Business overview Phoenix Group is the UK’s largest closed life and pension fund consolidator. The Group has in excess of £66 billion of assets under management and over 6.5 million policyholders.
As a closed life business consolidator Phoenix Group focuses on the effi cient run-off of existing policies, maximising economies of scale and generating capital effi ciencies through operational improvements. The Group only writes annuity business for existing policyholders and therefore has limited new business capital strain.
Our vision To be recognised as “the industry solution” for the safe, innovative and profi table decommissioning of closed life funds in the UK.
Group operating structure Our structure is aligned to the market sectors in which we operate.
Corporate Offi ce The Corporate Offi ce brings together centralised functions that provide Group-wide services to support the delivery of the Group goals, strategies and business plans
Phoenix Life Phoenix Life manages the closed life business of the Group
Ignis Asset Management Ignis provides asset management services to the Group’s life companies as well as third party clients
Acquisition of “Pearl businesses” – impact for Annual Report & Accounts 2009 The Annual Report & Accounts 2009 include the consolidate d results of Phoenix Group Holdings and its subsidiaries from 1 January to 31 December 2009 presented in accordance with International Financial Reporting Standards (“IFRS”). The results of the Pearl businesses are therefore included from 28 August 2009* to 31 December 2009.
Certain commentary provided throughout the Annual Report & Accounts 2009 refers to the activities of the Pearl businesses prior to their acquisition. The Directors believe it is necessary to include this information in the context of the programmes of strategic and operational change that the Group is currently undertaking.
Corporate governance and capital structure – Change of name to enhance brand recognition – Appointment of Ron Sandler as Chairman and four new independent Non-Executive Directors – Successful exchange of almost 22 million Public and all Insider warrants to simplify Group capital structure
Performance Key performance indicators 18 Group performance 22 Cash generation 23 Group performance – MCEV 25 Group operating profit – IFRS 32
IFRS financial statements Statement of Directors’ responsibilities 76 Auditor’s report 77 Consolidated income statement 78 Statement of consolidated comprehensive income 79 Pro forma reconciliation of Group operating profit to profit before the tax attributable to owners 79 Statement of consolidated financial position 80 Statement of consolidated cash flows 82 Statement of consolidated changes in equity 83 Notes to the consolidated financial statements 84
MCEV supplementary information Statement of Directors’ responsibilities 160 Auditor’s report 161 Summarised consolidated income statement 162 Pro forma MCEV earnings per ordinary share 162 Statement of consolidated comprehensive income 163 Reconciliation of movement in pro forma Group MCEV equity 163 Analysis of movement in pro forma Group MCEV equity 164 Pro forma Group MCEV analysis of earnings 166 Reconciliation of Group IFRS equity to MCEV net worth 167 Notes to the pro forma MCEV financial statements 168
Our goals – Maximise business performance and value – Improve customer outcomes – Sustain a robust and scalable business model – Be a place where people want to work – Build an industry-wide reputation – Pursue value-adding acquisitions 8p For more information see page 14 and 15
Assets under management £66.9 billion 8p For more information see page 18 to 21
The UK life insurance industry, our core marketplace, continues to adapt to changes in the market and regulatory environment. The disappointing returns and lack of transparency of traditional with profit products have led to a significant reduction in their attractiveness for providers and consumers alike. Taken together with a more onerous regulatory framework, it is clear that there will be an increasing number of life companies ceasing to write new capital intensive policies and disposing of books of business. The Group is well positioned to meet the growing need for providers capable of managing legacy policies safely and responsibly on behalf of millions of policyholders.
I am pleased to present the first annual results of Phoenix Group Holdings since the acquisition of the Pearl businesses in September 2009. I believe this acquisition marks the beginning of an exciting phase in the Company’s history and positions us strongly for the future.
Our primary measure of long-term shareholder value is MCEV. We achieved a Group MCEV pro forma operating profit of £374 million for the year ended 31 December 2009 and Group MCEV of £1,827 million at 31 December 2009 (compared to a pro forma £1,044 million on a comparable basis at 31 December 2008). The change during the year reflects the positive impact of improved investment markets in the second half of 2009 and implemented management actions.
Ignis Asset Management Our asset management business continued to perform well despite the market volatility. We achieved a pro forma IFRS operating profit of £34 million with assets under management also remaining broadly stable at £66.9 billion in spite of insurance policy maturities.
 Assets under management of £66.9 billion at 31 December 2009.
 The transition of the private Pearl businesses into a listed environment has brought about a short-term change in our priorities.
Risk and capital management Risk and capital management are an essential part of the Group’s strategic agenda. The effective management of our risks and the efficient allocation of capital against them is crucial in allowing us to achieve our strategic and operating objectives regardless of prevailing market conditions.
Solvency II We fully endorse the principles underlying the Solvency II framework and expect its implementation to result in an improved understanding of the links between governance, risk and capital management. However, while I welcome the benefits that Solvency II brings to the insurance industry, a number of important issues concerning the development and implementation of the Solvency II proposals remain – and these will need to be resolved without inadvertently impacting policyholders or the industry as a whole.
We have developed our own programme of activities to ensure compliance and identify opportunities within the Solvency II framework. For details
* All references to 2009 achievements are for the full year; encompassing the achievements of the Pearl businesses from 1 January 2009.
Transition to Premium Listing Achieving a Premium Listing on the LSE is an important objective for the Group. Over time we believe that it will help to develop a broader investor base and improve liquidity.
In order to achieve a Premium Listing we are required to satisfy certain UK Listing Authority (UKLA) requirements. In particular we need to simplify our capital structure by reducing the number of outstanding warrants and contingent rights over the Group’s shares to a maximum of 20 percent of the issued share capital. I was therefore pleased with the successful outcome of our public warrant and insider warrant exchange invitations.
Discussions with the holders of the contingent rights over shares have continued with a view to arriving at a solution which brings the proportion of dilutive instruments below the level required by the UKLA.
Outlook for the Phoenix Group I believe the Group’s business model is attractively differentiated from the rest of the UK life assurance sector. Our focus is on the consolidation of closed funds and our existing scale and previous experience makes us the natural home for these businesses. I expect the Group to play an increasingly important role in continuing to ensure the effective and efficient management of closed life insurance funds while overseeing the safe decommissioning of the with profit sector.
Our analysis shows that many life insurance companies employ significant amounts of regulatory capital to support in-force policies which are no longer actively marketed or sold. Furthermore, continued market volatility and management of key business risks will bring the issue of capital allocation into sharper focus as the insurance industry heads towards Solvency II. We believe this will encourage companies to identify ways of releasing and reallocating capital currently tied up in closed or quasi-closed funds. Additionally, the operational management costs involved in administering run-off portfolios will become increasingly uneconomic, particularly for those insurers with inefficient legacy infrastructure. These factors play to our strengths and reinforce the importance of the Group’s role within the industry as it enters a period of significant change.
Maintaining strict financial discipline, a prudent approach to risk management and a focus on service will protect and, over time, enhance the value of the Group and its reputation.
 Successful outcome of our public warrant and insider warrant exchange invitations.
Our business Although the markets in which we operate are complex, our operating model is straightforward. We acquire and efficiently manage closed life insurance businesses that are in run-off.
As a closed life business we do not need to allocate significant capital to support the writing and distribution of new insurance products. This means that the capital requirements of our operating businesses will decline as policies mature, thereby releasing excess capital as free cash flow. This emerging cash flow can be used to fund future acquisitions, reduce financial leverage and pay dividends to shareholders.
In operating this way the Group’s management is able to focus its attention on financial control, risk management and customer outcomes.
Deliver high quality Human – Resources (“HR”) 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, ExCo and the Group Board
D – evelop and deliver the Group’s financial business plan in line with the strategy Ensure that the Group’s finances and – capital are managed and controlled Ensure that the Group has effective – processes in place to ensure all reporting obligations are met Assist the Group Chief Executive – in managing the Group’s key external stakeholders
Lead the development and – delivery of the Phoenix Life business strategy, including the continued integration of life businesses Ensure the optimisation of – outcomes for customers in terms of both value and security Ensure Phoenix Life deploys – capital efficiently and effectively, while adhering to all regulatory requirements
Phoenix Life Phoenix Life is responsible for the financial and operational management of the closed life funds with the support of the management service companies and outsource service providers. Phoenix Life is overseen by a management team, led by its Chief Executive, Mike Merrick.
Insurance business The Group comprises eight 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 integrate its life companies as far as possible in order to optimise economies of scale and capital allocation.
Certain of the Group’s life insurance companies include a small amount of run-off general insurance business and Phoenix Group Holdings also owns Opal Re, a reinsurer based in Bermuda. Opal Re provides reinsurance solely to Phoenix Life to support the diversification of risk on the annuity books.
Management services The management services operations ensure the life companies benefit from economies of scale, established outsourcer relationships and innovative integrated technology infrastructure.
Whilst Ignis Asset Management primarily manages assets for the Group life companies, which provides the life companies with greater control over asset allocation and investment performance, it has also established and is further developing third party distribution channels. Ignis Asset Management has its own sales and marketing division with some 70 employees who focus on developing relationships with independent financial advisers and global investment consultants to help access new clients and increase Ignis Asset Management’s third party asset base.
Ignis Asset Management has approximately 530 employees with offices in Glasgow and London.
Our mission is to improve returns for policyholders and deliver value for shareholders. We will do this by realising our vision to be recognised as “the industry solution” for the safe, innovative and profitable decommissioning of closed life funds in the UK.
Phoenix Group Holdings acquired the Pearl businesses in September 2009. Since then, the Group has undertaken a detailed review of its goals and strategies. The review concluded that the core business purpose, rationale and direction of the underlying Pearl businesses remain appropriate with the acquisition and restructuring providing the platform to execute these strategies.
Demonstrate an understanding – of customer needs Deliver consistent industry-standard – customer service Provide easy access to information – and communicate clearly Ensure policyholder security –
Strategies Extend customer research and – improvement programmes Optimise estate distribution – Extend product performance – review programme Maintain strong capital policies –
Ensure long – -term ability to service debt Optimise capital and debt structures – Operational excellence in – Phoenix Life and Ignis Asset Management Share register matched to long-term – ambitions of the Group
Strategies Increase share liquidity – Debt and capital simplification – Transform Phoenix Life operations – Integrate operating platforms – within Ignis Asset Management
Key 2009 achievements – Benefit of acquisition and restructuring of some £1 billion Secondary – listing on LSE Further outsourc – ed of Phoenix Life operations and renegotiated improved terms on existing contracts Closure of Phoenix Life Glasgow – operations on track and the transition plans for the Peterborough operations accelerated Integrat – ion of the businesses of Axial and Ignis Asset Management under the Ignis brand 2010 priorities Achieve Premium – Listing on LSE Maintain strong – financial position and further simplify capital structures Continue life company and outsourcer – transformation programmes Complete Ignis – Asset Management operational integration Achieve all Solvency II programme – 2010 milestones * All references to 2009 achievements are for the full year; encompassing the achievements of the Pearl businesses from 1 January 2009.
High levels of employee engagement – Strong and effective leadership – Clear communication – Fair reward and development policies – and practice
Key 2009 achievements Established employee engagement – survey and action plans agreed Flexible benefits scheme implemented – Senior – management leadership development programme initiated “ – Next Steps” programme implemented to support exiting staff Announced new people values –
Recognised as the industry lead – er in closed life fund consolidation
Strategies Proactive relationships with – potential vendors Identification and evaluation of – opportunities that offer significant value enhancement and synergy benefits Right skills and support –
Key 2009 achievements Market analysis identified – future acquisition opportunities 2010 priorities Continued analysis and assessment – of opportunities Discuss market opportunities – with key market participants
Performance The Group has delivered a strong performance despite generally unstable economic conditions, resulting in a pro forma IFRS operating profit of £457 million
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: Pro forma UK holding company cash inflows £716 million IGD capital surplus £1.2 billion Group MCEV £1,827 million Pro forma IFRS operating profit IFRS operating profit £457 million £282 million
The Group financial KPIs are set out below. Comparatives are not provided since Phoenix Group Holdings was a SPAC during 2008.
Certain KPIs are calculated on a pro forma basis for 2009, as explained in the Annual report section on the inside cover. The pro forma KPIs are identified as such below.
P Pro forma UK holding company cash inflows £716 million The Board’s intention is to build a long-term base of owners through the development of a progressive dividend policy. The Board seeks to achieve this through improving UK holding company cash inflows: Analysis: Continued strong cash generation by the Group’s operating subsidiaries has allowed the Group to exceed its full year target of more than £500 million in UK holding company cash inflows As at 31 December 2009 the Group has achieved £275 million of its cash flow acceleration target of £500 million by the end of 2010 Definition and calculation: UK holding company cash inflows are a measure of cash and cash equivalents remitted by the Group’s operating subsidiaries to the UK holding companies2 and are available to cover dividends, bank interest and other items The 2009 KPI is pro forma and includes the cash flows of the Pearl businesses for the full year Quantified target: Annual UK holding company cash inflows target of £400 to £500 million. In addition, an accelerated UK holding company cash inflows target of over £500 million by the end of 2010
 Exceeded full year UK holding company cash inflows target of £500 million.
Estimated IGD capital surplus as at 31 December 2009 £1.2 billion IGD surplus is a measure of the capital strength of the business: Analysis: The estimated IGD surplus at 31 December 2009 has increased by over £500 million from the 1 January 2009 pro forma position of £673 million, primarily as a result of the cash injection from Phoenix Group Holdings and strong performance of the non profit funds, partially offset by financing costs. The estimated IGD surplus represents 132 percent coverage of regulatory requirements Definition and calculation: The IGD surplus is a regulatory capital measure which calculates surplus capital at the highest European Economic Area (“EEA”) level insurance group holding company, which is PLHL. IGD surplus is defined as Group regulatory capital employed less the Group regulatory capital requirement Quantified target: Group capital resources of 125 percent of the regulatory requirement
IFRS operating profit Pro forma IFRS operating profit £282 million £457 million (pro forma) The Board considers that IFRS operating profit is a more representative measure of performance than profit before tax as it provides long-term performance information and gives an insight into the Group’s ability to generate cash flows to support dividends: Analysis: The IFRS operating profit of £282 million reflects a strong performance in continuing volatile economic conditions Definition and calculation: The Group operating profit – IFRS section on pages 32 to 35 explains the definition and calculation of IFRS operating profit Pro forma IFRS operating profit: To provide a basis for future comparison, a pro forma IFRS operating profit for the year ended 31 December 2009 of £457 million is disclosed The pro forma IFRS operating profit is calculated as the operating profit of the Group plus the Pearl businesses for the period prior to their acquisition by Phoenix Group Holdings
This is a measure of owner return. In an environment of low interest rates, the Group recognises that dividends are important to owners1: Analysis: Phoenix Group Holdings legally acquired the Pearl businesses on 2 September 2009 and therefore a final pro-rated dividend is intended to be paid in 2010 in respect of the four month period to 31 December 2009 Quantified target: Whilst it remains restricted by its credit agreements, the Group initially intends to pay a dividend of €0.50 per share per annum
1 Phoenix Group is subject to Cayman Islands Companies Law. Under Cayman Companies Law distributions can be made out of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group’s going concern assessment criteria. Therefore distributions may also be made by Phoenix Group Holdings out of share premium.
 Pro forma Ignis Asset Management IFRS operating profit of £34 million.
Cash generation is a key measure of the Group’s performance and the Cash generation section sets out an analyis of the UK holding company cash flows for a full year.
Group performance 22 Phoenix Group Holdings Annual Report & Accounts 2009
Pro forma UK holding company cash flow The statement of cash flows prepared in accordance with IFRS combines cash flows relating to policyholders and cash flows relating to owners, but the practical management of cash within the Group maintains a distinction between the two, as well as taking into account regulatory and other restrictions on availability and transferability of capital. For this reason, the following discussion of cash flows focuses on the UK holding company cash flows (i.e. the holding companies under Phoenix Group Holdings) for the year ended 31 December 2009, which reflect cash flows relating only to owners and which are, therefore, more representative of the cash that could potentially be distributed to the Group’s owners.
This cash flow reflects the cash receipts from the operating subsidiaries to the Group’s UK holding companies, as well as the uses of the cash receipts. The surplus owner cash will be used to fund inter alia the payment of Phoenix Group Holdings’ dividend in April 2010.
Pro forma UK holding company cash inflows from the operating subsidiaries for the year were ahead of target at £716 million, compared to the 2009 target of £500 million.
Cash receipts Cash receipts from life companies 466 Cash equivalents released from life companies 194 Cash receipts from Ignis Asset Management 21 Cash receipts from service companies 35 Total receipts of cash and cash equivalents1 716
Debt interest The UK holding companies paid interest to their lending banks and Royal London of £167 million in 2009. Annualising the £34 million post acquisition financing costs on this debt (as set out in the Group operating profit – IFRS section) provides a more representative indication of the Group’s future debt financing commitments than the full year cash payments and forms the basis for the recurring, non recurring split as provided above.
1 In connection with their acquisition of Resolution plc in 2007, the Pearl businesses transferred certain assets of Resolution plc to Royal London for total consideration of £1.3 billion (subject to certain post-closing adjustments, or “true-ups”).
Basis of preparation Whilst the IFRS consolidated financial statements consolidate the results of the Pearl businesses for the period from acquisition on 28 August 2009 to 31 December 2009, the pro forma MCEV results include a full year’s contribution for the acquired Pearl businesses. The pro forma MCEV results are therefore based on the results of the Group plus the Pearl businesses for the period prior to their acquisition by Phoenix Group Holdings.
– no allowance for the costs of non-hedgeable risk 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 costs of residual nonhedgeable risk is disclosed separately in note 1 of the Basis of preparation in the notes to the MCEV supplementary information
Life MCEV operating earnings (after tax) Other than vesting annuities, the Group’s Life operations are closed to new business. The principal underlying components of the life MCEV operating earnings are therefore the expected existing business contribution together with non-economic experience variances and assumption changes.
Life MCEV operating earnings before tax has been calculated by grossing up the after tax Life MCEV operating earnings using a tax rate of 28 percent. Life MCEV operating earnings before tax of £380 million is therefore calculated as £273 million (as above) grossed up for tax at 28 percent
Expected existing business contribution The expected contribution on the existing business for the year ended 31 December 2009 of £95 million after tax represents the expected return on the opening MCEV using a one year gilt forward rate plus the Group’s short-term expectations of excess investment returns on equities, properties and bonds. This rate is expected to increase in line with the forward gilt yield curve.
Management services generated an operating profit before tax of £14 million for the year ended 31 December 2009, reflecting a business as usual outsourcer average expense per policy of £24.1
Ignis Asset Management In the face of volatile economic conditions the fund management business recorded a pro forma operating profit before tax of £34 million for the year ended 31 December 2009.
Retail revenue 14 Institutional and international revenue 15 Life fund revenue 82 Total revenues2 111 Expenses2 (77) Ignis Asset Management operating profit before tax 34 * Includes 12 months of results of the Pearl businesses 2 Revenues and expenses are stated net of rebates from collective investment schemes
The following diagram shows the development of assets under management during the year.
Internal funds under management reduced by £0.9 billion (1.5 percent) to £60.1 billion in the 12-month period as positive changes in market values of £3.7 billion offset the run-off of the closed life business of £4.6 billion.
Corporate As discussed on page 12 the Group’s business structure includes a Corporate Office that provides a coordination and oversight function. The Corporate Office’s operating loss of £54 million before tax for the year ended 31 December 2009 includes: – Corporate office costs and project spend of £14 million – Net expected charge on the Pearl Group Staff Pension Scheme of £22 million and a £17 million contribution to the PGL pension scheme. The £17 million contribution is an expense under the Group’s MCEV basis as a deduction to the Group’s MCEV is made for pension schemes in deficit, but no credit is taken for pension scheme surpluses.
Group Holdings Capital generation* IGD at 28 Phoenix Group Holdings Annual Report & Accounts 2009
Reconciliation of Group MCEV operating earnings to Group MCEV earnings Group MCEV operating earnings is reconciled to the Group MCEV earnings, as follows: Pro forma £ million
Group MCEV operating earnings after tax 269 Economic variances on covered business 701 Economic variances on non-covered business (245) Non-recurring items (78) Gain on debt refinancing 491 Finance costs attributable to owners (390) Tax on non-operating earnings (197) Group MCEV earnings after tax 551 * Includes 12 months of results of the Pearl businesses
Economic variances on covered business Positive economic variances in 2009 of £504 million after tax reflect the benefit of the reduction in credit spreads on corporate bonds and favourable equity and yield movements, partially offset by an increase of £36 million in the market value of listed debt issued by Phoenix Life Limited (ex Scottish Mutual Assurance).
Non-recurring items Non-recurring items reduced pro forma embedded value by £78 million before tax and primarily includes: £27 million of costs associated with the Phoenix Life site rationalisation – and associated staff reductions and the Group’s transformation programme with its outsourcers
Debt finance costs1 176 Debt issue costs 202 Other finance costs 12 Finance costs attributable to owners 390 * Includes 12 months results of the Pearl businesses 1 Finance costs on the Impala and Pearl facility agreements (and associated swap interest)
As part of Phoenix Group Holdings’ acquisition of the Pearl businesses and debt restructure, fees of £202 million were paid to the banks as consideration to facilitate the transaction. The consideration was in the form of equity issued to the lenders by Phoenix Group Holdings and therefore resulted in a corresponding increase in capital. Under IFRS these debt issue costs are taken into account in determining the cost of acquisition of the Pearl businesses.
 75 percent increase in MCEV to £1,827 at 31 December 2009.
Inclusion of Opal Re MCEV at 31 December 2008 As Opal Re is now part of the Group it is included within covered business from 31 December 2008 and is valued on a basis consistent with the annuity business within the life companies.
Liquidity premiums The allowance for default risk has been increased to include an explicit margin for unexpected default risk premium. This reduces the value of liquidity premiums within the MCEV. This change is to align the Group’s methodology with the risk-neutral principles that form the basis of the CFO Forum’s MCEV methodology.
Group operating profit – IFRS The Group has delivered a strong performance despite the generally unstable economic and financial conditions.
The Group generated an IFRS operating profit1 of £282 million for the year ended 31 December 2009. This operating profit represents four months of the results of the Pearl businesses which came under the control of Phoenix Group Holdings for accounting purposes with effect from 28 August 2009. The pro forma IFRS operating profit for the year ended 31 December 2009 is £457 million.
Pro forma IFRS operating profit before tax The pro forma IFRS operating profit before tax of £457 million reflects the positive performance of the Pearl businesses throughout the year. The post acquisition performance was relatively stronger than the year as a whole which is a reflection of the improved market conditions in that period relative to the first half of the year.
Phoenix Life3 – reported operating profit before tax £ million Year ended
1 Operating profit, a key metric used in both IFRS and MCEV reporting, reports the profit (or loss) in a financial year but excludes short-term fluctuations in investment returns and other items considered to be non-operating by management.
The operating profit on non profit and unit linked funds was £201 million in the four-month post-acquisition period. This includes margin emergence and return on surplus assets of £52 million. This return was supplemented with favourable non-economic experience variances as well as assumption changes related to longevity (as discussed above) which were only partially offset by increased provisions for expenses as some funds moved from being managed on a passive to an active basis.
The longer term return on owners’ funds for 2009 of £17 million reflects the asset mix of owners’ funds, primarily cash-based assets and fixed interest securities.
Ignis Asset Management The Group’s two asset management businesses have recently been integrated under the Ignis brand, with the aim of enhancing the brand and revenue generation of the asset management businesses.
Reconciliation of IFRS operating profit to profit after tax IFRS operating profit is reconciled to profit after tax, as follows: £ million Year ended
Overall, the Phoenix Life business had net favourable investment return variances and economic assumption changes of £145 million for the four months ended 31 December 2009, largely reflecting narrowing credit spreads, stronger performance on hedge funds and favourable property returns.
Amortisation of acquired in-force business and other intangibles Acquired in-force business and other intangibles of £2.7 billion were recognised on the acquisition of the Pearl businesses.
For further information on these intangible assets refer to notes 3 and 33 to the IFRS financial statements.
– Costs associated with the Phoenix Life site rationalisation and associated staff reductions and the Group’s transformation programme with its outsourcers amounted to £13 million.
With effect from the acquisition of the Pearl businesses the Company has been managed and controlled from Jersey, where its permanent office premises are located, and as a Jersey resident holding company the Company is expected to be subject to a zero percent tax rate on its income. Consequently tax charged in these Accounts primarily represents UK tax on profits earned in the UK, where the principal life companies, excluding Opal Re, have their centre of operations.
The effective tax rate for 2009 has been impacted by a number of one-off events. These include the restructuring of National Provident Limited (“NPL”), which crystallised operational losses incurred in prior years, but not previously recognised for tax purposes, of £250 million.
Capital management Capital management framework The Group’s Capital Management Framework is designed to achieve the following objectives: Provide appropriate security for policyholders and meet all regulatory – capital requirements whilst not retaining unnecessary excess capital Ensure sufficient liquidity to meet obligations to policyholders – and creditors Meet the dividend expectations of – owners as set by the Group’s dividend policy.
Regulatory capital requirements Each UK life company must retain sufficient capital at all times to meet the regulatory capital requirements mandated by the FSA. In addition to EU-directive-based “Pillar 1” and group capital requirements, the FSA has also stipulated a “Pillar 2” of risk-based capital requirements that have been implemented in the UK. A life company’s actual capital requirement is based on whichever of the Pillar 1 or Pillar 2 requirement turns out to be more onerous for the company. Each 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.
Pillar 1 With the exception of with profit businesses, the regulatory capital requirement under Pillar 1 is the total amount held in respect of investment, expense and insurance risks (the long-term insurance capital component (“LTICR”)) and any additional amounts required to cover the more onerous of two specified stress tests (the resilience capital requirement (“RCR”)). The regulatory capital requirement is then deducted from the available capital resources to give the regulatory basis excess capital.
Pillar 2 The Pillar 2 capital requirements are based on a self-assessment methodology, 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 percent confidence level, or 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.
The components of the estimated IGD calculation are shown below: £ billion Year ended
1 AAA – 100bps, AA – 113bps, A – 120bps, BBB – 153bps, BB – 370bps, B – 613bps.
Sensitivity 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 the 125 percent target in a range of reasonably foreseeable circumstances. The results of that stress testing are provided below: £ billion Year ended
The GCRR includes a WPICC which is matched by GCR in the with profit funds. In stress scenarios, as the value of GCR falls, it is broadly offset by a corresponding decrease in the WPICC within the GCRR. Therefore, although both GCR and GCRR decline, the IGD surplus is not impacted to the same extent, which can cause the percentage margin to increase in stress scenarios.
Capital resources The primary sources of capital used by the Group covering individual life company and Group capital requirements are equity, perpetual reset capital securities, subordinated debt and other borrowings.
Liquidity management Details on the Group’s objectives and policies for the management of liquidity risk are included within the Risk management report and note 42.3.3 of the IFRS financial statements.
Movement in IGD capital position £ billion * This amount includes £52 million of established surplus on non profit business.
Embedded value of the original Pearl Group at 31 Dec 08 (as disclosed in
Pro forma MCEV at 31 Dec 08 (Phoenix Group Holdings and
Group Holdings Capital generation* IGD at 38 Phoenix Group Holdings Annual Report & Accounts 2009
The Group’s Solvency II programme was started in 2008 with its involvement in the fourth Quantitative Impact Survey exercise. The programme spans all areas of the business with multi-discipline workstreams in place. Due to the complexity of the Group’s insurance business and the number of smaller life companies within the Group, the Group will pursue a partial internal model approach to Solvency II and will seek approval from the FSA to utilise its own risk assessment models for the material insurance entities within the Group. The formulaic approach will be adopted for smaller insurance entities such as Scottish Mutual International and the Group’s general insurance business. Regular dialogue continues with the FSA that is focused on ensuring the Group is well positioned to achieve Wave 1 approval for its own internal model application.
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 ExCo is in place.
A series of divisional management oversight committees covering financial and operational risks exists within the Group. These committees are responsible for ensuring the risks associated with the divisional business activities are identified, controlled, monitored and reported to the relevant boards and board committees.
 Risk management is an essential part of the Group’s strategic agenda.
Risk assessment activity is a continuous process and is performed on the basis of identifying and managing the significant risks to the achievement of the Group’s objectives. Stress and scenario tests are used to support the assessment of risk and analysis of the financial impact. The Board Committees, ExCo, senior management and specialist functions (e.g. Finance, Risk and Actuarial) review the various outputs of the risk assessments. A Group-level risk assessment process determines the most significant risks to the Group and the options available for their management. An overview of the key risks and uncertainties facing the Group is provided below.
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.
Each policy is the responsibility of a member of ExCo who is charged with overseeing compliance with the policy throughout the Group.
The Group has ongoing principal repayment and interest obligations to a syndicate of lenders. In the event that transfers from the Group’s insurance and investment management subsidiaries are limited by any law or regulatory action, this may impair the Group’s ability to service these obligations. 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 shares in Group companies.
The Group puts considerable efforts into managing relationships with our regulators so that we are 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.
The Group regularly monitors its counterparty exposure and has specific limits relating to counterparty credit rating. Where possible, exposures are diversified through the use of a range of counterparty providers. All reassurance and derivative positions are appropriately collateralised and guaranteed.
The Group undertakes regular reviews of experience and annuitant survival checks to identify any variances in assumptions.
Corporate responsibility* Building trust through corporate responsibility Our commitment to managing a responsible business will help create long-term value.
In order to capitalise on these opportunities, we need to protect our reputation through robust non-financial risk management. This risk management process shows us where to focus the energies of our corporate responsibility activity. In 2009, this has involved the identification, analysis, mitigation and reporting of material non-financial risks (as set out in this section) and is the essence of our early-stage Corporate Responsibility programme. However, we aim to reinforce our commitment to building a sustainable business model by more closely aligning this process with our business strategy and Group values.
– Community – where our employees and customers live and work and our obligations to broader society
Workplace Overview The Group employs over 1,000 people in four main locations in the UK. These employees are key players in the success of our business; therefore building an engaged, productive workforce offers our business significant opportunities to enhance our business performance that benefits customers, owners and employees alike.
Our employee values We developed a set of employee values in 2009, which are described in full in the Corporate Responsibility section of our website. They were developed with our employees and carry the full support of the Board. They reflect our view that a key strategic objective is to attract, develop and retain the best talent and that a failure to do this would pose a significant risk to the long-term success of our business.
“Our commitment to Corporate Responsibility helps us to create more valuable relationships with our stakeholders, by demonstrating robust management of the non-financial risks that may affect our ability to deliver our strategic ambitions.” Jonathan Moss Group Chief Executive
* All references to 2009 achievements and performance indicators in the Corporate Responsibility report are for the full year, encompassing the achievements of the Pearl businesses from 1 January 2009.
– A policy of non-discrimination and equality of opportunity for all – The provision of ‘family-friendly’ and ‘work/life balance’ policies, which support flexible working, consistent with the need to maintain levels of customer service
– Provision of a safe, attractive and productive working environment for our employees
Development programme The Group is committed to providing appropriate learning and development for every one of its employees, with development needs linked to the achievement of agreed personal and business objectives. In particular, the Group considers it important that all its employees understand and operate in accordance with high standards of business practice. A “Business Ethics” training programme has been developed to assist employees in ensuring they do not act in a way which could harm others and bring either themselves or the Group into disrepute.
The year-on-year fall in both overall annual employee and new starter turnover is primarily the result of the recent slow down in the economy and general reduction in employment opportunities nationally. Despite the challenges which have faced the Group, it is encouraging to note there has been only minimal increase in the percentage of days lost through illness.
1 2008 performance indicators relate to the Pearl businesses for the full year.
Marketplace Maintaining positive and effective relationships with our customers can only be achieved through the successful integration of functions, disciplines and the interests of relevant stakeholders. Our objective is to sustain appropriate capital and liquidity, provide tangible and robust standards of Governance and Risk Management, give confidence to investors, and maintain and enhance our reputation by transparently evidencing that all of this is in place.
Our relationship with our Regulators and their confidence in us are also important in maintaining stakeholder confidence; compliance as a function is, therefore, also a key element in how we manage our business and interact credibly with our customers.
Our Strategic Treating Customers Fairly (“TCF”) proposition Our strategic TCF proposition comprises five objectives: – To offer our customers security and opportunities for fund growth – To drive new standards and behaviours in the management of “closed book” businesses – To deliver the behaviour which a properly informed and prudent customer is reasonably entitled to expect of us and to deal with all of our customers honestly, openly, competently and with integrity
– To have an informed understanding of our customers’ needs – To be committed to help our customers get the most out of their relationship with us.
As the survey has highlighted, customers throughout the industry continue to have concerns regarding “return on investment” and “complaint handling”. We are doing a number of things to address them. For example, on complaint handling we are creating a Complaints-Handling Guide, to be used by all of our companies.
Future plans – Continue to listen and respond appropriately to our customers’ concerns – Communicate with them, in a transparent way the changes we are making as part of our programme of continuous improvement in this area – Extend our participation in the Origo Options scheme to speed up open market option processing times for pension-to-pension transfer transactions – Continue to participate in the ABI Customer Impact Scheme and support those customer commitments which are relevant to our business – Identify the key measures that provide the best picture of our customer service and on which we will report in future years.
Outcomes for 2009 The Group is committed to and has made good progress during 2009 in achieving further economies of scale by embedding its procurement policy throughout the Group. This policy sets the minimum standards by which the Group expects each division to operate, thereby creating a consistent framework for management and governance.
Community The Group believes that its commitment to the Community leads to greater employee engagement and is attractive to potential employees. It helps us to attract and retain the best talent.
Donations during 2009 of more than £2,000 included: Citizens Advice Bureau £10,000 British Heart Foundation £6,287 Cancer Research UK £3,003 The Prostate Cancer Charity £2,427 Acorns Children’s Hospice Trust £2,277 The Multiple Sclerosis Society of Great Britain and Northern Ireland £2,249
 Our commitment to and interaction with the communities in which our people and customers live and work are important for us.
* All references to donations encompass the Pearl businesses from 1 January 2009.
Employee fundraising Employees are encouraged to organise office-based fundraising activities for charities they nominate. This is an important aspect of team building and employee engagement. During 2009, in addition to the donations by the Group, employees raised over £18,000 for registered charities.
The Group provides recycling opportunities within all their UK sites. The consolidation of the main life company operations into the Wythall site will continue to provide further opportunities to reduce the Group’s carbon footprint as travel between sites reduces and energy consumption requirements continue to fall.
Future plans – Investigate how energy use and travel policies might be structured to reduce our carbon footprint – Develop a Group Environmental policy – Investigate processes for enhanced data capture.
54 Board of Directors 58 Directors’ report 63 Corporate governance report 68 Remuneration report
Governance To effectively balance the needs of policyholders and shareholders it is crucial that we have strong and effective governance arrangements
Board of Directors Ron Sandler, CBE (age 58) Chairman Ron Sandler was appointed Chairman of the Company on 24 September 2009. He is also Chairman of Northern Rock plc, Paternoster Ltd and Ironshore Inc, and is an adviser to Palamon Capital Partners. Mr Sandler was previously Chief Executive of Lloyd’s of London and Chief Operating Officer of NatWest Group. In 2002, at the request of the Chancellor of the Exchequer, he led an independent review of the UK Long Term Savings Industry. He is a recent past president of the Chartered Institute of Bankers. Mr Sandler is Chairman of the Board Nomination Committee.
Jonathan Moss (age 46) Group Chief Executive Jonathan Moss has been Group Chief Executive of the Pearl businesses since 2006. He was previously Finance Director of the Pearl businesses and before that the Chief Actuary of AMP Life in Australia. Mr Moss has also previously been the Appointed Actuary of London Life and National Provident Life. Mr Moss was appointed to the Board of Directors of the Company on 2 September 2009.
Alastair Lyons, CBE (age 56) Senior Independent Director & Audit Committee Chairman Alastair Lyons was appointed to the Board of Directors of the Company as Senior Independent Director on 29 March 2010. He is also Chairman of Admiral Group plc, the FTSE-100 direct motor insurer, Chairman of Serco Group plc, the FTSE-100 international services company, and Deputy Chairman-designate of Bovis Homes Group plc. He is additionally Chairman of Cardsave Limited and Legal Marketing Services Limited. In his executive career he was Director of Corporate Projects at National Westminster Bank plc, Chief Executive Officer of the National Provident Institution, executive Director of Abbey National, responsible for the insurance division, and Chief Executive Officer of National Provincial Building Society. He is a fellow of the Institute of Chartered Accountants and has been a Non-Executive Director of both the Department for Work and Pensions and the Department for Transport. Mr Lyons is Chairman of the Board Audit Committee.
Rene Pierre Azria (age 53) Non-Executive Director Rene-Pierre Azria is Chief Executive Officer of Tegris Advisors LLC, a U.S. private advisory firm specialising in strategic financial analysis and mergers and acquisitions. Prior to founding Tegris, Mr Azria was a worldwide partner with Rothschild & Co. Prior to joining Rothschild in 1996, Mr Azria served as Managing Director of Blackstone Indosuez and President of Financiére Indosuez Inc. in New York. Mr Azria serves as a Director and Compensation Committee member of Jarden Corporation, a NYSE listed Fortune 500 U.S. diversified consumer products company and of two privately-held book publishers in France and the U.S. Mr Azria was appointed to the Board of Directors of the Company on 2 September 2009 and is a member of the Board Risk Committee.
David Barnes (age 55) 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 and is a member of the Board Audit and Board Remuneration Committees.
Charles Clarke (age 55) Non-Executive Director Charles Clarke is a Jersey-resident 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 Islands operation 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 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 and is a member of the Board Audit Committee.
Ian Cormack (age 62) Non-Executive Director & Remuneration Committee Chairman Ian Cormack is a Non-Executive Director of Aspen Insurance Holdings, the Qatar Financial Centre and the Qatar Insurance Service. Mr Cormack was Chief Executive Officer of AIG, Inc. in Europe from 2000 to 2002 and was Chairman of Citibank International plc and co-head of the Global Financial Institutions Client Group at Citigroup. Mr Cormack served on the Board of Directors of the former Pearl Group Limited from May 2005 to September 2009. He was appointed to the Board of Directors of the Company on 2 September 2009. Mr Cormack is Chairman of the Board Remuneration Committee and a member of the Board Nomination Committee.
Tom Cross Brown (age 62) Non-Executive Director Tom Cross Brown was Global Chief Executive of ABN AMRO Asset Management (which managed some €160 billion, with offices in 30 countries around the world) from 2000 to 2003, as well as Chairman of ABN AMRO Asset Management in the U.K. from 1997 to 2003. Prior to this, he was Chief Executive Officer of Lazard Brothers Asset Management in London, where he spent a total of 21 years. Mr Cross Brown is non-executive 56 Phoenix Group Holdings Annual Report & Accounts 2009
Chairman of Just Retirement (Holdings) Limited, a Non-Executive Director of Bluebay Asset Management PLC and Artemis Alpha Trust PLC, as well as of other private companies and charities. Mr Cross Brown served on the Board of Directors of the former Pearl Group Limited from May 2005 until September 2009. Mr Cross Brown was appointed to the Board of Directors of the Company on 24 September 2009 and is a member of the Board Nomination and Board Risk Committees.
Manjit Dale (age 44) Non-Executive Director Manjit Dale is a founding partner of TDR Capital, a private equity firm established in 2002. TDR Capital manages over €2.5 billion of assets on behalf of a variety of institutional pension funds, university endowments and wealthy private individuals. Prior to founding TDR Capital, Mr Dale was Managing Partner at Deutsche Bank Capital Partners Europe. He has served on the Boards of Pizza Express and Center Parcs. Mr Dale has over 20 years’ experience in private equity, finance and consulting gained with BankersTrust, 3i plc, NM Rothschild and Andersen Consulting. He served on the Board of Directors of the former Pearl Group Limited from December 2004 to September 2009. Mr Dale was appointed to the Board of Directors of the Company on 2 September 2009.
Hugh Osmond (age 48) Non-Executive Director Hugh Osmond founded Punch Group and was its Executive Chairman between 1997 and 2001, during which time he built Punch Group into one of the U.K.’s largest pub companies. He previously co-led the acquisition and market listing of Pizza Express in 1993 and helped build it into the UK’s largest sit-down restaurant chain. Mr Osmond served on the Board of Directors of the former Pearl Group Limited from December 2004 until September 2009. Mr Osmond also serves on the Board of Horizon plc. Mr Osmond was appointed to the Board of Directors of the Company on 2 September 2009 and is a member of the Board Risk Committee.
As a Company incorporated in the Cayman Islands and listed on Euronext Amsterdam, the Company is not required to comply with the requirements of the UK Companies Act 2006. However, the Directors support enhanced standards for disclosure and have sought to comply voluntarily with these provisions.
Changes of name Shareholder approval for the change of name of the Company from Liberty Acquisition Holdings (International) Company to Pearl Group was given on 24 July 2009 and the change of name took effect on 2 September 2009.
On 15 March 2010, the Company’s shareholders approved a further change of name of the Company to Phoenix Group Holdings and the change of name took effect on that date.
Principal activities The Company is incorporated in the Cayman Islands and has its head office in Jersey.
Neither the Company nor any of its subsidiaries undertake any research and development-related activities.
The reviewed MCEV supplementary information for the year ended 31 December 2009 is set out on pages 160 to 177.
The Group results for the year are shown in the consolidated income statement on page 78 and a review of these results and the MCEV results is presented in the Performance section on pages 22 to 35.
Information about the Group’s financial KPIs is also provided in the Performance section on pages 18 to 21 with information on other non-financial KPIs presented principally within the Corporate Responsibility section on pages 46 to 51. The Performance section includes a review of the Group’s operations, current position and future prospects for the Group.
Details of the principal risks and uncertainties facing the Group together with details about the Group’s risk management framework are provided in the Performance section on pages 40 to 43. Further information about risk exposures and risk management policies is provided in note 42 to the IFRS financial statements.
Dividends The directors are recommending a dividend for 2009 of €0.17 per share (2008: €nil).
Having thoroughly considered the going concern assessment, including a detailed review of the regulatory capital and cash flow positions of each subsidiary company and the availability across the Group of a range of management actions, the Board has concluded that there are no material uncertainties that may cast significant doubt about the Group and the Company’s ability to continue as a going concern. The Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
Directors The names and biographies of the current Directors are shown on pages 54 to 57.
During the year the following changes in Directors took place: Upon the acquisition of the Pearl businesses on 2 September 2009, Martin Franklin resigned as Chairman and a Director, Nicolas Berggruen resigned as a Director, Dimitri Goulandris resigned as a Director, Ashley Silverton resigned as a Director and Miguel Pais do Amaral resigned as a Director.
Hugh Osmond, Manjit Dale, Ian Cormack, Jonathan Evans, Jonathan Moss, Simon Smith, René-Pierre Azria, Ian Ashken and David Barnes were appointed as Directors on 2 September 2009.
The interests of the Directors of the Company and their connected persons in the issued share capital of the Company are shown in the Remuneration report on page 72.
None of the service agreements or letters of appointment of the Company’s Directors includes provisions for the payment of compensation for loss of office or employment.
The rules about the appointment and replacement of Directors are contained in the Company’s Articles of Association (“the Articles”). These state that a Director may be appointed by an ordinary resolution of the shareholders or by a resolution of the Directors. If appointed by a resolution of the Directors, the Director concerned holds office only until the conclusion of the next Annual General Meeting (“AGM”) following their appointment.
The powers of the Directors are determined by Cayman Islands company law, the provisions of the Company’s Memorandum and Articles and by any directions given by shareholders by way of special resolution.
Directors’ responsibilities The statement of Directors’ responsibilities for the IFRS financial statements is included on page 76.
The statement of Directors’ responsibilities for the MCEV supplementary information is included on page 160.
The Memorandum and Articles are available on the Company’s website, www.thephoenixgroup.com.
Share capital Details of the authorised, issued and fully paid share capital as at 31 December 2009 and movements in share capital during the period are presented in note 16 to the IFRS financial statements.
Details about the warrants outstanding over the Company’s ordinary and ‘B’ ordinary shares are presented in note 24 of the IFRS financial statements.
Substantial shareholdings Under the Dutch Financial Supervision Act, actual or potential interests in five percent or more of the Company’s shares in issue are required to be disclosed to the Netherlands Authority for the Financial Markets (“AFM”). Based on information contained in the public register kept by the AFM and other information available to the Company as at 30 March 2010 (the last practicable date prior to the publication of the Annual Report and Accounts), the parties named in the table below have disclosed that they hold actual interests in voting rights over five percent or more of the Company’s shares in issue.
No. of ‘B’ ordinary shares held Aggregate no. of shares held
Charitable contributions Details of the charitable contributions of more than £2,000 made by the Company and its subsidiaries during the year are presented in the Corporate Responsibility section on pages 50 to 51.
The Company complied throughout 2009 with Cayman Islands law, Euronext Listing Rules and with regulations applicable to the Company’s secondary listing on the London Stock Exchange from 17 November 2009 (the date of that listing).
The Board is responsible to the shareholders for the overall governance and performance of the Group. The Board’s role is to provide entrepreneurial leadership within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board has a schedule of matters reserved for its consideration and approval. These matters include: Group strategy and business plans – Major acquisitions, investments and capital expenditure – Financial reporting and controls – Dividend policy – Capital structure – The constitution of Board committees – Appointments to the Board and Board committees – Key group policies including the remuneration policy for the Company – ’s Directors.
The schedule of matters reserved for the Board is available from the Company Secretary. Matters which are not reserved for the Board and also its committees under their terms of reference (which are available on the Group website), or for shareholders in general meetings, are delegated to the Group Chief Executive, Group Finance Director and other senior executives under a schedule of delegated authorities with specific parameters approved by the Board.
Central management and control is in Jersey where the Company’s head office is located.
The Chairman, Group Chief Executive 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, Jonathan Moss, 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 54.
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 appraisal of the Chairman’s performance by the Non-Executive Directors and for leading the process for appointing a new Chairman, when appropriate.
Board effectiveness The Board of the Company changed completely at the start of September 2009 on the Company’s acquisition of the Pearl businesses. Additions were made to the Board during the latter part of 2009 and the first quarter of 2010 to establish the Board in its current state. The evaluation of its performance and that of its committees and individual Directors will take place in accordance with the Board’s approved evaluation process. This is scheduled to take place in the latter part of 2010 once the new Board has operated as a unit for a reasonable period. The process, approved by the Board, is as follows: The Chairman will facilitate a discussion on, and evaluation of, the Board’s performance. This will include discussions both collectively and individually about: – The Board’s role; – The Board processes; – The Board’s performance; – The role and performance of its Committees; – Any conflicts of interest; and – Other relevant issues.
A review of a Director’s individual performance will be undertaken by the Chairman and the Board as part of the evaluation. This review will aim to show whether the Director in question continues to contribute effectively and to demonstrate commitment to the role (including commitment of time to Board and committee meetings and any other duties). The Chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the Board and, where appropriate, proposing new members to be appointed to the Board or seeking the resignation of Directors.
All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board. To ensure that the Directors continually update their 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.
Since the acquisition of the Pearl businesses on 2 September 2009, at which stage the composition of the Board was completely changed, the Board met four times in 2009. Attendance by each of the Directors at those meetings was: Date appointed
The dates of appointment of the remaining current Directors were: Charles Clarke – 18 February 2010 Isabel Hudson – 18 February 2010 David Woods – 18 February 2010 Alastair Lyons – 29 March 2010
The Board approved, on 3 September 2009, a corporate governance manual which sets a framework within which the Directors and other employees are expected to act to protect the interests of shareholders, customers, employees and suppliers. It includes policies on share trading, market disclosure and conflicts of interest.
All Directors have access to the advice and services of the Company Secretary, who can be appointed or removed only with the approval of the Board. The Board has adopted a procedure whereby Directors may, in the performance of their duties, seek independent professional advice at the Company’s expense if considered appropriate.
Board Committees The Board has delegated specific responsibilities to four standing committees of the Board. The terms of reference of the committees are on the Company’s website.
The Company has adopted a Charter of Statutory Auditor Independence, which requires both the Company and the external auditors to take measures to safeguard the objectivity and independence of the external auditors. These measures include a prohibition regarding non-audit services in respect of specific areas, such as secondments to management positions, or which could create a conflict or perceived conflict. It also includes details of the procedures for the rotation of the external audit engagement partner. The Charter is on the Company’s website.
Nomination Committee Ron Sandler is the Chairman of the Nomination Committee. The other members are Ian Cormack and Tom Cross Brown. The composition of the Committee is in accordance with the requirements of the Combined Code that the Nomination Committee should consist of a majority of independent Non-Executive Directors and that the Chairman or an independent Non-Executive Director should chair the Committee. The Nomination Committee was established on 1 February 2010 following the appointment of additional independent Non-Executive Directors to the Board.
The Nomination Committee is responsible for considering the size, composition and balance of the Board, and the retirement and appointment of Directors and making recommendations to the Board on these matters. During 2009 and the early part of 2010, the appointment of new Directors was considered by the Board, and in all cases, an external search consultancy was used to identify suitable candidates. The Nomination Committee considers succession planning for Directors and other senior executives.
The Company’s investor relations department is dedicated to facilitating communication with institutional investors. The Directors consider it important to understand the views of shareholders and in particular any issues which concern them. The Chairman and the Non-Executive Directors provide feedback to the Board on topics raised with them by major shareholders. Should major shareholders wish to meet the newly appointed Directors, or any of the Directors generally, they are welcome to do so.
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 Board’s going concern assessment is included within the Directors’ report on page 59.
Internal controls The Combined Code requires Directors to review and report to shareholders on the effectiveness of the Company’s systems of internal controls which include financial, operational and compliance controls and risk management. The Board has overall responsibility for the Group’s systems of internal controls and for reviewing their effectiveness. The Group’s systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.
Additional assurance is provided by the internal audit function, which operates and reports independently of management. The internal audit function provides objective assurance on the policies and processes supporting the internal controls to the Audit and Risk committees.
Prior to the establishment of the Remuneration Committee, and following the acquisition of the Pearl businesses on 2 September 2009, remuneration recommendations were presented to the Board of Phoenix Group Holdings. Advice was provided during 2009 by Hewitt New Bridge Street (“HNBS”) and they continue to advise the Remuneration Committee. HNBS provided no other services to the Group during the year and their terms of engagement are available from the Company Secretary. The Company Secretary acted as secretary to the Remuneration Committee.
Remuneration policy The success of the Group is dependent, amongst other things, upon the ability to attract, motivate and retain highly-skilled management and other specialist personnel. Competition for such individuals in the life insurance and asset management sectors remains significant and is anticipated to remain so for the foreseeable future.
Following a recent review of remuneration arrangements, the Remuneration Committee concluded that a remuneration policy consistent with UK listed comparators should be adopted whereby: – Base salaries are set at broadly mid-market levels; and – A competitive set of annual and long-term incentives are used so that a significant proportion of total remuneration is performance-linked, being subject to challenging targets without encouraging excessive risk taking.
The Remuneration Committee has also considered the implications for the Group of the recommendations of the FSA Code of Practice on Remuneration Policies, published in August 2009 and the Walker Review of Corporate Governance of UK Banking Industry, published in November 2009 and have incorporated relevant recommendations where appropriate.
Summary of remuneration practice The Committee reviews base salaries for Executive Directors (and senior executives) annually, having regard to: – The rates for similar roles in listed life assurance, asset management and general financial organisations (but avoiding the ratchet effect of following median or upper quartile levels); – The performance of the individual concerned, together with any changes in responsibilities which may have occurred during the year; and
Sharesave Scheme The Group is keen to align employee and wider owner interests through share ownership. All UK-based staff, including Executive Directors, employed on 30 November 2009, became eligible under defined criteria for grants of options to acquire shares under the Phoenix Group Holdings 2010 Sharesave Scheme (the “Scheme”). The Scheme provides for the grant of options to subscribe for Group shares at the end of either three or five years, using the proceeds from a savings contract entered into at the time the option was granted. Options under the Scheme have been granted with a 15 percent discount to the market price at the time of the grant. As at 19 March 2010, 834 participants held options over 1,159,069 shares under the Scheme.
Non-Executive Directors do not have service agreements with the Group, but are engaged under a formal letter of appointment setting out the Group’s expectations of them, including the amount of time they are required to spend on Group business. Appointment is for a fixed term of three years, terminable with one months’ notice on either side. Any subsequent terms are considered by the Group’s Nomination Committee. Non-Executive Directors are not eligible to participate in incentive arrangements or receive pension provision.
Annual bonus For 2009, bonus potential for the Executive Directors under the Group annual bonus scheme was as follows: Target*
Jonathan Moss 100 200 Simon Smith 85 170 * Assumes “on target” financial and personal performance
For the purposes of assessing the corporate element of performance, the following targets apply: 60 – percent – targeted improvements in the Group EV over 2009. 20 – percent – actual cost management performance against the annual Operating Plan budget, and 20 – percent – achievement of risk management targets, as determined by the achievement of predetermined reductions in the 2009 ICA relative to 2008.
Share awards During 2009, ‘B’ ordinary shares were allocated to an employee benefit trust in relation to the LTIP and BSP and recommendations were made to the trustee in respect of the shares allocated. The Executive Directors are potential beneficiaries of the employee benefit trust and the terms of the recommendation requests the trustees to consider allocating the following number of ‘B’ ordinary shares to them or their family trusts: ‘B’ ordinary shares subject of the recommendation under the LTIP
Neither of the Executive Directors or their respective family trusts has any entitlement to or interest in the shares unless or until the trustee exercises its discretion to allocate the shares to them.
On 22 January 2010, the Group Chief Executive and Group Finance Director were granted 1,611 and 2,761 options over shares under the Phoenix Group Holdings 2010 Sharesave Scheme. These options were granted at an exercise price of £5.63 and are exercisable from 1 March 2013 and 1 March 2015, respectively.
On 31 December 2009, the middle market price of Phoenix Group Holdings ordinary shares was £6.64 per share (€7.44 – Euronext), having varied from 17 November (when the Company obtained a Standard Listing on the Official List) to 31 December 2009, between a low of £6.60 and a high of £7.92.
The equivalent information for the year from 1 January to 31 December 2009, as traded on Euronext Amsterdam, was a low of €7.30 and a high of €10.03.
Simon Smith is a member of the Pearl Final Salary Section (defined benefit) of the Pearl Group Staff Pension Scheme. His pension entitlement accrues at 1/60th for each year of service, with a maximum pension entitlement of 2/3rds pensionable salary at the age of 60. No contributions were paid or are payable by Simon Smith under the terms of the Scheme. The increase in his pension entitlement for the period from 2 September 2009 until 31 December 2009 was as follows: Final salary pension as at 2 September
External appointments Executive Directors are not permitted to accept any other non-Group engagement or office (other than at the request of the Group) without the prior approval of the Board. At present there are no external appointments held by any of the Executive Directors, other than when they are representing the Group.
Total Shareholder Return In view of Phoenix Group Holdings acquiring the Pearl businesses during September, the Directors do not believe the provision of TSR information is meaningful this year. The Group intends to include a graph showing TSR against an appropriate broad equity index in future Annual Report & Accounts.
Ian Ashken8 (appointed 2 September 2009) – – René-Pierre Azria (appointed 2 September 2009) – 16,391 David Barnes (appointed 2 September 2009) – – Nicolas Berggruen7 (resigned 2 September 2009) 7,404,6002 9,954,6413 Ian Cormack (appointed 2 September 2009) – – Tom Cross Brown (appointed 24 September 2009) – – Manjit Dale4 (appointed 2 September 2009) – – Jonathan Evans (appointed 2 September 2009, resigned 22 October 2009) – – Martin Franklin7 (resigned 2 September 2009) 7,404,600 9,954,6413
Holdings directly. 3 Consists of 7,954,641 ordinary shares and 2,000,000 Sponsors’ Warrants that became exercisable upon consummation of the acquisition of the Pearl businesses on 4 TDR Capital Nominees Limited is a wholly-owned subsidiary of TDR Capital LLP, of which Manjit Dale is a founding partner. Details of TDR Capital’s interests can be found within the Directors’ report. In addition, TDR Capital has contingent rights in respect of a further 10,871,095 shares.
7 On the consummation of the acquisition on 2 September 2009, 50 percent of all warrants held by warrant holders were mandatorily redeemed. As a result, 31,800 warrants each held by Miguel Pais do Amaral and Dimitri Goulandris were redeemed in exchange for 3,067 newly issued ordinary shares each. Berggruen Acquisition Holdings II Ltd and Marlin Equities IV, LLC (in which Nicolas Berggruen and Martin Franklin have each respectively been considered to have a beneficial interest) redeemed a total of 5,702,300 warrants each (2,000,000 sponsor warrants and 3,702,300 founder warrants), in exchange for 550,040 ordinary shares each. The exchange ratio equated to one ordinary share for each 10.36705 warrants redeemed. As at 2 September 2009, the share price of Phoenix Group Holdings was €9.28.
76 Statement of Directors’ responsibilities 77 Auditor’s report 78 Consolidated income statement 79 Statement of consolidated comprehensive income 79 Pro forma reconciliation of Group operating profit to profit before the tax attributable to owners 80 Statement of consolidated financial position 82 Statement of consolidated cash flows 83 Statement of consolidated changes in equity 84 Notes to the consolidated financial statements
The Board of Directors of Phoenix Group Holdings hereby declares that, to the best of its knowledge: 1. The IFRS Financial Statements for the year ended 31 December 2009 give a true and fair view of the assets, liabilities, financial position and results of Phoenix Group Holdings and its consolidated subsidiaries taken as a whole; 2. The Annual Report gives a true and fair view of the state of affairs of Phoenix Group Holdings and its consolidated subsidiaries as at 31 December 2009 and for the financial year to which the Annual Report and Accounts relate; and 3. That the Annual Report describes the principal risks facing Phoenix Group Holdings.
Auditor’s responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with Dutch law. This law requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance 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 entity’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.
The Hague, 30 March 2010 Ernst & Young Accountants LLP was signed by S.B. Spiessens
Gross premiums written 545 – Less: premiums ceded to reinsurers (31) – Net premiums written 514 –
Policyholder claims (2,043) – Less: reinsurance recoveries 105 – Change in insurance contract liabilities 1,137 – Change in reinsurers’ share of insurance contract liabilities 142 – Transfer to unallocated surplus 21 (175) – Net policyholder claims and benefits incurred (834) –
Change in investment contract liabilities (429) – Acquisition costs 9 (8) – Change in present value of future profits 33 4 – Amortisation of acquired in-force business 33 (50) – Amortisation of other intangible assets 33 (7) –
Attributable to: Owners of the parent 95 31 Non-controlling interests 19 40 –
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.
The analysis of pro forma profit attributable to owners for the year ended 31 December 2009 incorporates the results of the acquired Pearl businesses for the four-month post-acquisition period only.
Insurance contract liabilities Liabilities under insurance contracts 20 50,291 – Unallocated surplus 21 721 –
Net asset value attributable to unitholders 946 – Obligations for repayment of collateral received 25 4,106 –
Reinsurance payables 17 – Payables related to direct insurance contracts 29 759 – Current tax 28 103 – Accruals and deferred income 30 177 9 Other payables 31 650 –
Equities 13,151 – Fixed and variable rate income securities 37,658 – Collective investment schemes 6,094 –
Insurance assets Reinsurers’ share of insurance contract liabilities 20 2,860 – Reinsurance receivables 264 – Insurance contract receivables 17 –
Current tax 28 44 – Prepayments and accrued income 622 – Other receivables 38 781 – Cash and cash equivalents 39 6,081 2 Amounts in trust 40 – 591
Cash flows from operating activities Cash absorbed by operations 40 (357) – Taxation received 37 –
Cash and cash equivalents at the beginning of the year 2 – Effect of exchange rate changes on cash and cash equivalents 1 5
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.
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
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 from non-controlling interests – – – – – – – (3) (3)
The financial statements are presented in sterling (£) rounded to the nearest £ million except where otherwise stated.
Non-controlling interests are stated at the initial amount attributed adjusted for the relevant share of subsequent changes in equity.
Notes to the consolidated financial statements 84 Phoenix Group Holdings Annual Report & Accounts 2009
Prior period adjustments Following a review of the agreements in relation to the Company’s Initial Public Offering (“IPO”) and Founders’ warrants the comparative amounts for 2008 have been restated to classify the warrants as financial liabilities instead of equity instruments. As a result of this restatement retained earnings have increased by £17 million, the foreign currency translation reserve has decreased by £4 million, share premium has decreased by £24 million and derivative financial liabilities have increased by £11 million.
The presentational currency of the Group has also been changed from euros to sterling as a result of the acquisition of the Pearl businesses which are predominately based in the UK and transact this business in sterling. The comparative amounts for 2008 have accordingly been restated. This change in accounting policy has resulted in the initial recognition of a foreign currency translation reserve in other comprehensive income for the period ended 31 December 2008 of £133 million and a subsequent reduction in the reserve in the year ended 31 December 2009 of £43 million. This change in accounting policy does not affect earnings and therefore there is no effect on the earnings per share calculation.
Income taxes Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all the available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which the losses can be relieved. The UK taxation regime applies separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a capital or trading nature may affect the recognition of deferred tax assets. Any judgements made, and uncertainties considered, in arriving at deferred tax balances in the financial statements are discussed in note 28.
Pensions benefit assets and liabilities The valuation of pension benefit assets and liabilities is determined using actuarial valuations, which involves making assumptions about discount rates, expected return rates on assets, future salary increases, mortality rates and future pension increases. As defined benefit pension plans are long term in nature, such assumptions are subject to significant uncertainty. Details of the key assumptions used are shown in note 32.
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 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.
Foreign currency transactions are translated into the functional currency of the transacting Group entity using average exchange rates. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement.
Insurance liabilities The insurance contract liability for non participating non linked business is calculated initially to comply with the requirements of the Prudential Sourcebook for Insurers issued by the Financial Services Authority (“FSA”), the UK Regulator. The liability for insurance contracts for business 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.
1. Accounting policies (continued) Present value of future profits (“PVFP”) on non participating business in the with profit funds For UK with profit life funds falling within the scope of the FSA realistic capital regime, and hence FRS 27, an amount may be recognised for the PVFP on non participating business written in a with profit fund where the determination of the realistic value of liabilities in that with profit fund takes account, directly or indirectly, of this value.
Where the value of future profits can be shown to be due to policyholders this amount is recognised as a reduction in the liability rather than as an intangible asset, and is then apportioned between the amounts that have been taken into account in the measurement of liabilities and other amounts which are shown as an adjustment to the unallocated surplus.
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 42.
Unallocated surplus The unallocated surplus comprises the excess of the assets over the policyholder liabilities of the with profit business of the Group’s life operations. For the Group’s with profit funds, the amount included in the statement of consolidated financial position caption ‘Unallocated surplus’ represents amounts which have yet to be allocated to equity holders since the unallocated surplus attributable to policyholders has been included within liabilities under insurance contracts. The with profit funds are closed to new business and as permitted by IFRS 4, the whole of the unallocated surplus has been classified as a liability (either within insurance contract liabilities or unallocated surplus).
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.
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
1. Accounting policies (continued) (l) Income tax Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised in the statement of consolidated comprehensive income or the statement of consolidated changes in equity, in which case it is recognised in these statements.
(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.
The economic surplus or deficit is subsequently adjusted to eliminate on consolidation the carrying value of insurance policies issued by Group entities to the defined benefit pension schemes (the reported surplus or deficit). A corresponding adjustment is made to the carrying values of insurance contracts liabilities and investment contracts liabilities.
The movement in the reported surplus/deficit is analysed between the service cost (recognised within administrative expenses in the consolidated income statement), the net interest gain or loss on the liabilities less the expected return on assets, including any reimbursement assets (recognised within net investment income in the consolidated income statement), curtailment gains/losses and actuarial gains and losses (recognised in other comprehensive income). All actuarial gains and losses are recognised in full.
Acquired in-force business Insurance and investment contracts with and without DPF acquired in business combinations and portfolio transfers are measured at fair value at the time of acquisition. The difference between the fair value of the contractual rights acquired and obligations assumed and the liability measured in accordance with the Group’s accounting polices for such contracts is recognised as acquired in-force business.
Acquired in-force business is amortised over the estimated life of the contracts on a basis which recognises the emergence of the economic benefits.
Customer relationships and other intangible assets 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 finite lives are amortised over their useful economic life and assessed for impairment whenever there is an indication that the fair value of the intangible asset is less than its carrying value.
1. Accounting policies (continued) Equities, fixed and variable rate income securities and collective investment schemes are designated as at fair value through profit or loss and accordingly are stated in the statement of consolidated financial position at fair value. They are designated at fair value through profit or loss because they are managed and evaluated on a fair value basis in accordance with the Group’s stated risk management policies to maximise returns to equity holders.
Invested cash held in collective investment schemes that are consolidated is recognised as a financial asset rather than cash and cash equivalents.
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.
Collateral received in the form of cash, where the Group has contractual rights to receive the cash flows generated, is recognised as an asset on the statement of consolidated financial position with a corresponding liability for its repayment. Non-cash collateral received is not recognised in the statement of consolidated financial position, unless the counterparty defaults on its obligations under the relevant agreement.
Reinsurance premiums payable in respect of certain reinsured individual and group pensions annuity contracts are payable by quarterly instalments. Due to the period of time over which reinsurance premiums are payable under these arrangements, the reinsurance premiums and related creditor are discounted to present values using a pre-tax risk-free rate of return. The unwinding of the discount is included as a charge within the consolidated income statement.
A provision is recognised for onerous contracts in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs reflect the least net cost of exiting the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.
1. Accounting policies (continued) Fee and commission income Fee and commission income relates to the following: – fund management based fees, which are recognised as the services are provided; – investment contract income – investment contract policyholders are charged for policy administration services, investment management services, surrenders and other contract fees. These fees are recognised as revenue over the period in which the related services are performed. If the fees are for services provided in future periods, then they are deferred and recognised over those periods. ‘Front end’ fees are charged on some non-participating investment contracts. Where the non participating investment contract is measured at fair value, such fees which relate to the provision of investment management services are deferred and recognised as the services are provided; and
Realised and unrealised gains and losses on financial assets designated at fair value through profit or loss are recognised in the consolidated income statement. Realised gains and losses are the difference between the net sale proceeds and the original cost. Unrealised gains and losses are the difference between the valuation at the period end and their valuation at the previous period end or purchase price, if acquired during the year.
(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 on death are accounted for 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.
(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.
Assets, liabilities, revenues or expenses that are not directly attributable to a particular segment are allocated between segments where there is a reasonable basis for doing so.
2. Financial information The consolidated financial statements for the year ended 31 December 2009, set out on pages 76 to 157, were authorised by the Board of Directors for issue on 30 March 2010. The financial statements have been prepared in accordance with IFRS adopted for use by the EU and also in accordance with the statutory provision of Part 9, Book 2, of the Netherlands Civil Code.
In addition, the following standards, amendments and interpretations have been issued but are not currently relevant to the Group: – IFRIC 18 Transfers of Assets from Customers (July 2009); – IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (2011); – Additional Exemptions for First-time Adopters (Amendments to IFRS 1) (2010); – Group Cash-settled Share-based Payment Transactions (Amendments to IFRS 2) (2010); – Classification of Rights Issues (Amendments to IAS 32) (2011); and – Prepayments of a Minimum Funding Requirement (Amendments to IFRIC 14) (2011).
3. Acquisition of the Pearl businesses With effect from 28 August 2009, the Company acquired 100% of the issued share capital of PGH (LCA) Limited (formerly Sun Capital Investments Limited), PGH (LCB) Limited (formerly Hera Investments One Limited), PGH (TC1) Limited (formerly SunCap Parma Topco Limited), PGH (TC2) Limited (formerly TDR Parma Topco Limited) and Opal Reassurance Limited, collectively the ‘Pearl businesses’, for a total consideration of £493 million. At the same time a third party’s interest in a 49.4% holding in Ignis Investment Management Limited (formerly Axial Investment Management Limited) was purchased by Pearl Group Holdings (No. 2) Limited (formerly Pearl Group Limited) (“PGH2”) for a consideration of £1. The Pearl businesses are involved in the management of various classes of insurance business and the provision of investment management services through their subsidiary companies.
Deferred tax assets 28 98 – 98 Insurance assets 2,983 – 2,983 Current tax 20 – 20 Deferred acquisition costs 15 (15) – Prepayments and accrued income 562 - 562
Pension scheme deficit 32 288 – 288 Liabilities under insurance contracts 20 51,413 – 51,413
Reinsurance payables 19 – 19 Payables related to direct insurance contracts 761 – 761 Current tax 54 – 54 Accruals and deferred income 296 (4) 292
3. Acquisition of the Pearl businesses (continued) The goodwill arising on the acquisition of the Pearl businesses is attributed to the Ignis Asset Management business and the management services operations within Phoenix Life.
If the acquisition of the Pearl businesses had been completed on the first day of the financial year, Group total revenue, net of reinsurance for the year would have increased by £1,081 million from £541 million to £1,595 million. However, the impact on Group profit has not been disclosed as it is impracticable to calculate this given the complex nature of the acquisition of the Pearl businesses and the associated acquisition accounting.
(a) The share consideration to the vendors included the issue of 40.7 million fully paid up ‘B’ ordinary shares. The fair value of this consideration was ascertained using the market price of the Company’s shares as quoted on Euronext. The market price on the date of acquisition was €9.26 (£8.16).
(b) In addition to these ‘B’ ordinary shares, 26.5 million contingent rights over shares were also given to certain of the vendors. These shares will be issued to the vendors depending upon the future performance of the Company’s share price as follows: – 8,833,333 shares will be issued when the share price is greater than or equal to €13 for 20 consecutive trading days; – 8,833,333 will be issued when the share price is greater than or equal to €14 for 20 consecutive trading days; and finally – 8,833,334 will be issued when the share price is greater than or equal to €15 for 20 consecutive trading days.
There is no quoted market price for these contingent rights over shares and therefore an appropriate valuation technique has been used to ascertain their fair value for accounting purposes. A Black–Scholes methodology has been used to value these contingent rights over shares as at the date of the acquisition. The key assumptions used to ascertain the fair value are as follows: – share price as at the date of acquisition of €9.28; – strike price of zero; – zero dividend schedule (with dividend adjustment); – zero stock borrowing cost assumption; – volatility of 30%; and – termination date of 2 September 2016.
The value of the warrants has been calculated at £0.75 per warrant. Details of these warrants are given in note 24.
(d) Prior to the acquisition the Company entered into an underwriting agreement with certain of its existing owners, to cover the value of any potential share redemption up to a maximum total of £75 million if required. One million ‘B’ ordinary shares are to be issued to the underwriters as a contingent fee for agreeing to perform this underwriting service. The issue of the shares is dependent upon the performance of the business in that the shares will be issued if the closing share price is greater than or equal to €15 for 20 consecutive trading days.
There is no quoted market price for these contingent rights over shares and therefore an appropriate valuation technique has been used to ascertain their fair value for accounting purposes. A Black–Scholes methodology has been used to value these contingent rights over shares as at the date of the acquisition. The key assumptions used to ascertain the fair value are as set out in (b) above. The value of these contingent rights over shares has been calculated at €5.60 (£4.94) per share.
(e) As part of the acquisition £9 million of professional fees were incurred. These have been capitalised and included within the total consideration. These costs were paid in the period.
Inter-segment transactions are set on an arm’s length basis in a manner similar to transactions with third parties. Segment results include those transfers between business segments which are then eliminated on consolidation.
Predominantly all revenues from external customers is sourced in the UK.
Net investment income: Net investment income 1,095 – (63) – 1,032 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
Operating profit/(loss) before adjusting items 285 14 (17) – 282 Investment return variances and economic assumption changes on long-term business 145 – – – 145 Variance on owners’ funds 9 – (79) – (70) Amortisation of acquired in-force business (45) – – – (45) Amortisation of other intangible assets (6) (1) – – (7) Non-recurring items (101) (4) – – (105) Financing costs attributable to the owners – – (49) – (49) Segment result before the tax attributable to owners 287 9 (145) – 151
Non-recurring items include: – a charge of £78 million related to the court-approved Guaranteed Annuity Option Compromise scheme for Phoenix & London Assurance Limited. This removed longevity risk from the business whilst providing immediate policyholder cash 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.
5. Investment return variances and economic assumption changes (continued) The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items. The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long term business, including unit linked and with profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
The variances excluded from operating profit in relation to owners’ funds are as follows: 2009 £m
General business result 2 – Income under Royal London transitional services agreement 31 – Insurance claim 11 – Other income 23 –
Wages and salaries 56 – Social security contributions 5 – Other pension costs 4 –
Phoenix Life 875 – Ignis Asset Management 534 – 1,409 –
Audit of the consolidated financial statements 0.8 0.1 The auditing of accounts of associates of the Company pursuant to legislation 3.5 – Other services supplied pursuant to such legislation: Audit related 0.7 – Services as reporting accountants 0.2 – Other services: Audit of MCEV supplementary information 0.6 – Other 1.4 –
Deferred tax: Reversal/(origination) of temporary differences (51) – On non profit surpluses (17) – On amortisation of acquired in-force business On profit arising from the changes in assumptions used for determining insurance liabilities in accordance with PS 06/14 (5) – Capital allowances in excess of depreciation 1 – Pension scheme movements 16 – On provisions for future expenditure (12) – Utilisation of tax losses 63 –
13. Tax (credit)/charge (continued) 13.2 Tax charged to other comprehensive income 2009 £m
Tax at standard UK* rate of 28% 42 – Net tax losses on corporate restructuring not matched in accounts (63) – Disallowable expenses 10 – Adjustment to tax charge in respect of prior years (3) – Decrease in deferred tax on movement in non profit surplus (51) – Policyholder tax calculation methodology 48 – Tax relief on accrued interest not valued 11 – Profits taxed at rates other than 28% 12 – Other 10 –
15. Earnings per share The profit attributable to owners for the purposes of computing earnings per share has been calculated as set out below. This is after adjusting for profits attributable to non-controlling interests.
Issued ordinary shares at beginning of the year 53 – Effect of ordinary shares issued/redeemed 39 53 Weighted average number of ordinary shares 92 53
The Founders’, Sponsors’ and IPO warrants issued in 2008 were dilutive up until 2 September 2009 and had the effect of increasing the weighted average number of ordinary shares by 14 million in calculating the diluted weighted averaged number of ordinary shares.
The following instruments could potentially dilute basic earnings per share in the future but have not been included in the diluted earnings per share figure because they are anti-dilutive for the periods presented: – 5 million warrants issued to the Lenders on 2 September 2009; – 12.36 million warrants issued to Royal London on 2 September 2009; and – The Founders’, Sponsors’ and IPO warrants from 2 September 2009 on which date the exercise price of the outstanding warrants was increased from €7 to €11.
Details of the warrants are given in note 24. The following contingently issuable shares have not been included in the diluted earnings per share figure, as none of the conditions would have been satisfied and therefore no shares would have been issued: – 26.5 million contingent rights over shares issued to the vendors on 2 September 2009 as part of the consideration for the acquisition of the Pearl businesses. These are payable in three tranches conditional upon the share price reaching thresholds of €13, €14 and €15 for 20 consecutive dealing days; – 1 million contingent rights over shares were granted in satisfaction of the contingent underwriting fee. These are payable on condition that the share price reaches €15; and
Issued and fully paid: 80.4 million (2008: 75 million) ordinary shares of €0.0001 each 6,067 5,583 49.8 million (2008: nil) ‘B’ ordinary shares of €0.0001 each 4,383 –
The holders of the ordinary and ‘B’ ordinary shares have the same rights to returns and voting. The holders are entitled to one vote per share on matters to be voted on by owners and to receive such dividends, if any, as may be declared by the Board of Directors in its discretion out of legally available profits.
Movements in share capital during the period: 2009 Number 2008 Number
At 2 January 2008 and 1 January 2009 – Issued in year 4
This reserve represents the value of the shares transferred to the PGL EBT to satisfy awards granted to employees under the Bonus Share Plan (“BSP”) and the Long Term Incentive Plan (“LTIP”). The number of shares held by the PGL EBT at 31 December 2009 was 500,000 (2008: nil).
The following information was relevant in the determination of the fair value of the Sponsors’ warrants: Share price: €10.00 Exercise price: €7.00 Expected life: an expected life equal to the maturity of the option of 5 years is used. Risk free rate: 3.422% being the yield on German Government Bonds on 13 February 2008. Volatility: 26% which is the average volatility of shares in a sample of ten companies with a similar market capitalisation.
On 24 July 2009, the Company’s owners approved the adoption of a suite of share-based incentive plans including the BSP and the LTIP. On 2 September 2009 500,000 ‘B’ ordinary shares were issued to the trustees of the PGL EBT and on 21 September 2009 the Board of Phoenix Group Holdings made recommendations for awards to the Trustee of the PGL EBT in respect of 403,750 ‘B’ ordinary shares under each of the BSP and the LTIP, and approved the issue of a further 307,500 ‘B’ ordinary shares to the trustee of the PGL EBT to be held, together with the original 500,000 ‘B’ ordinary shares, on an unallocated basis pending satisfaction of the performance and vesting conditions. A letter of wishes from Phoenix Group Holdings to the Trustee of the PGL EBT requested the apportionment of 403,750 shares to named individuals under each of the BSP and the LTIP, following satisfaction of performance and vesting conditions. The additional 307,500 shares have not yet been issued to the Trustee of the PGL EBT and the Company is now considering whether these shares should be issued to the Trustee of the PGL EBT, or whether other arrangements should be implemented to enable the Trustee to acquire these shares on market.
18. Share-based payment (continued) The rules for the BSP and the LTIP anticipate that awards to participants will be subject to two-year and three-year vesting periods respectively. The rules also note that there are no performance conditions associated with the BSP and following a meeting of the Board of Phoenix Group Holdings on 21 September 2009, the performance conditions attaching to the awards under the LTIP will be the achievement of a premium listing on the London Stock Exchange (“LSE”).
On 24 September 2009 it was agreed to grant to the Chairman 300,000 ‘B’ ordinary shares as part of the remuneration package to secure his appointment. The grant date of this award was 24 September 2009 which is the date the Chairman’s contract of employment was signed. All vesting conditions are considered to have been met on this date as by signing the contract the Chairman joined the Group and his appointment was thereby secured. The fair value of the award has been determined assuming that all shares vest and using a share price at 24 September 2009 of €9.35. The expense recognised in the income statement in relation to this award is £2.5 million (2008: £nil). After 31 December 2009, the terms of the Chairman’s award were amended. Details of these changes can be found in the ‘Directors’ Interests’ section of the Remuneration Report.
At 2 January 2008 and 1 January 2009 – – – On acquisition of the Pearl businesses 518 181 699 Profit for the year 9 31 40 Dividends paid – (8) (8) Effect of share transactions – (3) (3)
19.1 Perpetual Reset Capital Securities Pearl Group Holdings (No. 1) Limited (“PGH1”) has 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.
The Notes have no fixed maturity date and interest payments may be deferred at the option of PGH1; accordingly the Notes meet the definition of equity for financial reporting purposes. The Notes also meet the conditions for Innovative Tier 1 capital treatment in the calculation of the Group Capital Resources under the rules of the FSA. As the Notes are not directly held by the Company, these are disclosed as a non-controlling interest in the consolidated financial statements.
The Notes may be redeemed at par at the option of PGH1 on the first reset date of 25 April 2016 or on any coupon payment date thereafter. Redemption is subject to the agreement of the FSA. In certain circumstances PGH1 has the right to substitute the Notes or to redeem the Notes before the first reset date.
Coupons are payable annually in arrears on 25 April, at the rate of 6.5864% per annum, until the first reset date. Thereafter coupons are payable semi-annually at 2.73% per annum over the then prevailing offered rate for six-month sterling deposits. The consent of certain Lenders is required to enable the payment of coupons due in 2010 and thereafter.
On 25 March 2009, the Board of PGH1 gave notice to the holders of the Notes of its decision to defer the coupon payment on the Notes at the next payment date of 25 April 2009 and PGH1 indicated that it had no present intention to initiate the ACSM.
On 23 March 2010 PGH1 gave notice to the holders of the Notes of its decision to defer the coupon on the Notes which would otherwise have been due for payment on 25 April 2010. PGH1 announced that if certain amending proposals are agreed by the Noteholders this notice will be withdrawn and the 2010 coupon will be paid in full on the first business day after the payment date of 25 April 2010; in addition the deferred 2009 coupon will be paid by 31 December 2010. Further information on this is given in note 48.
UK Commercial Property Trust Limited (“UKCPT”) is a property investment subsidiary which is domiciled in Guernsey and listed on the LSE.
At 2 January 2008 and 1 January 2009 – – On acquisition of the Pearl businesses 51,413 2,689
Other changes in liabilities 361 216 Foreign exchange adjustments 15 29
Phoenix Group Holdings acquired these bonds as part of the acquisition of the Pearl businesses and they were recognised at their fair value.
– a limited recourse share charge granted by PGH2 over its 75% shareholding in Impala. (g) In 2008, UKCPT entered into an £80 million revolving loan facility agreement with Lloyds TSB. This loan accrues interest at LIBOR plus a variable margin of 0.50% to 0.70% per annum. The lender holds a floating charge over certain assets of UKCPT and its subsidiaries. The repayment date for this facility is 19 June 2015.
(h) On 14 May 2008, PGH (MC1) Limited issued PIK notes for the value of £154.5 million to Royal London and PGH (MC2) Limited obtained a £154.5 million PIK facility from Royal London. On 2 September 2009, £250 million in aggregate of the PIK notes and the facility outstanding (comprising principal and capitalised interest) was assigned to Phoenix Group Holdings as part of the acquisition of the Pearl businesses in exchange for the issue of 1.5 million shares and 12.36 million warrants. The acquired PIK notes and facility were recognised at their fair value. Interest accrues on the PIK notes and facility at LIBOR plus a margin of 2% unless an election is made by PGH (MC1) Limited or PGH (MC2) Limited to capitalise the interest, in which case the margin increases to 3.5%. In December 2009, interest of £2.3 million was capitalised on the PIK notes and facility. The final maturity date on the PIK notes and facility is 30 June 2019.
The borrowings under the £425 million facility are secured by first fixed and floating charges over all of the assets and undertakings of PGH (LCA) Limited and PGH (LCB) Limited (including their respective 50% shareholdings in Phoenix Life Holdings Limited (“PLHL”), all real estate, book debts, bank accounts, investments and other assets).
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 on the statement of consolidated financial position as either an asset or an associated liability as the Group is not permitted to sell or re-pledge the collateral in the absence of default. The total value of the collateral held under such arrangements in respect of reinsurance treaties was £1,846 million (2008: £nil)
Where collateral has been pledged by the Group and the right of set off is only enforceable on the occurrence of a particular future event then the pledged asset continues to be recognised by the Group. On the same basis the Group does not recognise collateral pledged by counterparties. Off balance sheet derivative collateral at 31 December 2009 which had been pledged to/by the Group amounted to £188 million (2008: £nil) and £455 million (2008: £nil) respectively.
Warrants over shares in Phoenix Group Holdings In 2008 Phoenix Group Holdings issued 20.12 million Founders’ warrants and 60 million IPO warrants. On 2 September 2009 12.36 million warrants were issued to Royal London and 5 million were issued to the Lenders. The table below shows a reconciliation of the outstanding number of these warrants: IPO warrants Number
Forfeiture of Founders’ warrants and shares (2 September 2009) – (63,600) – – Conversion of 50% of outstanding warrants into ordinary shares (2 September 2009) (30,000,000) (7,468,200) – – Issue of warrants to Royal London and Lenders (2 September 2009) – – 5,000,000 12,360,000 Conversion of IPO warrants into new ordinary shares (31 December 2009) (21,830,132) – – –
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.
If the Company calls the warrants for redemption as described above, it will have the option to require any holder that wishes to exercise its warrant (including the Founders’ warrants) to do so on a cashless basis.
The Founders’ and IPO warrants are listed and are valued using the warrant price quoted on Euronext for the Company. At 31 December 2009 the Founders’ warrants were valued at £7 million (2008: £2 million) and the IPO warrants were valued at £8 million (2008: £9 million).
The Company can issue a similar number of ordinary shares instead of ‘B’ ordinary shares. This is effective from the earlier of: – the date the ordinary shares are listed and traded on the LSE; and
All outstanding warrants may be redeemed at the option of the Company at any time after they become exercisable and prior to their expiration at a price of €0.01 per warrant provided that the last closing bid price of the ordinary shares is equal to or exceeds £19.50 on each of 20 consecutive trading days. The Company must give not less than 30 days’ notice of the redemption date. Each warrant may then be exercised by the warrant holder (in whole or any part) at its option.
The holders are entitled to exercise their warrants for cash, assignment of an amount of outstanding principal/accrued interest of any Global Debt (i.e. any debt owed to the registered holder by any Group company) or on a cashless basis where the Company redeems the warrants. Any warrant either not exercised or tendered back to the Company by the redemption date shall be cancelled on the books of the Company and have no further value except for the €0.01 redemption price.
These Lenders’ warrants are not traded in an active market and have therefore been valued using a Black-Scholes valuation model. The key assumptions used to ascertain a value as at 31 December 2009 are as follows: – share price as at 31 December 2009 of €7.44; – volatility of 30%; – the warrants are not adjusted for dividends; – the valuation incorporates the impact of the issuance of 4.0 million new ordinary shares in exchange for 21.8 million public warrants; and – upside participation limited to 70%.
The value of the warrants at the year end was £2 million (2008: £nil).
The Royal London warrants are not traded in an active market and have therefore been valued using a Black-Scholes valuation model.
The key assumptions used to ascertain a value as at 31 December 2009 are as for the Lenders’ warrants (see above). The value of the warrants at the year end was £6 million (2008: £nil).
Carrying value Financial liabilities at fair value through profit or loss: Designated upon initial recognition 9,774 – Held for trading – derivatives 2,842 11 Financial liabilities measured at amortised cost 8,460 –
Effect of discounting and of changes in the discount rate – – 1 – – 1
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 two years.
27. Provisions (continued) The known incidents provision was created for historical data quality, administration systems problems and process deficiencies on the policy administration, financial reconciliations and operational finance aspects of business outsourced.
Current tax receivables 44 – Net deferred tax assets 81 – Total tax assets 125 –
Current tax payables 103 – Net deferred tax liabilities 776 – Total tax liabilities 879 –
Trading losses 28 – Expenses and deferred acquisition costs carried forward 142 – Provisions and other temporary differences 30 – Pension scheme deficit 34 – Accelerated capital allowances 24 – Unpaid interest 45 – Gross deferred tax assets 303 – Less: offset against deferred tax liabilities (222) – Net deferred tax assets 81 –
Acquired in-force business 736 – Unrealised gains on investments 7 – Surplus within the non profit funds 96 – Provisions and other temporary differences 19 – Adjustment for insurance policies held with related parties in respect of the PGL Pension Scheme 17 – Intangible assets 123 – Gross deferred tax liabilities 998 – Less: offset against deferred tax assets (222) – Net deferred tax liabilities 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.
Deferred tax assets have not been recognised in respect of: Tax losses carried forward 141 – Excess expenses and deferred acquisition costs carried forward 50 – Provisions and other temporary differences 3 – Deferred tax assets not recognised on capital losses 210 –
29. Payables related to direct insurance contracts 2009 £m 2008 £m
In calculating the provisions in respect of long-term UK Industrial disease business the future investment income on the assets held to cover the related provisions has been taken into account by discounting future cash flows. The average period before the undiscounted liability will be settled has been estimated at 14 years for 2009 and the provision has been discounted at 2.5% per annum.
The overall effect is to reduce the gross and net claims outstanding financial liability for those classes of business referred to above at 31 December 2009 by £9 million from £35 million to £26 million. The total amount of the investment return which corresponds to the unwinding of the discount is £0.6 million.
32. Pension schemes The Group operates two staff Pension Schemes, the Pearl Group Staff Pension Scheme and the PGL Pension Scheme.
Pearl Group Staff Pension Scheme deficit (121) – PGL Pension Scheme – economic surplus 62 – Adjustment for insurance policies held with related parties and eliminated on consolidation (66) – PGL Pension Scheme – reported deficit (4) – Total deficit (125) –
Information on each of these schemes is set out below. This principally relates to the period from 28 August 2009 to 31 December 2009.
Given the deficit in the Pearl Scheme, the principal employer and the Trustees of the Pearl Scheme entered into an agreement effective 2 September 2009, the principal terms of which provided for the following: – a cash payment into the scheme of £50 million in October 2009 followed by cash payments of £25 million per annum for a period of ten years, commencing on 30 September 2010, subject to certain capital resource and other requirements being maintained; and
– the Trustees being granted a first charge over shares in Pearl, NPLL, London Life Limited, Pearl Group Services Limited and PGS 2 Limited to secure an amount not exceeding 60% of the deficit arising on the triennial scheme valuation (as calculated in accordance with the terms of the agreement), subject to an initial amount and a maximum of £600 million, such security ceasing on a scheme buy out, the principal employer discharging its liabilities under the agreement or upon a valuation of the scheme demonstrating there is no funding deficit if earlier. Enforcement of the security may take place on the occurrence of various events, the key ones being (i) a failure by the principal employer to pay agreed cash contributions to the scheme, (ii) an insolvency or other similar financial difficulties of the principal employer, (iii) except in certain defined circumstances, payments of interest or principal to the principal employer’s lenders or of dividends to the principal employer’s owners being made at a time when the principal employer has failed to maintain an embedded value of at least 1.3 times the amount secured, (iv) the principal employer failing to maintain an embedded value of at least 1.05 times the amount secured or (v) the principal employer granting certain types of security over its assets. NP Life Holdings Limited has also granted a limited recourse share charge over the shares it holds in NPLL in favour of the Trustee in respect of the principal employer’s obligation under this agreement. This security is granted on substantially the same terms as the security granted by the principal employer. The principal employer has also agreed to provide a share charge over NPI if NPI is not transferred within the Group by 14 April 2010.
In addition, the principal employer meets the administration expenses of the Pearl Scheme.
32. Pension schemes (continued) The principal financial assumptions of the Pearl Scheme are set out below: Rate of general long-term increase in salaries 4.5 – Rate of increase in pensions 3.5 – Discount rate 5.7 – Inflation 3.5 – Expected rate of return on scheme assets 5.1 –
It has been assumed that post-retirement mortality is in line with standard tables PMA92C2009 for males and PFA92C2009 for females, based on year of use and including Medium Cohort projections for future mortality improvements. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 26.8 years and 29.8 years for male and female members respectively.
Actual return less expected return on scheme assets 36 – Experience gains arising on scheme liabilities 58 – Loss due to changes in assumptions underlying scheme liabilities (65) –
The amounts recognised in the statement of financial position are as follows: 2009 £m 2008 £m
The actual return on the scheme assets comprises the following: 2009 £m 2008 £m
The change in the fair value of the scheme assets is as follows: 2009 £m 2008 £m
Equities 318 – Bonds 1,215 – Properties 63 – Cash 72 – Other 16 –
Contributions totalling £25 million are expected to be paid into the scheme in 2010 in accordance with the agreement with the Trustees of the Pearl Scheme.
Fair value of scheme assets 1,684 Defined benefit obligation (1,805) Deficit (121)
Defined benefit scheme The defined benefit section of the PGL Scheme is a final salary arrangement which is generally closed to new entrants and, in respect of former members of the Phoenix Life Group pension scheme (which merged with the PGL Scheme in 2006) to future service accruals.
The valuation has been based on an assessment of the liabilities of the PGL Scheme as at 31 December 2009, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related current service costs have been measured using the projected unit credit method.
The principal financial assumptions of the PGL Scheme are set out below: Rate of general long term increase in salaries 4.6 – Rate of increase in pensions 3.5 – Discount rate 5.7 – Inflation 3.6 – Expected rate of return on scheme assets 5.4 –
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 57 is 33.9 years and 35.0 years for male and female members respectively. The average life expectancy from retirement for a member currently aged 50 retiring at age 57 is 32.5 years and 34.2 years for male and female members respectively.
The amounts recognised in the income statement are as follows: 2009 £m 2008 £m
Actual return less expected return on scheme assets 23 – Experience gain arising on scheme liabilities 18 – Gain due to changes in assumptions underlying scheme liabilities 35 – Actuarial gain 76 –
The cumulative net actuarial gains recognised in other comprehensive income since 28 August 2009 amounted to £76 million.
32. Pension schemes (continued) The actual return on the scheme assets comprises the following: 2009 £m 2008 £m
On acquisition of the Pearl businesses 1,096 – Expected return on scheme assets 17 – Actuarial gain on scheme assets 23 – Contributions by the employer 6 – Benefits paid (16) – At 31 December 1,126 –
The distribution of the scheme assets at the end of the year was as follows: 2009 £m 2008 £m
Contributions totalling £15 million are expected to be paid into the scheme in 2010.
Amortisation At 2 January 2008 and 1 January 2009 – – – – – Amortisation charge for the year – 50 7 – 57
The amortisation in relation to these customer relationship intangibles is presented separately on the consolidated income statement.
Cost or valuation At 2 January 2008 and 1 January 2009 – On acquisition of the Pearl businesses 35 Additions 1
Depreciation At 2 January 2008 and 1 January 2009 – Charge for the year (2)
The useful lives of plant and equipment have been taken as follows: motor vehicles three to four years, computer equipment three to four years, furniture and office equipment five to ten years.
Direct operating expenses (included within administrative expenses) in respect of investment properties that generated rental income during the year amounted to £8 million. The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £3 million.
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.
The first of these investment 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 £18 million and in the worst case scenario the fair value would decrease by £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 £19 million and a reduction in yields of 25bps would increase the value by £21 million.
Level 3 investments in indirect property, private equity and hedge funds are valued using net asset statements provided by independent third parties and therefore no sensitivity analysis has been prepared.
Debt securities categorised as Level 3 investments are valued using broker quotes. Although such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
Financial assets at fair value Derivatives – – Financial assets designated at fair value through profit or loss upon initial recognition Equities – – Fixed and variable rate income securities 226 334 Collective investment schemes – –
Financial liabilities at fair value Derivatives 9 – Financial liabilities designated at fair value through profit or loss upon initial recognition Investment contract liabilities – – Borrowings – – Net asset value attributable to unitholders – –
Financial liabilities designated at fair value through profit or loss upon initial recognition Net asset value attributable to unitholders – 170 8 (24) – 154 29
Gains and losses on Level 3 financial instruments are included in net investment income in the consolidated income statement. There were no gains or losses recognised in other comprehensive income.
The reinvested assets are primarily AAA listed securities and cash and the Group also has other readily realisable financial assets which are available to settle the collateral liabilities if required.
40. Cash flows 40.1 Cash flows from operating activities 2009 £m
Profit for the year before tax 91 31 Non-cash movements in profit for the year before tax Fair value (gains)/losses on: Investment property (159) – Financial assets 354 – Unrealised (losses)/gains on: Financial liabilities – (17) Borrowings 32 – Depreciation of property, plant and equipment 2 – Amortisation of intangible assets 57 – Change in present value of future profit (4) – Change in unallocated surplus 175 – Change in deposit received from reinsurers (25) – Interest income on trust account (2) (16) Share-based payment charge 5 2 Interest expense on borrowings 87 – Net expected return on pension assets 9 – Foreign currency exchange gains (1) – Decrease in investment assets 487 – Increase in reinsurance assets (160) – Decrease in insurance contract and investment contract liabilities (951) – Net increase in working capital (354) – Cash absorbed by operations (357) –
9 – Cash and cash equivalents of the Pearl businesses (6,155) –
40. Cash flows (continued) 40.3 Trust account The trust account was held at Goldman Sachs, International, London branch and consisted of the net proceeds of the IPO, the proceeds of the sale of the Founders’ units sold to the Founders prior to the consummation of the IPO, the proceeds of the sale of the Sponsors’ warrants and £9 million of the underwriting fee that the underwriters had agreed to defer until the consummation of a business combination. Release of this amount was not at the discretion of the Company. The amounts held in the trust account were only to be released to the Company upon the consummation of a business combination, as set forth in the offering circular dated 25 January 2008 and the supplement thereto dated 5 February 2008. The trust account was under supervision of the Trustee under the trust agreement. Following the acquisition of the Pearl businesses, £45 million was returned from the Trust Account to subscribers for IPO shares who did not vote in favour of the business combination comprising £41 million share premium and £4 million accrued interest. The remainder of the trust account was transferred to the Company.
41. Capital statement Capital Management Framework The Group’s Capital Management Framework is designed to achieve the following objectives: – provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary excess capital; – ensure sufficient liquidity to meet obligations to policyholders and other creditors; and – meet the dividend expectations of owners as set by the Group’s dividend policy.
The capital policy of each Group holding company is set by the Board of Phoenix Group Holdings and monitored each month at both the executive and Board level. The policies ensure sufficient liquidity to meet creditor and dividend obligations through the combination of cash buffers and cash flows from the Group’s operating companies. Volatility in the latter is monitored at the executive and Board level through stress and scenario testing. Where cash flow volatility is judged to be in excess of the Board’s risk appetite, de-risking activities are undertaken.
Regulatory capital requirements Each UK life company must retain sufficient capital at all times to meet the regulatory capital requirements mandated by the FSA. In addition to EU-directive-based ‘Pillar 1’ and group capital requirements, the FSA has also stipulated a ‘Pillar 2’ of risk-based capital requirements that have been implemented in the UK. A life company’s actual capital requirement is based on whichever of the Pillar 1 or Pillar 2 requirement turns out to be more onerous for the company. Each 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.
Pillar 2 The Pillar 2 capital requirements are based on a self-assessment methodology, the so called 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 1 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”).
Insurance Groups’ Directive (“IGD”) FSA regulated insurance groups (including their holding companies) are also required to provide an assessment of capital adequacy on a Group-wide basis to enable the FSA to assess both the level of insurance and financial risk within the Group and the capital resources available to cover that risk. The assessment is known as the IGD and is the Group’s primary capital and solvency measure.
The Group’s IGD assessment is made at the highest EEA level insurance Group holding company, which is PLHL. PLHL is a subsidiary of the Company.
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.
Pearl Pacific fund – the owner attributed assets, known as the Pacific fund, are held within the surplus of the 0:100 fund of Pearl and are attributable to owners. The assets can only be released when, in the opinion of the Actuarial Function Holder and the Board, to do so would not adversely affect either the reasonable expectations of with profit policyholders or the security of non profit policyholders.
41. Capital statement (continued) The capital statement and movement analysis that follows presents information about the capital resources for the Group’s UK life businesses.
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.
Owners’ funds held outside long-term fund – – – – – – – Owners’ funds held in long-term fund – – – – – – – Total owners’ funds at 31 December 2009 – – – – – – – Adjustments onto a regulatory basis: Other qualifying capital: Subordinated debt 83 – – – – – 83 Contingent loans – – – – – 382 382 Allocation of Group capital 122 – – – – – 122 Total available capital resources at 31 December 2009 984 927 803 294 643 819 4,470 138 Phoenix Group Holdings Annual Report & Accounts 2009
Total available capital resources at 1 January 2009 – – – – – – – – – On acquisition of the Pearl businesses 850 738 634 357 619 427 659 1,902 6,186
Management actions The management actions that have had the most significant impact on available capital resources of the Phoenix Life segment of the Group during the period to 31 December 2009 generally comprise financing activities, both to strengthen the Phoenix Life segment in the form of subordinated debt, and to pay dividends to finance corporate activities. In respect of investment strategy, the improvement in capital resources has arisen from an initiative to restructure the with profit fund of PALAL to improve the outlook for policyholders of that fund.
The Group’s overall exposure to investment risk is monitored by appropriate committees, which agree policies for managing each type of risk on an ongoing basis, essentially within the ALM framework that has been developed to achieve investment returns in excess of amounts due in respect of insurance contracts. The effectiveness of the Group’s ALM relies on close matching of assets and liabilities arising from insurance and investment contracts, taking into account the types of benefits payable to policyholders under each type of contract. Separate portfolios of assets are maintained for with profit business, which includes all of the Group’s participating business, non linked non participating business and unit linked business.
42.3.1 Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. These obligations can relate to both on and off balance sheet assets and liabilities.
There are two principal sources of credit risk for the Group: – credit risk which results from direct investment activities, including investments in fixed interest securities, equities, derivatives, collective investment vehicles, hedge funds 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.
The amount disclosed in the statement of consolidated financial position in respect of all financial assets, together with rights secured under off-balance sheet collateral arrangements, and excluding those that back unit linked liabilities, represents the Group’s maximum exposure to credit risk.
Credit risk is managed by the monitoring of aggregate Group exposures to individual counterparties and by appropriate credit risk diversification. The Group manages the level of credit risk it accepts through divisional credit risk tolerances. In certain cases, protection against exposure to particular credit risk types may be achieved through use of derivatives. The credit risk borne by the shareholder on with profit policies is usually minimal unless the insurance fund is relying on shareholder support.
Cash and cash equivalents 2 – – – – – – – 2 Amounts in trust – – 591 – – – – – 591
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
Concentration of credit risk Concentration of credit risk might exist where the Group has significant exposure to an individual counterparty or a group of counterparties with similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. The Group has most of its counterparty risk within its life business and this is monitored by the counterparty limits contained within the investment guidelines and investment management agreements, overlaid by regulatory requirements.
The Group is also exposed to concentration risk with outsourced service providers. This is due to the nature of the outsourced services market. The Group operates a policy to manage outsourcer service counterparty exposures and the impact from default is reviewed regularly by executive committees and measured though the ICA stress and scenario testing.
42.3.2 Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises interest risk, currency risk and other price risk.
Interest risk Interest risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates due to the effect such movements have on the value of interest-bearing assets and on the value of future guarantees provided under certain contracts of insurance.
42. Risk management (continued) An increase of 1% in interest rates, with all other variables held constant, would result in decreases in the profit after tax in respect of a full financial year and in equity of £61 million (2008: £nil). A decrease of 1% in interest rates, with all other variables held constant, would result in an additional profit after tax in respect of a full financial year and an increase in equity of £89 million (2008: £nil).
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.
The impact of non government fixed interest securities and, inter alia, the change in market credit spreads during the year are fully reflected in the values shown in these financial statements. Similarly, the value of derivatives that the Group holds takes into account fully the changes in swap spreads.
A 10% increase in equity/property 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 £13 million (2008: £nil).
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 £196 million (2008: £nil).
Currency risk The Group’s principal transactions are carried out in sterling and therefore its exchange risk is limited principally to foreign operations.
The Group’s foreign operations (taken to be those denominated in non-sterling) generally invest in assets in the same currency denomination as their liabilities, so foreign currency mismatch risk between assets and liabilities is largely mitigated. Consequently, the foreign currency risk from the foreign operations mainly arises when the assets and liabilities denominated in a foreign currency are translated into sterling.
Certain Phoenix Life with profit funds have an exposure to overseas assets which is not driven by liability considerations. The purpose of this exposure is to reduce overall risk whilst maximising returns by diversification. This exposure is limited and managed through investment mandates which are subject to the oversight of the Investment Committees of the Boards of each life company. Fluctuations in exchange rates from holdings in overseas assets are hedged against currency risks.
Sensitivity of profit after tax and in equity to fluctuations in currency exchange rates is not considered significant at 31 December 2009, since unhedged exposure to foreign currency was relatively low.
The Group’s policy is to maintain sufficient liquid assets of suitable credit quality at all times and, where appropriate, to have access to borrowings so as to be able to meet all foreseeable current liabilities as they fall due in a cost-effective manner. Forecasts are prepared regularly to predict required liquidity levels over both the short and medium term allowing management to respond appropriately to changes in circumstances.
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.
42. Risk management (continued) 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
42.4 Unit linked contracts For unit linked contracts the Group matches all the liabilities with assets in the portfolio on which the unit prices are based. There is therefore no interest, price, currency or credit risk for the Group on these contracts.
In extreme circumstances, the Group could be exposed to liquidity risk in its unit linked funds. This could occur where a high volume of surrenders coincides with a tightening of liquidity in a unit linked fund to the point where assets of that fund have to be sold to meet those withdrawals. Where the fund affected consists of property, it can take several months to complete a sale and this would impede the proper operation of the fund. In these situations, the Group considers its risk to be low since there are steps that can be taken first within the funds themselves both to ensure the fair treatment of all investors in those funds and to protect the Group’s own risk exposure.
It is therefore necessary for the Boards of each life company to make decisions, based on actuarial advice, which ensure an appropriate accumulation of assets relative to liabilities. These decisions include investment policy, bonus policy and, where discretion exists, the level of payments on early termination.
Sensitivities Insurance liabilities are sensitive to changes in risk variables, such as prevailing market interest rates, currency rates and equity prices, since these variations alter the value of the financial assets held to meet obligations arising from insurance contracts and changes in investment conditions also have an impact on the value of insurance liabilities themselves. Additionally, insurance liabilities are sensitive to the assumptions which have been applied in their calculation, such as mortality and lapse rates. Sometimes allowance must also be made for the effect on future assumptions of management or policyholder actions in certain economic scenarios. This could lead to changes in assumed asset mix, or future bonus rates. The most significant non-economic sensitivities arise from mortality, longevity and lapse risk.
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 £27 million (2008: £nil).
An increase of 5% in assurance mortality, 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 shareholders’ equity of £27 million (2008: £nil).
A decrease of 25% in lapse rates, 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 £50 million (2008: £nil).
An increase of 25% in lapse rates, 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 £41 million (2008: £nil).
Valuation of non participating insurance contracts The non participating insurance contract liabilities are determined using either a net premium or gross premium valuation method.
Process used to determine assumptions For participating business in realistic basis companies the assumptions about future demographic trends are intended to be “best estimates”. They are determined after considering the companies’ recent experience and/or relevant industry data. Economic assumptions are market consistent.
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 were as follows: Increase/ (decrease)
Valuation interest rate For realistic basis companies the liabilities are determined stochastically using an appropriate number of risk-neutral scenarios produced by an economic scenario generator calibrated to market conditions and gilt yields as at the valuation date.
Valuation interest rates (after tax for life policies) are typically in the following ranges: Life policies 2.14 – 3.82 – Pension policies 2.76 – 4.84 –
Most with profit contracts give a guaranteed minimum payment on a specified date or range of dates or on death if before that date or dates. For pensions’ contracts, the specified date is the policyholder’s chosen retirement date or a range of dates around that date. For endowment contracts, it is the maturity date of the contract. For with profit bonds it is often a specified anniversary of commencement, in some cases with further dates thereafter. Annual bonuses when added to with profit contracts usually increase the guaranteed amount.
The Group has significant discretion regarding investment policy, bonus policy and early termination values. The process for exercising discretion in the management of the with profit funds is set out in the PPFM for each with profit fund and is overseen by with profit committees. Advice is also taken from the with profit actuary of each company which has a with profit fund. Compliance with the PPFM is reviewed annually and reported to the FSA and policyholders.
The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the with profit funds together with other elements of the experience of the fund. The shareholders of the Group are entitled to receive one-ninth of the cost of bonuses declared for some funds and £nil for others.
Unitised and traditional with profit policies are exposed to equivalent risks, the main difference being that unitised with profit policies purchase notional units in a with profit fund whereas traditional with profit policies do not. Benefit payments for unitised policies are then dependent on unit prices at the time of a claim, although charges may be applied. A unitised with profit fund price is typically guaranteed not to fall and increases in line with any discretionary bonus payments over the course of one year.
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 GCO policies.
During the last decade, interest rates and inflation have fallen and life expectancy has increased more rapidly than originally anticipated. Deferred annuity policies which are written to provide annuity benefits are managed in a similar manner to immediate annuities and are exposed to the same risks.
The Group has commitments under non-cancellable operating leases as set out below: 2009 £m 2008 £m
Not later than 1 year 11 – Later than 1 year and no later than 5 years 42 – Later than 5 years 54 –
To subscribe to private equity funds and other unlisted assets 520 – To purchase, construct or develop investment property 108 – For repairs, maintenance or enhancements of investment property 3 –
Other transactions and transactions with Directors and former Directors Major Group decisions are made by the Board. Total remunerations received by current Directors in the year ended 31 December 2009 totalled £2.4 million (2008: £nil). Further details are given in the Remuneration Report.
Nicholas Berggruen is the President of Berggruen Acquisition Holdings II Ltd and Martin Franklin is the majority owner and managing member of Marlin Equities IV, LLC. The interests of these former Directors in the ordinary shares of the Company represent the interests of Berggruen Acquisition Holdings II Ltd and Marlin Equities IV, LLC respectively. On 9 January 2008, each of Berggruen Acquisition Holdings II Ltd, Marlin Equities IV, LLC, and the Company’s three initial independent Directors, Dimitri Goulandris, Guy Naggar and Miguel Pais do Amaral (collectively, the “Founders”) issued a non-interestbearing note in favour of the Company for the purchase price of the Founders’ ordinary shares (“Founders’ shares”) and warrants (“Founders’ warrants”) in the aggregate amount of €25,000. These notes were repaid by the Founders on 28 January 2008. On 10 January 2008, 20,125,000 units (each unit consisting of one Founders’ share and one Founders’ warrant and together referred to herein as a “Founders’ unit”) were issued as follows: Units
On or about 5 February 2008, in connection with the pricing of the IPO, the Company repurchased an aggregate of 2,875,000 of the Founders’ units as follows: Units
On 11 March 2008, as a result of the expiration without exercise of the underwriters over allotment option in connection with the IPO, Founders’ units were automatically redeemed as follows: Units
Berggruen Acquisition Holdings II Ltd 1,110,690 Marlin Equities IV, LLC 1,110,690 Dimitri Goulandris 9,540 Guy Naggar 9,540 Miguel Pais do Amaral 9,540 Total 2,250,000
45. Related party transactions (continued) On 29 October 2008, Guy Naggar resigned from the Board of Directors and agreed to forfeit his Founders’ shares and Founders’ warrants, which forfeiture was effected by the Company’s repurchase of his Founders’ shares at par value (and the concurrent cancellation of his Founders’ warrants) upon the approval by the Company’s owners and the Company’s consummation of a business combination. On 29 October 2008, the Company’s Board of Directors appointed Ashley Silverton to fill the vacancy on the Board of Directors. The Company paid Ashley Silverton €10,000 as compensation for his agreeing to fill this vacancy and agreed to pay Ashley Silverton a fee in the amount of €636,000 upon the consummation of a business combination. In connection with his appointment to the Board of Directors, Ashley Silverton resigned his position as vice president of the Company. The fee of €636,000 was paid to Ashley Silverton on 2 September 2009.
Prior to the IPO, the Company agreed to pay Berggruen Holdings Ltd, an affiliate of Nicholas Berggruen, a total of €10,000 per month commencing on the date of the IPO for certain operating services and support until the earlier of the Company’s consummation of a business combination or its liquidation. This arrangement with Berggruen Holdings Ltd was agreed to by Berggruen Holdings Ltd for the Company’s benefit and was not intended to provide Berggruen Holdings Ltd compensation in lieu of a management fee. The Company believes that such fees are at least as favourable as it could have obtained from an unaffiliated third party. Prior to the IPO, Berggruen Holdings Ltd provided the Company with certain operating services and support at no charge. This fee ceased on the acquisition of the Pearl businesses and €80,000 was charged in 2009. No amounts were outstanding at 31 December 2009.
Other than part of the €10,000 per month for operating services and support payable to Berggruen Holdings Limited and a €1,000 per month fee payable to Ashley Silverton for his services as an officer of the Company, the €10,000 payment to Ashley Silverton for his agreeing to fill the vacancy on the Board of Directors following Guy Naggar’s resignation, the €636,000 fee payable to Ashley Silverton upon the consummation of a business combination and reimbursable out-of-pocket expenses payable to the Company’s officers and Directors, no compensation or fees of any kind, including finders and consulting fees, have been or will be paid to the Company’s officers or its Directors who owned the Company’s shares prior to the IPO, or to any of their respective affiliates for services rendered to the Company prior to or in connection with a business combination.
On the same date, 50% of the remaining Founders’ warrants were converted into ordinary shares as follows: Units Number of ordinary shares
Berggruen Acquisition Holdings II Ltd 2,000,000 192,919 Marlin Equities, IV, LLC 2,000,000 192,919 154 Phoenix Group Holdings Annual Report & Accounts 2009
The Group is party to an uncollateralised total return swap with TDR Capital Nominees Limited in relation to the performance of certain investments of Axial Income Opportunities S.a.r.l. As at 31 December 2009 a fair value of £27.1 million (2008: £nil) has been attributed to these swaps and interest of £1.4 million (2008: £nil) has been charged by TDR Capital Nominees Limited. At 31 December 2009, interest of £0.3 million was outstanding (2008: £nil).
During the year an associate of the Group, Sant Topco Holdings I S.a.r.l has been charged a financial consulting fee of €0.1 million by Sun Capital Partners Limited.
As a result of the acquisition of the Pearl businesses the Xercise Limited group of companies, a group in which Hugh Osmond is deemed to have significant influence, received 14,108,205 ‘B’ ordinary shares and 9,180,660 contingent rights over shares in Phoenix Group Holdings in exchange for shares it held in the acquired group of companies.
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”) has challenged the tax treatment of these transfers in the year ended 31 December 2004 and litigation may follow in 2010. The Directors do not consider it probable that any additional tax liability will arise. However, were HMRC’s challenge to be successful, the Group expects that the liability (before interest and penalties) should not exceed £45 million.
London Life Limited, has provided information to the FSA on its categorisation of £54 million 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 £54 million exists if London Life Limited were required to transfer this working capital back to policyholder funds.
Insurance companies BA (GI) Limited (general insurance company) UK Ordinary shares of £0.05 London Life Limited UK Ordinary shares of £1 National Provident Life Limited UK Ordinary shares of £1 NPI Limited UK Ordinary shares of £1 Pearl Assurance plc UK ‘A’ ordinary shares of £0.05 PA (GI) Limited (general insurance company) UK Ordinary shares of £0.01 and deferred shares of £0.25 Phoenix Life Limited UK Ordinary shares of £1 Phoenix & London Assurance Limited UK Ordinary shares of £1 Phoenix Pensions Limited UK Ordinary shares of £1 Scottish Mutual International Limited ROI Ordinary shares of €1.25 Non-insurance companies Axial Fixed Income Opportunities S.a.r.l. (investment vehicle) Luxembourg Ordinary shares of €100 Ignis Asset Management Limited (investment management company)
Ignis Fund Managers Limited (unit trust management) UK Ordinary shares of £1 Ignis Investment Services Limited (investment management company)
‘B’ ordinary shares of £1 Opal Reassurance Limited Bermuda ‘A’ ordinary shares of £1 and
On 15 March 2010 the Company changed its name from Pearl Group to Phoenix Group Holdings.
On 30 March 2010 the Board declared a dividend of €0.17 per share for the year ended 31 December 2009. The cost of this dividend has not been recognised as a liability in the financial statements for 2009 and will be charged to the statement of changes in equity in 2010.
R Sandler J Moss S Smith A Lyons I Ashken R-P Azria D Barnes C Clarke I Cormack T Cross Brown M Dale I Hudson H Osmond D Woods
MCEV supplementary information The Group’s primary measure of long‑term shareholder value is MCEV. Group MCEV increased by £783 million during 2009
Statement of Directors’ responsibilities in respect of the Market Consistent Embedded Value (MCEV) basis 160 Phoenix Group Holdings Annual Report & Accounts 2009
Ernst & Young Accountants LLP have reported separately on the IFRS consolidated financial statements of Phoenix Group Holdings for the year ended 31 December 2009.
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 this 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.
Respective responsibilities of directors and auditors As described in the Statement of Directors’ responsibilities on page 160, the directors are responsible for preparing the Phoenix Group MCEV supplementary information, under the basis of preparation set out on pages 168 to 171.
We report to you our opinion as to whether the Phoenix Group MCEV supplementary information, has been properly prepared in all material respects in accordance with the basis of preparation set out on pages 168 to 171. We also report to you if we have not received all the information and explanations we require for our audit of the Phoenix Group MCEV supplementary information.
We read other information contained in the Annual Report & Accounts and consider whether it is consistent with the Phoenix Group MCEV supplementary information.
Basis of audit opinion We conducted our audit having regard for International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Phoenix Group MCEV supplementary information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the Phoenix Group MCEV supplementary information, and of whether the accounting policies are appropriate to the Phoenix Group Holdings’ circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Phoenix Group MCEV supplementary information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of the Phoenix Group MCEV supplementary information.
Life MCEV operating earnings 380 Management services operating profit 14 Ignis Asset Management operating profit 34 Corporate operating loss (54) Group MCEV operating earnings before tax 374
Group MCEV earnings after tax Basic1 597.2p Diluted2 521.1p 1 Based on 92,269,310 shares 2 Based on 105,732,020 shares, allowing for warrants in issue
The earnings on covered business are calculated on a post‑tax basis and are grossed up at the effective rate of shareholder tax for presentation in the income statement. The tax rate used is the UK corporate tax rate of 28%.
New business value New business profits generated during the year amounted to £22 million after tax and represent the value of vesting pension policies not reflected in the opening MCEV. These arise from pension policies which have no attaching annuity guarantees.
Non-economic experience variances and assumption changes The life companies’ non‑economic experience variances and assumption changes for the year ended 31 December 2009 contributed £156 million to pro forma MCEV operating earnings after tax.
Ignis Asset Management operating profit Ignis Asset Management’s performance was favourable throughout the year generating a pro forma IFRS operating profit before tax of £34 million.
Economic variances on non‑covered business The economic variances on non‑covered business of £245 million before tax primarily relate to the increase in the market value of listed debt issued by the Group’s subsidiary Pearl Group Holdings (No. 1) Limited and Phoenix Group Holdings warrants, which reduced MCEV earnings by £169 million and £51 million respectively. In addition, the economic variances include a £29 million foreign exchange loss incurred by Phoenix Group Holdings primarily related to its euro cash holdings prior to its capital injection into the Pearl businesses. Having reduced its euro cash holdings, Phoenix Group Holdings’ exposure to foreign exchange fluctuations has reduced.
– Offset by a profit of £102 million after tax as a result of reassessing the impairment of a loan made to the Phoenix & London Assurance long‑term fund. The improved recoverability of the loan reflects the outcome of risk management activity within Phoenix & London Assurance and the improved financial position of the fund.
Debt finance costs1 176 Debt issue 202 Other finance costs 12 Finance costs attributable to owners 390 1 Finance costs on the Impala and Pearl facility agreements (and associated swap interest) and the Royal London PIK notes
Debt financing costs include interest of £142 million on the holding company debt for the eight‑month period prior to the refinancing (as discussed above) and interest on the refinanced debt on amended terms thereafter of £34 million for the final four‑month period.
Capital and other movements Other comprehensive income of £58 million includes £14 million of actuarial losses on defined benefit pension schemes, and £44 million exchange rate losses which will reduce going forward as Phoenix Group Holdings changed its functional currency from euros to sterling during the year.
The £275 million of share capital issued includes £202 million in connection with the associated debt restructuring and an additional cash equity injection of £73 million at the time of the acquisition of the Pearl businesses by Phoenix Group Holdings.
Foreign exchange – – – (44) (44) Other movements – – – (14) (14) Capital and dividend flows – internal (134) (51) (15) 200 – Capital and dividend flows – external – – – 290 290
Closing value at 31 December 2009 4,731 56 39 (2,999) 1,827 1 Comprises the Group holding companies that do not form part of the Phoenix Life and Ignis Asset Management divisions 166 Phoenix Group Holdings Annual Report & Accounts 2009
Reconciliation of Group IFRS equity to MCEV net worth For the year ended 31 December 2009 £m
1. Basis of preparation Overview The supplementary information on pages 162 to 177 covering the year to 31 December 2009 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 to 31 December 2009, the pro forma MCEV results include a full year’s contribution for the acquired Pearl businesses. The pro forma MCEV results are therefore based on the results of the Group plus the Pearl businesses for the period prior to their acquisition by Phoenix Group Holdings.
– As indicated above the value of the asset management and management service companies are calculated on an IFRS basis.
Covered business The MCEV calculations cover all long‑term insurance business written by the Group, but exclude Ignis Asset Management, the management service companies and business carried on at the Corporate level.
(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 – Frictional costs of required capital.
The market consistent value of in‑force business represents the present value of profits attributable to shareholders arising from the in‑force business, less an allowance for the time value of financial options and guarantees embedded within life insurance contracts and frictional costs of required capital.
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.
Notes to the pro forma MCEV financial statements continued 1. Basis of preparation (continued) Present value of future profits (“PVFP”) The PVFP represents the present value of profits attributable to shareholders arising from the in‑force business. The PVFP is calculated by projecting and discounting using risk‑free rates, with an allowance for liquidity premiums where appropriate.
Time value of financial options and guarantees (“TVFOGs”) The Group’s embedded value includes an explicit allowance for the time value of financial options and guarantees embedded within insurance contracts, including investment performance guarantees on participating business and guaranteed vesting annuity rates. The cost of these options and guarantees to shareholders is calculated using market‑consistent stochastic models calibrated to the market prices of financial instruments as at the period end.
Cost of residual non-hedgeable risks (“CNHR”) The CNHR should allow for risks that can have an asymmetric impact on shareholder value to the extent these risks have not already been reflected in the PVFP or TVFOGs. The majority of such risks within the Group are operational and tax risks.
No allowance for the cost of non‑hedgeable risk has been made, as in the opinion of the Directors, the cost of residual non‑hedgeable risk 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.
For with profits business the theoretical cost of residual non‑hedgeable risk would increase the TVFOGs by £93 million.
The National Provident Life Securitised 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.
(d) Taxation Full allowance has been made for the value of tax that would become payable on the transfer of surplus assets out of non profit funds. This allowance reflects the projected pace of releases of surplus from non profit funds that is not required to support with profits funds.
(e) New business The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteed annuity terms. These policies are excluded from the definition of new business on the basis that the annuity being provided is an obligation under an existing policy and the life companies are already reserving for the cost of these guarantees.
(f) Participating business Allowance is made for future bonus rates on a basis consistent with the projection assumptions and established company practice.
(g) Pension schemes The MCEV allows for pension scheme deficits as calculated on an IFRS basis, but no benefit is taken for pension scheme surpluses.
Notes to the pro forma MCEV financial statements continued 2. Components of the MCEV of covered business £m £m
The net worth of covered business of £2,234 million at December 2009 consisted of £1,826 million of required capital and £408 million of free surplus.
New business value 18 4 22 Expected existing business contribution (reference rate) 32 27 59 Expected existing business contribution (in excess of reference rate) 10 26 36 Transfer from VIF 181 (181) –
Other non‑operating variance 12 (5) 7 Total Life MCEV earnings 521 263 784
Present value of future profits 975 767 508 305 309 2,864 6. Economic assumptions Reference rates (a) Risk-free rates Risk‑free rates are based on the annually compounded UK government bond nominal spot curve plus ten basis points, extrapolated as necessary to meet the term of the liabilities. Recognising that this is a departure from MCEV principles, a sensitivity based on swap yields is disclosed.
The risk‑free rates assumed for a sample of terms were as follows: Year ended 31 December 2009 Year ended 31 December 2008 Term Gilt Yield +10 bps Swap yield Gilt Yield +10 bps Swap yield
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 2009. 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 ten basis points, consistent with the deterministic projections. Interest rate volatility is calibrated to swaption implied volatilities, as per the sample below.
Best estimate levels of volatility are assumed for directly held property. The model implied volatility for 2009 is 15%. The modelling of corporate bonds allows for credit transitions and defaults, calibrated to historic data, with an additional allowance for the credit risk premium, derived from current markets.
Operating earnings MCEV operating earnings assume investment returns based on the one‑year risk‑free rate at the beginning of the reporting period, plus expected returns in excess of the risk‑free rate (an asset risk premium). The table below sets outs the asset risk premiums used: Equities 2.5 Property 2.0 Gilts 0.0
The table below summarises the value of these debt obligations as at 31 December 2009.
Perpetual Reset Capital Securities 540 264 517 95 Phoenix Life Limited (ex‑Scottish Mutual Assurance) subordinated debt 211 156 211 120
Pearl and Impala facilities 2,760 3,085 Royal London PIK note 102 332 7. Sensitivity to assumptions The table below summarises the key sensitivities of the MCEV of covered business at 31 December 2009: 2009 Total Life
Unaudited historical pro forma net EV as disclosed in the Proxy Statement as at 31 December 2008 1,265
Phoenix Group Holdings IFRS net assets at 31 December 2008 573 MCEV of Opal Re at 31 December 2008 (a) 12 Proforma Group MCEV before methodology changes 1,850
Methodology changes: PVFP of non‑covered business (b) (630) Reduced liquidity premiums (c) (251) Vesting annuities (d) 65 Other changes 10 Pro forma Group MCEV at 31 December 2008 1,044
(a) As Opal Re is now part of the Group it is included within covered business from 31 December 2008 and is valued on a basis consistent with the annuity business within the life companies.
(b) Asset management and management service companies have been excluded from the definition of covered business. Under CFO Forum principles and guidance productivity gains should not be recognised until achieved. This treatment is inconsistent with the cost profile of a closed fund where continual cost reductions are expected to maintain unit costs as the business runs off. In the opinion of the Directors, if the MCEV principles and guidance were to be applied to the asset management and the management service companies, it would not provide a fair reflection of the Group’s financial position. These companies are therefore reported alongside the Group’s other non‑life Group companies at their IFRS net asset value.
(c) The allowance for default risk has been increased to include an explicit margin for unexpected default risk premium. This reduces the value of liquidity premiums within the MCEV. This change is to align the Group’s methodology with the risk‑neutral principles that form the basis of the CFO Forum’s MCEV methodology.
(d) The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteed annuity terms. These policies are excluded from the definition of new business on the basis that the annuity being provided is an obligation under an existing policy and the life companies are already reserving for the cost of these guarantees.
Our registrar, The Royal Bank of Scotland N.V. (RBS), maintains the Company’s register of members and if you have any queries in respect of your shareholding, please contact them directly using the contact details set out below: Registrar details RBS Gustav Mahlerlaan 10 (HQ3130) 1082 PP Amsterdam The Netherlands
Telephone number: +31 20 464 3707 Fax number: +31 20 464 1707 (Monday to Friday 8.00am to 4.30pm) Email: corporateactions@rbs.com8
H You can access the current share price of Phoenix Group Holdings ordinary shares at www.thephoenixgroup.com
Ordinary shares – 2009 final dividend Ex‑dividend date 6 April 2010 Record date 8 April 2010 Dividend payment date 15 April 2010
Interim dividend – 2010 Dividend payment October 2010 180 Phoenix Group Holdings Annual Report & Accounts 2009
Other factors which could cause actual results to differ materially from those estimated by forward‑looking statements include but are not limited to: Global economic environment – Asset prices – Monetary and interest rate policies – Impact of inflation and deflation – Changes to regulation, taxes and legislation – Market competition. –
ACSM Alternative Coupon Satisfaction Mechanism – A deferred coupon settled through the issuance of share capital.
AUM Assets Under Management – The total value of assets that the Group manages and administers for itself and its customers, including assets managed for third parties outside the context of insurance.
Black‑Scholes A mathematical model used to calculate the value of an option.
BSP Bonus Share Plan – The Group’s incentive programme under which a bonus is paid to employees in accordance with rules concerning eligibility, performance targets, time period, and size and form of payments.
CFO Forum A high‑level discussion group formed of the Chief Financial Officers of major European listed and non‑listed insurance companies.
Corporate Governance The framework of customs, policies, procedures, laws and institutions influencing the way a corporation or company is managed.
DPF Discretionary Participation Feature – A contractual right under an insurance contract to receive, as a supplement to guaranteed benefits, additional benefits whose amount or timing is at the discretion of the issuer.
EEA European Economic Area – Established on 1 January 1994 and is an agreement between Norway, Iceland, Liechtenstein and the European Union. It allows these countries to participate in the EU’s single market without joining the EU.
The UK’s independent regulator responsible for promoting confidence in corporate reporting and governance.
FSA Financial Services Authority – The UK regulator for the financial services industry.
GCR Group Capital Resources – In accordance with the UK regulatory regime for insurers firms are required at all times to maintain overall financial resources to ensure liabilities can be met as they fall due.
GCRR Group Capital Resource Requirement – In accordance with the UK regulatory regime for insurers it is the sum of the individual capital resource requirements for the insurer and each of its regulated undertakings.
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.
Insider Warrant Warrants held by the original founders and sponsors of the Company.
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 a Premium Listing replaces the pre‑existing Primary Listing on the London Stock Exchange. Under a Premium Listing companies are required to comply with “premium” or “super‑equivalent” standards.
RPIX Retail Price Index excluding mortgage interest payments – Official measure of the general level of inflation as reflected in the retail price of goods and services.
SPAC A Special Purpose Acquisition Company is a company set up with the express purpose of acquiring other businesses.
TSR Total Shareholder Return – The total return of a stock to an investor (capital gain plus dividends).
TVFOG Time value of financial options and guarantees embedded within insurance contracts.
UEL Useful Economic Life – The period over which fixed assets are depreciated.
VIF The Value of in‑force business – The Present Value of Future Profits (PVFP) plus the Time Value of Financial Options and Guarantees (TVFOG) less the Frictional Costs of Required Capital (COC).