1 The shares of this subsidiary undertaking are held by a trust. The Group has assessed that it exercises overall control in respect of this subsidiary undertaking. 2 These subsidiary undertakings are directly owned by Phoenix Group Holdings. 3 201 Bishopsgate, London, EC2M 3AE. 4 1 Wythall Green Way, Wythall, Birmingham, B47 6WG.
5 25/28 North Wall Quay, Dublin 1, Ireland. 6 Ugland House, Grand Cayman, Cayman Islands, KY1-1104.
The following subsidiary undertakings were fully disposed of during the period and were deconsolidated from the date of disposal: Ɛ Scottish Mutual International Limited (life assurance company) (for further details see note I1.3); Ɛ Castle Hill Credit Opportunities Holdings Limited (for further details see note I1.4); Ɛ Castle Hill Fixed Income Opportunities Sarl; Ɛ PUTM Bothwell Emerging Market Debt Absolute Return Fund; Ɛ Ignis Funds SICAV – Ignis Absolute Return Emerging Market Debt Fund; Ɛ Ignis Funds SICAV – Global Emerging Markets Equity Fund; and
The following subsidiary undertakings were reclassified as significant holdings due to the loss of effective control by the Group during the period: Ɛ Henderson Global Care Funds – Henderson Institutional Global Care Managed Fund.
Ɛ is part of a coordinated plan to dispose of a separate line of business.
Gain on disposal of discontinued operations 107 Attributable tax credit 3
The gain on disposal of discontinued operations of £110 million recognised in the results for the year ended 31 December 2014, comprised net consideration received of £384 million less net assets and liabilities disposed of £254 million, transaction costs and tax.
I1.1.2 Cash flows generated by discontinued operations The net cash flows generated by Ignis (including cash flows relating to the divestment) are as follows: 2014 £m
Cash flows from investing activities of £311 million comprises net consideration received of £384 million less attributable transaction costs of £5 million, less cash and cash equivalents disposed of £68 million.
Goodwill 57 Customer relationships and other intangibles 136 Financial assets 37 Property, plant and equipment 10 Cash and cash equivalents 68 Deferred tax assets 3 Other assets 53 Deferred tax liabilities (27) Provisions (23) Other liabilities (60) Net assets and liabilities disposed of 254
I1. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE AND DISPOSALS continued
I1.2.1 Annuity liabilities transfer On 31 July 2014, the Group entered into a reinsurance agreement, effective from 1 January 2014, to reinsure certain portfolios of the Group’s annuity liabilities to Guardian in exchange for the transfer of financial assets of £1.7 billion. The annuity in-payment liabilities are currently held in the Group’s with-profit funds. It is highly probable that the reinsurance agreement will be replaced by a formal scheme under Part VII of the Financial Services and Market Act 2000 to transfer the annuity liabilities to Guardian or a member of its group. Management’s expectations are that the necessary approvals will be in place by the end of 2016. The parties remain committed to fulfilling their contractual obligations in relation to the Part VII. Accordingly the assets and liabilities to be transferred have been classified as held for sale.
Liabilities classified as held for sale include the annuity liabilities reinsured to Guardian and directly attributable expense reserves where they will be extinguished at the time of transfer. Assets classified as held for sale include the associated reinsurers’ share of insurance contract liabilities.
The Group completed the sale of its entire interest in BAGI to National Indemnity Company on 18 March 2014 for cash consideration of £21 million. The carrying value of the net assets transferred was £17 million, resulting in a pre-tax gain of £4 million.
Long-term incentive plan (‘LTIP’) In 2009, the Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in the form of nil-cost options to acquire an allocated number of ordinary shares. Assuming no good leavers or other events which would trigger early vesting rights, these awards will be subject to performance conditions tied to the Company’s financial performance in respect of growth in MCEV, cumulative cash generation over a three year period and total shareholder return (‘TSR’). For all LTIP awards made from 2015 onwards, a holding period applies so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividends will accrue for LTIP awards until the end of the holding period. There are no cash settlement alternatives.
1.3 (for 3.25 year scheme) and 1.9 (for 5.25 year scheme)
Expected volatility (%) based on the Company’s share price volatility to date 30.0 30.0 30.0 30.0 30.0
Deferred bonus share scheme (‘DBSS’) With effect from 31 December 2010, part of the annual incentive for certain executives, for any year, is deferred into Phoenix Group Holdings’ shares. This grant of shares is conditional on the employee remaining in employment with the Group for a period of three years. For DBSS awards made in 2015 and for those to be made in subsequent years, the three year deferral period will run to the dealing day following the three year anniversary of the announcement of the annual results. Dividends will accrue for DBSS awards over the three year deferral period. The 2015 DBSS was granted on 28 September 2015 and is expected to vest on 19 March 2018. The 2012 DBSS awards vested during the year. The 2013 awards are expected to vest on 27 March 2016 and the 2014 awards are expected to vest on 28 March 2017.
The following tables illustrate the number of, and movements in, share options during the year: No. of share options 2015
The weighted average share price at the date of exercise for the rewards exercised is £8.36 (2014: £6.90).
The weighted average remaining contractual life for the rewards outstanding as at 31 December 2015 is 1.6 years (2014: 1.4 years).
I3. CASH FLOWS FROM OPERATING ACTIVITIES The following analysis gives further detail behind the ‘cash utilised operations’ figure in the statement of consolidated cash flows.
Profit for the period before tax from continuing operations 152 465 Loss for the period before tax from discontinued operations (see note I1.1.1) – (27) Profit for the period before tax 152 438 Non-cash movements in profit for the year before tax Fair value (gains)/losses on: Investment property (140) (200) Financial assets 1,125 (3,494) Change in fair value of borrowings 48 19 Amortisation and impairment of intangible assets 163 113 Change in present value of future profits 6 9 Change in unallocated surplus (84) 11 Share-based payment charge 4 7 Interest expense on borrowings 136 156 Net interest income on Group defined benefit pension scheme asset/liability (17) (4) Other expenses and losses on pension schemes 3 3 Gain on sale of BAGI (see note I1.5) – (4) Gain on divestment of Ignis (see note I1.1.1) – (107) Decrease in investment assets 2,468 5,556 (Increase)/decrease in reinsurance assets (1,134) 43 (Decrease)/increase in insurance contract and investment contract liabilities (3,487) 37 (Decrease)/increase in deposits received from reinsurers (30) 23 Decrease in obligation for repayment of collateral received (229) (6,330) Net decrease in working capital 440 8 Cash utilised by operations (576) (3,716)
This note sets out the Group’s approach to managing capital, provides an analysis of available capital resources and explains the different regulatory capital requirements of the Group and its life companies.
The Group’s Capital Management Framework is designed to achieve the following objectives: Ɛ provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary excess capital; Ɛ ensure sufficient liquidity to meet obligations to policyholders and other creditors; Ɛ optimise the level of debt in the Group statement of consolidated financial position to maintain an investment grade credit rating; and
Regulatory capital adequacy at a Group level is calculated at the ultimate EEA insurance parent undertaking which is PLHL. This continues to be the case after 1 January 2016 under the Solvency II regime.
From 1 January 2016, the primary sources of capital used by the Group comprise the Group Basic Own Funds calculated on a Solvency II basis (see Solvency II regulatory capital measures below).
Under the regulatory rules applicable until 31 December 2015, each UK life company and PLHL was required to retain sufficient capital at all times to meet the regulatory capital requirements mandated by the PRA. In addition to EU-directive-based ‘Pillar 1’ individual and group capital requirements, the PRA also stipulated a ‘Pillar 2’ of risk-based capital requirements that were implemented in the UK. The actual capital requirement for each UK life company and PLHL is based on whichever of the Pillar 1 or Pillar 2 requirement turns out to be more onerous for the company and for PLHL. Each UK life company generally holds an amount of capital that is greater than the minimum required amount to allow for adverse events in the future that may use capital and might otherwise cause the company to fail the minimum level of regulatory capital test.
Prior to 1 January 2016, PLHL maintained two separate measures of its regulatory capital resources and related capital requirements. These were the Insurance Groups’ Directive (‘IGD’) and PLHL ICA, which correspond to the Pillar 1 and Pillar 2 requirement respectively.
PLHL ICA Prior to 1 January 2016, the Group undertook a further group solvency calculation, the ‘PLHL ICA’, at the same level at which the IGD calculation was performed. This involves an assessment, on an economic basis, of the capital resources and requirements arising from the obligations and risks which exist outside of the life companies.
For this measure the capital resources included the surplus over capital policy in the life companies and the net assets of the holding companies, less the pension scheme obligations on an economic basis. The capital requirements relate to the risks arising outside of the life companies including those in relation to the Group’s staff pension schemes, offset by Group diversification benefits. Applicable until 31 December 2015 and as agreed with the PRA, the Group aimed to ensure that PLHL maintains an ICA surplus of at least £150 million. As at 31 December 2015, the unaudited estimated PLHL Group ICA position was £0.6 billion (2014: £0.7 billion).
The Solvency II Directive became effective from 1 January 2016. Under this regime, each UK life company and the PLHL Group are required to retain sufficient capital (termed ‘own funds’) at all times to meet the Solvency Capital Requirements (‘SCR’) as determined by Phoenix’s PRA approved Internal Model.
The Basic Own Funds can be classified into three tiers based on permanency and loss absorbency (tier 1 being the highest quality and tier 3 the lowest). Limits are imposed on the amount of each tier that can be held to cover the SCR. Eligible Own Funds at a Life company level are obtained after having applied these prescribed tiering limits to the Basic Own Funds.
Surplus funds in with-profit funds of the life companies (‘ring fenced funds’) are restricted and can only be included in Eligible Own Funds up to the value of the SCR they are used to support.
The Group’s Solvency II assessment is made at the ultimate parent undertaking within the EEA, which is PLHL. Solvency at the PGH Group level is regulated by the PRA through a series of ‘other methods’ as agreed in a PRA approved waiver exempting the PGH Group from application of the full group requirements of the Solvency II Directive.
Each UK Life company and the PLHL Group generally hold an amount of Eligible Own Funds that is greater than the SCR to allow for adverse events in the future that may use capital and might otherwise cause the company to fail the minimum level of regulatory capital test (termed the Minimum Capital Requirement).
Estimated Solvency II surplus (unaudited) 1.3 1 Own funds includes the net assets of the life and holding companies calculated under Solvency II rules, pension scheme surpluses calculated on an IAS19 basis not exceeding the holding companies’ contribution to the Group SCR and qualifying subordinated liabilities.
Information on other transactions with the pension schemes is included in note G6.
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: £m £m
Leases, where a significant portion of the risks and rewards of ownership are retained by the lessor, are classified as operating leases. Where the Group is the lessee, payments made under operating leases, net of any incentives received from the lessor are charged to the consolidated income statement on a straight-line basis over the period of the lease.
Operating lease rentals charged within administrative expenses amounted to £8 million (2014: £10 million).
The principal operating lease commitments for 2015 concern office space located at St Vincent Street, Glasgow and Juxon House, London (2014: St Vincent Street, Glasgow and Juxon House, London).
Disclosures of future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties are included in note G9.
On 22 March 2016, the Board recommended a final dividend of 26.7p per share (2014: 26.7p per share) for the year ended 31 December 2015. Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend has not been recognised as a liability in the financial statements for 2015 and will be charged to the statement of changes in equity in 2016.
H Staunton C Bannister J McConville A Barbour I Cormack T Cross Brown I Hudson D Woods K Sorenson
There are no other comprehensive income items for 2015 and 2014.
STATEMENT OF CASH FLOWS For the year ended 31 December 2015
Cash and cash equivalents at the beginning of the year 3 9
Credit to equity for equity-settled share-based payments (note I2) – – – 4 4
STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2014
Issue of ordinary share capital (note D1) – 1 – – 1
Credit to equity for equity-settled share-based payments (note I2) – – – 7 7
The financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’).
Investments in Group entities are carried in the statement of financial position at cost less impairment.
The recoverable amount is determined based on the cash flow projections of the underlying entities.
The assessment of whether an investment in a Group entity is impaired is considered to be a critical accounting judgement for the Company.
3. SEGMENTAL ANALYSIS The Company has one reportable segment, comprising its investment in and loans to/from its subsidiaries. Its revenue principally comprises the dividend and interest income derived from these investments and loans. Information relating to this segment is included in the Company’s primary financial statements on pages 189 to 191. The accounting policy for segmental analysis is included in note B1.
Net investment income 620 147 5. ADMINISTRATIVE EXPENSES The accounting policy for administrative expenses is included in note C2.
On 27 April 2015, the Company received a £10 million dividend (2014: £9 million) from Opal Reassurance Limited (‘Opal Re’) in the form of preference shares. During the year, the Company received £90 million as a result of a return of share capital from Opal Re.
Loans due from PGH (LCA) Limited and PGH (LCB) Limited 626 164 791 257
Loans due from PGH (MC1) Limited and PGH (MC2) Limited 113 99 262 194
Notes due from Phoenix Life Holdings Limited 75 – 74 –
On 22 March 2010, the Company subscribed for £325 million of Eurobonds which were issued equally by PGH (LCA) Limited and PGH (LCB) Limited. On 23 March 2010, the Eurobonds were listed on the Channel Islands Stock Exchange. Interest accrues on these Eurobonds at a rate of LIBOR plus a margin of 2.5% and the final maturity date to 30 June 2025. The Eurobonds were initially recognised at fair value and are accreted to par over the period to 2025. At 31 December 2015, £175 million was due (2014: £160 million).
In June 2015, the Company was assigned loans of £436 million issued equally by PGH (LCA) Limited and PGH (LCB) Limited. These loans accrue interest at a rate of LIBOR plus a margin of 2.9% and mature on 5 June 2020. Interest of £10 million was capitalised during the year. At 31 December 2015, £446 million was due.
On 22 March 2010, the Company subscribed for £250 million of Eurobonds which were issued equally by PGH (MC1) Limited and PGH (MC2) Limited. On 23 March 2010, the Eurobonds were listed on the Channel Islands Stock Exchange. Interest accrues on these Eurobonds at a rate of LIBOR plus a margin of 2.5% and the final maturity date to 30 June 2025. The Eurobonds were initially recognised at fair value and are accreted to par over the period to 2025. At 31 December 2015, £113 million was due (2014: £99 million).
On 22 April 2010, Pearl Group Holdings (No.1) Limited issued a balancing instrument under which notes with a principal of £75 million were issued to Phoenix Group Holdings. During January 2015 the notes were transferred from PGH1 to Phoenix Life Holdings Limited (‘PLHL’). The notes have no fixed maturity date and are included in the Company’s financial statements at a value of £75 million (2014: £nil). Phoenix Group Holdings paid no consideration for the notes and has waived its right to receive a coupon on the notes. In November 2015, PLHL agreed, subject to obtaining approvals, to repay the notes in full in 2016.
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Continued 10. CASH AND CASH EQUIVALENTS The accounting policy for cash and cash equivalents is included in note G11.
Short-term deposits (including demand and time deposits) – 3 11. CASH FLOWS FROM OPERATING ACTIVITIES
Cash (utilised)/generated by operations (28) 15 12. CAPITAL AND RISK MANAGEMENT The Company’s capital comprises share capital and all reserves. At 31 December 2015, total capital was £1,504 million (2014: £1,454 million). The movement in capital in the year comprises the total comprehensive income for the year attributable to owners of £164 million (2014: £125 million), proceeds from the issue of ordinary share capital of £2 million (2014: £1 million) and a credit to equity for equity-settled share-based payments of £4 million (2014: £7 million), partly offset by payment of dividends of £120 million (2014: £120 million).
The primary operation of the Company is to manage its investment in subsidiaries. The Company’s other assets and liabilities mainly consist of receivables due from and borrowings owed to other Group entities.
The principal risks and uncertainties facing the Company are: Ɛ interest rate risk, since the movement in interest rates will impact the value of interest receivable and payable by the Company; Ɛ liquidity risk, exposure to liquidity risk as a result of normal business activities, specifically the risk arising from an inability to meet short-term cash flow requirements; and
Ɛ credit risk, arising from the default of the counterparty to a particular financial asset and is significantly reduced as assets are primarily inter-company receivables from other Group entities.
13. SHARE-BASED PAYMENTS For detailed information on the long-term incentive plans, sharesave schemes and deferred bonus share schemes refer to note I2 in the consolidated financial statements.
14. DIRECTORS’ REMUNERATION Details of the remuneration of the Directors’ of Phoenix Group Holdings is included in the Directors’ remuneration report on pages 57 to 80 of the Annual Report and Accounts.
During the year ended 31 December 2015, the Company entered into the following transactions with Group entities: £m £m
Interest received on loans and receivables due from Group entities 58 48
16. AUDITOR’S REMUNERATION Details of auditor’s remuneration, for Phoenix Group Holdings subsidiary undertakings, is included in note C3 to the consolidated financial statements.
Financial assets held by the non-controlling interest in the consolidated UKCPT 736
Financial assets held by the non-controlling interest in consolidated collective investment schemes 4,652
1 Includes policy loans of £12 million, other loans of £24 million, net derivative assets of £362 million and other investments of £788 million.
The life companies’ debt portfolio was £23.5 billion at 31 December 2015. Shareholders had direct exposure to £8.7 billion of these assets (including supported participating funds), of which 99% of rated securities were investment grade. The shareholders’ credit risk exposure to the non-supported participating funds is primarily limited to the shareholders’ share of future bonuses. Shareholders’ credit risk exposure to the unitlinked funds is limited to the level of asset management fee, which is dependent on the underlying assets.
Sovereign and supranational debt represented 40% of the debt portfolio in respect of shareholder exposure, or £3.5 billion, at 31 December 2015. The vast majority of the life companies’ exposure to sovereign and supranational debt holdings is to UK gilts.
At 31 December 2015, the life companies had £nil (2014: £5 million) shareholder exposure to sovereign debt of the Peripheral Eurozone, defined as Portugal, Italy, Ireland, Greece and Spain.
The £2,226 million shareholder exposure to financial institution corporate debt comprised £1,281 million (2014: £1,556 million) bank debt and £945 million (2014: £1,135 million) non-bank debt.
The following table sets out a breakdown of the life companies’ ABS holdings by country: Analysis of ABS holdings by country
Ɛ no allowance for the costs of residual non‑hedgeable risk has been made.
INDEPENDENT AUDITOR’S REPORT TO THE DIRECTORS OF PHOENIX GROUP HOLDINGS ON THE CONSOLIDATED GROUP MCEV
We have audited the Consolidated Phoenix Group MCEV (‘Phoenix Group MCEV’) supplementary information for the year ended 31 December 2015 which comprises the Summarised consolidated income statement – Group MCEV basis, MCEV earnings per ordinary share, Statement of consolidated comprehensive income – Group MCEV basis, Reconciliation of movement in equity – Group MCEV basis, Group MCEV analysis of earnings, Reconciliation of Group IFRS equity to MCEV net worth and related notes 1 to 7. The Phoenix Group MCEV supplementary information has been prepared by the Directors of Phoenix Group Holdings (‘the Group’) in accordance with the basis of preparation set out on pages 213 to 215.
DIRECTORS’ RESPONSIBILITIES FOR THE PHOENIX GROUP MCEV SUPPLEMENTARY INFORMATION The Directors are responsible for the preparation of the Phoenix Group MCEV supplementary information in accordance with the basis of preparation set out on pages 213 to 215 and for such internal control as the Directors determine is necessary to enable the preparation of supplementary information that is free from material misstatement, whether due to fraud or error.
AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on the Phoenix Group MCEV supplementary information based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require us to comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Phoenix Group MCEV supplementary information is free from material misstatement.
OTHER MATTER We have reported separately on the IFRS consolidated financial statements of Phoenix Group Holdings for the year ended 31 December 2015.
The information contained in the Phoenix Group MCEV supplementary information should be read in conjunction with the consolidated financial statements prepared on an IFRS basis.
Analysed between: Group MCEV earnings after tax from continuing operations 26 429
Group MCEV earnings after tax 1 Based on 224 million shares (2014: 225 million) as set out in note B3.1 of the IFRS consolidated financial statements. 2 Based on 225 million shares (2014: 225 million), allowing for share options in issue as set out in note B3.2 of the IFRS consolidated financial statements.
Other comprehensive income: Remeasurements and pension scheme contributions on defined benefit pension schemes (net of tax) (44) (27)
1 Comprises the Group holding and other companies that do not form part of the Phoenix Life division. 2 Following the de‑authorisation of Opal Reassurance Limited in December 2015, its remaining net assets have been transferred from covered business to non‑covered business.
Capital and dividend flows – internal (421) (12) (29) 462 –
3 Relates to the Ignis division disposed of on 1 July 2014, classified as discontinued operations. The Asset Management MCEV earnings after tax of £12 million includes intra‑group income of £30 million. 4 Comprises capital flows relating to the disposal of Ignis and BA(GI) Limited.
Goodwill and other intangibles in accordance with IFRS removed (net of tax) (204) (217)
Value of in‑force business in accordance with IFRS removed (net of tax) (906) (1,011)
MCEV value of in‑force business included (net of tax) as set out in note 2 1,942 2,181
Closing Group MCEV 2,513 2,647 1 Pension scheme surpluses valued on an IFRS basis are removed. This includes the IFRIC 14 adjustments as described in note G6 of the IFRS consolidated financial statements. 2 Includes adjustments to revalue unlisted debt carried at amortised cost under IFRS at face value.
1. BASIS OF PREPARATION OVERVIEW The supplementary information on pages 209 to 220 has been prepared on a MCEV basis except for the items described further below.
The MCEV methodology adopted by the Group is in accordance with the MCEV principles and guidance published by the CFO Forum in June 2008 and amended in October 2009, except that: Ɛ risk‑free rates have been defined as the annually compounded UK Government bond nominal spot curve plus 10bps rather than as the swap rate curve; Ɛ no allowance for the cost of residual non‑hedgeable risk (‘CNHR’) has been made because, in the opinion of the Directors, the Group operates a robust outsourcer model in terms of operational risk, does not write new business, is focused entirely on the back book, and has succeeded in closing out significant legacy risks. The theoretical value of CNHR is disclosed separately in note 1(b); and
A further 1% reduction, to 17%, effective from April 2020 has been announced in the 2016 Budget and will be introduced by future legislation. The impact of this change has not been reflected in the Group’s MCEV at 31 December 2015.
On 2 December 2015, the Group completed the sale of its entire interest in Scottish Mutual International Limited (‘SMI’) for cash consideration of £14 million following a pre‑completion return of capital by SMI. The results of SMI have been included in the MCEV supplementary information up to the date of the disposal, and a loss on disposal of £4 million has been recorded in ‘Other non‑operating variances on life business’.
For the Group’s life companies, net worth is defined as the market value of shareholder funds plus the shareholders’ interest in surplus assets held in long‑term business funds less the market value of any outstanding debt of the life companies.
Ɛ 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.
The projection is based on actively reviewed best estimate non‑economic assumptions. Best estimate assumptions make appropriate allowance for expected future experience where there is sufficient evidence to justify; for example, in allowing for future mortality improvements on annuity business.
Frictional cost of capital (‘COC’) COC is defined as the difference between the market value of shareholder‑owned assets backing required capital and the present value of future releases of those assets allowing for future investment returns on that capital, investment expenses and taxes.
No allowance for the CNHR has been made, as in the opinion of the Directors, the CNHR calculated in accordance with CFO Forum principles and guidance does not anticipate further risk management actions, and therefore does not provide a fair reflection of the Group’s ongoing risk.
The National Provident Life Limited recourse bonds are backed by surpluses that are expected to emerge on blocks of its unit‑linked and unitised with‑profits business. This securitisation has been valued on a cash flow basis, allowing for payments expected to be due based on the projected level of securitised surpluses emerging. The full VIF of the securitised unit‑linked and unitised with‑profits business is expected to be payable to bondholders; therefore, no additional value accrues to the embedded value.
Under IFRIC 14, an interpretation of IAS 19, pension funding contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable would result in a surplus that would not be recoverable, a liability is recognised when the obligation arises. The IFRS IFRIC 14 adjustments are not reflected in the Group MCEV as the Group anticipates that its ultimate contributions into the pension schemes will not give rise to an unrecoverable surplus.
The net worth of covered business of £732 million at 31 December 2015 (2014: £675 million) consists of £190 million of free surplus in excess of required capital (2014: £196 million).
5. MATURITY PROFILE OF BUSINESS 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.
The risk‑free rates assumed for a sample of terms were as follows: Term
A LIBOR Market Model with displaced diffusion and stochastic volatility is used to generate risk‑free rates over a complete yield curve, calibrated to the UK nominal spot curve plus 10bps, consistent with the deterministic projections. Interest rate volatility is calibrated to swaption implied volatilities, as per the sample below.
Real interest rates have been modelled using the two‑factor Hull‑White model, calibrated to index‑linked gilts.
Best estimate levels of volatility are assumed for directly held property. The model implied volatility for 31 December 2015 is 15% (2014: 15%).
OPERATING EARNINGS The Group uses normalised investment returns in calculating the expected existing business contribution. The Group considers that an average return over the remaining term of its 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 calculates the expected contribution on existing business using a 15‑year gilt rate at the beginning of the reporting period plus 10bps and long‑term expectations of excess investment returns.
EXPENSES Each life company’s projected per policy expenses are based on agreements with the Group’s management service companies, adjusted to allow for additional costs incurred directly by the life companies, including, for example, regulatory fees and one‑time expenses.
The life companies’ projected investment expenses are based on the fees agreed with the Group’s fund managers, allowing for current and projected future asset mixes.
Unlisted debt has been included at face value: 2015 Face value £m 2014 Face value £m
(12) 25% decrease in lapse rates and paid‑up rates (40) (30)
(15) Required capital equal to the minimum regulatory capital2 20 16 1 25bps is assumed to relate to default risk. 2 Minimum regulatory capital is defined as the greater of Solvency I Pillar 1 and Pillar 2 capital requirements without any allowance for the Group’s capital management policy.
ANNUAL GENERAL MEETING Our Annual General Meeting (‘AGM’) will be held on 11 May 2016 at 12:30pm.
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If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme (‘FSCS’). The FCA can also be contacted by completing an online form available at www.fca.org.uk/consumers/scams/investment-scams/share-fraudand -boiler-room-scams/reporting-form.
Statements containing the words: ‘believes’, ‘intends’, ‘will’, ‘may’, ‘should’, ‘expects’, ‘plans’, ‘aims’, ‘seeks’, ‘targets’, ‘continues’ and ‘anticipates’ or other words of similar meaning are forward-looking. Such forward-looking statements and other financial and/or statistical data involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group’s control. For example, certain insurance risk disclosures are dependent on the Group’s choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that we have estimated. Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to: Ɛ domestic and global economic and business conditions; Ɛ asset prices; Ɛ market-related risks such as fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the performance of financial markets generally; Ɛ the policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and the effect of the European Union’s ‘Solvency II’ requirements on the Group’s capital maintenance requirements; Ɛ market developments and government actions regarding the referendum on UK membership of the European Union; Ɛ the impact of inflation and deflation; Ɛ market competition; Ɛ changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); Ɛ the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; Ɛ risks associated with arrangements with third parties; Ɛ inability of reinsurers to meet obligations or unavailability of reinsurance coverage; and
Ɛ the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.
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 2015 Annual Report and Accounts.
The Group undertakes no obligation to update any of the forward-looking statements contained within the 2015 Annual Report and Accounts or any other forward-looking statements it may make or publish.
The 2015 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.
ASSET MANAGEMENT The management of assets using a structured approach to guide the act of acquiring and disposing of assets, with the objective of meeting defined investment goals and maximising value for investors, including policyholders
COC Frictional Cost of Capital – The difference between the market value of shareholder-owned assets backing required capital and the present value of future releases of those assets allowing for future investment returns on that capital, investment expenses and taxes
FINANCIAL LEVERAGE Gross shareholder debt (financial leverage basis) as a percentage of the gross MCEV
The UK’s independent regulator responsible for promoting high-quality corporate governance and reporting to foster investment
FREE SURPLUS The amount of capital held in life companies in excess of that needed to support their minimum regulatory capital requirement, plus the capital required under the Group’s capital management policy
Gross shareholder debt (gearing basis) is defined as the sum of the IFRS carrying value of shareholder debt (as disclosed in the Borrowings note in the IFRS financial statements) and 50% of the IFRS carrying value of the Tier 1 Notes given the hybrid nature of that instrument
ICA Individual Capital Assessment – A life company’s Pillar 2 assessment of its capital requirements to ensure that assets exceed liabilities 99.5% of the time over a 1 year period or (in other words) to be able to withstand a 1 in 200 year event
IN-FORCE Long-term business written before the period end and which has not terminated before the period end
NON-PROFIT FUND A fund which is not a with-profit fund, where risks and rewards of the fund fall wholly to shareholders
PILLAR 2 The PRA’s Pillar 2 risk-based capital requirements for insurance companies that have been implemented in the UK. The Pillar 2 surplus is the excess of available capital resources over capital calculated on an economic basis required to ensure entities can meet their liabilities. It is based on a self-assessment methodology called the ICA (‘Individual Capital Assessment’)
SOLVENCY II A new regime for the prudential regulation of European insurance companies that came into force on 1 January 2016
TIER 1 NOTES £500 million Perpetual Reset Capital Securities issued by Pearl Group Holdings (No. 1) Limited. In January 2015, the Group announced the exchange of 99% of the Group’s Tier 1 notes for £428 million of new subordinated notes
VIF The Value of In-Force business in the MCEV – The Present Value of Future Profits (‘PVFP’) plus the Time Value of Financial Options and Guarantees (‘TVFOG’) less the Frictional Cost of Required Capital (‘COC’)
WPICC With-Profit Insurance Capital Component – The WPICC is the amount by which the regulatory surplus exceeds the realistic surplus for with-profit funds
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REDUCING OUR ENVIRONMENTAL IMPACT In line with our Corporate Responsibility programme, and as part of our desire to reduce our environmental impact, you can view key information on our website.
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