Deferred bonus share scheme (‘DBSS’) Each year, part of the annual incentive for certain executives 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 2016 DBSS was granted on 30 March 2016 and 2 June 2016 and is expected to vest on 24 March 2019. The number of shares for all outstanding DBSS awards has been increased to take into account the impact of the Group’s rights issue (see note D1). This adjustment has been based on the Theoretical Ex-Rights Price. The 2013 DBSS awards vested during the year. The 2014 awards are expected to vest on 28 March 2017 and the 2015 awards are expected to vest on 19 March 2018.
The weighted average fair value of options granted during the year was £6.11 (2015: £6.93).
The weighted average share price at the date of exercise for the rewards exercised is £7.69 (2015: £8.36).
The weighted average remaining contractual life for the rewards outstanding as at 31 December 2016 is 1.3 years (2015: 1.6 years).
This note sets out the Group's approach to managing capital, provides a description of what the Group manages as capital and explains the regulatory requirements and capital policies of the Group and its life companies.
The Group’s capital management framework is designed to achieve the following objectives: – to provide appropriate security for policyholders and meet all regulatory capital requirements under the Solvency II regime while not retaining unnecessary excess capital; – to ensure sufficient liquidity to meet obligations to policyholders and other creditors; – to optimise the Fitch Rating’s financial leverage ratio to maintain an investment grade credit rating; and
A Solvency II capital assessment involves a valuation in line with Solvency II principles of the Group's Own Funds and a risk-based assessment of the Group's Solvency Capital Requirement ('SCR'). Solvency II surplus is the excess of Own Funds over the SCR.
Each UK life company and the Group will hold an amount of 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, the Minimum Capital Requirement ('MCR').
The capital policy of each Group holding company is designed to ensure that there is sufficient liquidity to meet creditor obligations through the combination of cash buffers and cash flows from the Group’s operating companies.
The Basic Own Funds are classified into three Tiers based on permanency and loss absorbency (Tier 1 being the highest quality and Tier 3 the lowest). The Group's Own Funds are assessed for their eligibility to cover the Group SCR with reference to both the quality of capital and its availability and transferability. Surplus funds in with-profit funds of the life companies and in the pension schemes are restricted and can only be included in Eligible Own Funds up to the value of the SCR they are used to support.
An analysis of the PLHL Solvency II surplus as at 31 December 2016 is provided in the Business Review section on page 29 of the Annual Report and Accounts.
During the year, the Group entered into the following transactions with one of its pension schemes and associate: Transactions 2016 £m
Operating lease rentals charged within administrative expenses amounted to £6 million (2015: £8 million).
The principal operating lease commitments for 2016 concern office space located at St Vincent Street, Glasgow and Juxon House, London (2015: St Vincent Street, Glasgow and Juxon House, London).
There are no other comprehensive income items for 2016 and 2015.
STATEMENT OF CASH FLOWS For the year ended 31 December 2016
Return of share capital from Opal ReAssurance Limited (‘Opal Re’) 77 90
Cash and cash equivalents at the beginning of the year – 3
Cash and cash equivalents at the end of the year – –
STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2015
Total comprehensive income for the year attributable to owners – – – 164 164
Issue of ordinary share capital (note D1) – 2 – – 2
Dividends paid on ordinary shares (note B4) – (120) – – (120)
STATEMENT OF COMPLIANCE The financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’). The financial statements are presented in sterling (£) rounded to the nearest million unless otherwise stated.
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 liabilities simultaneously. Income and expenses are not offset in the statement of comprehensive income unless required or permitted by an IFRS or interpretation, as specifically disclosed in the accounting policies of the Company.
(B) ACCOUNTING POLICIES The accounting policies in the separate financial statements are the same as those presented in the consolidated financial statements on pages 106 to 108, except for the policy noted below. Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note. Each note within the Company financial statements makes reference to the note to the consolidated financial statements containing the applicable accounting policy. The accounting policy in relation to foreign currency transactions is included within note A2.1 to the consolidated financial statements.
INVESTMENTS IN GROUP ENTITIES Investments in Group entities are carried in the statement of financial position at cost less impairment.
The Company assesses at each reporting date whether an investment is impaired. The Company first assesses whether objective evidence of impairment exists. Evidence of impairment needs to be significant or prolonged to determine that objective evidence of impairment exists. If objective evidence of impairment exists, the Company calculates the amount of impairment as the difference between the recoverable amount of the Group entity and its carrying value and recognises the amount as an expense in the statement of comprehensive income.
Net investment income 92 620 5. ADMINISTRATIVE EXPENSES The accounting policy for administrative expenses is included in note C2 to the consolidated financial statements.
Write down of loans due from other Group entities 11 8
All borrowings are categorised as Level 3 financial instruments. The fair value of borrowings with no external market is determined by internally developed discounted cash flow models using a risk-adjusted discount rate corroborated with external market data where possible.
Changes to the Company’s borrowings since 31 December 2016 are detailed in note I9 to the consolidated financial statements.
During 2016, the Company made capital contributions totalling £929 million in an equal share to PGH (LCA) Limited and PGH (LCB) Limited.
Loans due from PGH (LCA) Limited and PGH (LCB) Limited 603 626 718 791
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 is 30 June 2025. The Eurobonds were initially recognised at fair value and are accreted to par over the period to 2025. At 31 December 2016 £191 million was due (2015: £175 million).
On 12 December 2011, the Company, PGH (LCA) Limited and PGH (LCB) Limited, became party to a joint £77 million loan agreement to formalise an inter-company balance which had arisen in 2009 relating to fees payable to a syndicate of external banks. The loan accrued interest at a rate of LIBOR plus a margin of 1.25% and matured on 30 June 2016. No interest was capitalised during the year (2015: £0.1 million). On 22 March 2016, the outstanding balance of £5 million was written off.
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. During the year, interest of £16 million was capitalised (2015: £10 million) and £50 million of repayments were received (2015: £nil). At 31 December 2016 £412 million was due (2015: £446 million).
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 is 30 June 2025. The Eurobonds were initially recognised at fair value and are accreted to par over the period to 2025. At 31 December 2016 £128 million was due (2015: £113 million).
There are no externally imposed capital requirements on the Company. The Company’s capital is monitored by the Directors and managed on an ongoing basis via a monthly close process to ensure that it remains positive at all times.
Details of the Group risk management policies are outlined in notes E6 and F4 to the consolidated financial statements.
– credit risk, arising from the default of the counterparty to a particular financial asset and is significantly reduced as assets are primarily intercompany receivables from other Group entities.
12. SHARE-BASED PAYMENTS For detailed information on the long-term incentive plans, sharesave schemes and deferred bonus share schemes refer to note I2 to the consolidated financial statements.
13. DIRECTORS’ REMUNERATION Details of the remuneration of the Directors’ of Phoenix Group Holdings are included in the Directors’ remuneration report on pages 58 to 84 of the Annual Report and Accounts.
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Continued 14. RELATED PARTY TRANSACTIONS The Company has related party transactions with Group entities and its key management personnel. Details of 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 included in note I5 to the consolidated financial statements.
Amounts due from related parties at the end of the year: Loans due from Group entities 737 819
Amounts due to related parties at the end of the year: Loans due to Group entities – 3
The Company guarantees certain borrowings of PGH Capital plc as detailed in note E5 to the consolidated financial statements. These guarantees applied up to the date of the Substitutions of debt to PGH from PGH Capital plc as detailed in note I9 to the consolidated financial statements.
16. EVENTS AFTER THE REPORTING PERIOD Details of events after the reporting date are included in note I9 to the consolidated financial statements.
H Staunton C Bannister J McConville A Barbour I Cormack I Hudson W Mayall J Pollock N Shott K Sorenson D Woods
Financial assets held by the non-controlling interest in consolidated collective investment schemes 5,473
Participating non-supported £m Unit-linked £m Total £m 1 Includes debt issued by governments; public and statutory bodies; government backed institutions and supranationals.
Sovereign and supranational debt represented 37% of the debt portfolio in respect of shareholder exposure, or £5.2 billion, at 31 December 2016. The vast majority of the life companies’ exposure to sovereign and supranational debt holdings is to UK gilts.
The life companies had £46 million (2015: £39 million) shareholder exposure to financial institution corporate debt of the Peripheral Eurozone, defined as Portugal, Italy, Ireland, Greece, and Spain, at 31 December 2016. The £3,906 million (2015: £2,226 million) total shareholder exposure to financial institution corporate debt comprised £2,125 million (2015: £1,742 million) senior debt, £2 million (2015: £4 million) Tier 1 debt and £1,779 million (2015: £480 million) Tier 2 debt.
The £3,906 million shareholder exposure to financial institution corporate debt comprised £2,170 million (2015: £1,281 million) bank debt and £1,736 million (2015: £945 million) non-bank debt.
Participating non-supported £m Unit-linked £m Total £m 98% of rated securities were investment grade at 31 December 2016 (2015: 97%). The percentage of rated securities that were investment grade in relation to the shareholder and policyholders’ funds were 99% and 98% respectively (2015: 99% and 96% respectively).
Tier 3 items include the new Tier 3 bond issued in January 2017 of £0.3 billion on a pro forma basis (2015: nil) and deferred tax asset of £0.1 billion (2015: £0.1 billion).
BREAKDOWN OF SCR An analysis of the undiversified SCR of PLHL is presented below: Pro forma %
The principal risks are described in detail in note E6 and F4 in the IFRS financial statements.
PLHL’s eligible Own Funds to cover MCR is £6.0 billion (2015: £5.2 billion) leaving an excess of eligible own funds over MCR of £4.8 billion (2015: £4.1 billion), which translates to an MCR coverage ratio of 496% (2015: 482%).
The voting results for our 2017 AGM, including proxy votes and votes withheld, will be available on the Group’s website shortly after the meeting.
Shareholder helpline number +44 (0) 370 702 0000 Fax number +44 (0) 370 703 6101 Shareholder helpline email address info@computershare.co.je
If you receive any unsolicited investment advice: – make sure you get the correct name of the person and organisation; – check that they are properly authorised by the Financial Conduct Authority (‘FCA’) before getting involved by visiting www.fca.org.uk/ firms/systems-reporting/register; – report the matter to the FCA by calling the FCA Consumer Helpline on 0800 111 6768; and
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-fraud-andboiler -room-scams/reporting-form.
Nothing in the 2016 Annual Report and Accounts is or should be construed as a profit forecast or estimate.
ABS Asset Backed Securities – A collateralised security whose value and income payments are derived from a specified pool of underlying assets
BREXIT The vote by the people of the United Kingdom to leave the EU in the referendum held on 23 June 2016
The Shareholder Capital Coverage Ratio represents the shareholder view of the Group solvency position and is calculated as the ratio of Eligible Own Funds to SCR adjusted to exclude amounts relating to those unsupported with-profit funds and Group pension schemes whose Own Funds exceed their SCR
SOLVENCY II SURPLUS The excess of Eligible Own Funds over the Solvency Capital Requirement
SCR relates to the risks and obligations to which the Group is exposed, and is calibrated so that the likelihood of a loss exceeding the SCR is less than 0.5% over one year. This ensures that capital is sufficient to withstand a broadly ‘1 in 200 year event’
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Phoenix Group Holdings Po Box 309 Ugland House Grand Cayman Ky1-1104 Cayman Islands