a number of NED and community appointments. Mr Clarke was appointed to the Board of Directors of the Company on 18 February 2010. He is a member of the Board Audit Committee.
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.
BOARd Of dIRECTORS CONTINuEd 60 Phoenix Group Holdings Annual Report and Accounts 2010
Isabel Hudson 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, MGM Advantage 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 30 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. She is a member of the Board Risk and Board Remuneration Committees.
principal activities and business review The Company is incorporated in the Cayman Islands and Premium Listed on the London Stock Exchange, having de-listed from Euronext, Amsterdam, on 17 November 2010. The Company is not required to comply with the requirements of the uK Companies Act 2006. However, the Directors support these enhanced standards for disclosure and have sought to comply voluntarily with these requirements.
The uK Companies Act 2006 requires a company to set out in this report a fair review of the business of the Group during the financial year ended 31 December 2010 including an analysis of the position of the Group at the financial year end, and a description of the principal risks and uncertainties facing the Group (known as a ‘Business Review’).
Going concern The Board has followed the uK Financial Reporting Council’s ‘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 are 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 47 to the IFRS consolidated financial statements.
During 2010 and in 2011 up to the date of this report, the following changes to the Board took place: −The appointments of Charles Clarke, Isabel Hudson and David Woods as Non-Executive Directors were made on 18 February 2010. Alastair Lyons was appointed as a Non-Executive Director and Senior Independent Director on 29 March 2010. −Simon Smith resigned from the Board on 23 June 2010 and was replaced as Group Finance Director by Jonathan yates who was appointed to the Board on 23 June 2010.
1 For the 4 month period from the date of acquisition of the Pearl businesses to 31 December 2009.
Following the evaluation of the Board of Directors conducted in 2010 and in accordance with the uK Corporate Governance Code, the Board of Directors will be unanimously recommending that all of the Directors should be put forward for election or re-election at the forthcoming Annual General Meeting to be held on 13 May 2011.
The Directors have been authorised to allot and issue securities and grant options over or otherwise dispose of shares under Article 14. Subject to obtaining shareholder approval at the forthcoming Annual General Meeting, the Company is authorised to make purchases of its own shares under Article 19 and make payment for the redemption or purchase of its own shares in any manner permitted by the Cayman Companies Law (2010 version), applicable law or regulation, including without limitation, out of capital, profits, share premium or the proceeds of a fresh issue of shares.
Directors’ remuneration and interests A report on Directors’ remuneration appears on pages 74 to 85 including details of their interests in shares and share options or any rights to subscribe for shares in the Company.
Directors’ conflicts of interest The Board has established procedures for handling conflicts of interest in accordance with Cayman Islands Company Law and the Company’s Articles.
Directors’ and officers’ liability insurance The Company maintains Directors’ and Officers’ liability insurance cover which is reviewed annually.
Memorandum and articles of association Changes to the Company’s Memorandum and Articles of Association require prior shareholder approval and, in some cases, approval under the Group’s two main credit facilities.
share capital Details of the authorised, issued and fully paid share capital as at 31 December 2010 and movements in share capital during the period are presented in note 16 to the IFRS financial statements.
restrictions on transfer of shares Pursuant to the amended contingent rights agreements dated 22 June 2010, certain shareholders undertook not to transfer the ordinary shares they received on 5 July 2010 for a period of 12 months. As at the year end, 31,251,401 ordinary shares were subject to these restrictions on transfer. Since that date there have been no changes to that number. On 22 June 2010 the same shareholders entered into orderly market arrangements with the Company which prevent a disposal of any ordinary shares (that they 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. See prospectus for further details.
under the Articles of Association 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, which are available on the Company’s website, www.thephoenixgroup.com/investor-relations/ additional-information.aspx).
TDR Capital Nominees Limited 28,003,087 16.33% Xercise2 Limited 22,610,453 13.19% Berggruen Holdings1 10,338,714 6.03% Hugh Edward Osmond2 9,161,266 5.34% Lloyds Banking Group plc 6,970,158 4.07% William Alan McIntosh 6,844,529 3.99% Alpha-Gamma Shares Limited 6,585,499 3.84% Royal London Asset Management Limited 6,180,000 3.60% Martin E Franklin 5,885,048 3.43% Legal & General Group plc 5,198,399 3.03%
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).
There are change of control clauses contained in certain of the Group’s financing agreements. upon a change of control of the Company, the principal amounts outstanding and the accrued interest under the Pearl and Impala facility agreements, the Pearl loan notes, the Royal London PIK facility and Royal London PIK notes would become immediately repayable or be required to be immediately redeemed.
essential contracts or arrangements There are a number of relationships with third parties, which are of significant value to the Group. Apart from the two main credit facilities, no single relationship, is considered to be essential to the Group as a whole.
2 Hugh Osmond’s share disclosure differs from that shown in the Directors’ Interest table within the Remuneration Report due to differing reporting requirements as a shareholder and a director under DTR3 and DTR5 respectively. For further information details can be found from the announcements made on 8 and 28 October 2010 and available on the Company’s website www.thephoenixgroup.com
political donations No political donations were made during the year ended 31 December 2010. The Company and its subsidiaries do not intend to make donations to political parties or independent election candidates nor have they made or do they intend to make any donations to Eu political organisations or incur Eu political expenditure.
Charitable contributions During the year the Group made charitable donations of £104,094 details of which are presented in the Corporate Responsibility section on pages 50 to 55.
re-appointment of the auditors Ernst & young Accountants LLP have indicated their willingness to continue in office and a resolution that they be 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 on the consolidated IFRS financial statements. For the MCEv supplementary information and the Group’s uK subsidiaries’ individual financial statements, which are audited by Ernst & young LLP, there is no cap on auditor liability.
Company secretary The Company Secretary throughout the period was Gerald Watson.
Clive bannister Jonathan yates Group Chief Executive Officer Group Finance Director
St Helier, 28 March 2011 66 Phoenix Group Holdings Annual Report and Accounts 2010
This report sets out details of how the Company has applied the principles and complied with the provisions of the Combined Code during the period from 5 July 2010 to 31 December 2010. The Company also supported the standards of the Combined Code prior to its London Premium Listing on 5 July 2010. Where appropriate, for example, in respect of Board and Committee attendance, the position for the full year is shown. From 1 January 2011 the Company is subject to the governance regime of the uK Corporate Governance Code (‘the uK Code’). The Board intends to apply the provisions set down in the uK Code. In particular, in relation to the more notable provisions of the uK Code, it is intended that all directors will be subject to annual re-election by shareholders and that evaluation of the Board will be externally facilitated every three years.
the board The Board comprises the Non-Executive Chairman, the Chief Executive Officer, the Finance Director and eleven other Non-Executive Directors, seven of whom are independent. Biographical details of all Directors are provided on pages 58 to 61. The Board considers that the following Directors are independent as they do not have any interest or business and other relationship which could, or could be perceived to, interfere materially with their ability to act in the best interests of the Company: David Barnes, Charles Clarke, Ian Cormack, Tom Cross Brown, Isabel Hudson, Alastair Lyons and David Woods. The Board has considered the criteria proposed by the Combined Code in assessing the independence of the Directors.
Non-Executive Directors are appointed for a fixed term of three years, and any subsequent terms are considered by the Nomination Committee. The remuneration of the Directors is shown in the Remuneration Report on pages 74 to 85. The terms and conditions of appointment of NonExecutive Directors are on the Company’s website. In accordance with the provisions of the uK Code, all Directors will submit themselves for election or re-election at the Company’s Annual General Meeting on 13 May 2011.
The head office of the Company is in Jersey and, as such, the Board and its Committees hold their meetings in Jersey.
The Chairman, Group Chief Executive Officer and Senior Independent Director There is a division of responsibility, approved by the Board, between the Chairman, Ron Sandler, who is responsible for the leadership and effective operation of the Board and the Group Chief Executive Officer, Clive Bannister, who is responsible to the Board for the overall management and operation of the Group. The Chairman’s other significant commitments are set out in his biographical details on page 58.
The Senior Independent Director, appointed by the Board, is Alastair Lyons. His role is to be available to shareholders whose concerns are not resolved through the normal channels or when such channels are inappropriate. He is also responsible for leading the annual appraisal of the Chairman’s performance by the Non-Executive Directors (which was undertaken in the latter part of 2010) and for leading the process for appointment of a new Chairman, when appropriate.
Board effectiveness The establishment of the current Board was completed in March 2010. In accordance with the Combined Code, the Board undertook an evaluation of its own performance and that of its Committees and individual Directors in the latter part of 2010.
The review was led by the Chairman, with the support of the Company Secretary. It is intended that the next review, expected to be undertaken in the second half of 2011, will be externally facilitated. An action list, with senior executive accountability, has been established to address the recommendations from the evaluation. The review concluded that the Board and its Committees functioned well and effectively. Most of the recommendations related to issues of process and interaction between the Board and the executive. The most significant recommendation was for the establishment of a Board Investment Committee to provide greater focus on investment strategy and performance. This will be established in the first half of 2011.
All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board. To ensure that the Directors maintain up to date skills and their knowledge of the Company, all Directors receive regular presentations on different aspects of the Company’s business and on financial, legal and regulatory issues.
Operation of the Board The terms of appointment for the Directors state that they are expected to attend in person regular (at least six per year) and emergency Board meetings of the Company and to devote appropriate preparation time ahead of each meeting. The Board is scheduled to meet seven times in 2011 including a two day strategy-setting meeting. Additional meetings will be held as required, and the Non-Executive Directors will hold meetings with the Chairman without the Executive Directors being present.
Chairman executive Directors Clive Bannister (CEO)1 – – – – – – – – – – Jonathan Moss2 9 9 – – – – – – – – Simon Smith3 5 5 – – – – – – – – Jonathan yates (FD)4 4 4 – – – – – – – – non-executive Directors
Ian Ashken 9 9 – – – – – – – –
Manjit Dale 9 8 – – – – – – – –
Board Committees The Board has delegated specific responsibilities to four standing committees of the Board. The terms of reference of the Committees can be found on the Company’s website.
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 and 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.
1 Clive Bannister was appointed to the Board on 28 March 2011.
4 Jonathan yates was appointed to the Board on 23 June 2010.
−Reviewed arrangements for whistleblowing should an employee wish to raise concerns, in confidence, about any possible improprieties.
CORPORATE GOVERNANCE REPORT CONTINuEd remuneration Committee Ian Cormack, Chairman David barnes Isabel Hudson
Hewitt New Bridge Street, the Company’s remuneration consultants, provided advice to the Remuneration Committee and are independent of the Company.
risk Committee David Woods, Chairman rené-pierre azria tom Cross brown Isabel Hudson Hugh osmond
The Risk Committee met five times in 2010 following its establishment on 26 February 2010.
The Risk Committee advises the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board’s overall degree of risk aversion, the current financial situation of the Company and, drawing on assessment by the Audit Committee, the Company’s capacity to manage and control risks within the agreed strategy. It advises the Board on all high-level risk matters and does not extend into operational matters which are for the Executive within the overall risk framework determined by the Board. Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 45 to 47.
Communication with shareholders The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues. There is a regular dialogue with institutional shareholders through meetings held on a regular basis. The Chairman and Executive Directors are available to meet institutional investors, fund managers and analysts when required. At these meetings a wide range of relevant issues including strategy, performance, management and governance are discussed. Board members regularly receive copies of the latest analysts’ and brokers’ reports on the Company and the sector, to further develop their knowledge and understanding of external views about the Company.
The Company’s Annual General Meeting provides an opportunity to communicate with its shareholders. At the 2011 meeting, the Company intends to comply with the uK Code as it relates to voting, the separating of resolutions and the attendance of Board Committee Chairmen. Shareholders will be invited to ask questions during the meeting and have an opportunity to meet with the Directors following the conclusion of the formal part of the meeting. In line with the uK Code, details of proxy voting by shareholders will be made available at the meeting and will be posted on the Company’s website following the meeting.
The Company’s Annual Report and Accounts, together with the Company’s interim report, interim management statements and other public announcements and presentations are designed to present a balanced and understandable view of the Group’s activities and prospects and are available on the Company’s website.
The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business Strategy and Performance sections on pages 12 to 47.
The Board’s going concern assessment is included within the Directors’ Report on page 62.
phoenix Group – Directors’ remuneration report for the year ended 31 December 2010 74 Phoenix Group Holdings Annual Report and Accounts 2010
The auditors have reported on certain parts of the Directors’ Remuneration Report and stated whether in their opinion those parts of the report have been properly prepared in accordance with the Companies Act 2006. The report has, therefore, been divided into separate sections for audited and unaudited information.
Remuneration Committee The Group established a Remuneration Committee (the ‘Committee’) on 18 February 2010.
The Committee’s main responsibilities are to: −Establish and operate a framework for remuneration throughout the Group, with particular emphasis on aligning the remuneration policy with the overall aims and risk appetite of the Group −Determine and recommend to the Board the remuneration policy and all elements of pay for the Chairman of the Board; Executive Directors; Executive Committee members; those individuals receiving a base salary greater than £200,000; and those individuals who perform a significant influence function and/or undertake activities which could have a material impact on the risk profile of the Group −Review the design of, and agree targets for, any performance-related incentive schemes operated by the Group and approve the total annual payments made under such schemes −Review the design of all share-based plans (or other plans requiring shareholder approval) for approval by the Board and shareholders, including the overall level of awards in any year, the individual award levels for Executive Directors and Senior Executives and performance targets −Select, appoint and determine the terms of reference for independent remuneration consultants to advise the Committee −Approve remuneration practices within IGNIS, applying similar overall principles as applied to the rest of the Group but relating these to an appropriate peer group of asset managers
The Committee meets at least twice a year but more frequently if required. During the year, four Remuneration Committee meetings were held and details on attendance at meetings are set out in the Corporate Governance Report.
Advice The Committee received independent remuneration advice from its appointed adviser, Hewitt New Bridge Street (‘HNBS’), part of Aon Hewitt. A separate team within Aon Hewitt also provided advice to the Group in respect of actuarial pension services although the Committee does not believe that the independence of its adviser is compromised by this appointment. The Committee also consulted with the Chief Executive Officer, Group HR Director and General Counsel who attended, by invitation, various Committee meetings during the year although no Executive is ever permitted to participate in discussions or decisions regarding their own remuneration. Going forward, input will also be sought from the Chief Risk Officer.
There are five main elements of the remuneration package for Executive Directors and senior executives: −Base salary −Benefits −Pension −Annual Incentives −Long Term Incentives
The policy for Directors for 2011 is described in more detail below.
Salary and benefits Executive Directors’ base salaries are reviewed annually by the Committee taking into account the responsibilities, skills and experience of each individual and salary levels within listed companies of a similar size and complexity. Base salary levels are as follows: name role From 1 January 2011 From 1 January 2010
Incentive awards for 2010 which are in excess of target 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.
For 2011, the maximum incentive potential remains 150 percent of base salary for Executive Directors although the arrangement has been simplified and aligned closer to market practice. The multiplicative approach operated in prior years has been replaced with a more market consistent additive structure. For Executive Directors and Senior Executives, 20 percent of potential will be based on personal measures and 80 percent of potential will be based on the following financial measures: performance Metric % of 80% of incentive potential based on financial measures
Embedded value operating profit 30% Market Consistent Embedded value 30% Cash flow 30% Cost management 10%
REmuNERATION REPORT CONTINuEd 78 Phoenix Group Holdings Annual Report and Accounts 2010
For LTIP awards granted in May 2010, the performance measures are 50 percent based on market consistent embedded value (‘Ev’) growth and 50 percent based on cumulative cash generation, with both targets measured over the 3 financial years commencing 1 January 2010 and underpinned by a debt management assessment. A summary of the targets is set out below: Ev Growth (50 percent of awards)
25 percent of the Ev related component of the award will vest for Ev growth in excess of the risk free rate by 2.5 percent per annum. rising on a pro rata basis until 100 percent vests for Ev growth in excess of the risk free rate by 6 percent per annum.
The current expectation is that Ev and cash generation performance metrics will continue to be used for the 2011 awards, with performance targets (which will be no less challenging than those presented above) set in advance of the awards being granted.
All employee share plans The Group operates a Sharesave scheme which is approved by HM Revenue & Customs. All eligible employees, including Executive Directors, are invited to participate on similar terms to save up to a maximum of £250 each month for a fixed period of three or five years. At the end of the savings period, individuals may use their savings plus a tax-free bonus to buy ordinary shares in the Company at a discount currently capped at 15 percent of the market price set at the launch of each scheme.
IGNIS The Committee is responsible for approving the remuneration practices within IGNIS, the Group’s asset management business. 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.
Non-Executive Directors’ contracts The Non-Executive Directors, including the Group Chairman, have letters of appointment which set out their duties and responsibilities. Appointment is for a fixed term of three years, terminable by one month’s notice on either side. Non-Executive Directors are not eligible to participate in incentive arrangements or receive pension provision or other benefits such as private medical insurance (‘PMI’) and life insurance.
name Date of Letter of Appointment Appointment end date unexpired term
aUDIteD InForMatIon Directors’ emoluments The emoluments of the Directors for 2010 were as follows: name
David Woods6 94,628 – – – – 94,628 – Former Directors Jonathan Evans – – – – – – 24,380 Ashley Silverton – – – – – – 571,775 1 The total figures for Jonathan Moss and Simon Smith do not include the amount of any contribution made to the Group’s employee benefit trust (see notes 2 and 4 below).
2 In lieu of any incentive payment for 2010 £857,188 was contributed to the Group’s employee benefit trust (the sum being calculated by reference to the 2010 corporate and personal performance targets) post year end. The contribution is subject to a recommendation that it be appointed to a sub-trust for the benefit of Jonathan Moss’ family.
3 Jonathan yates joined the Phoenix Group on 4 May 2010 and was appointed to the Board as a Director on 23 June 2010. The detail shown only relates to the period from his appointment as a Director to 31 December 2010. In addition to the amounts shown, as part of his recruitment arrangements Jonathan yates was paid an amount of £20,000.
4 Simon Smith left the Board with effect from 23 June 2010 and his employment terminated on 3 October 2010. His termination provisions were set out in full in the Premium Listing prospectus and are summarised again here. Simon Smith received £538,638 in connection with the termination of his employment representing 12 months salary and benefits. In lieu of any incentive payment for 2010, £611,875 was contributed to the Group’s employee benefit trust (the sum being calculated by reference to the 2010 corporate and personal performance targets post year end and reduced pro-rata to reflect the part of the financial year not worked plus £100,000). The contribution is subject to a recommendation that it be appointed to a sub-trust for the benefit of Simon Smith’s family. In addition, the Committee agreed to allow his 2010 LTIP to vest at the normal vesting date in 2013, subject to the satisfaction of the performance conditions and a two-thirds reduction to reflect the shortened service period. All emolument figures shown relate solely to the period he was a Director of the Group.
8 Benefits comprise car allowance, private medical insurance and life insurance. Included within the benefits figure shown for Jonathan yates is a figure of £44,220 which relates to relocation costs incurred during the period.
Jonathan Moss received a Company contribution of 11.7 percent of salary (up to a maximum earnings limit of £123,600) to a defined contribution pension arrangement. Jonathan yates received a Company contribution of 20 percent of base salary. Simon Smith was a member of the Pearl Final Salary Section (defined benefit) of the Pearl Group Staff Pension Scheme.
REmuNERATION REPORT CONTINuEd 82 Phoenix Group Holdings Annual Report and Accounts 2010
His pension entitlement accrued at 1/60th for each year of service. No contributions were paid or were payable by Simon Smith under the Scheme. Details of Executive Director’s pension arrangements during the year are set out below.
During the year to 31 December 2010, the Group has made the following contributions to the defined contribution scheme: £
*Accrued pension at 31 December 2010 is the member’s deferred pension at date of leaving on 3 October 2010.
2 The Bonus Share Plan (‘BSP’) was introduced to reward a small number of senior executives upon completion of the September 2009 refinancing. BSP awards normally vest on the second anniversary of grant, subject to continued service. In line with the BSP rules, Simon Smith’s BSP awards vested in full on the termination of his employment (3 October 2010) when the share price was 686p and Jonathan Moss’ BSP awards will vest in full on the termination of his employment on 29 March 2011. No further BSP awards will be granted.
3 In March 2010, the Group confirmed the operation of a phantom share award to a small number of senior executives. Individuals were granted a notional number of shares based on a multiple of salary at the time of grant (150% of base salary for the Chief Executive Officer and 125% of base salary for the Group Finance Director at that time (Simon Smith)). Awards (including those granted to Simon Smith and Jonathan Moss who will be treated as good leavers) will vest on the third anniversary of grant generally subject to continued employment, with the value delivered in cash based on the prevailing share price at that time.
4 The performance conditions for the 28 May 2010 award are set out in the Remuneration Policy section of this report. Simon Smith’s 2010 LTIP will vest at the normal vesting date in 2013, subject to the satisfaction of the performance conditions and a two thirds reduction to reflect this shortened service period (i.e. the 159,362 shares under award presented in the table above will be reduced (i) by two-thirds to 53,120 shares; and (ii) further reduced to the extent that performance targets are not met in full). Jonathan Moss’ award will be similarly pro-rated with the 207,171 shares presented in the table reduced to 57,547 shares.
Sharesave At the end of the year, the Executive Directors’ Sharesave share options were as follows: As at 1 Jan 2010
Jonathan yates – – – – – – – – –
During the year ended 31 December 2010, the highest mid-market price of the Group’s shares was 758p and the lowest mid-market price was 557.5p. At 31 December 2010, the Company’s share price was 611p.
Directors’ interests name As at 1 January 2010 or date of appointment if later As at 31 December 2010 and as at 28 March 20102
Jonathan Moss 33,989 162,505 Jonathan yates – – Ian Ashken – 1,260,7595
1 Ron Sandler was awarded 300,000 shares (equivalent to 177,000 shares on a net of tax basis). The share price on the award date of 31 March 2010 was 707.5p. The award of shares was negotiated as part of the terms of his appointment before the Premium Listing.
4 Hugh Osmond is a director of Xercise2 Limited, Xercise Limited and O-Re Holdings uK Limited and as such these are considered as connected persons. Hugh Osmond has a total interest in 29,285,940 shares of which he has beneficial interest over 9,714,015.
5 Ian Ashken holds 1,110,759 shares in his own name. Tasburgh LLC, of which Ian Ashken is a managing member, holds 150,000 shares and is considered a connected person to Mr Ashken.
Approval This report in its entirety has been approved by the Remuneration Committee and the Board of Directors and signed on its behalf by
– Phoenix Group Holdings – FTSE 250 (Excluding Investment Trusts) Index
Source: Thomson Reuters Datastream 85 Phoenix Group Holdings Annual Report and Accounts 2010
In this section 88 Statement of Directors’ responsibilities 89 Independent Auditor’s report 90 Consolidated income statement 91 Statement of consolidated comprehensive income 91 Pro forma reconciliation of Group operating profit to profit attributable to owners 92 Statement of consolidated financial position 94 Statement of consolidated cash flows 95 Statement of consolidated changes in equity 97 Notes to the consolidated financial statements 87 Phoenix Group Holdings Annual Report and Accounts 2010
St Helier 28 March 2011 88 Phoenix Group Holdings Annual Report and Accounts 2010
Independent auditor’s report Report on the consolidated financial statements We have audited the accompanying consolidated financial statements of Phoenix Group Holdings, Cayman Islands, and its subsidiaries (the ‘Group’), which comprise the statement of consolidated financial position as at 31 December 2010, the consolidated income statement, the pro forma reconciliation of Group operating profit to profit attributable to owners, the statement of consolidated comprehensive income, the statement of consolidated changes in equity and the statement of consolidated cash flows for the year then ended, and notes, comprising a summary of the significant accounting policies and other explanatory information.
Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Dutch law, including both the Dutch and International Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Group’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Report on other legal and regulatory requirements Directors’ Report in accordance with Netherlands Civil Code Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Netherlands Civil Code, we have no deficiencies to report as a result of our examination as to whether the Directors’ Report, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the Directors’ Report, to the extent we can assess, is consistent with the consolidated financial statements as required by Section 2:391 sub 4 of the Netherlands Civil Code.
The Hague, 28 March 2011 ernst & Young accountants llP was signed by S. B. Spiessens 89 Phoenix Group Holdings Annual Report and Accounts 2010
Tax attributable to policyholders’ returns 13 (5) 60 Profit before the tax attributable to owners 6 151
The consolidated income statement for the year ended 31 December 2009 incorporates the results of the acquired Pearl businesses for the four month post-acquisition period only.
Other comprehensive income: Actuarial gains of defined benefit pension schemes 32 45 105 Contribution in respect of actuarial losses of defined benefit pension scheme by the with-profit funds 32 27 – Exchange differences on translating foreign operations – (40)
Group costs (61) (17) total operating profit before adjusting items 4.2 373 282
Investment return variances and economic assumption changes on long-term business 5 18 145 variance on owners’ funds 5 19 (70) Amortisation of acquired in-force business (132) (45) Amortisation of customer relationships (18) (7) Non-recurring items 4.2 (139) (105) Profit before finance costs attributable to owners 121 200
Finance costs attributable to owners (115) (49) Profit before the tax attributable to owners 4.2 6 151
Reinsurance payables 25 17 Payables related to direct insurance contracts 29 713 759
Cash and cash equivalents 40 9,188 6,081 total assets 83,564 76,936 93 Phoenix Group Holdings Annual Report and Accounts 2010
STATEMENT oF CoNSoLIDATED CASh FLowS for the year ended 31 December 2010
Cash and cash equivalents at the beginning of the year 6,081 2 Effect of exchange rate changes on cash and cash equivalents − 1 cash and cash equivalents at the end of the year 40 9,188 6,081
The statement of consolidated cash flows for the year ended 31 December 2009 incorporates the cash flows of the acquired Pearl businesses for the four month post-acquisition period only.
STATEMENT oF CoNSoLIDATED ChANGES IN EquITy for the year ended 31 December 2010
Issue of share capital − 33 − − − − 33 − 33 Shares issued in lieu of dividends − 11 − − − − 11 − 11 Issue of ordinary shares – Chairman’s shares − 1 − − − (1) − − − Conversion of contingent rights over shares − 230 (230) (3) − − (3) − (3) Credit to equity for equity-settled share-based payment − − − − − 8 8 − 8 Conversion of warrants into ordinary shares − 9 (2) − − − 7 − 7 Shares in subsidiaries subscribed for by non-controlling interests − − − − − − − 96 96 Partial buy back of non-controlling interest − − − − − − − (19) (19) Restructure of non-controlling interests − − − − − 70 70 (70) − Shares acquired by employee trust − − − (10) − − (10) − (10) Shares distributed by employee trust − − − 4 − (4) − − −
STATEMENT oF CoNSoLIDATED ChANGES IN EquITy for the year ended 31 December 2009
Profit for the year − − − − − 95 95 40 135 Other comprehensive income for the year − − − − (40) 74 34 − 34 Total comprehensive income for the year − − − − (40) 169 129 40 169
Dividends paid to non-controlling interests − − − − − − − (8) (8)
Issue of share capital − 440 − − − − 440 − 440 Issue of share capital into employee trust − 4 − (4) − − − − − Redemption of shares − (41) − − − − (41) − (41) Contingent rights over shares: shares to be issued − − 255 − − − 255 − 255 Credit to equity for equity-settled share-based payment − − − − − 5 5 − 5 Conversion of warrants into ordinary shares − 55 (4) − − − 51 − 51 Repurchase of shares in subsidiaries from non-controlling interests − − − − − − − (3) (3)
The consolidated financial statements have been prepared on a historical cost basis except for investment property, owner-occupied property, and those financial assets, financial liabilities and insurance and investment contracts with DPF that have been measured at fair value.
Assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expenses are not offset in the consolidated income statement unless required or permitted by an IFRS or interpretation, as specifically disclosed in the accounting policies of the Group.
The Group uses the purchase method to account for the acquisition of subsidiary undertakings. The cost of an acquisition is measured at the fair value of the consideration. Any excess of the cost of acquisition over the fair value of the net assets acquired is recognised as goodwill. Any excess of the fair value of the net assets acquired over the cost of acquisition is recognised in the consolidated income statement. Directly attributable acquisition costs are included within administrative expenses except for acquisitions undertaken prior to 2010 when they are included within the cost of the acquisition. Costs directly related to the issuing of debt or equity securities are included within the initial carrying amount of debt or equity securities where these are not carried at fair value.
(b) Critical accounting estimates and judgements The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
1. accounting policies (continued) Insurance and investment contract liabilities Insurance and investment contract liability accounting is discussed in more detail in accounting policies (e) and (f) with further detail of the key assumptions made in determining insurance and investment contract liabilities included in note 43.
Fair value of financial assets and liabilities The fair values of financial assets and liabilities are classified and accounted for as set out in accounting policies (r) and (g) respectively. Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities, without any deduction for transaction costs. These are categorised as Level 1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued where valuation techniques are based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued where valuation techniques are based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates.
The accounting policy for income taxes (both current and deferred taxes) is discussed in more detail in accounting policy (l).
The results and financial position of all Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – assets and liabilities are translated at the closing rate at the period end; – income and expenses denominated in foreign currencies are translated at average exchange rates; – all resulting exchange differences are recognised through the statement of consolidated comprehensive income; and – cash flows are translated at average exchange rates.
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.
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 on 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.
For participating business, the Group follows the provisions of the UK Accounting Standard Board’s FRS 27 Life Assurance. In accordance with these requirements, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the FSA’s realistic capital regime. The key aspects of this methodology are: – liabilities to policyholders arising from the with-profit business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners’ share of projected future bonuses; – acquisition costs are not deferred; and – reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
1. accounting policies (continued) The value of the PvFP is determined in accordance with the FSA’s realistic capital regime. The principal assumptions used to calculate the PvFP are the same as those used in calculating the insurance contract liabilities given in note 43.
If the realistic value of liabilities to policyholders exceeds the value of the assets in the with-profit fund, the unallocated surplus is valued at £nil.
The valuation of liabilities on unit-linked contracts is based on the fair value of the related assets and liabilities. The financial liability is measured based on the carrying value of the assets and liabilities that are held to back the contract. The liability is the sum of the unit-linked liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges.
Investment income and the movements in the fair value of investment contracts without DPF are included in the ‘change in investment contract liabilities’ 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 a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or – a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the Group is provided internally on that basis to the Group’s key management personnel.
Warrants issued by the Company are recognised as a financial liability unless they can be exchanged for a fixed number of the Company’s own shares, or are accounted for as equity-settled share-based payments, in which case they are recognised as equity.
(j) Net asset value attributable to unitholders The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes where the Group has a holding in excess of 50%. This interest is classified at fair value through profit or loss and measured at fair value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group.
(k) Obligations for repayment of collateral received It is the Group’s practice to obtain collateral in stock lending, derivative and 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 ‘obligations for repayment of collateral received’ in the statement of consolidated financial position. The ‘obligations for repayment of collateral received’ are measured at amortised cost, which in the case of cash is equivalent to cost.
Deferred tax is provided for on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not provided in respect of temporary differences arising from the initial recognition of goodwill and the initial recognition of assets or liabilities in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting nor taxable profit. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates and laws enacted or substantively enacted at the period end.
1. accounting policies (continued) (m) Employee benefits Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the consolidated income statement as incurred.
Defined benefit schemes The net surplus or deficit (the economic surplus or deficit) in respect of the defined benefit pension schemes is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted. The discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. As required by IFRIC 14 to the extent that the economic surplus will be available as a refund the scheme assets are stated after a provision for tax that would be borne by the scheme administrators when the refund is made.
Part of the cost of changes in the longevity assumptions of the PGL pension scheme is recoverable from certain withprofit funds to the extent that cash contributions are made to the pension scheme. Recoveries are recognised when the related cash contributions are agreed with the Trustee of the pension scheme and are accounted for as a transfer to other comprehensive income from insurance contract liabilities.
Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. It is tested for impairment annually or when there is evidence of possible impairment. Goodwill is not amortised. For impairment testing, goodwill is allocated to cash-generating units (Phoenix Life and IGNIS Asset Management). Goodwill is impaired when the recoverable amount is insufficient to support its carrying value.
Customer relationships Intangible assets acquired separately 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.
Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortised.
Impairment of financial assets The Group assesses at each period end whether a financial asset or group of financial assets held at amortised cost is impaired. The Group first assesses whether objective evidence of impairment exists for financial assets. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised, are not included in the collective assessment of impairment.
Reinsurance assets are reviewed for impairment at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when there is objective evidence as a result of an event that occurred after initial recognition of the reinsurance asset that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. The impairment loss is recorded in the consolidated income statement. The reinsurers’ share of investment contract liabilities is measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
(v) Earnings per ordinary share Basic earnings per share is calculated using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares and ‘B’ ordinary shares in issue during the year.
Interest income is recognised in the consolidated income statement as it accrues using the effective interest method. Dividend income is recognised in the consolidated income statement on the date the right to receive payment is established, which in the case of listed securities is the ex-dividend date.
(y) Benefits, claims and expenses recognition Gross benefits and claims Claims on insurance contracts and investment contracts with DPF reflect the cost of all claims arising during the period, including policyholder bonuses allocated in anticipation of a bonus declaration. Claims payable on maturity are recognised when the claim becomes due for payment and claims payable on death are recognised on notification. Surrenders are accounted for at the earlier of the payment date or when the policy ceases to be included within insurance contract liabilities. Where claims are payable and the contract remains in-force, the claim instalment is accounted for when due for payment. Claims payable include the costs of settlement.
Where the terms and conditions of warrants are modified before they vest, the increase in the fair value of the warrants, measured immediately before and after the modification, is also charged to the consolidated income statement over the remaining vesting period.
(bb) Segmental reporting The Group’s results are analysed across two reportable segments: Phoenix Life and IGNIS Asset Management. The revenues generated in each reported segment are shown in the segmental information in note 4.
In preparing the consolidated financial statements the Group has adopted the following standards, interpretations and amendments which have been issued by the International Accounting Standards Board and have been adopted for use by the EU. None of these have a material effect on the results of the Group.
– Additional Exemptions for First-time Adopters (Amendments to IFRS 1). – Embedded Derivatives (Amendments to IFRIC 9 and IAS 39). This clarifies the treatment of embedded derivatives.
The International Accounting Standards Board has issued the following standards, interpretations and amendments which, subject to adoption for use by the EU, apply from the dates shown. The Group has decided not to early adopt any of these standards, interpretations or amendments where this is permitted. The impact of adopting them is subject to evaluation but is currently not expected to have a material effect on the results of the Group: – IFRS 9 Financial Instruments (2013). IFRS 9 is the first phase of the project to replace IAS 39 Financial Instruments: Recognition and Measurement and deals with the classification and measurement of financial assets and financial liabilities, including some hybrid contracts. – Annual improvements 2010 (2011). This makes a number of minor improvements to existing standards and interpretations. – Deferred tax: Recovery of Underlying Assets (Amendments to IAS 12) (2012). This provides a practical approach to the measurement of deferred tax liabilities and assets when investment property is measured at fair value, according to whether the entity expects to recover an asset by using or selling it. – Disclosure – Transfer of Financial Assets (Amendments to IFRS 7) (2012). This revises the required disclosures to help users of financial statements evaluate the risk exposures relating to transfers of financial assets and the effect of those risks on an entity’s financial position.
On 2 September 2009, the date of legal completion of the acquisition, certain external debt of the Pearl businesses was restructured as an integral part of the acquisition transaction, specifically the £905 million Pearl facility, the £2,260 million Impala facility and the Royal London PIK notes and facility. Of the £825 million outstanding under the £905 million Pearl facility, £325 million was assigned to Phoenix Group Holdings in exchange for £75 million consideration, £75 million of the remaining £500 million was converted into two tranches of £37.5 million each of secured C loan notes and the terms of the remaining £425 million were amended. The terms of the £2,260 million Impala facility were also amended. Of the £350 million Royal London PIK notes and facility outstanding (comprising principal and capitalised interest), £250 million was assigned to Phoenix Group Holdings in exchange for the issue to Royal London of 1.5 million ‘B’ ordinary shares and 12.36 million warrants for ‘B’ ordinary shares. The terms of the remaining £100 million PIK notes and facility were then amended. The banks and other lenders involved in this restructuring are collectively known as ‘the Lenders’.
Predominantly all revenues from external customers are sourced in the UK.
Net premiums written from: External customers 1,449 − − − 1,449 Other segment − − − − −
Other operating expenses: Profit/(loss) before finance costs and tax 274 43 (90) − 227
Tax attributable to policyholders’ returns (5) − − − (5) Segmental result before the tax attributable to owners 168 43 (205) − 6 * The Group has entered into derivatives to protect the Group’s net exposure to interest rate fluctuations and this reallocation derives the net economic interest exposure of the Group.
Net investment income: Offset interest income on interest swaps against interest expenses − − (16) − (16)
Other operating expenses: Profit/(loss) before finance costs and tax 249 9 (96) − 162
Offset interest income on interest swaps against interest expense − − 16 − 16
Tax attributable to policyholders’ returns 60 − − − 60 Segmental result before the tax attributable to owners 287 9 (145) − 151 111 Phoenix Group Holdings Annual Report and Accounts 2010
Operating profit/(loss) before adjusting items 388 46 (61) − 373 Investment return variances and economic assumption changes on long-term business 18 − − − 18 variance on owners’ funds 16 − 3 − 19 Amortisation of acquired in-force business (132) − − − (132) Amortisation of customer relationships (15) (3) − − (18) Non-recurring items (107) − (32) − (139) Financing costs attributable to owners − − (115) − (115) Segment result before the tax attributable to owners 168 43 (205) − 6
Non-recurring items included: – a charge of £78 million related to the court approved Guaranteed Annuity Option Compromise scheme for Phoenix & London Assurance Limited. This reduced longevity risk from the business whilst providing immediate policyholder benefit enhancements and resulted in a charge recognised in the consolidated income statement as a change in insurance contract liabilities and administrative expenses of £74 million and £4 million respectively; and – other non-recurring items of £27 million include costs associated with the Phoenix Life site rationalisation and associated staff reductions and the Group’s transformation programme with its outsourcers.
4.3 Segmental total assets and total liabilities assets £m liabilities £m
5.1 Life assurance business Operating profit for life assurance business is based on expected investment returns on financial investments backing owners’ and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
5.2 Owners’ funds For non-long-term business including owners’ funds, the total investment income, including fair value gains, is analysed between a calculated longer term return and short-term fluctuations.
The variances excluded from operating profit in relation to owners’ funds are as follows: 2010 £m 2009 £m variances on owners’ funds of: Subsidiary undertakings 7 9 The Company 12 (79)
The variances on owners’ funds of the Company comprises fair value gains/(losses) arising from movements in the fair value of warrants in issue over the Company’s shares.
The principal assumptions underlying the calculation of the longer term investment return are: Gilts (15 year gilt) 4.5 3.7 Other fixed interest (15 year gilt plus 0.6%) 5.1 4.3 2009 £m
Fund management based fees 62 30 Investment contract income 100 71 7. net investment income 2010 £m 2009 £m
General business result − 2 Income received from outsourcer 14 − Income under Royal London transitional services agreement 5 31 Insurance claim − 11 Other income 6 23 114 Phoenix Group Holdings Annual Report and Accounts 2010
Other expenses mainly comprise professional fees, information technology expenses and other general expenses.
Wages and salaries 134 56 Social security contributions 13 5 Other pension costs 11 4 2010 number 2009 Number average number of persons employed Phoenix Life 758 875 IGNIS Asset Management 520 534
Audit of the consolidated financial statements 0.7 0.8 The auditing of accounts of associates of the Company pursuant to legislation 3.5 3.5 Other services supplied pursuant to such legislation: Audit related 0.7 0.7 Services as reporting accountants 6.6 0.2
The total remuneration of the auditors of the Company for services as reporting accountants mainly comprised services provided in respect of the premium listing.
Attributable to: 13. tax (credit)/charge 13.1 Current year tax (credit)/charge 2010 £m 2009 £m
Current tax: UK Corporation tax 30 (15) Overseas tax 7 5
Tax at standard UK* rate of 28% 2 42 Net tax losses on group restructuring not matched in accounts (110) (63) Untaxed income and gains (61) − Disallowable expenses 18 10 Adjustment to tax charge in respect of prior years 16 (3) Movement in non-profit surplus taxed at less than 28% 20 (51) Policyholder tax calculation methodology − 48 Tax relief on accrued interest not valued − 11 Profits taxed at rates other than 28% (3) 12 Tax losses not previously valued (8) − Prior year deferred tax 12 − Deferred tax rate change (19) − Current year losses not valued 41 − Deductible temporary differences not valued 11 −
Policyholder tax charge/(credit) 5 (60) total tax credit for the year (69) (44) * The Group’s two operating segments operate predominantly in the UK. The reconciliation of the tax credit has, therefore, been completed by reference to the standard rate of UK tax rather than by reference to the Jersey income tax rate of 0% which is applicable to Phoenix Group Holdings.
On 30 March 2010, the Board declared a dividend of €0.17 per share in respect of the year ended 31 December 2009. The total dividend amounted to £20 million and was paid on 15 April 2010.
15. earnings per share The profit attributable to owners for the purposes of calculating earnings per share has been calculated as set out below. This is after adjusting for profits attributable to non-controlling interests.
Profit for the year 80 135 Share of result attributable to non-controlling interests (50) (40) Profit attributable to owners 30 95 117 Phoenix Group Holdings Annual Report and Accounts 2010
The diluted earnings per share of 20.1p (2009: 89.8p) has been based on the profit of £30 million (2009: £95 million) and a diluted weighted average number of ordinary shares outstanding during the year of 149 million (2009: 106 million) calculated as follows: million million
In 2009, the Founders’, Sponsors’ and IPO warrants were dilutive up until 2 September 2009 and had the effect of increasing the weighted average number of ordinary shares in calculating the diluted weighted average number of ordinary shares.
On 2 September 2009 the Company issued 36,000,000 contingent rights over its shares, none of which have been included in diluted earnings per share figures as none of the conditions were satisfied and therefore no shares would have been issued. On 5 July 2010, the Company completed the restructure of these contingent rights over shares which saw 32,400,000 of the contingent rights over shares converted into the same number of ordinary shares and the holders of the contingent rights over shares become entitled to receive a further 3,600,000 ordinary shares in aggregate if before 22 June 2013 (i) an offer is made to acquire all or a majority of the Company’s issued ordinary share capital or substantially all of the Company’s assets (in each case such transaction having become unconditional in all respects); or (ii) any party or parties acting in concert becomes interested in more than 50% of the ordinary shares of the Company through the issue of shares by the Company. As the conditions of this entitlement were not met in the period, these additional shares have not been included in the diluted earnings per share figures.
Authorised: 410 million (2009: 300 million) ordinary shares of €0.0001 each 31,750 22,050 Nil (2009: 110 million) ‘B’ ordinary shares of €0.0001 each − 9,700
Shares in issue at 1 January 75,000,000 5,583 ‘B’ ordinary shares issued on acquisition of the Pearl businesses 40,700,000 3,588 Ordinary shares issued in part settlement of debt restructuring fees 3,500,000 307 ‘B’ ordinary shares issued in part settlement of debt restructuring fees 7,070,000 620 ‘B’ ordinary shares issued on assignment of PIK notes and facility 1,500,000 131 ‘B’ ordinary shares issued to the employee trust 500,000 44 Ordinary shares redeemed on acquisition of the Pearl businesses (6,038,344) (533) Ordinary shares issued on conversion of warrants 7,969,076 710 Shares in issue at 31 December 130,200,732 10,450
On 13 January 2010, 147,925 ‘B’ ordinary shares were issued and on 15 January 2010, a further 1,937,198 ‘B’ ordinary shares were issued totalling 2,085,123. Both of these issues were pursuant to the exchange invitation for the insiders’ warrants and were issued at a premium of £9 million. On 31 March 2010, 177,000 ‘B’ ordinary shares were issued to the Chairman at a premium of £1 million. As announced previously, the Chairman had the entitlement under his letter of appointment to an award of 300,000 ‘B’ ordinary shares. In order to satisfy this agreement, shares were issued representing the net of tax value, with the Group funding the relevant taxes. On 5 July 2010, the Company completed the restructuring of the contingent rights over its shares. Under this restructuring the Company issued to each holder of contingent rights over shares 9 ordinary shares for every 10 ordinary shares that such holder would have received on crystallisation of the contingent rights over shares. 32,400,000 contingent rights over shares in issue were, therefore, converted into the same number of ordinary shares and were issued at a premium of £230 million. On 22 October 2010, the Company implemented a placing in connection with the operation of the Alternative Coupon Satisfaction Mechanism (‘ACSM’) in respect of the 2009 deferred coupon on the £500 million Perpetual Reset Capital Notes issued by Pearl Group Holdings (No. 1) Limited (‘PGH1’). The Company issued 5,020,000 new ordinary shares on 27 October 2010 at a premium of £33 million. During the year, the Company issued a further 5,339 shares at a premium of £30,058.
17. Shares held by the employee trust and group entities 2010 £m 2009 £m
At 1 January 4 − Issued in year − 4 Purchased in year 10 − vested to employees in year (4) − Shares issued to group entity on conversion of contingent rights 3 −
The carrying amount of the liability relating to the cash-settled options at 31 December 2010 is £1 million (2009: £nil) and is included within other payables.
2009 Long-term incentive plan Certain employees were granted nil-cost options to acquire an allocated number of ordinary shares during 2009. These options vested in full on achievement of the Company’s premium listing. There were no cash settlement alternatives.
Under the SAyE arrangement, participants remaining in the Group’s employment at the end of the 3 or 5 year saving period are entitled to use their savings to purchase shares at an exercise price of £5.63. Employees leaving the Group for certain reasons are able to use their savings to purchase shares within six months of their leaving before the end of their 3 and 5 year periods.
Bonus share plan In 2009, certain employees were granted nil-cost options to acquire an allocated number of ordinary shares. There were no performance criteria associated with these awards and no cash settlement alternatives. The contractual life of the awards is 2 years.
Deferred cash plan With effect from 2 September 2009, a number of executives were given deferred cash awards the value of which will be equal to a fixed number of Phoenix Group Holdings shares on 2 September 2012 and will be payable on this date provided the executive remains in employment.
The fair value of the awards has been determined assuming that all granted shares vest. As the award is a cash settled scheme, the fair value of the expense is updated at every period and to reflect movements in the Phoenix Group Holdings share price.
On 15 January 2010 the remaining 4,000,000 outstanding Sponsors’ warrants were converted into 727,271 ordinary shares.
Chairman’s shares On 24 September 2009 it was agreed to grant the Chairman 300,000 ‘B’ ordinary shares as part of the remuneration package to secure his appointment. On 26 February 2010 it was agreed to modify the terms of the award. On 31 March 2010 177,000 ‘B’ ordinary shares were issued and a cash payment of £1 million was made. The effect of this modification is to leave the 2009 charge of £2.5 million unchanged and to recognise a reduction in equity for the cash payment to settle the tax liability associated with the award of the shares.
The weighted average share price at the date of exercise for the rewards exercised is £6.77 (2009: £nil).
The weighted average remaining contractual life for the rewards outstanding as at 31 December 2010 is 2.5 years (2009: 2.0 years).
Profit for the year 20 30 50 Dividends paid − (18) (18) Restructure of non-controlling interest (70) − (70) Coupon paid, net of tax relief (47) − (47) Partial buyback of non-controlling interest (19) − (19) Shares in subsidiaries subscribed for by non-controlling interests − 96 96
19.1 Perpetual Reset Capital Securities On 1 January 2010, PGH1 had in issue £500 million of Perpetual Reset Capital Securities (‘the Notes’) which are admitted to the Official List of the UK Listing Authority and to trading on the LSE.
During the year the Company exercised a call option to acquire a number of the Notes from an external party for consideration of £4 million. This transaction has been recognised in the statement of consolidated financial position as a reduction of £19 million in non-controlling interests.
Life assurance business: Investment contracts with DPF 11,709 − 11,326 −
At 1 January 721 − On acquisition of the Pearl businesses − 546 Transfer from income statement 143 175 123 Phoenix Group Holdings Annual Report and Accounts 2010
(c) On 3 June 2008, Axial Fixed Income Opportunities S.a.r.l. issued B loans consisting of €9,397,311; £3,015,429 and US$4,476,558. These loans accrue a fixed interest rate of 0.1% plus a variable profit related element and mature in June 2015. Due to the strengthening of the pound against the dollar, the carrying value has fallen during the year. These loans were settled in full on 21 March 2011.
(e) The refinancing loan from Abbey National Property Investments was brought into the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Abbey National Property Investments finances to the value of the associated property reversions. As part of the arrangement Abbey National Property Investments receive an amount calculated by reference to the movement in the Halifax House Price Index and NPLL and NPI Limited have undertaken to indemnify Abbey National Property Investments against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years. During the year, a repayment of £24 million was made.
(f) On 9 February 2010 the Group sold a portion of its loan holding in Axial Credit Opportunities Holdings Limited to an external third party. This loan included two credit facilities, namely the B1 and B2 loans. The B1 loans are entitled to interest calculated at LIBOR plus a margin of 3.50%. The B2 loans are entitled to a variable profit related element. These loans would have matured in June 2015, but were settled in full on 21 March 2011.
(h) Unsecured loan notes of £72 million were issued by Impala Holdings Limited (‘Impala’) at par on 14 May 2008 at an interest rate of LIBOR minus 1% per annum with a final maturity date of 2012. During the year £6 million of these loan notes have been repaid and £12 million were outstanding.
The borrowings under the £2,260 million facility are secured by: – first fixed and floating charges over all the assets and undertaking of PGH (LC1) Limited and PGH (LC2) Limited (including their respective 12.5% shareholding in Impala, all real estate, book debts, bank accounts, investments and other assets); and – a limited recourse share charge granted by PGH2 over its 75% shareholding in Impala.
23. Deposits received from reinsurers 2010 £m 2009 £m carrying value and fair value: Amount due for settlement after 12 months 384 394
In addition to receiving the cash collateral set out above, it is also the Group’s practice to obtain collateral in the form of marketable securities. This collateral is held on behalf of the Group and is not recognised in the statement of consolidated financial position as either an asset or an associated liability. The total value of the collateral held under such arrangements in respect of reinsurance treaties was £1,898 million (2009: £1,846 million).
The fair values of derivative financial instruments are as follows: assets 2010 £m liabilities 2010 £m £m £m
Warrants over shares in Phoenix Group Holdings − 5 − 23
The amount recoverable after one year is £2,247 million (2009: £2,143 million). The amount payable after one year is £1,517 million (2009: £1,394 million).
Where the Group receives collateral in the form of marketable securities which it is not permitted to sell or re-pledge except in the case of default, it is not recognised in the statement of financial position. The fair value of financial assets accepted as collateral but not recognised in the statement of financial position amounts to £313 million (2009: £188 million).
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 and on 15 October 2010, following an issue of ordinary shares by the Company under a scrip dividend, the terms of the IPO warrants were amended to entitle the holder to purchase 1.009507 ordinary shares per IPO warrant and the exercise price was reduced to €10.90.
The exercise period for both the IPO and Founders’ warrants commenced on the later of: – consummation by the Company of a business combination; and – first anniversary of the date the units were admitted to trading on Euronext.
24. Derivatives (continued) Warrants over shares (continued) The warrants will expire at the close of trading on the London Stock Exchange on the first business day after 6 February 2013 or earlier upon redemption or liquidation. Once the warrants become exercisable, the Company may call the warrants for redemption: – in whole but not in part; – at a price of €0.01 per warrant; – upon not less than 30 days’ prior written notice of redemption to each warrant holder; and – if, and only if, the reported last sale price of the share equals or exceeds €13.75 per share for any 20 trading days within a period of 30 consecutive trading days ending on the third business day prior to the notice of redemption to warrant holders. On 2 September 2009 the threshold of €13.75 was increased to €16.50 and was subsequently amended to €16.34 on 15 October 2010.
The IPO warrants are listed and were previously valued using the warrant price quoted on the London Stock Exchange for the Company. Due to the relatively low number of IPO warrants in issue, they are thinly traded and the quoted price is not considered to be the best indicator of their fair value. As a result the IPO warrants have been valued using an extended Black-Scholes valuation model. The key assumptions used to ascertain a value as at 31 December 2010 are as follows: – share price as at 31 December 2010 of £6.11; – volatility of 30%; – the warrants are not adjusted for dividends; and – the valuation incorporates the impact of amending some of the terms of the warrants on 15 October 2010.
The exercise period terminates on the first to occur of: – 15th anniversary of the date issued; – date fixed for the redemption of the warrants; and – liquidation of the Company.
These Lenders’ warrants are not traded in an active market and have therefore been valued using an extended Black-Scholes valuation model to capture the embedded barrier feature. The key assumptions used to ascertain a value are the same as for the IPO warrants (see above). The value of the warrants at the year end was £280,000 (2009: £2 million).
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 entitled the holder to purchase one ‘B’ ordinary share at a price of €11 per share, subject to adjustment. Following the achievement of the Company’s Premium Listing, the Royal London warrants relate to ordinary shares rather than ‘B’ ordinary shares. On 15 October 2010, following an issue of ordinary shares by the Company under a scrip dividend, the terms of the warrants were amended to entitle the holder to purchase 1.009507 ordinary shares per warrant.
The Royal London warrants are not traded in an active market and have therefore been valued using an extended Black-Scholes valuation model.
Financial liabilities at fair value through profit or loss: Designated upon initial recognition 11,020 9,774 11,020 9,774 Held for trading – derivatives 2,431 2,842 2,431 2,842
The leasehold properties provision has been made for amounts in respect of the excess of lease rentals and other payments on properties that are currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties. The discount rate used ranged between 5.00% and 5.46% and it is expected that the provision will be utilised over the next 10 years.
Staff related provisions primarily relate to redundancy costs of staff that have been transferred under outsourcing contracts. This provision will be utilised over the next 2 years.
Current tax payables 99 103 Net deferred tax liabilities 569 776 total tax liabilities 668 879
Acquired in-force business 670 736 Customer relationships 114 123 Unrealised gains on investments − 7 Surplus within the non-profit funds 64 96 Provisions and other temporary differences 17 19 Adjustment for insurance policies held with related parties in respect of the
PGL Pension Scheme 20 17 Gross deferred tax liabilities 885 998 Less: offset against deferred tax assets (316) (222) net deferred tax liabilities 569 776
Deferred tax has been provided on the surpluses within the non-profit funds on the assumption that all such surpluses will eventually be distributed to owners.
Payables relating to direct insurance contracts includes claims outstanding on general insurance and life assurance. The general insurance element amounts to £263 million (2009: £254 million).
29. Payables related to direct insurance contracts (continued) General insurance Due to the historic diversity of issued general insurance policies and taking into account the legal and regulatory environment for hazardous risks, it is possible that additional claims could emerge from long tail unexpired risks albeit it is not possible to predict the quantum, location or timing of such occurrences.
Amount due for settlement after 12 months − 8 32. Pension schemes The Group operates two main staff pension schemes, the Pearl Group Staff Pension Scheme and the PGL Pension Scheme.
PGL Pension Scheme Economic surplus (including £92 million available as a refund on a winding up of the scheme) 165 62 Provision for tax on that part of the economic surplus available as a refund on a winding up of the scheme (32) − Net economic surplus 133 62 Adjustment for insurance policies held with related parties and eliminated on consolidation (74) (66) Reported surplus/(deficit) 59 (4)
32.1 Pearl Group Staff Pension Scheme The Pearl Group Staff Pension Scheme (‘the Pearl Scheme’) comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The final salary and hybrid sections of the Pearl Scheme are closed to new members.
Defined benefit scheme The defined benefit scheme is funded by payment of contributions to a separately administered trust fund. A Group company, Pearl Group Holdings (No. 2) Limited is the principal employer of the Pearl Scheme. The principal employer meets the administration expenses of the Pearl Scheme.
The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2010, undertaken by independent qualified actuaries. Following the UK Government’s announcement in the summer of 2010, the inflation index used to derive statutory pension increases (which for the Pearl Scheme applies to deferred pension benefits) has been changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). Due to a number of differences between the indices, including both constituents and construction, CPI is expected to be less than RPI over the long term and thus the scheme liabilities have reduced. The reduction in the scheme liabilities has been estimated at £50 million as at 31 December 2010. This has been treated as an assumption change and recognised within actuarial gains in other comprehensive income. The present values of the defined benefit obligation and the related current service costs have been measured using the projected unit credit method.
Rate of general long-term increase in salaries 4.45 4.50 Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.45 3.50 Rate of increase for deferred pensions (2010: CPI, 2009: RPI) 2.95 3.50 Discount rate 5.40 5.65 Inflation – RPI 3.45 3.50 Inflation – CPI 2.95 n/a Expected rate of return on scheme assets 4.80 5.10
It has been assumed that post retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial valuation as at 30 June 2009, based on the standard tables PMA92 for males and PFA92 for females and based on year of use. This includes medium cohort projections for future mortality improvements, subject to a minimum annual improvement of 1.25% at each age. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 29.6 years and 31.7 years for male and female members respectively.
Current service cost (1) − Interest cost (100) (32) Expected return on scheme assets 82 27
Actual return less expected return on scheme assets 19 36 Experience gains arising on scheme liabilities 70 58 Loss due to changes in assumptions underlying scheme liabilities (51) (65)
Fair value of scheme assets 1,725 1,684 Present value of defined benefit obligation (1,802) (1,805)
The defined benefit obligation arises from plans that are wholly or partly funded. The change in the fair value of the scheme assets is as follows: 2010 £m 2009 £m
Defined benefit scheme The defined benefit section of the PGL Scheme is a final salary arrangement which is generally closed to new entrants.
The valuation has been based on an assessment of the liabilities of the PGL Scheme as at 31 December 2010, undertaken by independent qualified actuaries. Following the UK Government’s announcement in the summer of 2010, the inflation index used to derive statutory pension increases (which for the PGL Scheme applies to deferred pension benefits) has been changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). Due to a number of differences between the indices, including both constituents and construction, CPI is expected to be less than RPI over the long term and thus the scheme liabilities have reduced. The reduction in the scheme liabilities has been estimated at £16 million as at 31 December 2010; this has been treated as an assumption change and recognised within actuarial gains in other comprehensive income.
The present values of the defined benefit obligation and the related current service costs have been measured using the projected unit credit method.
Rate of general long-term increase in salaries 4.45 4.60 Rate of increase for pensions in payment 3.30 3.50 Rate of increase for deferred pensions (2010: CPI, 2009: RPI) 2.95 3.60 Discount rate 5.40 5.70 Inflation – RPI 3.45 3.60 Inflation – CPI 2.95 n/a Expected rate of return on scheme assets 5.10 5.40
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 average life expectancy from retirement for a member currently aged 60 retiring at age 60 is 28.5 years and 30.6 years for male and female members respectively.
Current service cost (4) (2) Interest cost (63) (21) Expected return on scheme assets 63 17
The surplus/(deficit) recognised in the statement of financial position is as follows: 2010 £m 2009 £m
Fair value of scheme assets 1,252 1,126 Present value of defined benefit obligation (1,193) (1,130)
Expected return on scheme assets 63 17 Actual return less expected return on scheme assets 81 23 137 Phoenix Group Holdings Annual Report and Accounts 2010
32. Pension schemes (continued) 32.2 PGL Pension Scheme (continued) Defined benefit scheme (continued) The change in the present value of the defined benefit obligation is as follows: 2010 £m 2009 £m
At 1 January 1,130 − On acquisition of the Pearl businesses − 1,176 Current service cost 4 2 Interest cost 63 21 Actuarial losses/(gains) 42 (53) Benefits paid (46) (16)
At 1 January 1,126 − On acquisition of the Pearl businesses − 1,096 Expected return on scheme assets 63 17 Actual return less expected return on scheme assets 81 23 Provision for tax on the economic surplus available as a refund (32) − Contributions by the employer 60 6 Benefits paid (46) (16)
Cash and other 33 21 Provision for tax on the economic surplus available as a refund (32) −
Contributions totalling £30 million are expected to be paid into the scheme in 2011.
Fair value of scheme assets 1,252 1,126 Defined benefit obligation (1,193) (1,130) Surplus/(deficit) 59 (4)
Goodwill Goodwill of £77 million was created upon the acquisition of the Pearl businesses and is not amortised. The carrying value of goodwill has been tested for impairment at the period end. No impairment has resulted as the value in use of this intangible continues to exceed its carrying value. value in use has been determined as the present value of certain future cash flows associated with the IGNIS Asset Management business and the management services business of the Phoenix Life segment. The cash flows used in this calculation are consistent with those adopted by management in the Group’s operating plan and for the period 2014 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business. Future cash flows have been valued using a discount rate of 9.5% (2009: 10.0%).
These investment management contract customer relationships have been allocated to the IGNIS Asset Management segment.
34. Property, plant and equipment 2010 £m 2009 £m cost or valuation At 1 January 36 − On acquisition of the Pearl businesses − 35
Depreciation At 1 January (2) − Charge for the year (3) (2)
At 1 January 1,915 − On acquisition of the Pearl businesses − 1,807
Held for trading – derivatives 3,197 3,540 Designated upon initial recognition
37. Financial instrument fair value hierarchy 37.1 Determination of fair value and fair value hierarchy of financial instruments Level 1 financial instruments. The fair value of financial instruments traded in active markets (such as publicly traded securities and derivatives) is based on quoted market prices at the period end. The quoted market price used for financial assets is the current bid price on the trade date. If the bid price is unavailable a ‘last traded’ approach is adopted. For units in unit trusts and shares in open ended investment companies, fair value is by reference to published bid values.
37. Financial instrument fair value hierarchy (continued) 37.1 Determination of fair value and fair value hierarchy of financial instruments (continued) Level 3 financial instruments. The Group’s financial assets determined by valuation techniques using non-observable inputs are based on a combination of independent third party evidence and internally developed models. Third party evidence in the form of net asset valuation statements, are used in the valuation of the majority of indirect property, private equity and hedge funds. Broker quotes are received for certain bonds where the market is considered to be inactive. Internally developed models have been used in the valuation of a small number of investment vehicles which due to their nature and complexity have no external market. Inputs into the internally developed models are based on market observable data where available.
Fixed and variable rate income securities 34,336 5,816 747 40,899 total financial assets at fair value 51,813 9,942 1,945 63,700 level 1 £m level 2 £m level 3 £m total fair value £m
Net asset value attributable to unit holders 1,769 − 168 1,937 total financial liabilities at fair value 1,770 11,502 179 13,451 142 Phoenix Group Holdings Annual Report and Accounts 2010
Net asset value attributable to unit holders 792 − 154 946
Total financial liabilities at fair value 2,089 10,373 154 12,616 37.3 Level 3 financial instrument sensitivities Included in Level 3 investments are two property investment structures with a value of £96 million (2009: £106 million) and £117 million (2009: £110 million) respectively.
The first of these investments has been independently valued using a multi scenario discounted cash flow model. Under the optimistic scenario, the fair value of the investment would increase by £36 million (2009: £18 million) and in the worst case scenario the fair value would decrease by £63 million (2009: £8 million).
The second investment has been valued by taking the fair value of the property within the structure, which has been independently valued, less the fair value of the debt within the structure. The valuation is sensitive to movements in yields on the underlying property portfolio. An increase in yields of 25bps would reduce the value of the investment by £23 million (2009: £19 million) and a reduction in yields of 25bps would increase the value by £25 million (2009: £21 million).
There were no transfers of financial liabilities at fair value between Level 1 and Level 2 and between Level 2 and Level 1.
Financial liabilities at fair value Derivatives 9 − Financial liabilities designated at fair value through profit or loss upon initial recognition
38. Stock lending The Group lends listed financial assets held in its investment portfolio to other institutions. The Group conducts its stock lending programme only with well-established, reputable institutions in accordance with established market conventions.
The financial assets do not qualify for derecognition as the Group retains all the risks and rewards of the transferred assets except for the voting rights. The carrying value of listed financial assets lent at 31 December 2010 that have not been derecognised amounted to equities of £nil (2009: £398 million) and fixed and variable rate income securities of £9,994 million (2009: £8,214 million).
It is the Group’s practice to obtain collateral in stock lending transactions, usually in the form of cash or marketable securities.
Where the Group receives collateral in the form of marketable securities which it is not permitted to sell or re-pledge except in the case of default, such collateral is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as such collateral amounts to £648 million (2009: £5,135 million).
Bank and cash balances 2,101 2,223 Short-term deposits (including demand and time deposits) 7,087 3,858
All deposits are subject to fixed interest rates. The carrying amounts approximate to fair value at the period end. Cash and cash equivalents in long-term business operations and collective investment schemes of £8,545 million (2009: £5,551 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.
41. cash flows 41.1 Cash flows from operating activities 2010 £m 2009 £m
Profit for the year before tax 11 91 Non-cash movements in profit for the year before tax
Fair value (gains)/losses on: Investment property (87) (159) Financial assets (3,324) 354
Unrealised gains on: Depreciation of property, plant and equipment 3 2 Amortisation of intangible assets 165 57 Change in present value of future profit (7) (4) Change in unallocated surplus 143 175 Change in deposits received from reinsurers (12) (25) Interest income on trust account − (2) Share-based payment (income)/charge (3) 5 Interest expense on borrowings 269 87 Net expected return on pension assets 18 9 Foreign currency exchange gains (10) (1)
(Increase)/decrease in investment assets (1,308) 487 Increase in reinsurance assets (69) (160) Increase/(decrease) in insurance contract and investment contract liabilities 423 (951) Increase/(decrease) in obligation for repayment of collateral received 6,054 (85) Net decrease/(increase) in working capital 1,114 (269) cash generated/(absorbed) by operations 3,392 (357)
The capital policy of each Group holding company ensures sufficient liquidity to meet creditor obligations and dividend expectations through the combination of cash buffers and cash flows from the Group’s operating companies.
Pillar 2 The Pillar 2 capital requirements are based on a self-assessment methodology, called the Individual Capital Assessment (‘ICA’). This methodology determines the capital requirement to ensure that the life company’s realistic liabilities can be met in one year’s time with a 99.5% confidence level, or in other words to be able to withstand a one in 200 year event. The FSA reviews each life company’s ICA and may impose additional capital requirements if necessary in the form of Individual Capital Guidance (‘ICG’).
The Group’s material with-profit funds at 31 December 2010 are shown separately in the capital position statement and the less material with-profit funds are aggregated and shown as ‘Other’. The with-profit funds shown separately are the Phoenix with-profit fund (‘PLL PWP’), the Britannic with-profit fund (‘PLL BWP’), the SMA with-profit fund (‘SMA WPF’), the Scottish Provident with-profit fund (‘SPL WPF’) and the Pearl with-profit fund (‘Pearl WPF’). The with-profit funds of London Life Limited and Phoenix & London Assurance Limited (‘PALAL’) are aggregated within the ‘Other’ column.
The Group has a number of internal loan arrangements in place, which allow the Group to provide capital support to other areas of the business. In addition to these internal loan arrangements, the Group has in place a number of internal reinsurance contracts which are structured to manage the capital position between certain life funds. For the purposes of presentation in the capital position statement, an allocation of capital is made from Phoenix Life owners’ funds to non-participating and with-profit funds in respect of life assurance subsidiaries of the Phoenix Life owners’ funds.
non-participating funds – any available surplus held in these funds is attributable to owners. Capital within the non-participating funds may be made available to meet capital requirements elsewhere in the Group subject to meeting regulatory and legal requirements, and after consideration of the internal capital requirements of the relevant fund and company. Any transfer of surplus may give rise to a tax charge subject to availability of tax relief elsewhere in the Group.
Owners’ funds held outside long-term fund − − 2,194 2,194 (1,329) 865 Owners’ funds held in long-term fund − 715 − 715 − 715 total owners’ funds at 31 December 2010 − 715 2,194 2,909 (1,329) 1,580
Adjustments onto a regulatory basis: Other qualifying capital: Subordinated debt (note 3) − − 645 645
Adjustments onto a regulatory basis: Other qualifying capital: Subordinated debt (note 3) − − − − − − − Contingent loans − − − − − 736 736 Allocation of Group capital − − − − − 52 52 total available capital resources at 31 December 2010 1,048 963 1,032 295 713 1,023 5,074
Note 2: Regulatory adjustments to liabilities primarily reflect differences between the realistic valuation basis for the with-profit business used in calculating owners’ funds on an IFRS basis, and the more prudent regulatory valuation basis used to calculate the FSA peak 1 capital resources.
Note 3: Of the £645 million (2009: £720 million) subordinated debt attributed to the Phoenix Life segment of the Group £445 million (2009: £520 million) is internal to the Group, comprising £250 million (2009: £250 million) provided to Pearl and £195 million (2009: £270 million) provided to PALAL. The remaining £200 million (2009: £200 million) is external subordinated debt issued by PLL.
Adjustments onto a regulatory basis: valuation difference between IFRS basis and
Total available capital resources at 31 December 2009 4,470 586 1,919 6,975
Total available capital resources at 31 December 2009 984 927 803 294 643 819 4,470
Note 4: ‘Other activities and consolidation adjustments’ represent the contribution to consolidated owners’ funds arising outside of the Phoenix Life business. This includes the owners’ funds of IGNIS Asset Management and the holding companies of the Group but primarily consists of the consolidation adjustments to eliminate the cost of the Group’s investment in the Phoenix Life business.
42. capital statement (continued) An analysis of the movement in available capital resources for the period 1 January 2010 to 31 December 2010 is shown below: With-profit nonparticipating £m
An analysis of the movement in available capital resources for the period 1 January 2009 to 31 December 2009 is shown below: With-profit Nonparticipating £m
Changes in methodology and assumptions: 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: Adjustment for internal loans in excess of counterparty limits − − − − − − − (37) (37)
43. Risk management The Group is exposed to a number of risks in its business including those arising from underlying assets and liabilities. The Group’s overall approach to risk management is described in the Performance section of the annual report and accounts.
43.1 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 various cash flow requirements. Subject to this, the Group seeks to use available capital to achieve increased investment returns, balancing risk and reward, to generate additional value for policyholders and shareholders.
Derivatives are used in a number of the Group’s funds, within policy guidelines agreed by the Board of each life company and overseen by Investment Committees of the Boards of each life company supported by management oversight committees. Derivatives are primarily used for efficient portfolio management or for risk hedging purposes.
There are two principal sources of credit risk for the Group: – Credit risk which results from direct investment activities, including investments in fixed and variable rate income securities, equities, derivatives, collective investment schemes and the placing of cash deposits; and – Credit risk which results indirectly from activities undertaken in the normal course of business. Such activities include premium payments, outsourcing contracts, reinsurance, exposure from material suppliers and the lending of securities.
There is an exposure to spread changes affecting the prices of corporate bonds and derivatives. This exposure applies to with-profit funds, unit-linked funds, non-profit funds (where risks and rewards fall wholly to shareholders) and to shareholders’ funds.
A 100 basis point widening of credit spreads, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full financial year and in equity of £223 million (2009: £196 million).
Quality of credit assets An indication of the Group’s exposure to credit risk is the quality of the investments and counterparties with which it transacts. The following table provides information regarding the aggregate credit exposure with external credit ratings: aaa £m aa £m a £m
Fixed and variable rate income securities 25,694 4,872 5,369 3,145 343 511 828 137 40,899 Reinsurers’ share of insurance contract liabilities − 599 2,199 20 − − 109 12 2,939
Credit ratings have also not been disclosed in the above tables for holdings in collective investment schemes. The risk of loss to the Group due to credit default on its holdings in collective investment schemes is considered low due to the tradeable nature of these investments.
Fixed and variable rate income securities 37,137 − − − − 521 37,658 Reinsurers’ share of insurance contract liabilities 2,850 − − − − 10 2,860 Reinsurance receivables 264 − − − − − 264
The Group is mainly exposed to market risk as a result of: – the mismatch between liability profiles and the related asset investment portfolios; – the investment of surplus assets including shareholder reserves yet to be distributed, surplus assets within the withprofit funds and assets held to meet regulatory capital and solvency requirements; and – the income flow of management charges from the invested assets of the business.
The Group manages the levels of market risk that it accepts through an approach to investment management that determines: – the constituents of market risk for the Group; – the basis used to fair value financial assets and liabilities; – the asset allocation and portfolio limit structure; – diversification from benchmarks by type of instrument and geographical area; – the net exposure limits by each counterparty or group of counterparties, geographical and industry segments; – control over hedging activities; – reporting of market risk exposures and activities; and – monitoring of compliance with market risk policy and review of market risk policy for pertinence to the changing environment.
With-profits business and non-participating business within the with-profit funds are exposed to interest rate risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest stocks and derivatives. For with-profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits. The contribution of these funds to the Group result is determined primarily by either the shareholders’ share of the declared annual bonus or by the shareholders’ interest in any change in value in the capital advanced to the Group’s with-profit funds.
In the non-participating funds, policy liabilities are duration matched with primarily fixed and variable rate income securities, with the result that sensitivity to changes in interest rates is very low.
The portfolio of marketable equity securities and property investments which is carried in the statement of consolidated financial position at fair value has exposure to price risk. The Group’s objective in holding these assets is to earn higher long-term returns by investing in a diverse portfolio of high quality equities and properties. Portfolio characteristics are analysed regularly and price risks are actively managed in line with investment mandates. The Group’s holdings are diversified across industries and concentrations in any one company or industry are limited.
Equity and property price risk is primarily borne in respect of assets held in with-profit or unit-linked funds. For unit-linked funds this risk is borne by policyholders and asset movements directly impact unit prices and hence policy values. For with-profit funds policyholders’ future bonuses will be impacted by the investment returns achieved and hence the price risk. In addition some equity investments are held in respect of equity holders’ funds. The Group as a whole is exposed to price risk fluctuations impacting the income flow of management charges from the invested assets of all funds.
43. Risk management (continued) 43.3 Financial risk analysis (continued) 43.3.2 Market risk (continued) A 10% increase in equity prices, with all other variables held constant, would result in an increase in the profit after tax in respect of a full financial year and in equity of £21 million (2009: a decrease of £8 million).
Sensitivity of profit after tax and in equity to fluctuations in currency exchange rates is not considered significant at 31 December 2010, since unhedged exposure to foreign currency was relatively low.
43.3.3 Financial soundness risk Financial soundness risk is a broad risk category encompassing liquidity and funding risk, as well as tax risk and pension risk.
Some of the Group’s commercial property investments are held through a unit trust managed by IGNIS Asset Management. This unit trust has the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. To date, the unit trust has continued to process both investments and realisations in a normal manner and has not imposed any restrictions or delays.
The following table provides a maturity analysis showing the remaining contractual maturities of the Group’s undiscounted financial liabilities and associated interest. Liabilities under insurance contract contractual maturities are included based on the estimated timing of the amounts recognised in the statement of consolidated financial position in accordance with the requirements of IFRS 4: 1 year or less or on demand £m 1−5 years £m
Greater than 5 years £m no fixed term £m total £m
A significant proportion of the Group’s financial assets are held in gilts, cash, supranationals and highly rated securities which the Group considers sufficient to meet the liabilities as they fall due.
43. Risk management (continued) 43.5 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; Options – unanticipated changes in policyholder option exercise rates giving rise to increased claims costs; and
Phoenix has a number of small books of general insurance business across the Group. These have been closed to new business for a number of years and are in run-off.
A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year and an increase in equity of £23 million (2009: £27 million).
A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year and an increase in equity of £164 million (2009: £91 million).
An increase of 5% in annuitant longevity, 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 £162 million (2009: £83 million).
During the year a number of changes were made to assumptions to reflect changes in expected experience or to harmonise the approach across the enlarged Group. The impact of material changes during the year was as follows: Increase/ (decrease)
For funds not subject to realistic reporting, the method used to determine valuation interest rates generally follows the regulations set out in the Prudential Sourcebook for Insurers.
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.
Some pensions contracts include guaranteed annuity options (see deferred annuities in section 43.5.2 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 £1,541 million (2009: £1,469 million) and £20 million (2009: £52 million) respectively.
With-profit funds: Pensions: Deferred annuities – with guarantees 8,660 73 469 − Deferred annuities – without guarantees 1,593 107 − − Immediate annuities 4,450 − 705 − Unitised with-profit 1,291 9,143 102 −
non-profit funds: Deferred annuities – with guarantees 132 − 56 − Deferred annuities – without guarantees 1,013 6 477 − Immediate annuities 8,592 − 701 −
Non-profit funds: Deferred annuities − with guarantees 117 − 59 − Deferred annuities − without guarantees 1,012 5 474 − Immediate annuities 8,073 − 704 −
43. Risk management (continued) 43.5 Insurance risk (continued) 43.5.2 Managing product risk (continued) 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-participating 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’).
Deferred annuities Deferred annuity policies are written to provide either a cash benefit at retirement, which the policyholder can use to buy an annuity on the terms then applicable, or an annuity payable from retirement. The policies contain an element of guarantee expressed in the form that the contract is written in i.e. to provide cash or an annuity. Deferred annuity policies written to provide a cash benefit may also contain an option to convert the cash benefit to an annuity benefit on guaranteed terms; these are known as GAR policies. Deferred annuity policies written to provide an annuity benefit may also contain an option to convert the annuity benefit into cash benefits on guaranteed terms; these are known as Guaranteed Cash Option (‘GCO’) policies.
44. Operating leases Operating lease rentals charged within administrative expenses amounted to £7 million (2009: £15 million).
The Group has commitments under non-cancellable operating leases as set out below: 2010 £m 2009 £m
Not later than 1 year 11 11 Later than 1 year and no later than 5 years 41 42 Later than 5 years 47 54
The principal operating lease commitments concern office space located at Bothwell Street, Glasgow; St vincent Street, Glasgow; Juxon House, London; Harcourt Street, London and Cheapside, London.
Transactions with pension schemes During the year the Group entered into the following transactions with its pension schemes: transactions 2010 £m
The Pearl Scheme has invested in collective investment schemes that are controlled by the Group. At 31 December 2010 the Pearl Scheme held 1,118,197 units (2009: 1,118,197 units) in the IGNIS Systematic Strategies Fund and 147,928,525 units (2009: 115,477,491 units) in the IGNIS Liquidity Fund. The value of these investments at 31 December 2010 was £168 million (2009: £154 million) and £148 million (2009: £115 million) respectively.
Transactions with key management personnel The total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are as follows: 2010 £m 2009 £m
Pursuant to the Placing referred to in note 16, Hugh Osmond took up his contractual pre-emption rights and received 310,000 shares at 660 pence per share.
As a result of the acquisition of the Pearl businesses, some of the Directors received shares and contingent rights over shares in Phoenix Group Holdings in exchange for shares they held in the acquired group of companies. In addition, some Directors have received share-based payments. Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration Report.
On 29 November 2010, Pearl Assurance Limited and London Life Limited invested a total of €7,774,476 in Sant Topco Holdings II S.a.r.l (‘Topco’) through a subscription of 3,110 ‘B’ ordinary shares with a par value of € 25. This brings the Group’s direct investment in Topco and its ultimate holding company to approximately €166 million. As shareholders in Topco, TDR, Hugh Osmond and Edward Hawkes also subscribed for ‘B’ ordinary shares alongside Pearl Assurance Limited and London Life Limited.
47. contingent liabilities In the normal course of business the Group is exposed to certain legal issues, which involve litigation and arbitration, and as at the period end, the Group has a contingent liability in this regard.
Following a previous acquisition by the Pearl businesses, the shares in PLL and certain loans were transferred from the non-profit fund to the shareholder fund of PA (GI) Limited at their admissible regulatory value. HM Revenue & Customs (‘HMRC’) had challenged the tax treatment of these transfers in the year ended 31 December 2004 and litigation was anticipated in 2010. During the year, HMRC confirmed that they will not pursue litigation.
London Life Limited has provided information to the FSA on its categorisation of working capital to owner funds in 2006. The Directors are confident in this treatment, which is supported by legal and actuarial advice, but note that the FSA have not concluded their review into the matter and therefore a contingent liability of £27 million (2009: £54 million) exists if London Life Limited were required to transfer this working capital back to policyholder funds.
48. Group entities The principal subsidiary undertakings of the Group are as follows: country of incorporation and principal place of operation class of shares held (wholly-owned unless otherwise indicated)
IGNIS Fund Managers Limited (unit trust management) UK Ordinary shares of £1 IGNIS Investment Services Limited (investment management company) UK Ordinary shares of £1
PGH (LCA) Limited (finance company) UK Ordinary shares of £1 PGH (LCB) Limited (finance company) UK Ordinary shares of £1 PGH (LC1) Limited (finance company) UK Ordinary shares of £1 and
Preference shares of £1 PGH (TC1) Limited (holding company) UK ‘A’ ordinary shares of £1 and
Preference shares of £1 PGH (TC2) Limited (holding company) UK ‘A’ ordinary shares of £1 and
Preference shares of £1 168 Phoenix Group Holdings Annual Report and Accounts 2010
Pearl Group Holdings (No. 1) Limited (finance company) UK Ordinary shares of £0.05 Pearl Group Holdings (No. 2) Limited (holding company) UK Ordinary shares of £1 Pearl Life Holdings Limited (holding company) UK Ordinary shares of £1 Pearl Group Services Limited (service company) UK Ordinary shares of £1 PGS 2 Limited (finance company) UK Ordinary shares of £1 Pearl Group Management Services Limited
(service company) UK Ordinary shares of £1 Phoenix Life Holdings Limited (holding company) UK Ordinary shares of £1
49. events after the reporting period With effect from 1 January 2011, all of the long-term business and some of the shareholders’ funds of Phoenix & London Assurance Limited were transferred to Phoenix Life Limited for £nil consideration in accordance with the terms of a scheme under Part vII of the Financial Services and Markets Act 2000 approved by the High Court on 11 February 2011. Both of these companies are wholly owned subsidiaries of the Group and therefore there is no financial impact from an IFRS perspective for the Group.
On 21 March 2011, the Group successfully completed the restructuring of a £1.2 billion portfolio of corporate loans leading to a reduction in asset volatility. The restructuring has involved the repayment of a number of borrowings (see note 22). The restructuring has minimal financial impact from an IFRS perspective.
R Sandler C Bannister J yates A Lyons I Ashken R P Azria D Barnes C Clarke I Cormack T Cross Brown M Dale I Hudson H Osmond D Woods
St Helier 169 Phoenix Group Holdings Annual Report and Accounts 2010
Despite continuing volatility in market conditions, we achieved a 15 percent growth in MCEv, demonstrating the resilience of Phoenix Life and the Group’s ability to enhance shareholder value through innovative management actions.
– Group MCEv basis 174 MCEv earnings per ordinary share 175 Statement of consolidated comprehensive income
– Group MCEv basis 176 Group MCEv analysis of earnings 177 Reconciliation of Group IFRS equity to MCEv Net Worth 178 Notes to the MCEv financial statements
We have audited the Consolidated Phoenix Group MCEV (‘Phoenix Group MCEV’) supplementary information on pages 174 to 187 for the year ended 31 December 2010 which comprises the Summarised consolidated income statement – Phoenix Group MCEV basis, MCEV earnings per ordinary share, Statement of consolidated comprehensive income – Phoenix Group MCEV basis, Reconciliation of movement in equity – Phoenix Group MCEV basis, Phoenix Group MCEV analysis of earnings, Reconciliation of Group IFRS equity to Phoenix Group MCEV net worth and related notes. The Phoenix Group MCEV supplementary information has been prepared in accordance with the basis of preparation set out on pages 178 to 181.
This report is made solely to the Company’s Directors in accordance with our engagement letter dated 26 March 2010. Our audit work has been undertaken so that we might state to the Company’s Directors those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s Directors as a body, for our audit work, for this report, or for the opinions we have formed.
Scope of the audit of the Phoenix Group MCEV supplementary information
An audit involves obtaining evidence about the amounts and disclosures in the Phoenix Group MCEV supplementary information sufficient to give reasonable assurance that it is free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Phoenix Group MCEV supplementary information.
SUMMARISED CONSOLIDATED INCOME STATEMENT – GROUP MCEV BASIS for the year ended 31 December 2010 £m
Life MCEV operating earnings 758 380 Management services operating profit 20 14 Ignis Asset Management operating profit 46 34 Group costs (70) (54) Group MCEV operating earnings before tax1 754 374 Economic variances on covered business 101 701 Economic variances on non-covered business (38) (245) Other non-operating variances on covered business (54) 9 Non-recurring items on non-covered business (75) (87) Gain on debt refinancing – 491 Finance costs attributable to owners (168) (390) Group MCEV earnings before tax 520 853 Tax on operating earnings (211) (105) Tax on non-operating earnings (54) (197) Total tax (265) (302) Group MCEV earnings after tax 255 551 1 The Group has moved to calculating the expected contribution on existing business using longer term expectations of investment returns. The pro forma ‘Group MCEV operating earnings before tax’ and ‘Economic variances on covered business’ before tax would have been £538 million and £537 million respectively for the year ended 31 December 2009 if the expected contribution had been calculated using longer term rates of return.
MCEV EARNINGS PER ORDINARY SHARE for the year ended 31 December 2010 2010 Pro forma
Issue of share capital 33 275 Conversion of warrants into ordinary shares 7 51 Redemption of shares – (41) Movement in equity for equity-settled share-based payments (2) 5 Dividends paid on ordinary shares (54) – Shares issued in lieu of dividends 11 – Group MCEV equity at 31 December 2,104 1,827
1 Comprises the Group holding companies that do not form part of the Phoenix Life and Ignis Asset Management divisions. 2 Includes a re-allocation of a £250 million loan asset from Covered business to Other Group companies. This does not affect the closing Group MCEV or MCEV earnings.
Foreign exchange – – – (44) (44) Other movements – – – (14) (14) Capital and dividend flows – internal (134) (51) (15) 200 – Capital and dividend flows – external – – – 290 290 1 Comprises the Group holding companies that do not form part of the Phoenix Life and Ignis Asset Management divisions.
Group net assets attributable to owners of the parent as reported under IFRS 1,580 1,412 Goodwill and other intangibles in accordance with IFRS removed (net of tax) (391) (413) Value of in-force business in accordance with IFRS removed (net of tax) (1,345) (1,419) Adjustments to IFRS reserving (138) (98) Tax adjustments (90) (99) Revalue listed debt to market value 94 235 Eliminate value of contingent loan asset1 (276) (194) Fair value adjustments2 5 (40) Eliminate pension scheme surplus3 (net of tax) (112) (45) Other adjustments 30 (9) MCEV net worth attributable to owners of the parent (643) (670) MCEV value of in-force business included (net of tax) as set out in note 2 2,747 2,497 Closing Group MCEV 2,104 1,827 1 Removal of value attributed to contingent loans issued by holding companies to long-term funds as their expected repayments are captured within the 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 Pension scheme net of tax, as described in note 32 to the IFRS consolidated financial statements.
Overview The supplementary information on pages 174 to 187 has been prepared on a Market Consistent Embedded Value (‘MCEV’) basis except for the items described further below.
Whilst the IFRS consolidated financial statements consolidate the results of the Pearl businesses for the period from acquisition on 28 August 2009, the MCEV supplementary information treats the Pearl businesses as having been acquired on 1 January 2009. For this reason the results for the year ended 31 December 2009 are referred to as pro forma.
Covered business The MCEV calculations cover all long-term insurance business written by the Group, but exclude Ignis Asset Management and the management service companies.
MCEV methodology The embedded value of covered business is based on a market-consistent methodology. Under this methodology, assets and liabilities are valued in line with market prices and consistently with each other.
b) Value of in-force business (‘VIF’) The value of in-force covered business consists of the following components: − present value of future profits; − time value of financial options and guarantees; and
The approach adopted to calculate VIF combines deterministic and stochastic techniques (each of which is discussed in more detail below): − deterministic techniques have been used to value cash flows whose values vary in a linear fashion with market movements. These cash flows are valued using discount rates that reflect the risk inherent in each cash flow. In practice, it is not necessary to discount each cash flow at a different discount rate, as the same result is achieved by projecting and discounting all cash flows at risk-free rates. This is known as the ‘certainty equivalent approach’; and
− stochastic techniques have been used to value cash flows that have an asymmetric effect on cash flows to shareholders. Here, the calculation involves the use of stochastic models developed for the purposes of realistic balance sheet reporting.
Solvency II will introduce a new capital regime for insurers from the end of 2012. These disclosures do not take account of the impact of the change in regime as this is still under development.
d) Taxation Full allowance has been made for the value of tax that would become payable on the transfer of surplus assets out of nonprofit funds. This allowance reflects the projected pace of releases of surplus from non-profit funds that is not required to support with-profits funds.
Expected existing business contribution (in excess of reference rate)2 43 39 82
Life pro forma MCEV at 1 January 2009 1,816 2,265 4,081
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.
(b) Liquidity premiums In October 2009, the CFO Forum published an amendment to MCEV principles to reflect the inclusion of a liquidity premium. The changes affirm that the reference rate may include a liquidity premium over and above the risk-free yield curve for liabilities which are not liquid, given that the matching assets are able to be held to maturity.
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 2010. The scenario generator and calibration are consistent with that used for realistic balance sheet reporting.
A LIBOR Market Model is used to generate risk-free rates over a complete yield curve, calibrated to the UK nominal spot curve plus 10 basis points, consistent with the deterministic projections. Interest rate volatility is calibrated to swaption implied volatilities, as per the sample below. Option term (years)
Best estimate levels of volatility are assumed for directly held property. The model implied volatility for 2010 is 15% (2009: 15%).
Operating earnings The Group uses normalised investment returns in calculating the expected existing business contribution. In 2009 the expected contribution was calculated using a one-year gilt forward rate plus the Group’s long-term expectations of excess investment returns on equities, properties and bonds. From 2010, the Group considers that an average return over the remaining term of our in-force business is more appropriate than using a short-term rate and is more consistent with the Group’s expectation of longer term rates of return. Therefore, the Group has moved to calculating the expected contribution on existing business using a 15-year gilt rate at the beginning of the reporting period plus 10 basis points and long-term expectations of excess investment returns.
The table below sets outs the asset risk premiums used: 2010 2009
The table below summarises the value of these debt obligations. 2010 2009
Listed debt and non-controlling interests Perpetual Reset Capital Securities 439 304 540 264 Phoenix Life Limited subordinated debt 216 170 211 156
Unlisted debt Pearl and Impala facilities 2,639 2,760 Royal London PIK notes and facility 106 102
The table below summarises the key sensitivities of the MCEV of covered business at 31 December 2010: Life MCEV
(16) Swap curve as reference rate, retaining appropriate liquidity premiums (272)
1 44 bps is assumed to relate to default risk. 2 Minimum regulatory capital is defined as the greater of Pillar 1 and Pillar 2 capital requirements without any allowance for the Group’s capital management policy.
Banks and nominee companies 207 73 100,803,370 59 range of shareholders no. of shareholders % no. of shares %
FTSE250 FTSE350 life 190 Phoenix Group Holdings Annual Report and Accounts 2010
Shareholder services Managing your shareholding Our Registrar, Computershare, maintains the Company’s Register of Members. Shareholders may request a hard copy of this Annual Report from our registrar and if you have any further queries in respect of your shareholding, please contact them directly using the contact details set out below.
Registrar details Computershare Investor Services (Jersey) Limited PO Box 329 Queensway House Hilgrove Street St Helier Jersey JE4 9XY
The information booklet will detail how shareholders may elect to take up a scrip dividend alternative. Such elections must be received by the Company’s Registrars by 5pm on 26 April 2011.
They can be very persistent and extremely persuasive, and a 2006 survey by the Financial Services Authority has reported that the average amount lost by investors is around £20,000. It is not just the novice investor that has been duped in this way; many victims had been successfully investing for several years. Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free reports into the Company.
If you deal with an unauthorised firm, you would not be eligible to receive payment under the Financial Services Compensation Scheme. The FSA can be contacted by completing an online form at regulated/law/alerts/overseas.html or, if you do not have access to the internet, on 0845 606 1234.
More detailed information on this or similar activity can be found on the FSA website 191 Phoenix Group Holdings Annual Report and Accounts 2010
As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements within the 2010 Annual Report and Accounts. The Group undertakes no obligation to update any of the forward-looking statements contained within the 2010 Annual Report and Accounts or any other forward-looking statements it may make. The 2010 Annual Report and Accounts has been prepared for the members of the Company and no one else. The Company, its Directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed. nothing in the 2010 Annual Report and Accounts should be construed as a profit forecast.
A structured approach that guides the act of acquiring and disposing of assets to maximise shareholder and policyholder investment returns.
AUm Assets Under Management – This represents all assets actively managed or administered by the asset management operations of the Group, excluding the cash collateral managed through stocklending arrangements.
Combined Code Standards of good corporate governance practice in the UK relating to issues such as board composition and development, remuneration, accountability, audit and relations with shareholders. The version of the Code which applied to the Company in 2010 was the June 2008 edition.
CnHr Cost of residual non-hedgeable risk – The expected cost of non-hedgeable risks that can have an asymmetric impact on shareholder value to the extent these risks have not already been reflected in the PFvP or TvFOG. These can include both financial risks and non-financial risks such as mortality, persistency and expense risk.
fSA Financial Services Authority – The UK regulator for the financial services industry. GAo/GAr Guaranteed Annuity Option/Rate – An option or rate available to certain pension policyholders to acquire an annuity at a contractually guaranteed conversion rate.
Gearing net shareholder debt as a percentage of the sum of Group MCEv, net shareholder debt and the PvFP of IGnIS.
HmrC Her Majesty’s Revenue and Customs. ICA Individual Capital Assessment – A firm’s assessment of the adequacy of its capital required to ensure that assets exceed liabilities 99.5% of the time over a 1-year period. IfrS International Financial Reporting Standards – Accounting standards, Interpretations and the Framework adopted by the International Accounting Standards Board. ImC Investment Management Contract – A contract between an investor and an investment manager.
lSE London Stock Exchange. ltICr Long-Term Insurance Capital Requirement – Capital required to be held for regulatory purposes in respect of investment, expense and insurance risks. ltIP Long-Term Incentive Plan – A reward system designed to incentivise employees’
long-term performance. mCEV Market Consistent Embedded value – A measure of the consolidated value of shareholders’ interests calculated using the Group’s MCEv methodology as described in note 1 of the MCEv supplementary information.
mSA Management Services Agreement – A contract that exists between either Phoenix Life and management services or between management services and their outsourced services providers.
A type of company or a fund in the UK that is structured to invest in other companies with the ability to adjust its investment criteria and fund size.
PGH EBt Phoenix Group Holdings Employee Benefit Trust. PIK Payment-in-kind. PPfm Principles and Practices of Financial Management – An FSA requirement to produce a publicly available account of how a company’s with-profits business is run to ensure customers are treated fairly.
Premium listing From 6 April 2010 premium listings replaced primary listings on the London Stock Exchange. Under a premium listing companies are required to comply with ‘premium’ or ‘super-equivalent’ standards.
Public warrant warrants of the Company currently listed on the London Stock Exchange. PVfP Present value of Future Profits – The present value of profits attributable to shareholders arising from the in-force business.
Solvency II A fundamental review of the capital adequacy regime for the European insurance industry. Solvency II aims to establish a set of EU-wide capital requirements and risk management standards that will replace the current Solvency I requirements.
tVfoG Time value of Financial Options and Guarantees embedded within insurance contracts.
UEl Useful Economic Life – The period over which future economic benefits are expected to be derived from an asset.
UKCPt UK Commercial Property Trust Limited – A property subsidiary of the Group which is domiciled in Guernsey and listed on the London Stock Exchange.
UKlA UK Listing Authority – The FSA acting as the competent authority for listing, and which maintains the official list.
plus the Time value of Financial Options and Guarantees (TvFOG) less the Frictional Cost of Required Capital (COC).
Business overview Phoenix Group is the UK’s largest specialist closed life and pension fund consolidator with over 6 million policyholders and in excess of £67 billion of assets under management.