Phoenix Group is the UK’s largest specialist closed life and pension fund consolidator with approximately 6 million policyholders and in excess of £72 billion of assets under management. As a closed life fund consolidator Phoenix Life focuses on the efficient run-off of existing policies, maximising economies of scale and generating capital efficiencies through operational improvements. Ignis Asset Management focuses on delivering strong investment performance and high quality service to its clients. The Group’s strength derives from the combination and leverage of both the Phoenix Life and Ignis Asset Management businesses.
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Our business manages closed life funds in an efficient and secure manner, protecting and enhancing policyholders’ interests whilst maximising value for the Group’s shareholders.
responsibilities 85 Independent Auditor’s report 86 Consolidated financial statements 93 Notes to the consolidated financial statements
These achievements were realised in the face of considerable market uncertainty and volatility during the second half of 2011, demonstrating the resilience of the Group and its ability to manage prudently risk and capital.
In December 2011, we announced that Jonathan Yates, Group Finance Director, would be leaving the Group to pursue another opportunity. On behalf of the Board, I should like to express our thanks to Jonathan for his contribution to the Group and we wish him well for the future. We will announce his replacement once the Board has concluded the selection process.
I remain confident that given our strategy, the capabilities of our people and our performance to date, we can deliver this vision and in so doing, create significant value for our shareholders.
In a challenging year for financial markets, Phoenix Group has demonstrated its resilience and is well positioned for the future. On behalf of the Board, I should like to thank all of our employees for their contribution to the Group’s success in 2011.
Despite the volatile investment markets, Phoenix Life and Ignis have provided strong customer service and investment returns and we continue to work with our outsourced partners to improve our proposition for policyholders.
Group highlights In 2011, Phoenix Group achieved or exceeded its three financial operating targets, as set out last year. In particular, we generated cash flows of £810 million from our operating companies, compared with a target range of between £750 million and £850 million. This demonstrates the organic cash generative nature of our business model, even in difficult macroeconomic conditions, and has also allowed us to reduce our gearing ratio at the end of 2011 to 46%, well ahead of our previous target of less than 50%. We are targeting a further reduction to 43% or below by the end of 2012.
Phoenix Group Holdings Annual Report and Accounts 2011 net inflows of £1.7 billion and given its improved investment performance across many asset classes, is well placed to build on the progress it has made in 2011 in developing a strong third party proposition and expanding into the institutional market.
At the time of going to print I am also delighted to report that Phoenix Group is one of ‘Britain’s Top Employers 2012’. This certification is awarded to companies that have been independently recognised as being amongst the best companies to work for in the UK.
These are well-deserved awards, which are also reflected in our higher than ever employee engagement results.
Customers ‘Treating Customers Fairly’ is central to how we run our business. We have streamlined our life companies through a programme of fund mergers which, together with a rebranding of our life funds, aims to simplify our policyholder communications and provide customers with enhanced fund security. A new website for a number of our life funds will be launched this year to enhance the online customer experience.
Our existing long-term relationships with our outsourced partners are a key aspect of Phoenix’s business model, helping us to ensure our customers are treated fairly whilst managing our cost base efficiently. Together with Diligenta, our largest outsourced partner, we have continued to transform our administrative systems, including completing the transfer of a total of over 2 million live policies onto the BaNCS policy administration platform. This transfer from outdated legacy systems to a modern, ‘future proofed’ administration platform has provided our policyholders with online access to their investments, improving both service levels and transparency. This work will continue during 2012, with the planned transfer of a further 1 million live policies onto BaNCS.
Ignis has made excellent progress in strengthening its investment management capabilities and this has already yielded results in the investment performance achieved for the Group’s life companies. During 2011, 11 out of 15 of the Group’s main life funds achieved investment performance above their benchmark targets and, as a result, Ignis has generated significant performance fees during the year. This clearly demonstrates how we have aligned policyholder interests with those of our shareholders in the management of their investments.
Financial targets Despite the challenging market conditions experienced in 2011 we have reiterated our operating company cash generation target of £3.2 billion for the six year period between 2011 to 2016. Of this, we are aiming to deliver operating company cash generation of between £500 million and £600 million in 2012 which will be weighted towards the second half of the year. In addition, we maintain our previously set annual average target of £100 million of MCEV enhancements through management actions over the period 2011 to 2014.
Initiated the outsourcing of Ignis’ back office functions in partnership with HSBC
Business and strategy Our business brings together complementary skills to deliver improved performance for our life company and asset management customers. With a simple mission and a clear strategy we are well positioned to capitalise on opportunities to deliver value as they arise in the future.
Targets superior investment performance, client service and operational efficiency 6m Policyholders £778m Cash generation £70.7bn Assets under management, administration and oversight £46m IFRS operating profit
Unlike open life businesses, we are not required to allocate significant capital to support the writing and distribution of new insurance products. This means that the capital requirements of our operating life companies decline as policies mature, releasing excess capital as free surplus in the form of cash.
In addition to this released capital we create value from our in-force book of closed life funds, generating profits from participation in investment returns, policyholder charges and management fees earned on assets (to the extent they exceed expenses). These additional profits from the in-force policies can also be released by the Group’s life companies as free surplus in the form of cash.
External outsourced partners are used for policy administration thereby minimising fixed costs.
Ignis is incentivised to maximise investment performance for the Group’s policyholders through performance fee arrangements. In addition, Ignis is seeking to grow the assets it manages for third party investors in both the retail and institutional markets.
The Group functions provide support for, and coordination and delivery of, the Group’s strategic objectives and manages our relationships with our external stakeholders, including shareholders, our lenders, our Group pension schemes and the Financial Services Authority (‘FSA’).
Group functions At Group level, Phoenix operates centralised functions that provide Group-wide and corporate-level services and manage corporate activity. The Group-level operations include Group Finance, Treasury, Group Tax, Group Actuarial, Group Risk, Legal Services, HR, Corporate Communications, Strategy and Corporate Development, Investor Relations, Company Secretariat and Internal Audit.
As the number of policies held by the Group gradually declines over time, the fixed cost base of our operations as a proportion of policies will increase. Our management services team manages this risk by putting in place long-term arrangements for third party policy administration. By paying a fixed price per policy to our outsourced partners we minimise the fixed cost element of our operations.
Specialist roles such as finance, actuarial and risk are retained in-house, ensuring Phoenix Life retains full control over the core capabilities necessary to manage and integrate closed life funds.
The Phoenix Way covers areas such as operational management, outsourcing, investment management, restructuring and risk management. Examples include establishing a standardised with-profit ‘model fund’, consolidating outsourcing arrangements and developing standard systems for actuarial modelling as part of our AST project.
Although the life companies are closed and generally do not write new business, they do accept additional policyholder contributions on in-force policies and allow certain policies, such as pension savings plans, to be reinvested at maturity into annuities. The Group has a strong and steady stream of internal annuity vestings at a very low cost, so we can offer policyholders competitive annuity rates whilst generating additional value for shareholders.
Management services The Group’s management services companies are charged with the efficient provision of financial and risk management services, sourcing strategies and delivering
– Working with clients to provide creative solutions to changing product needs
This strategy is underpinned by: – Innovative people focused on Ignis’ clients and provided with the freedom to perform
– A partnership culture that ensures clear accountability and supports both the work within Ignis and with Ignis’ clients and counterparties
Ignis Asset Management Ignis Asset Management is the Group’s asset management business and is led by its Chief Executive Officer, Chris Samuel. It provides investment management services to the Group’s life companies as well as to third party clients, including both retail and institutional investors in the UK and overseas. Now one of the largest 15 UK asset management firms, Ignis is responsible for £70.7 billion of assets, including £62.1 billion of assets for the Group’s life companies.
With offices in London and Glasgow, and over 540 employees, Ignis has investment capabilities across multiple asset classes organised into six investment business units.
Ignis’ vision is to develop into a leading asset management business committed to performance excellence and innovation, where talented people want to work and, most importantly, where clients want to invest their money.
The AST programme is progressing to plan and will be an essential part of managing the Group’s life businesses under the Solvency II regime, as well as providing a platform for the integration of newly acquired closed life funds within the Group.
Ignis Advisors – Fund of Hedge Funds – Fund of Private Equity
Ignis Solutions – Liability driven investments – Asset liability matching and risk management
Ignis Partners Investment boutiques: – Argonaut – Cartesian – Castle Hill – Hexam
– HSBC will provide a standard back office framework enabling Ignis to focus future systems development on the front office
– It provides a single source of data for Phoenix Life, assisting with reconciliation and consolidation work
– It facilitates the introduction of innovative new products by enabling Ignis to leverage HSBC’s existing capabilities to provide increased speed to market
One element of The Phoenix Way involves consolidating our internal and external arrangements to further transform the model and improve outcomes for our policyholders and customers. In line with this, Ignis is planning to enter into a partnership with HSBC Securities Services to deliver its investment administration and other related back office administration services. As part of this, Phoenix Life will also consolidate certain existing ancillary investment related outsourced services with HSBC.
Business and strategy 16 Areas of strategic focus Manage capital Risk management is a key component of the Group’s strategic agenda. The effective management of our risks and the efficient allocation of capital against them is critical in allowing us to achieve our strategic and operational objectives. This includes ensuring there are robust capital policies within the life companies.
Service – customers want to be treated fairly, with empathy and respect in a timely fashion
Security – customers expect their investment to be secure in a well managed company.
Phoenix Group’s strategic journey continues to build on our recent achievements. Our mission is simple: to improve returns for Phoenix policyholders and Ignis customers and deliver value for shareholders.
Our objectives for 2011 Our achievements in 2011 Our priorities for 2012
Optimisation of life company capital through further transfers of business Achieve all Solvency II programme critical milestones Develop with-profit ‘Model Fund’ investment strategy Improve speed of payments across all claims and enhance complaint handling processes
Recaptured the internal reassurance between PPL and PLL Acceptance by the FSA of Phoenix’s initial Solvency II Self Assessment template Established a standardised with-profit ‘Model Fund’ Transferred over 2 million live policies from legacy systems to improve service and contain future costs Met 12 day industry target for Origo Open Market Option transfers Delivered £165 million of MCEV enhancement through management actions Increased distributable estate by over £126 million in 2011
Achieve £100 million of MCEV enhancing management actions each year on average from 2011 to 2014
Grow third party sales and revenue in Ignis through a number of areas including: – Sustained investment performance and service for all our clients
The Group has delivered a strong operating performance across all areas of its business. Increased cash generation by the operating subsidiaries and embedded value growth from value enhancing management actions allowed the Group to meet its targets for 2011 despite ongoing market volatility.
The KPIs comprise: £810m Operating companies’ cash generation 2010: £734m £2,118m Group MCEV 2010: £2,104m £387m Group IFRS operating profit 2010: £373m £1.3bn IGD surplus (estimated) 2010: £1.0bn £3.1bn IGD Excess Capital (estimated) 2010: £2.8bn
42p Dividend per share 2010: 42p £72.1bn Group assets under management 2010: £69.6bn £46m Asset management IFRS operating profit 2010: £46m
Maintaining strong cash flow delivery underpins debt servicing and repayment as well as shareholder dividends: Analysis Continued strong cash generation of £810 million by the Group’s operating companies enabled the Group to achieve its 2011 target for cash generation of £750 million to £850 million despite challenging market conditions.
Definition and calculation Operating companies’ cash generation is a measure of cash and cash equivalents remitted by the Group’s operating companies to the Holding Companies and is available to cover dividends, debt servicing and repayment, pension scheme contributions and operating expenses.
£500 million to £600 million of these cash flows are expected to be generated in 2012 and will be weighted towards the second half of the year.
£716m £734m £810m £1,827m £2,104m £2,118m * Pro forma. For ease of comparison 2009 pro forma information includes a full year’s results for the Pearl businesses even though Phoenix Group Holdings only acquired the Pearl businesses in the third quarter of 2009.
The Board considers that Group IFRS operating profit is a more representative measure of performance than Group IFRS profit before tax as it provides long‑term performance information unaffected by short‑term economic volatility and gives an insight into the Group’s ability to generate cash flows to support dividends1: Analysis Group IFRS operating profit of £387 million (2010: £373 million) reflects a strong performance from both the Group’s operating segments.
Definition and calculation Note 5 of the IFRS financial statements sets out the basis of calculation of Group IFRS operating profit.
Insurance Groups’ Directive (‘IGD’) surplus is the regulatory assessment of capital adequacy on a Group‑wide basis: Analysis The estimated IGD surplus has increased to £1.3 billion with IGD capital generation of £0.6 billion offsetting the payment of dividends, debt interest and debt repayments of £0.3 billion. The surplus of £1.3 billion represents headroom of £0.4 billion (2010: £0.1 billion) over the Group’s IGD capital policy.
Analysis The increase in the IGD Excess Capital from 2010 is consistent with the increase in the IGD surplus. The IGD Excess Capital coverage percentage was 182% at 31 December 2011 (2010: 170%).
key performance indicators continued £1.2bn £1.0bn £1.3bn £3.1bn £2.8bn £3.1bn 2009*
£457m £373m £387m 1 Phoenix Group Holdings is subject to Cayman Islands Companies Law. Under Cayman Islands Companies Law, distributions can be made out of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group’s going concern assessment criteria.
Assets under management are a key driver of operating profit: Analysis Total Group assets under management increased by £2.5 billion to £72.1 billion1.
The increase was driven by net third party sales of £1.7 billion and positive fair value movements on the Group’s fixed interest portfolio which offset the run‑off of the closed life business.
Analysis Ignis’ IFRS operating profit of £46 million remained stable (2010: £46 million) despite increased costs of new business development.
Definition and calculation Gearing is calculated as net shareholder debt2 divided by the sum of Group MCEV, net shareholder debt and the present value of future profits of Ignis.
* Dividend paid in respect of the 4 month period post acquisition of Pearl businesses (€0.17 converted using the 15 April 2010 exchange rate).
Cash and cash equivalents at 1 January 486 202 Operating companies’ cash generation: Cash receipts from Phoenix Life1 778 708 Cash receipts from Ignis Asset Management 32 26 Total receipts of cash by Holding Companies2 810 734 Uses of cash: Operating expenses 52 45 Pension scheme contributions 35 38 Debt interest 122 123 Total recurring outflows 209 206 Non‑recurring outflows 24 79 Uses of cash before debt repayments and shareholder dividend 233 285 Debt repayments 171 122 Shareholder dividend 55 43 Total uses of cash 459 450 Cash and cash equivalents at 31 December3 837 486 1 Includes cash equivalents of £nil (2010: £39 million). Cash equivalents are defined by management as investments that can readily be converted into cash.
2 Includes amounts received by the Holding Companies in respect of tax losses surrendered to the operating companies.
Cash generation The Group’s cash flows are generated from the interest earned on capital, the release of excess capital as the life funds run‑off, policyholder charges and fees earned on assets under management. The Group’s closed life funds provide predictable fund maturity and liability profiles, creating stable long‑term cash flows for distribution to shareholders and for repayment of outstanding debt. Although investment returns are less predictable, some of the investment risk is borne by policyholders.
Holding Companies’ cash flows The statement of cash flows prepared in accordance with IFRS combines cash flows relating to policyholders and cash flows relating to shareholders, 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 the availability and transferability of capital. For this reason, the following analysis of cash flows focuses on the Holding Companies’ cash flows, which reflect cash flows relating only to shareholders and which are, therefore, more representative of the cash that could potentially be distributed as dividends, or used for the repayment of debt. This cash flow analysis reflects the cash paid by the operating companies to the Holding Companies, as well as the uses of those cash receipts.
In 2011, the Group has delivered cash flows from its operating subsidiaries of £810 million, including cash flows of £359 million from management actions. The latter increased cash flows primarily through the restructuring of a portfolio of corporate bonds and investment and operational de‑risking activities.
Valuation differences and other in 2010 included a £125 million benefit from the restructuring of a portfolio of corporate bonds.
Recurring cash outflows Operating expenses of £52 million (2010: £45 million) increased primarily due to the payment of expenses related to previous years. The remaining recurring cash outflows were in line with 2010.
Phoenix Life free surplus The generation of free surplus, net of movements in required capital, underpins the cash remittances from Phoenix Life. The table below analyses the movement in free surplus of Phoenix Life which represents the life companies’ free surplus plus the IFRS net assets of the service companies: Year ended 2011 £m
Opening free surplus 750 464 IFRS operating profit 395 388 IFRS investment variances and non‑recurring items (336) (73) IFRS tax (20) 76 Movements in capital requirements and policy 84 405 Valuation differences and other1 (2) 198 Cash distributed to Holding Companies (778) (708) Closing free surplus2 93 750 1 Includes differences between IFRS valuation of assets and liabilities and valuation for capital purposes.
Target cash flows The Group is targeting operating companies’ cash generation of £3.2 billion for the period from 1 January 2011 to 31 December 2016: Sources of cash flows £bn
Future cash flows: Emergence of surplus 1.1 Release of capital 1.1 Recurring cash receipts generated by life companies 2.2 Other2 0.2 Total future cash flows target 2.4 Achieved cash flows 0.8 Operating companies’ cash generation target 3.2 2 Includes cash flows from Ignis and the management services companies.
£500 million to £600 million of these targeted cash flows are expected to be generated in 2012.
Base case 6‑year projections 3.2 20% fall in equity markets 3.1 15% fall in property values 3.1 75bps increase in yields 3.2 Credit spreads widening3 2.9 Combined stress4 2.6 3 10 year term: AAA – 52bps, AA – 72bps, A – 104bps, BBB – 152bps.
Life MCEV operating earnings2 556 758 Management services operating profit 17 20 Ignis Asset Management operating profit 46 46 Group costs (84) (70) Group MCEV operating earnings before tax 535 754 Tax on operating earnings (141) (211) Group MCEV operating earnings after tax 394 543 2 Life MCEV operating earnings are derived on an after tax basis. For presentational purposes Life MCEV operating earnings before tax have been calculated by grossing up the after tax Life MCEV operating earnings. Life MCEV operating earnings before tax of £556 million (2010: £758 million) are therefore calculated as £409 million operating earnings (2010: £546 million) grossed up for tax at 26.5% (2010: 28%).
New business value New business profits generated from vesting annuities during 2011 were £13 million after tax (2010: £19 million).
Positive experience variances of £181 million mainly related to the benefits of improved asset allocations of £95 million, data cleansing projects of £30 million and the resolution of legacy tax issues of £20 million. Experience variances in 2010 included a £139 million benefit from the restructuring of a portfolio of corporate bonds and £78 million of tax optimisation benefits.
Management services and Ignis Asset Management operating profit Commentary on the management services companies and Ignis Asset Management operating profit is provided in the Group IFRS operating profit section.
Reconciliation of Group MCEV operating earnings to Group MCEV earnings Group MCEV operating earnings are reconciled to Group MCEV earnings, as follows: Year ended 2011 £m
Capital and dividend flows (49) (5) Group MCEV at 31 December 2,118 2,104
The actuarial gains on defined benefit scheme relate to the Pearl Group Staff Pension Scheme and were capped at the point at which the Scheme returned to surplus on an accounting basis. Capital and dividend flows in 2011 mainly comprise external dividend cash payments of £55 million.
Economic variances on non‑life business MCEV was positively impacted by a decrease in the market value of the Tier 1 Bonds which increased MCEV earnings by £48 million before tax (2010: reduced MCEV earnings by £40 million before tax). This gain was partly offset by losses on interest rate swaps held in the Holding Companies.
Other non‑operating variances on life business Other non‑operating variances on life business of negative £12 million before tax primarily relate to regulatory change and systems transformation costs.
With‑profit 69 55 With‑profit where internal capital support provided 66 (7) Non‑profit and unit‑linked 206 278 Longer term return on owners’ funds 37 42 Management services 17 20 Phoenix Life operating profit before tax 395 388
Business review changes of £29 million. The 2010 result benefited from positive longevity and morbidity assumption changes of £41 million.
The operating profit for management services of £17 million (2010: £20 million) comprises income from the life companies in accordance with the respective management service agreements less fees payable in relation to the outsourcing of services and other operating costs.
The increase in expenses reflects investment in additional asset management capability together with the infrastructure to support growth in third party business. This includes new premises in London, building up support functions and investing in system architecture.
Group costs Group costs were £54 million in the period of which costs relating to Group functions amounted to £39 million before tax (2010: £40 million). The balance of the charge in both periods relates primarily to pension scheme costs, partly offset by miscellaneous income.
The Group tax credit for the period attributable to owners is £79 million, based on a loss (after policyholder tax) of £177 million. The difference between the actual credit of £79 million and the expected credit (based on the UK corporation tax rate of 26.5%) of £47 million primarily reflects the benefit of a decrease of £41 million in deferred tax liabilities as a result of the ongoing reduction in UK corporation tax rates and a £47 million benefit from the resolution of legacy tax issues, partly offset by the £49 million impact of losses and deductions not fully valued by the Group, or for which relief at the full rate of tax is not available.
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.
Total including stock lending collateral £bn 1 Includes the transfer of £1.0 billion of assets in respect of the Hexam partnership following its restructuring in 2010. £0.9 billion of third party assets under management in respect of the Argonaut Capital Partnership are due to transfer from Ignis administration in the first half of 2012.
Targets are established in relation to regulatory capital requirements and debt ratios and are used in managing capital in accordance with the Group’s risk appetite and the interests of its stakeholders.
The capital policy of each life company is set and monitored by each life company board. These policies ensure there is sufficient capital within each life company to meet regulatory capital requirements under a range of stress conditions. The capital policy of each life company varies according to the risk profile and financial strength of the company.
Regulatory capital requirements Each UK life company must maintain sufficient capital at all times to meet the regulatory capital requirements mandated by the FSA1. These measures are aggregated under the European Union Insurance Groups’ Directive (‘IGD’) as implemented by the FSA, to calculate regulatory capital adequacy at a Group level.
The Group’s capital policy, which is agreed with the FSA, is to maintain GCR at the PLHL level of: – 105% of the with‑profit insurance component (‘WPICC’), being an additional capital requirement of with‑profit funds; plus
– Restricted surplus which mainly relates to surplus excluded from the IGD calculation due to the corporate structure of the PLHL Group.
At 31 December 2011 the IGD Excess Capital was £3.1 billion (2010: £2.8 billion) and is reconciled to the IGD surplus as shown below: 2011 £bn 2010 £bn
IGD Excess Capital 3.1 2.8 Restricted surplus (0.3) (0.4) Excess policyholder capital (1.5) (1.4) IGD surplus (estimated) 1.3 1.0 1 Further details on the regulatory capital requirements of the individual life companies are included within note 42 of the IFRS financial statements.
Sensitivity and scenario analysis As part of the Group’s internal risk management processes, the estimated IGD surplus is tested against a number of financial and non‑financial scenarios to ensure it remains in excess of our target in a range of stress conditions. The results of that stress testing are provided below: Estimated IGD
2 20% fall in equity markets, 10% fall in property, 80bps increase in yields and credit spreads widening (10 year term: AAA – 70bps, AA – 97bps, A – 140bps, BBB – 205bps).
Solvency II The Group has a well established Solvency II programme and has continued to progress development towards meeting the Solvency II requirements. 2012 is a key year in the development of Solvency II. The Omnibus II Directive and the Level 2 Implementing Measures are expected to be approved by the European Parliament and adopted by the European Council during 2012. Also, the European Insurance and Occupational Pensions Authority (‘EIOPA’) will consult on Level 2 technical standards and Level 3 guidelines and recommendations and will submit final proposals to the European Commission during the year. The Group remains actively engaged in supporting the development of Solvency II through industry consultation and participation in FSA and ABI industry fora. As part of the negotiations surrounding the Omnibus II Directive the time frame for implementation of Solvency II is being discussed. The FSA’s implementation assumptions are that 1 January 2013 will be the date at which the responsibilities of supervisors and EIOPA will commence, but Solvency II requirements will not commence for firms until 1 January 2014.
The Group remains on track to deliver an approved partial Group internal model and was accepted into the pre‑application phase of the FSA internal model approval process following the submission of the pre‑application qualifying criteria template in 2010. In respect of the resources the FSA will devote to the pre‑application process, it has stated that it will concentrate its resources on a smaller population of firms representing a significant market share and which it regards as having the highest potential impact on its objectives. The Group is included in this category and remains in continuous and constructive dialogue with the FSA in this regard. The Model Governance Committee, established in 2011, will continue to play a central role in the oversight of the design, implementation capital management continued
Shareholder debt (including hybrid debt) at 31 December 2011: 2011 £m 2010 £m
Bank debt at face value – Pearl facility 400 425 – Pearl loan notes 78 76 – Impala facility 1,993 2,138 – Royal London PIK notes and facility 111 106 Tier 1 Bonds at market value 256 304 PLL subordinated debt at market value 139 170 Shareholder debt (including hybrid debt)2 2,977 3,219 Holding Company cash and cash equivalents (837) (486) Net shareholder debt 2,140 2,733 2 The unsecured loan notes of £7 million (2010: £12 million) are excluded from this shareholder debt analysis as their repayment will be funded in 2012 from an escrow account which is not included in the Holding Company cash and cash equivalents.
Further detail on shareholder debt is included in note 22 to the IFRS financial statements.
The Group has two main credit agreements (the Pearl and Impala facilities), which have separate security arrangements. Although these facilities carry favourable interest rates and are tax efficient, they are scheduled to mature in the period 2014 to 2016.
and operation of the partial internal model being built for Solvency II. Furthermore, the Group’s application for internal model approval will be supported by a continued programme of education for its Boards, Committees and senior management who will review and challenge the outputs from the internal model over the coming year.
The Group’s Actuarial Systems Transformation project (‘AST’) will deliver a single actuarial modelling platform across the business, transforming modelling capability and efficiency and underpinning development of the Solvency II internal model and Own Risk and Solvency Assessment.
1 Net shareholder debt as a percentage of the sum of Group MCEV, net shareholder debt and PVFP of Ignis.
The Group’s Risk Management Framework The Group operates a Risk Management Framework (‘RMF’) which seeks to establish a coherent and interactive set of arrangements and processes to support the effective management of risk throughout the Group. The components of the framework are shown below. The outputs of the RMF provide assurance that risks are being appropriately identified and managed and that an independent assessment of management’s approach to risk management is being performed.
Risk strategy The Group’s risk strategy provides an overarching view of how risk management is incorporated consistently across all levels of the business, from decision‑making to strategy implementation. It also sets out how overall risk management within the Group is proportionate to the nature, scale and complexity of the risks faced by the business.
Risk appetite The Group’s risk appetite framework consists of a set of statements and targets that articulate the level of risk the Group is willing to accept, in pursuit of shareholder value and achievement of the Group’s strategic objectives. The statements encapsulate policyholder security, earnings volatility, liquidity and the internal control environment as follows: – Capital – The Group and each life company will hold sufficient capital to meet regulatory requirements in a number of asset and liability stress scenarios
– Embedded value – The Group will take action to protect embedded value risk management
Second line: risk oversight is provided by the Group Risk function and business unit risk and compliance functions and the Board Risk Committee, which is responsible for the oversight of risk across the Group. The Board Risk Committee comprises five Non‑Executive Directors, three of whom are independent. It is supported by the Chief Risk Officer and met six times during the year.
External communication and stakeholder management The Group has a number of internal and external stakeholders, each of whom has an active interest in the Group’s performance, including how it is managing its risks. Significant effort is made to ensure that our stakeholders have appropriate, timely and accurate information to support them in forming views of the Group.
The impact of any proposed changes to the Group’s operating plan and ongoing compliance with the Group’s risk appetite statements are reviewed on a quarterly basis by the Board Risk Committee.
Risk organisation The Chief Risk Officer manages the Group Risk function and has responsibility for the implementation and oversight of the Group’s RMF. The Group Risk function has responsibility for financial and operational risk, risk governance, FSA relationship management and regulatory risk. Risk review functions across the Group manage the RMF in line with the Group’s established standards. The risk functions ensure that business unit risk committees are provided with meaningful risk reports and that there is appropriate information to assess and aggregate risks.
– The minimum controls required in order to manage the risk to an acceptable level
Management information Overall monitoring and reporting against the risk universe is undertaken through business unit management committees through to the relevant business unit executive committee and reported to the Executive Committee, PLHL Board and Group Board via regular risk reporting.
The total principal amount outstanding under the Groups main credit facilities as at 31 December 2011 was £2,471 million. These main credit facilities require that a significant portion of the principal amount outstanding is repaid in the years 2014 to 2016. The Group may need to refinance the outstanding principal amounts on terms which are not as favourable as the existing terms or it may be unable to refinance those obligations at all.
The Group undertakes regular meetings and reviews with the lending banks to ensure open dialogue is maintained and that all relevant parties are aware of the current position.
The Group has ongoing principal repayment and interest obligations to its lending syndicates. In the event that transfers from the Group’s insurance and investment management subsidiaries are limited by any law, regulatory action or change in established approach, 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.
The Group puts considerable effort into managing relationships with its regulators so that it is able to maintain a forward view regarding potential changes in the regulatory landscape. The Group assesses the risks of regulatory change and their impact on our operations and lobbies where appropriate.
Significant counterparty failure. Assets held to meet obligations to policyholders include debt securities. Phoenix Life is exposed to deterioration in the actual or perceived creditworthiness or default of issuers of relevant debt securities or from trading counterparties failing to meet all or part of their obligations; such as reinsurers failing to meet obligations assumed under reinsurance arrangements or derivative counterparties or stock‑borrowers failing to pay as required. An increase in credit spreads on such securities, particularly if it is accompanied by a higher level of actual or expected issuer defaults, could have a material adverse impact on the Group’s financial condition.
In this section 46 Corporate responsibility 46 Environment 47 Community 48 Workplace 50 External stakeholders
During 2011 we have taken time to reflect on what has already been achieved, how this links with our aspirations and how we can best further develop our programme into the future, being mindful of the current economic climate.
We have been members of Business in the Community (‘BITC’) for the past year, which has given us excellent support and has provided a useful insight into what has worked best for other companies – helping us to further shape our programme.
Following the refresh of our Group website at www.thephoenixgroup.com we now have a comprehensive section for CR, which explains more about our programme and provides more detail on our CR activities.
Environment Our environmental impact is lower than that of many other industries, however, we recognise that we have a duty to ensure this impact, however small, is minimised. Our employees also have a shared desire to protect and preserve the wider environment. As part of our staff CR awareness programme we provided staff with information to help them consider their impact on the environment, both at home and in the workplace.
– Our new office site for Ignis in London has an excellent BREEAM rating, with its own environmental policy. As tenants we are obliged to comply with this policy.
Charitable giving During 2011 just under £100,000 was donated by Phoenix Group to selected charities. Our focus has been on selecting and supporting charities which benefit the local communities in which we live and work and those nominated by our staff.
Looking ahead, some of our plans for 2012 are noted below: – By the end of 2012, all of our paper will be Programme for the Endorsement of Forest Certification (‘PEFC’) and Forest Stewardship Council (‘FSC’) sourced from sustainable, managed forests
Community Despite the current economic climate, Phoenix Group continues to support a number of charity and community initiatives. Our commitment to the community leads to greater employee engagement and is welcomed by our customers, suppliers and potential employees.
Employee benefits Our ability to attract and retain the best and most talented people represents a key focus area for the Group. We continue to offer our staff access to a range of policies and benefits including: – Personal development plans
Total number of external staff training days 1,961 Total spend on external staff training £1,137,123
Employee metrics The Human Resources function continues to monitor employee metrics related to turnover, sickness and training. Employee metrics help us to compare ourselves to industry benchmarks and previous years. Staff turnover is down compared to last year and we are pleased to report we are now below the industry average of 8.7% for employees leaving voluntarily. We also recorded one of the lowest levels of absence through sickness in our sector.
Staff turnover (employees choosing to leave voluntarily) 7.5% 9.9% 3.8% Annual new starter turnover (number of employees leaving voluntarily within 12 months of starting) 10.0% 13.0% 7.3% Percentage of days lost through sickness 1.4% 1.3% 1.6% Percentage of employees sponsored on a professional qualification 22.6% 17.4% 21.1%
Media During 2011, we have kept the local press up-to-date with our CR initiatives which has helped to share information within our local community and has consequently led to an increased local awareness of the Group.
Customers The Group recognises the responsibility we have to our customers, as both custodian of their financial assets, supplier of their pension and investment needs and life cover.
Customer satisfaction We expanded our research programme to further understand what our customers think about us and the service we offer. From our programme of focus groups, detailed telephone interviews and face-toface meetings, we believe our customers are happy with the service they receive from us.
Third party services In line with our ‘Treating Customers Fairly’ proposition, we have carefully selected third party providers to offer our customers an increased range of products and services which we do not offer ourselves and which meet their needs. For example, we are currently piloting an arrangement with a specialist annuity provider to make it easier for our customers to get access to enhanced annuities.
Mike Merrick, Chief Executive Officer, Phoenix Life comments on the initiative: “We recognised that many customers will have taken out these policies to cover funeral expenses but with the impact of inflation, the real value of these policies was eroding. We wanted to offer these customers a choice – to either keep the policy in force or take the benefits to save or spend as they choose.”
We have worked on improving the way we communicate with our customers and this will continue to be a focus during 2012. There are customers who may have forgotten they have a policy with us and we will be looking at different ways to find these customers and reduce the incidence of ‘missing’ customers in the future.
Dealing with complaints We take complaints very seriously and we recognise that with approximately six million customers and several million transactions being handled each year, that there will be occasions when our customers feel the need to express their dissatisfaction. It is important that customers can contact us easily when they wish to complain and that they can be confident of someone resolving the complaint promptly.
Ron Sandler Chairman Ron Sandler was appointed Chairman of the Company on 24 September 2009. He is Chairman of Ironshore Inc, is an adviser to Palamon Capital Partners and was Executive Chairman of Northern Rock plc whilst the bank was in public ownership. Mr Sandler has an MA from Queens’ College, Cambridge and an MBA from Stanford University. He was previously Chief Executive of Lloyd’s of London and played a key role in the Lloyd’s reconstruction and renewal programme. Subsequently, he was 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.
Clive Bannister Group Chief Executive Officer Clive Bannister joined the Group in February 2011 as Group Chief Executive Officer. Prior to this, he was Group Managing Director of Insurance and Asset Management at HSBC. Clive joined HSBC in 1994 and held various leadership roles in Planning and Strategy in the Investment Bank (USA) and was Group General Manager and CEO HSBC Group Private Banking. He started his career at First National Bank of Boston and prior to working at HSBC was a partner in Booz Allen Hamilton in the Financial Services Practice providing strategic support to financial institutions including leading insurance companies, banks and investment banks. Throughout his career he has lived and worked internationally. Mr Bannister was appointed to the Board of Directors of the Company on 28 March 2011.
Alastair Lyons Senior Independent Director 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, Deputy Chairman of Bovis Homes Group plc and Chairman of the Towergate Insurance Group. In his executive career he was Chief Executive Officer of the National Provident Institution, Executive Director of Abbey National responsible for the insurance division and Chief Executive Officer of the 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.
Ian Cormack Non-Executive Director Ian Cormack is Non-Executive Chairman of Maven Income & Growth VCT 4 plc and is a Non-Executive Director of Bloomsbury Publishing Plc, 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.
Manjit Dale Non-Executive Director Manjit Dale is a founding partner of TDR Capital, a private equity firm established in 2002. TDR Capital manages over €2.6 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 and currently also serves on the Board of Algeco Scotsman. Mr Dale has over 20 years’ experience in private equity, finance and consulting gained with Bankers Trust, 3i plc, NM Rothschild and Andersen Consulting. Mr Dale graduated from Cambridge University with an Honours Degree in Economics.
Isabel Hudson Non-Executive Director Isabel Hudson is a former Executive Director of Prudential Assurance Company Limited. She was also Chief Financial Officer at Eureko BV. Ms Hudson is Executive Chair of the National House Building Council and a Non-Executive Director of QBE Insurance, MGM Advantage and The Pensions Regulator and a member of the With-Profit Committee of Standard Life. Ms Hudson is Chairman of the business development Board of Scope, a UK charity, and has 30 years experience in the insurance industry in the UK and mainland Europe. She was appointed to the Board of Directors of the Company on 18 February 2010. She is a member of the Board Risk and Board Remuneration Committees.
Hugh Osmond Non-Executive Director Hugh Osmond founded Punch Group and served as its Executive Chairman between 1997 and 2001, during which time he built Punch Group into one of the UK’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. He was appointed to the Board of Directors of the Company on 2 September 2009 and is a member of the Board Investment and Board Risk Committees.
– Ensure the Group’s finances and capital are managed and controlled
– Ensure the Group has effective processes in place to enable all reporting obligations to be met
– Maximise shareholder value though clear, rigorous assessment of business opportunities.
Mike Merrick Chief Executive Officer, Phoenix Life – Lead development and delivery of the Phoenix Life business strategy, including the continued integration of life businesses
– Ensure optimisation of outcomes for customers in terms of both value and security
– Deliver, over the longer term, Ignis’ vision of becoming a leading asset management business committed to performance excellence and innovation
– Lead the implementation of the Group’s employee strategy in order to recruit, retain, motivate and develop high quality employees
– Oversee and co-ordinate maintenance of and adherence to appropriate corporate governance procedures across the Group
– Design and implement a framework to manage legal risk within the Group including compliance by Group companies and staff with relevant legal obligations.
Jean Park Chief Risk Officer – Lead the Group’s risk management function, embracing changes in best practice and regulation including Solvency II
– Support the Board Risk Committee in the oversight of the Group’s risk framework, in line with risk strategy and appetite.
Share capital The issued share capital of the Company was increased by 3,017,205 ordinary shares during the year. 12,112 shares were allotted under the Group’s employee share plans and 3,005,093 were allotted under the Group’s scrip dividend scheme for the final 2010 and interim 2011 dividends. At 31 December 2011, the issued ordinary share capital totalled 174,472,815.
The rights and obligations attaching to the Company’s ordinary shares are set out in the Company’s Articles of Association (‘the Articles’) which are available on the Company’s website at www.thephoenixgroup.com/aboutus /corporate-governance/articles-of-association.aspx.
Substantial shareholdings Information provided to the Company pursuant to the FSA’s Disclosure and Transparency Rules (‘DTR’) is published on a Regulatory Information Service and on the Company’s website. As at 22 March 2012, the Company had been notified of the following significant holdings of voting rights in its shares.
Board Board of Directors The membership of the Board and biographical details of the Directors are given on pages 54 to 57 and are incorporated by reference into this report. Details of Directors and their connected persons’ beneficial and non-beneficial interests in the shares of the Company are shown in the Remuneration report on pages 72 to 82.
– Jonathan Yates resigned from the Board on 21 December 2011.
Details of related party transactions which took place during the year with Directors of the Company and entities where Directors are deemed to have significant influence, are provided in the Remuneration report and in note 46 to the IFRS financial statements.
The rules about the appointment and replacement of Directors are contained in the Company’s Articles of Association. 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 AGM following the appointment.
Following the evaluation of the Board of Directors conducted in 2011 and in accordance with the UK Corporate Governance Code, the Board of Directors will be unanimously recommending that all of the Directors should be put forward for re-election at the forthcoming AGM to be held on 3 May 2012.
At the Company’s AGM held on 13 May 2011, shareholders granted the Company authority to purchase up to 10% of its issued ordinary shares. Any ordinary shares purchased under the authority would, subject to the Cayman Islands Companies Law (as amended), either be cancelled or held in treasury. These authorities were not used during the year or up to the date of this report.
Directors’ remuneration and interests A report on Directors’ remuneration is presented on pages 72 to 82 including details of their interests in shares and share options or any rights to subscribe for shares in the Company.
The deed of indemnity remains in force as at the date of signature of this Directors’ report.
All Directors and employees of the Company and its subsidiaries are subject to the Group conflicts of interest policy which has been established to provide a clear framework for an effective system of internal control to manage conflicts of interest throughout the Group.
Governance Going concern The Board has followed the UK Financial Reporting Council’s ‘Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009’ when performing its going concern assessment. As part of its comprehensive assessment of whether the Group and the Company are a going concern, the Board has undertaken a review of the valuation and liquidity of its investments as at the date of preparation of the statement of consolidated financial position. The Board has also reviewed solvency and cash flow projections under both normal and stressed conditions. The cash and solvency projections include the potential impact of the contingent liabilities stated in note 47 to the IFRS financial statements.
Corporate governance statement The disclosures required by section 7.2 of the FSA’s Disclosure and Transparency Rules can be found in the Corporate Governance report on pages 65 to 71 which is incorporated by reference into this Directors’ report.
Financial controls The Group operates a financial controls policy for the internal control and risk management systems relating to the process of preparing consolidated accounts. The policy incorporates minimum control standards for operating within risk appetite.
Memorandum and Articles of Association Changes to the Company’s Memorandum and Articles of Association require prior shareholder approval and in some cases, approval of the Group’s main lenders.
Re-appointment of the Auditors Ernst & Young Accountants LLP has indicated its willingness to continue in office and a resolution that it be re-appointed will be proposed at the AGM. There is a liability cap in place in relation to audit work that is carried out by Ernst & Young Accountants LLP on the consolidated IFRS financial statements. For the MCEV supplementary information and the Group’s UK subsidiaries’ individual financial statements, which are audited by Ernst & Young LLP, there is no cap on auditor liability.
Details of fees paid to Ernst & Young Accountants LLP during 2011 for audit and non audit work are disclosed in note 11 to the IFRS financial statements.
Company Secretary The Company Secretary throughout the period was Gerald Watson.
Contractual/Other Significant agreements impacted by a change of control of the Company Details of the change of control provisions contained in the amended contingent rights agreements dated 22 June 2010 are set out in note 15 to the IFRS financial statements.
Apart from the aforementioned, there are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts and joint venture agreements. None is considered to be significant in terms of their potential impact on the business of the Group.
Employees The Company is committed to achieving equality of opportunity and the equal treatment of all our people and those applying to join us. To this end, all our people share an obligation to their colleagues, customers and business partners to provide a safe, fair and equitable working environment in which every individual can seek, obtain and continue employment without experiencing any unfair or unreasonable discrimination.
The Company recognises the need to treat people with disabilities fairly and equally. Full and fair consideration is given to applications for employment by people with a disability. Applicants are asked if they have any special requirements when invited to attend an interview and reasonable provisions are made to meet the applicant’s request. Applicants are considered on the basis of the job requirements and the individual’s ability and competencies, also taking into consideration any appropriate reasonable workplace adjustments.
Political donations No political donations were made during the year ended 31 December 2011. The Company and its subsidiaries do not intend to make donations to political parties or independent election candidates nor have they made or do they intend to make any donations to EU political organisations or incur EU political expenditure.
Clive Bannister Alastair Lyons Group Chief Executive Officer Audit Committee Chairman
It is the Board’s view that the Company has been fully compliant during 2011 with the provisions set down in the Code with the one exception that not all Directors were able to attend the AGM (Code provision E.2.3). This did not impact the AGM as there were no questions posed at the meeting. It is the Board’s intention to comply with this provision in 2012.
The Board The Board comprises the Non-Executive Chairman, the Group Chief Executive Officer and 11 other Non-Executive Directors, seven of whom are independent. Biographical details of all Directors are provided on pages 54 to 57. The Board considers that the following Directors are independent as they do not have any interest or business and other relationship which could, or could be perceived to, interfere materially with their ability to act in the best interests of the Company: David Barnes, Charles Clarke, Ian Cormack, Tom Cross Brown, Isabel Hudson, Alastair Lyons and David Woods. The Board has considered the criteria proposed by the Code in assessing the independence of the Directors.
The schedule of matters reserved for the Board is available from the Group 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 Executive Management under a schedule of delegated authorities approved by the Board.
– Undertaking a successful AGM at which all resolutions were passed by a majority of at least 96% of votes cast
The Senior Independent Director, appointed by the Board, is Alastair Lyons. His role is to be available to shareholders whose concerns are not resolved through the normal channels or when such channels are inappropriate. He is also responsible for leading the annual appraisal of the Chairman’s performance by the Non-Executive Directors (which was undertaken in the latter part of 2011) and for leading the process for appointment of a new Chairman, when appropriate.
Board effectiveness In accordance with the Code, an evaluation of the performance of the Board and that of its Committees and individual Directors was undertaken in the latter part of 2011 and was externally facilitated by Egon Zehnder International (‘EZI’) who is independent of the Company.
An action list, with senior executive accountability, has been established to address the recommendations from the evaluation. The EZI review concluded as follows: “Phoenix has a well functioning Board and has made substantial steps to improve the quality of Directors and the level of debate over the past two years. Overall, this Board effectiveness review concurs with Phoenix’s own tracking process that most of the previous recommendations have been implemented with a few minor exceptions.”
Executive Directors Clive Bannister1 6 6 – – – – – – – – – – Jonathan Yates 7 7 – – – – – – – – – – Non-Executive Directors Alastair Lyons 7 7 – – 7 7 – – – – – – Ian Ashken 7 7 – – – – – – – – – –
Audit Committee’s principal activities during 2011 – Reviewed the Company’s 2010 Annual Report and Accounts, 2011 interim financial statements and 2011 interim management statements, recommending their approval to the Board, as well as related disclosures and the financial reporting process, supported by reports from management and the external auditors
– Reviewed and monitored the independence of the external auditors including their provision of non-audit services
– Reviewed arrangements for whistleblowing should an employee wish to raise concerns, in confidence, about any possible improprieties
– Reviewed the internal controls effectiveness report prior to its consideration by the Board.
The composition of the Nomination Committee is in accordance with the requirements of the Code that a majority of its members should be independent Non-Executive Directors. The Nomination Committee is responsible for considering the size, composition and balance of the Board; the retirement and appointment of Directors; succession planning for the Board and senior management and making recommendations to the Board on these matters. The Nomination Committee met four times in 2011.
The standard process used by the Committee for Board appointments involves the use of an external search consultancy to source candidates external to Phoenix (and may in the case of executive appointments also consider internal candidates). Detailed assessments of short-listed candidates are undertaken by the search consultancy, followed by interviews with Committee members and other Directors and the sourcing of references before the Committee recommends the appointments to the Board.
Nomination Committee’s principal activities during 2011 – Delivery of recommendations to the Board in connection with the appointments of the Group Chief Executive
– Review of the balance of skills, knowledge and experience of the Board, taking account of the Board evaluation report
– Given the above, delivery of recommendations to the Board to approve the AGM notice stating that the performance of each director continues to be effective and demonstrates commitment to the role
Risk Committee David Woods, Chairman René-Pierre Azria Tom Cross Brown Isabel Hudson Hugh Osmond
The Risk Committee advises the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board’s overall degree of risk aversion, the current financial situation of the Company and, drawing on assessment by the Audit Committee, the Company’s capacity to manage and control risks within the agreed strategy. It advises the Board on all high-level risk matters. Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 38 to 43.
– Monitoring of compliance and satisfying itself that action plans to address significant breaches of the Group’s principal risk policies are sufficient
– Oversight of and challenge to, the design and execution of the Group’s stress and scenario testing, including any changes of assumptions.
Investment Committee Tom Cross Brown, Chairman René-Pierre Azria Charles Clarke Manjit Dale Hugh Osmond
The Investment Committee was formed in May 2011 in response to a recommendation from the Board evaluation undertaken at the end of 2010 to provide greater focus on investment strategy and performance. The Committee reviews investment performance and strategic asset allocation across the Group. It held its first two meetings in 2011 and is scheduled to meet four times in 2012.
The Company’s Investor Relations department is dedicated to facilitating communication with investors and analysts and an active investor relations programme is maintained. The Company continued to increase its communication and engagement with the investment community during 2011. The Chairman, Senior Independent Director and Executive Directors are available to meet investors and analysts when required. At these meetings a wide range of relevant issues including strategy, performance, management and governance are discussed. Should major shareholders wish to meet newly appointed Directors, or any of the Directors generally, they are welcome to do so.
The Directors consider it important to understand the views of the market and in particular any issues which concern them. Board members regularly receive copies of the latest analysts’ reports on the Company and the sector, as well as market feedback to further develop their knowledge and understanding of external views about the Company. The Chairman and the Non-Executive Directors provide feedback to the Board on topics raised with them by major shareholders. In addition, an independent investor perception study is conducted periodically. The Company held two investor days in 2011 and going forward, it plans to hold these on a recurring basis.
The Company’s AGM provides another opportunity to communicate with its shareholders. At the 2011 meeting, the Company complied with the Code provisions relating to voting and the separating of resolutions. Shareholders were invited to ask questions during the meeting. It is intended that the same processes will be followed at the 2012 AGM and that shareholders will have an opportunity to meet with the Directors following the conclusion of the formal part of the meeting. In line with the Code, details of proxy voting by shareholders will be made available at the meeting and will be posted on the Company’s website following the meeting.
The Company’s Annual Report and Accounts, together with the Company’s interim report, interim management statements and other public announcements and presentations are designed to present a balanced and understandable view of the Group’s activities and prospects. These are available on the Company’s website at www.thephoenixgroup.com, along with a wide range of relevant information for private and institutional investors, including the Company’s financial calendar.
Phoenix Group – Directors’ Remuneration report for the year ended 31 December 2011
– The structure of the long-term incentive arrangement and the use of embedded value and cash generation performance metrics remain appropriate and in line with the Group’s strategy. The current expectation is that awards to be granted in April 2012 will be at similar levels and be based on similar performance metrics to those granted in April 2011 (with Total Shareholder Return (‘TSR’) also being considered) with the precise targets set just prior to the awards being granted
Introduction Although not required for a non-UK incorporated company, this report has been prepared in accordance with the requirements of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The report also meets the relevant requirements of the FSA’s Listing Rules and describes how the Board has complied with the provisions set out in the UK Corporate Governance Code relating to remuneration matters. This report sets out the policy for the financial year just ended, for the forthcoming financial year and, subject to ongoing review, for subsequent financial years.
Unaudited information Remuneration Committee The Group established the Committee on 18 February 2010. The terms of reference of the Committee are available at www.thephoenixgroup.com. During 2011, the Committee’s main responsibilities were to: – Establish and operate a framework for remuneration throughout the Group, with particular emphasis on aligning the remuneration policy with the overall aims and risk appetite of the Group
– Determine and recommend to the Board the remuneration policy and the approval of all elements of pay for each of the following categories: the Chairman of the Board; Executive Directors; Executive Committee members; those individuals receiving a base salary greater than £200,000 or who have total target pay or receive an award on joining to buy-out value from a former employer which warrants the attention of the Committee even if their salary is below £200,000; and those individuals who perform a significant influence function and/or undertake activities which could have a material impact on the risk profile of the Group
– Review the design of, and agree targets for, any performance-related incentive schemes operated by the Group and approve the total annual payments made under such schemes
– Select, appoint and determine the terms of reference for independent remuneration consultants to advise the Committee
The table below shows the independent Non-Executive Directors who served on the Committee during 2011 and their date of appointment: Member From To
None of the Committee members have any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships, or day-to-day involvement in running the business.
The Committee also consulted with the Group Chief Executive Officer, Group HR Director and General Counsel who attended, by invitation, various Committee meetings during the year although no Executive is permitted to participate in discussions or decisions regarding his or her own remuneration. Input is also sought from the Chief Risk Officer.
– Are competitive but not excessive, in relation to the UK life assurance and asset management markets
Clive Bannister1 Group Chief Executive Officer £700,000 £700,000 Jonathan Yates2 Group Finance Director £415,000 £415,000 1 Joined the Phoenix Group on 7 February 2011 and was appointed to the Board as a Director on 28 March 2011.
Pension The Executive Directors (as at the date of this report) receive a contribution equal to 20% of base salary to a defined contribution pension arrangement.
Details of the actual incentive payments awarded in respect of the 2011 financial year (to be paid in March 2012) are presented in the emoluments table and notes on page 78. In summary, the AIP corporate out-turn was 75% of maximum. The table below shows the actual out-turn against the annual incentive maximum.
For 2012, the on-target and maximum incentive potential remains at 75% and 150% respectively of base salary for Executive Directors and the measures remain as set out above, but with an increase in the weighting of the expense management target by 10% (with corresponding 10% reduction in GMCEV), given the Board’s continued focus on expense management.
Consistent with best practice, the Committee operates a claw-back provision which will operate for any annual incentive amounts subsequently found to have been based on materially inaccurate results.
Long-term incentives The LTIP is designed to retain executives and align their interests to the Group’s long-term goals and, through those goals, to the delivery of superior returns to shareholders. Each year, approximately 50 participants receive contingent awards of shares in the Group which will permit the participant to receive shares three years after they were awarded, but only if both suitably stretching performance conditions measured over the three-year period are met and they remain employed (or are designated as a good leaver).
The Committee’s policy is to award Executive Directors shares with an initial face value equal to no more than 200% of their respective base salaries. This is below the formal plan limits of 300% of base salary or 400% in exceptional circumstances.
25% of the MCEV related component of the award will vest for MCEV growth in excess of the risk free rate by 2.5% per annum rising on a pro rata basis until 100% vests for MCEV growth in excess of the risk-free rate by 6% per annum.
Debt underpin Notwithstanding the MCEV and cash generation performance targets, if the Committee determines that the Group’s debt levels and associated interest costs have not remained within parameters acceptable to the Committee over the performance period and that the Group has not made progress considered to be reasonable by it in executing any strategy agreed by the Board on debt management and capital structuring, the level of awards vesting will either be reduced or lapse in full.
The Committee selected these performance metrics as they are directly linked to the objectives set out in the Group’s strategy and there is a clear line of sight for participants between performance and reward.
Shareholding guidelines The Company operates share ownership guidelines for Executive Directors. Under the guidelines, Executive Directors are expected to retain all shares (net of tax) which vest under the LTIP (or any other discretionary long-term incentive arrangement introduced in the future) until such time that they hold a specified value of shares (200% of salary for the Chief Executive Officer, 100% of salary for other Executive Directors). Once shareholding guidelines have been met, individuals are expected to retain these levels as a minimum. The Committee will review shareholdings annually in the context of this policy.
Ignis The Committee is responsible for approving the remuneration practices within Ignis, the Group’s asset management business. In structuring remuneration arrangements within Ignis, the Committee applies similar overall principles to those used in the rest of the Group, but relating these to an appropriate peer group of asset managers.
Clive Bannister 7 February 2011 12 Jonathan Yates1 6 May 2010 12 1 Resigned from the Board on 21 December 2011.
Name Date of letter of appointment Appointment end date Unexpired term
The remuneration of the Non-Executive Directors is a matter for the Chairman and Executive members of the Board and the remuneration of the Non-Executive Chairman is a matter for the Board. Fees for both the Non-Executive Directors and the Non-Executive Chairman are reviewed from time to time with regard to the complexity of the Group, the time commitment required and the level of fees paid by comparable companies.
Audited information Directors’ emoluments The emoluments of the Directors for 2011 were as follows: Name
3 Clive Bannister joined Phoenix Group on 7 February 2011 and was appointed to the Board as a Director on 28 March 2011. The detail shown only relates to the period from his appointment as a Director to 31 December 2011, except for the AIP which includes the amount earned in respect of the period 7 February 2011 to 28 March 2011.
7 Simon Smith resigned from the Board on 23 June 2010. The details shown for 2010 only relate to the period from the 1 January 2010 to 23 June 2010.
8 Jonathan Yates resigned from the Board on 21 December 2011.
2 In March 2010, the Group confirmed the operation of a phantom share award to a small number of senior executives. Individuals were granted a notional number of shares based on a multiple of salary at the time of grant (150% of base salary for the Group Chief Executive Officer). Awards (including those granted to Jonathan Moss who was treated as a good leaver) will vest on the third anniversary of grant generally subject to continued employment, with the value delivered in cash based on the prevailing share price at that time.
4 In addition to the shares awarded under the LTIP presented above, participants received an additional number of shares (based on the number of LTIP awards which actually vest) to reflect the dividends paid during the vesting period.
5 On vesting, the shares awarded under the 2009 LTIP were appointed into sub-trusts of the Phoenix Group Holdings Employee Benefit Trust, for the benefit of Jonathan Moss’ family. On vesting the shares to be awarded under the BSP were also appointed into this sub-trust.
Sharesave At the end of the year, the Executive Directors’ Sharesave share options were as follows: As at 1 Jan
Jonathan Yates – – – – – – – – –
During the year ended 31 December 2011, the highest mid-market price of the Company’s shares was 688p and the lowest mid-market price was 451.1p. At 31 December 2011, the Company’s share price was 525p.
2 Manjit Dale is a director of TDR Capital Nominees Limited, Jambright Limited and O-Re Holdings UK Limited and as such these companies are all considered as connected persons. Total interests held by these entities amount to 33,763,900.
The FTSE 250 Index (excluding investment trusts) is considered to be an appropriate comparator for this purpose as it is a broad equity index of which the Company is a constituent.
– Employees performing a Significant Influence Function in relation to the Code firm
Design and structure of remuneration The individual elements of employees’ remuneration packages at Phoenix Group comprise fixed pay (base salary, retirement and other benefits) and performance-related pay (consisting of annual incentives, deferred awards and long-term incentives).
Taking into account the expected value of long-term incentives, the performance-related elements of the package make up a significant proportion of the total remuneration of Code Staff, while maintaining an appropriate balance between fixed and variable elements.
Base salary and fees All Code Staff receive either a base salary (employees) or fees (Non-Executive Directors) to reflect their experience, skills, competencies and contribution to the Group relative to the market for comparable roles. Phoenix Group ensures that fixed remuneration is sufficient to cover employees’ key financial needs while generally seeking to pay base salary around a mid-market range.
Performance measurement/assessment For Group and life company employees, performance assessment is normally based upon a balanced scorecard of measures related to Group and/or life company and individual targets. These targets typically include financial performance, risk, people and customer measures. Overall bonus costs are reviewed by the Committee at the year end having regard to the Group KPIs and non-financial measures.
In each case, target levels of individual reward have regard to market levels for comparable roles internally and externally.
Deferral and vesting The Committee requires that one-third of annual incentives awarded to the Group’s senior employees are deferred into Phoenix Group Holdings shares. Equivalent rules apply to Ignis employees who are required to defer part of their bonus into phantom shares where the value of the outcome is determined by Ignis’ financial performance.
Risk adjustment To manage the risk aspects of the remuneration policy, the Committee considers the performance of the Group and individual businesses against risk objectives in determining the bonus pool and requires the Chief Risk Officer to report to the Committee on this.
There were 23 Code Staff that have been classified as Group and 23 as Ignis. Aggregate remuneration expenditure is broken down as follows: Number of staff £m
The IFRS operating profit of £387 million reflects a strong performance from both the Group’s operating segments.
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 2011 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 2011 and their development in the financial year to which the Annual Report and Accounts relate; and 3. The Annual Report describes the principal risks facing Phoenix Group Holdings.
Report on the consolidated financial statements We have audited the accompanying consolidated financial statements 2011 of Phoenix Group Holdings, Cayman Islands, and its subsidiaries (the ‘Group’), which comprise the statement of consolidated financial position as at 31 December 2011, the consolidated income statement, the statement of consolidated comprehensive income, the pro forma reconciliation of Group operating profit to result attributable to owners, the statement of consolidated changes in equity and the statement of consolidated cash flows for the year then ended, and notes, comprising a summary of the significant accounting policies and other explanatory information.
Directors’ responsibility The Directors are responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the Directors’ Report in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore the Board of Directors is responsible for such internal control as it determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Opinion with respect to the consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2011, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
– certain disclosures of Directors’ remuneration specified by law are not made; or
Ernst & Young Accountants LLP was signed by S. B. Spiessens
Change in present value of future profits 33 (19) 7 Amortisation of acquired in-force business 33 (134) (147) Amortisation of customer relationships 33 (18) (18)
Tax (charge)/credit 13 (94) 69 Add: tax attributable to policyholders’ returns 13 173 5 Tax credit attributable to owners 13 79 74 (Loss)/profit for the year attributable to owners (98) 80
Attributable to: Owners of the parent (131) 30 Non-controlling interests 19 33 50
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME For the year ended 31 December 2011 £m 2010 £m
Other comprehensive income: Actuarial gains of defined benefit pension schemes 32 251 45 Contribution in respect of actuarial losses of defined benefit pension scheme by the with-profit funds 32 – 27
Tax credit on actuarial gains of defined benefit pension schemes 13 1 4
PRO FORMA RECONCILIATION OF GROUP OPERATING PROFIT TO RESULT ATTRIBUTABLE TO OWNERS For the year ended 31 December 2011 £m 2010 £m
Operating profit Phoenix Life 395 388 Ignis Asset Management 46 46
Group costs (54) (61) Total operating profit before adjusting items 387 373
Finance costs attributable to owners (110) (115) (Loss)/profit before the tax attributable to owners 4.2 (177) 6
Fixed and variable rate income securities 42,010 40,899 Collective investment schemes 6,251 7,144
Reinsurers’ share of insurance contract liabilities 20 3,153 2,939 Reinsurance receivables 257 263 Insurance contract receivables 14 19
Cash flows from operating activities Cash generated by operations 41 3,692 3,392 Taxation (paid)/recovered (16) 3
Cash flows from investing activities Purchase of property, plant and equipment (7) (3)
Cash and cash equivalents at the end of the year 40 11,723 9,188
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY For the year ended 31 December 2010
Coupon paid to non-controlling interests, net of tax relief – – – – – – – (47) (47) Issue of share capital – 33 – – – – 33 – 33 Shares issued in lieu of dividends – 11 – – – – 11 – 11 Issue of ordinary shares –
Chairman’s shares – 1 – – – (1) – – – Conversion of contingent rights
Credit to equity for equity-settled share-based payment – – – – – 8 8 – 8 Conversion of warrants into
Shares in subsidiaries subscribed for by non-controlling interests – – – – – – – 96 96 Partial buy back of non-controlling
Phoenix Group Holdings is subject to Cayman Islands Companies Law. Under Cayman Islands Companies Law distributions can be made out of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group’s going concern assessment criteria.
Retained earnings comprise the owners’ interest in the post-acquisition retained earnings of the subsidiary companies and the retained earnings of the Company. Distribution of the retained earnings held within the long-term business funds and surplus assets held within the owners’ funds of the life companies is subject to retaining sufficient funds to protect policyholders’ interests.
1. Accounting policies (continued) (b) Critical accounting estimates and judgements (continued) Fair value of financial assets and liabilities The fair values of financial assets and liabilities are classified and accounted for as set out in accounting policies (r) and (g) respectively. Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities. These are categorised as Level 1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued where valuation techniques are based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued where valuation techniques are based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates. Further details of the estimates made are included in note 37.
Pension benefit assets and liabilities The valuation of pension benefit assets and liabilities is determined using actuarial valuations using a number of assumptions. 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.
(e) Insurance contracts and investment contracts with DPF Under current IFRS requirements, insurance contracts and investment contracts with DPF are measured using accounting policies consistent with those adopted under UK GAAP. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.
For participating business, the Group follows the provisions of the UK Accounting Standard Board’s FRS 27 Life Assurance. In accordance with these requirements, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the FSA’s realistic capital regime. The key aspects of this methodology are: – liabilities to policyholders arising from the with-profit business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners’ share of projected future bonuses; – acquisition costs are not deferred; and
Present value of future profits 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 present value of future profits (‘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. This 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 valuation of liabilities on unit-linked contracts is based on the fair value of the related assets and liabilities. The liability is the sum of the unit-linked liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges.
(j) Net asset value attributable to unitholders The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes which are consolidated by the Group. This interest is classified at fair value through profit or loss and measured at fair value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group.
(k) Obligations for repayment of collateral received It is the Group’s practice to obtain collateral in stock lending and derivative transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a ‘financial asset’ and the collateral repayable is recognised as ‘obligations for repayment of collateral received’ in the statement of consolidated financial position. The ‘obligations for repayment of collateral received’ are measured at amortised cost, which in the case of cash is equivalent to cost.
Part of the cost of changes in the longevity assumptions of the PGL pension scheme is recoverable from certain with-profit funds to the extent that cash contributions are made to the pension scheme. Recoveries are recognised when the related cash contributions are agreed with the Trustee of the pension scheme and are accounted for as a transfer to other comprehensive income from insurance contract liabilities.
Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. It is tested for impairment annually or when there is evidence of possible impairment. Goodwill is not amortised. For impairment testing, goodwill is allocated to cash-generating units (Phoenix Life and Ignis Asset Management). Goodwill is impaired when the recoverable amount is less than the carrying value.
Intangible assets with finite lives are amortised on a straight-line basis over their useful economic lives and assessed for impairment whenever there is an indication that the recoverable amount of the intangible asset is less than its carrying value.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These investments are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributable to the acquisition are also included in the cost of the investment. Subsequent to initial recognition, these investments are carried at amortised cost, using the effective interest method.
Stock lending Financial assets that are lent under the Group’s stock lending programme do not qualify for derecognition from the statement of consolidated financial position as the Group retains substantially all the risks and rewards of the transferred assets.
– other fees, which are recognised as the services are provided.
1. Accounting policies (continued) (x) Income recognition (continued) Net investment income Net investment income comprises interest, dividends, rents receivable, net expected return on pension assets, fair value gains and losses on financial assets and investment property and impairment losses on loans and receivables.
2. Financial information The consolidated financial statements for the year ended 31 December 2011, set out on pages 84 to 164, were authorised on 22 March 2012 by the Board of Directors for issue.
In preparing the financial statements the Group has adopted the following standards, interpretations and amendments which have been issued by the International Accounting Standards Board (‘IASB’) and have been adopted for use by the EU. None of these have a material effect on the results of the Group.
– IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. This addresses the accounting by an entity when the terms of a financial liability are renegotiated and result in its equity instruments being issued to extinguish all or part of the financial liability.
– Deferred tax: Recovery of Underlying Assets (Amendments to IAS 12) (2012). This provides a practical approach to the measurement of deferred tax liabilities and assets when investment property is measured at fair value, according to whether the entity expects to recover an asset by using or selling it.
– IFRS 11 Joint Arrangements (2013) establishes principles for financial reporting by parties to a joint arrangement.
– IFRS 13 Fair Value Measurement (2013) defines fair value and sets out in a single IFRS a framework for measuring fair value.
IFRS financial statements 3. Prior period adjustment During the Group’s review of the recoverability of its deferred tax assets, it was identified that a deferred tax asset of £38 million should have been written off at the date of, and as a consequence of, the 2009 acquisition of the then Pearl businesses by the Company. The consequence of this is a prior year understatement of deferred tax liabilities and goodwill of £38 million. The impact of the correction on the prior year statement of consolidated financial position is to increase goodwill and deferred tax liabilities by £38 million. The correction of this classification error has no impact on operating profit, profit attributable to owners, retained earnings or net assets. A statement of consolidated financial position as at 31 December 2009 has not been presented as it would not add any further clarity to the information presented above.
No revenue transaction with a single customer external to the Group amounts to greater than 10% of the Group’s revenue.
Net premiums written from: External customers 1,388 – – – 1,388 Other segment – – – – –
Net investment income: Offset interest income on interest swaps against interest expenses2 – – (53) – (53) Non-recurring (5) – – – (5)
Other operating income: Net policyholder claims and benefits incurred: Non-recurring (64) – – – (64)
Offset interest income on interest swaps against interest expense2 – – 53 – 53
4. Segmental analysis (continued) 4.2 Reconciliation of operating profit/(loss) before adjusting items to the segmental result 2011
Operating profit/(loss) before adjusting items 388 46 (61) 373 Investment return variances and economic assumption changes on long-term business 18 – – 18 Variance on owners’ funds 16 – 3 19 Amortisation of acquired in-force business (132) – – (132) Amortisation of customer relationships (15) (3) – (18) Non-recurring items (107) – (32) (139) Financing costs attributable to owners – – (115) (115) Segment result before the tax attributable to owners 168 43 (205) 6
Non-recurring items include: – premium listing and other restructuring costs, including site rationalisation and outsourcer transformation, of £80 million; – regulatory change and systems transformation costs of £36 million; and
IFRS financial statements 5. Investment return variances and economic assumption changes The long-term nature of much of the Group’s operations means that, for internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. This note explains the methodology behind this.
The investment variances and economic assumption changes excluded from the long-term business operating profit reflect the impact of the increase in credit spreads on corporate bonds and movements in equities, properties and yields.
The variances excluded from operating profit in relation to owners’ funds are as follows: £m 2010 £m
The principal assumptions underlying the calculation of the longer term investment return are: %
Gilts (15 year gilt) 4.0 4.5 Other fixed interest (15 year gilt plus 0.6%) 4.6 5.1
Fund management based fees 75 62 Investment contract income 95 100 7. Net investment income £m 2010 £m
Financial assets at fair value through profit or loss Held for trading – derivatives 960 (17) Designated upon initial recognition 595 3,324
Net investment income 4,920 5,907 8. Other operating income £m 2010 £m
General business result 2 – Income received from outsourcer – 14 Income under Royal London transitional services agreement – 5 Other income 10 6 9. Acquisition costs £m 2010 £m
Acquisition costs paid 13 12 10. Administrative expenses £m 2010 £m
Audit of the consolidated financial statements 0.5 0.7 The auditing of accounts of subsidiaries of the Company pursuant to legislation 2.9 3.5 Other services supplied pursuant to such legislation: Audit related 0.4 0.7 Services as reporting accountants 0.1 6.6
Wages and salaries 137 134 Social security contributions 12 13 Other pension costs (21) 11
Current tax: UK Corporation tax 68 30 Overseas tax 16 7
Deferred tax on actuarial gains of defined benefit schemes (1) (4)
(Loss)/profit before tax (4) 11 Policyholder tax charge (173) (5) (Loss)/profit before the tax attributable to owners (177) 6
On 30 March 2011, the Board recommended a final dividend of £0.21 per share in respect of the year ended 31 December 2010. A scrip dividend option was available to shareholders and the total dividend that was settled on 17 May 2011, following shareholders’ approval at the AGM, amounted to £36 million of which £7 million was settled via the scrip dividend option.
– 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.
There are 3,600,000 remaining contingent rights over ordinary shares which will result in the issue of ordinary shares on a one-for-one basis if before 22 June 2013 (i) an offer is made to acquire all or a majority of the Company’s issued ordinary share capital or substantially all of the Company’s assets (in each case such transaction having become unconditional in all respects); or (ii) any party or parties acting in concert becomes interested in more than 50% of the ordinary shares of the Company through the issue of shares by the Company. As the conditions for this conversion were not met in the reporting period, these additional shares have not been included in the diluted earnings per share figures.
Authorised: 410 million (2010: 410 million) ordinary shares of €0.0001 each 31,750 31,750
Issued and fully paid: 174.5 million (2010: 171.5 million) ordinary shares of €0.001 each 14,165 13,904
The holders of ordinary shares 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 issued share capital during the year: Shares in issue at 1 January 171,455,610 13,904 Ordinary shares issued for scrip dividend (note 14) 3,005,093 260 Other ordinary shares issued in the year 12,112 1 Shares in issue at 31 December 174,472,815 14,165
Shares in issue at 1 January 130,200,732 10,450 ‘B’ ordinary shares issued on conversion of warrants 2,085,123 177 ‘B’ ordinary shares issued to the Chairman 177,000 16 Ordinary shares issued on conversion of contingent rights over shares 32,400,000 2,677 Ordinary shares issued for scrip dividend 1,567,416 138 Ordinary shares issued in connection with Alternative Coupon Satisfaction Mechanism 5,020,000 445 Other ordinary shares issued in the year 5,339 1 Shares in issue at 31 December 171,455,610 13,904 17. Shares held by the employee trust and group entities £m 2010 £m
This reserve represents the value of the shares held by the Phoenix Group Holdings Employee Benefit Trust (‘PGH EBT’) to satisfy awards granted to employees under the Group’s share-based payment schemes and shares issued to Pearl Assurance Limited following the restructuring of the contingent rights over ordinary shares of the Company which occurred during 2010. During the year nil (2010: 1,580,671) further shares were purchased on market and 306,250 (2010: 595,740) shares were awarded to employees (see note 18). The number of shares held by the PGH EBT at 31 December 2011 was 1,245,509 (2010: 1,484,931).
18. Share-based payment 18.1 Share-based payment expense The expense recognised for employee services receivable during the year is as follows: £m 2010 £m
The carrying amount of the liability relating to the cash-settled options at 31 December 2011 is £2 million (2010: £1 million) and is included within other payables.
The fair value of the awards has been determined assuming that all granted shares vest. As the award is a cash settled scheme, the fair value of the expense is updated at every period end to reflect movements in Phoenix Group Holdings’ share price.
Deferred bonus share plan (‘Deferred BSP’) With effect from 31 December 2010, part of the annual incentive for certain executives, for any year, is deferred into Phoenix Group Holdings’ shares. This grant of shares is conditional on the employee remaining in employment with the Group for a period of three years. The 2010 Deferred BSP shares are expected to vest on 6 April 2014.
18.3 Movements in the year The following tables illustrate the number of, and movements in, share options during the year: No of share options 2011
Outstanding at the beginning of the year 1,424,549 1,037,214 326,250 229,370 – Granted during the year 1,405,116 310,366 – – 88,729 Forfeited during the year (271,185) (206,851) – – – Exercised during the year – (12,112) (306,250) – – Outstanding at the end of the year 2,558,480 1,128,617 20,000 229,370 88,729
The weighted average fair value of options granted during the year was £5.65 (2010: £4.95).
The weighted average share price at the date of exercise for the rewards exercised is £5.84 (2010: £6.77).
Profit for the year 20 30 50 Dividends paid – (18) (18) Restructure of non-controlling interest (70) – (70) Coupon paid, net of tax relief (47) – (47) Partial buyback of non-controlling interest (19) – (19) Shares in subsidiaries subscribed for by non-controlling interests – 96 96
The Notes have no fixed maturity date and coupon payments may be deferred at the option of PGH1; accordingly the Notes meet the definition of equity for financial reporting purposes. Under the rules of the FSA, the Notes also meet the conditions to be included in Tier 1 capital in the calculation of the Group’s Capital Resources. As the Notes are not held by the Company, these are disclosed as a non-controlling interest in the consolidated financial statements.
Life assurance business: Insurance contracts 40,517 3,153 38,770 2,939 Investment contracts with DPF 11,283 – 11,709 –
Transfer (to)/from income statement (16) 143 22. Borrowings Carrying value Fair value £m £m £779 million loan (note b) – 757 – 766 £15 million loan (note b) – 14 – 15 £4 million loan (note b) – 4 – 4 Property Reversions loan (note c) 217 234 217 234 £150 million term facility (note e) 60 – 60 –
d. In 2008, UKCPT entered into an £80 million revolving loan facility agreement. This loan accrues interest at
The £150 million investment term loan facility agreement accrues interest at LIBOR plus a variable margin of 1.60% to 2.00% per annum. The lender holds security over the assets of UK Commercial Property Estates Holdings Limited and UK Commercial Property Estates Limited, both of which are subsidiaries of UKCPT. The repayment date for this facility is 19 May 2018. As at 31 December 2011 the amount drawn down was £60 million.
– Tranche C loan of £492.5 million is repayable on 30 November 2016 and attracts interest at LIBOR plus a cash margin of 1.75% and a PIK margin of 0.25% for the first four years and LIBOR plus a cash margin of 3.75% for the subsequent years.
The borrowings under the £2,260 million facility are secured by: – first fixed and floating charges over all the assets and undertaking of PGH (LC1) Limited and PGH (LC2) Limited (including their respective 12.5% shareholding in Impala, all real estate, book debts, bank accounts, investments and other assets); and
– a limited recourse share charge granted by PGH2 over its 75% shareholding in Impala.
During 2011, a repayment of £145 million (2010: £122 million) was made.
i. On 14 May 2008, PGH (MC1) Limited issued PIK notes to the value of £154.5 million to Royal London and PGH (MC2) Limited obtained a £154.5 million PIK facility from Royal London. The PIK notes and facility were subsequently amended on 2 September 2009, leaving a total of £100 million outstanding. At 31 December 2009, interest of £2 million had been capitalised, leaving an outstanding balance of £102 million. Interest accrues on the PIK notes and facility at LIBOR plus a margin of 2% unless an election is made by PGH (MC1) Limited or PGH (MC2) Limited to capitalise the interest, in which case the margin increases to 3.5%. During 2011, interest of £5 million (2010: £4 million) was capitalised on the PIK notes and facility. The final maturity date on the PIK notes and facility is 30 June 2019.
Warrants over shares in Phoenix Group Holdings – 3 – 5
The amount recoverable after one year is £4,320 million (2010: £2,247 million). The amount payable after one year is £3,368 million (2010: £1,517 million).
Warrants over shares On 1 January 2010, the Company had in issue 7.5 million Founders’ warrants, 8.2 million IPO warrants, 12.4 million warrants held by Royal London and 5 million held by the Lenders. The table below shows a reconciliation of the outstanding number of these warrants: IPO warrants
During January 2010, the remaining Founders’ warrants in issue were converted into ordinary shares. On 5 July 2010, the IPO warrants were admitted to trading on the LSE. The IPO warrants were subsequently delisted from Euronext on 17 November 2010.
The exercise period for the IPO warrants commenced on the later of: – consummation by the Company of a business combination; and
– if, and only if, the reported last sale price of the share equals or exceeds €13.75 per share for any 20 trading days within a period of 30 consecutive trading days ending on the third business day prior to the notice of redemption to warrant holders. On 2 September 2009 the threshold of €13.75 was increased to €16.50 and was subsequently amended to €16.34 on 15 October 2010.
– the valuation incorporates the impact of amending some of the terms of the warrants on 15 October 2010.
The exercise period terminates on the first to occur of: – 5th anniversary of the date issued; – date fixed for the redemption of the warrants; and
The key assumptions used to ascertain a value as at 31 December 2011 are as for the IPO warrants (see above). The value of the warrants at the year end was £2 million (2010: £3 million).
Financial liabilities at fair value through profit or loss: Designated upon initial recognition 11,404 11,020 11,404 11,020 Held for trading – derivatives 4,292 2,431 4,292 2,431
Utilised during the year (4) (4) – (4) (12) Released during the year (16) (3) – (7) (26)
Current tax payables 105 99 Net deferred tax liabilities 673 607 Total tax liabilities 778 706 Deferred tax assets comprise £m £m
Write off to goodwill – (38) Amounts (charged)/credited to the income statement (67) 122 Amounts credited to the statement of other comprehensive income 1 4
On 23 March 2011, HMRC issued a technical note on “Solvency II and the Taxation of Insurance Companies”, outlining changes to the taxation of UK insurance companies with effect from 2013. The Group has been actively involved in consulting with HMRC and HM Treasury on the detail of the new rules, including providing comments on proposed draft legislation, with the aim of ensuring that the Group’s policyholders and shareholders are, as far as possible, not adversely affected by the changes.
The Group is still assessing the likely impact of the new rules (subject to the final legislation which will be introduced following the March 2012 Budget). The Group’s view, at this stage, is that transition to the new rules is likely to result in the acceleration of some taxable profits (which will be recognised over a 10-year period under transitional provisions in the new rules), but this is not expected to have a material impact on its overall tax position.
IFRS financial statements 29. Payables related to direct insurance contracts 2011 £m 2010 £m
PA (GI) Limited Within PA (GI) Limited the provision for outstanding general insurance claims comprises the estimated ultimate cost of settling claims notified but not settled by the period end. It includes related expenses and a deduction for the expected value of salvage and other recoveries. The provision is determined using the best information available of claims settlement patterns, forecast inflation and settlement of claims. The general insurance liabilities of PA (GI) Limited are wholly reinsured externally to RSA.
Amount due for settlement after 12 months 6 9 £m 2010 £m
32. Pension schemes The Group operates two main staff pension schemes, the Pearl Group Staff Pension Scheme and the PGL Pension Scheme.
PGL Pension Scheme Economic surplus (including £471 million (2010: £92 million) available as a refund on a winding-up of the scheme)
Net economic surplus 426 91 Provision for tax on that part of the economic surplus available as a refund on a winding-up of the scheme (149) (32) Reported surplus 277 59 Total reported pension scheme surplus/(deficit) 314 (18)
The total net actuarial gains recognised in the statement of consolidated comprehensive income is set out below.
Defined benefit scheme The defined benefit scheme is funded by payment of contributions to a separately administered trust fund. A Group company, Pearl Group Holdings (No. 2) Limited (‘PGH2’) is the principal employer of the Pearl Scheme. The principal employer meets the administration expenses of the Pearl Scheme.
In June 2011, following formal consultation, the trustees of the Pearl Scheme signed a deed of amendment to the defined benefit scheme, which closed the scheme to future accrual by active members with effect from 1 July 2011. Thus, the active members become deferred members of the scheme and their future service will not qualify for benefits under the scheme. As a result of this, the Group has recognised a curtailment gain, relating to a release from future liabilities, of £3 million, which has been recognised in the consolidated income statement during the year.
In November 2011, following formal consultation, the Group carried out a pension increase exchange (’PIE’) exercise where existing in-scope pensioners were offered the option to exchange future non-statutory pension increases for benefits accrued before 6 April 1997 for a higher, non increasing pension, thereby reducing longevity and inflation risk for the Group. The offer period for this exercise ended on 3 January 2012. The financial effect
Rate of general long-term increase in salaries n/a 4.45 Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.10 3.45 Rate of increase for deferred pensions (CPI) 2.10 2.95 Discount rate 4.90 5.40 Inflation – RPI 3.10 3.45 Inflation – CPI 2.10 2.95 Expected rate of return on scheme assets 3.70 4.80
The discount rate and inflation rate assumptions used for the calculation of the liabilities have been determined by considering the shape of the appropriate yield curves and the duration of the Pearl Scheme liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial valuation as at 30 June 2009, based on the standard tables PMA92 for males and PFA92 for females and based on year of use. This includes medium cohort projections for future mortality improvements, subject to a minimum annual improvement of 1.25% at each age. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 29.6 years and 31.7 years for male and female members respectively.
A triennial funding valuation of the Pearl Scheme as at 30 June 2009 was completed in June 2010. This showed a deficit on the funding basis as at 30 June 2009 of £755 million.
Change in provision for tax on the economic surplus available as a refund (19) –
Expected return on scheme assets 81 82 Actual return less expected return on scheme assets 110 19
Current service cost 1 1 Interest cost 95 100 Past service cost (16) – Curtailment gain (3) – Actuarial losses/(gains) 9 (19) Benefits paid (79) (85)
Expected return on scheme assets 81 82 Actual return less expected return on scheme assets 110 19 Provision for tax on the economic surplus available as a refund (19) – Contributions by the employer 28 25 Benefits paid (79) (85)
The distribution of the scheme assets at the end of the year was as follows: £m
Cash and other 149 175 Provision for tax on the economic surplus available as a refund (19) –
Experience (losses)/gains on scheme liabilities (22) 70 58 32.2 PGL Pension Scheme The PGL Pension Scheme comprises a final salary section and a defined contribution section.
The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2011, undertaken by independent qualified actuaries.
In June 2011, as outlined for the Pearl Scheme, the PGL Pension Scheme signed a deed of amendment to the defined benefit scheme, which closed the scheme to future accrual by active members with effect from 1 July 2011. A curtailment gain of £7 million, has been recognised in the consolidated income statement during the year.
Rate of general long-term increase in salaries n/a 4.45 Rate of increase for pensions in payment 3.00 3.30 Rate of increase for deferred pensions (‘CPI’) 2.10 2.95 Discount rate 4.90 5.40 Inflation – RPI 3.10 3.45 Inflation – CPI 2.10 2.95 Expected rate of return on scheme assets 3.90 5.10
The discount rate and inflation assumptions used for the calculation of the liabilities have been determined by considering the shape of the appropriate yield curves and the duration of the PGL Scheme liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.
The net actuarial gains recognised in other comprehensive income comprise the following: £m
Change in provision for tax on the economic surplus available as a refund (117) (32)
The surplus recognised in the statement of financial position is as follows: £m
Expected return on scheme assets 66 63 Actual return less expected return on scheme assets 327 81
32. Pension schemes (continued) 32.2 PGL Pension Scheme (continued) The change in the present value of the defined benefit obligation is as follows: £m
Goodwill The carrying value of goodwill has been tested for impairment at the period end. No impairment has resulted as the value in use of this intangible continues to exceed its carrying value. Value in use has been determined as the present value of certain future cash flows associated with the Ignis Asset Management business and the management services business of the Phoenix Life segment. The cash flows used in this calculation are consistent with those adopted by management in the Group’s operating plan and for the period 2016 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business.
Customer relationships The first part of the customer relationships intangible relates to vesting pension premiums which captures the new business arising from policies in-force at the acquisition date, specifically top-ups made to existing policies and annuities vested from matured pension policies. The total value of this customer relationship intangible at acquisition was £297 million and has been allocated to the Phoenix Life segment. This intangible is being amortised over a 20 year period.
The second part of the customer relationships intangible relates to the investment management contracts (‘IMCs’) held within Ignis Asset Management. These are further split into IMCs held with open ended funds and institutional mandates. The open ended IMCs had a value at acquisition of £130 million and an indefinite useful economic life (‘UEL’). The reason for the indefinite UEL is that funds are open ended and indefinite in nature. An impairment review has been completed for these intangibles at the period end with an indefinite life and no impairment has arisen. Under this impairment review, value in use has been determined as the present value of future cash flows associated with the open-ended IMCs. The cash flows used in this calculation are consistent with those adopted by management in the Group’s operating plan, with a declining growth rate assumed for the extended forecast period beyond the period of this plan and a terminal value applied at the year where growth stabilises to 2% per annum. Future cash flows have been valued using a discount rate of 10.0% (2010: 9.6%). The institutional mandate IMCs had a value at acquisition of £18 million and a UEL of between 5 and 7 years.
These investment management contract customer relationships have been allocated to the Ignis Asset Management segment.
PVFP on non-participating business in the with-profit fund The value of the PVFP is determined in accordance with the FSA’s realistic capital regime and is allocated in full to the Phoenix Life segment. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note 43.5.1. Revaluation of PVFP is charged or credited to the consolidated income statement as appropriate.
Depreciation and impairment At 1 January (5) (2) Charge for the year (3) (3) Impairment (8) –
Held for trading – derivatives 6,099 3,197 Designated upon initial recognition
37. Financial instrument fair value hierarchy 37.1 Determination of fair value and fair value hierarchy of financial instruments Level 1 financial instruments The fair value of financial instruments traded in active markets (such as publicly traded securities and derivatives) is based on quoted market prices at the period end. The quoted market price used for financial assets is the current bid price on the trade date. If the bid price is unavailable a ‘last traded’ approach is adopted. For units in unit trusts and shares in open ended investment companies, fair value is by reference to published bid values.
37.2 Fair value hierarchy of financial instruments measured at fair value 2011
Financial liabilities at fair value Derivatives – 4,292 – 4,292 Financial liabilities designated at fair value through profit or loss upon initial recognition Investment contract liabilities – 7,978 – 7,978
Financial liabilities at fair value Derivatives 1 2,419 11 2,431 Financial liabilities designated at fair value through profit or loss upon initial recognition Investment contract liabilities – 8,849 – 8,849
Total financial liabilities at fair value 1,770 11,502 179 13,451 37.3 Level 3 financial instrument sensitivities Included in Level 3 investments are two property investment structures with a value of £66 million (2010: £96 million) and £102 million (2010: £117 million) respectively.
The second investment has been valued by taking the fair value of the property within the structure, which has been independently valued, less the fair value of the debt within the structure. The valuation is sensitive to movements in yields on the underlying property portfolio. An increase in yields of 25bps would reduce the value of the investment by £23 million (2010: £23 million) and a reduction in yields of 25bps would increase the value by £25 million (2010: £25 million).
37. Financial instrument fair value hierarchy (continued) 37.4 Significant transfers of financial instruments between Level 1 and Level 2 (continued) 2010
All the Group’s Level 2 assets have been valued using standard market pricing sources, which have not changed during 2011. However, following consultation with our investment managers and pricing providers, we have updated our criteria for an active market, particularly with reference to corporate bonds, and hence have classified some assets as Level 2 when they would have been Level 1 in previous periods.
The Group saw an improvement in the liquidity of the fixed and variable rate securities market throughout 2011, which has resulted in a number of securities moving from Level 2 into Level 1. There were however, a number of securities that moved from Level 1 to Level 2 as a result of a downgrading in their credit rating. These securities were mainly in the financial sector with issuers such as banks and insurance companies.
Financial assets Derivative assets – (22) 111 – 89 (202) Financial assets designated at fair value through profit or loss upon initial recognition
Financial liabilities Derivative liabilities – (5) – 16 11 11 Financial liabilities designated at fair value through profit or loss upon initial recognition
Level 3 financial instruments are transferred to Level 1 or Level 2 as and when the conditions of each Level are met. During 2011 the Group saw a decrease in observable inputs leading to an increase in Level 3 financial instruments.
The financial assets do not qualify for derecognition as the Group retains all the risks and rewards of the transferred assets except for the voting rights. The carrying value of listed financial assets lent at 31 December 2011 that have not been derecognised amounted to fixed and variable rate income securities of £10,924 million (2010: £9,994 million).
38. Stock lending and collateral (continued) Collateral and pledges Assets accepted It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to over-the-counter (’OTC’) derivatives and reinsurance transactions, usually in the form of cash or marketable securities.
Where the Group receives collateral on OTC derivatives and reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of collateral received, disclosed as ‘Obligations for the repayment of collateral received’ and ‘Deposits received from reinsurers’ respectively. The amounts recognised as financial liabilities from cash collateral received at 31 December 2011 are set out below.
Assets pledged Where the Group pledges collateral in the form of cash or marketable securities and retains all the risks and rewards of the transferred assets, they continue to be recognised in the statement of consolidated financial position. The value of assets pledged at 31 December 2011 in respect of OTC derivative liabilities of £4,268 million (2010: £2,411 million) amounted to £236 million (2010: £500 million).
Collateral has also been pledged and charges granted in respect of certain of the Group’s borrowings as set out in note 22. In addition, the Trustees of the Pearl Group Staff Pension Scheme have been granted certain charges as set out in note 32.
Bank and cash balances 1,713 2,101 Short-term deposits (including demand and time deposits) 10,010 7,087
(Loss)/profit for the year before tax (4) 11 Non-cash movements in profit for the year before tax
Change in fair value of borrowings 20 12 Depreciation of property, plant and equipment 3 3 Impairment of owner occupied property 8 – Amortisation of intangible assets 152 165 Change in present value of future profit 19 (7) Change in unallocated surplus (16) 143 Share-based payment charge/(income) 4 (3) Interest expense on borrowings 251 269 Net expected return on pension assets 11 18 Other gains on pension schemes (37) – Foreign currency exchange gains – (10)
The capital policy of each Group holding company ensures sufficient liquidity to meet creditor obligations through the combination of cash buffers and cash flows from the Group’s operating companies.
The Group’s capital adequacy assessment is made at the highest EEA level insurance Group holding company, which is PLHL. PLHL is a subsidiary of the Company.
The primary source of capital used by the Group is equity shareholders’ funds and borrowings. The capital statement and movement analysis that follows presents information about the capital resources for the Group’s UK life businesses.
Owners’ funds held outside long-term fund – – 1,688 1,688 (763) 925 Owners’ funds held in long-term fund – 727 – 727 – 727 Total owners’ funds at 31 December 2011 – 727 1,688 2,415 (763) 1,652
Other qualifying capital: Subordinated debt (note 3) – – 645 645 Contingent loans 412 (73) (209) 130
Other qualifying capital: Contingent loans – – – – – 412 412 Total available capital resources
An analysis of the movement in available capital resources for the period 1 January 2011 to 31 December 2011 is shown below: With-profit
Adjustment for internal loans in excess of counterparty limits – – – – – – (2) (182) (184)
Total available capital resources at 1 January 2010 984 927 803 294 643 819 586 1,919 6,975
Phoenix Life – – – – – – – (433) (433) New business and other factors: Intragroup capital
Changes in methodology and assumptions Changes to capital resources arising from changes in methodology and assumptions occur in the normal course of the assumption setting process and reflect changes in available data inputs.
In pursuing these objectives, the Group deploys financial assets and incurs financial liabilities. Financial assets principally comprise investments in equity securities, fixed and variable rate income securities, collective investment schemes, property, derivatives, reinsurance, trade and other receivables, and banking deposits. Financial liabilities comprise investment contracts, borrowings for financing purposes, derivative liabilities and other payables.
The Group’s overall exposure to market and credit 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.
43. Risk management (continued) 43.3 Financial risk analysis (continued) 43.3.1 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.
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 £249 million (2010: £223 million).
A 100 basis point narrowing of credit spreads, 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 £292 million (2010: £246 million).
The Group manages the levels of market risk that it accepts through an approach to investment management that determines: – the constituents of market risk for the Group; – the basis used to fair value financial assets and liabilities; – the asset allocation and portfolio limit structure; – diversification from and within benchmarks by type of instrument and geographical area; – the net exposure limits by each counterparty or group of counterparties, geographical and industry segments; – control over hedging activities; – reporting of market risk exposures and activities; and
The sensitivity analysis for interest rate risk indicates how changes in the fair value or future cash flows of a financial instrument arising from changes in market interest rates at the reporting date result in a change in profit after tax and in equity. It takes into account the effect of such changes in market interest rates on all assets and liabilities that contribute to the Group’s reported profit after tax and in equity (but excludes the impact on the Group’s defined benefit pension schemes).
With-profit business and non-participating business within the with-profit funds are exposed to interest rate risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest stocks and derivatives. For with-profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits dependent on the existence of policyholder guarantees. The contribution of these funds to the Group result is determined primarily by either the shareholders’ share of the declared annual bonus or by the shareholders’ interest in any change in value in the capital advanced to the Group’s with-profit funds.
An increase of 1% in interest rates1, 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 £2 million (2010: a decrease of £103 million). A decrease of 1% in interest rates1, with all other variables held constant, would result in a decrease in profit after tax in respect of a full financial year, and in equity, of £6 million (2010: an increase of £78 million).
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, whilst the Group also has exposure to the value of guarantees provided to with-profit policyholders. In addition some equity investments are held in respect of shareholders’ 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.
A 10% increase in equity prices, with all other variables held constant, would result in an decrease in the profit after tax in respect of a full financial year, and in equity, of £16 million (2010: an increase of £21 million).
A 10% increase in 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 £45 million (2010: £51 million).
The Group’s financial assets are primarily denominated in the same currencies as its insurance and investment liabilities. Thus the main foreign exchange risk arises from recognised assets and liabilities denominated in currencies other than those in which insurance and investment liabilities are expected to be settled and, indirectly, from the earnings of UK companies arising abroad.
General insurance – higher than expected number of non-life claims on general insurance policies and occurrence of one or more large claims.
Due to the historic diversity of issued general insurance policies and taking into account the legal and regulatory environment for hazardous risks, it is possible that additional claims could emerge from long tail unexpired risks albeit it is not possible to predict the quantum, location or timing of such occurrences.
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 £24 million (2010: £23 million).
A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £191 million (2010: £164 million).
An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £186 million (2010: £162 million).
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 £56 million (2010: £61 million).
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 £51 million (2010: £49 million).
Valuation of non-participating insurance contracts The non-participating insurance contract liabilities are determined using either a net premium or gross premium valuation method.
During the year a number of changes were made to assumptions to reflect changes in expected experience or to harmonise the approach across the enlarged Group. The impact of material changes during the year was as follows: Increase/ (decrease) in insurance liabilities 2011 £m
Change in longevity assumptions (72) (43) Change in persistency assumptions 18 35 Change in expenses assumptions (25) 10
Expense inflation Expenses are assumed to increase at the rate of increase in the Retail Price Index (‘RPI’) plus fixed margins in accordance with the various management service agreements (‘MSAs’) the Group has in place with outsourced partners. For with-profit business the rate of RPI inflation is determined within each stochastic scenario. For other business it is based on the Bank of England inflation spot curve. For MSAs with contractual increases set by reference to national average earnings inflation, this is approximated as RPI inflation plus 1%. In instances in which inflation risk is not mitigated, a further margin for adverse deviations may then be added to the rate of expense inflation.
Some pensions contracts include guaranteed annuity options (see deferred annuities in section 43.5.2 for details). The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £2,248 million (2010: £1,541 million) and £59 million (2010: £20 million) respectively.
In common with other life companies in the UK which have written pension transfer and opt-out business, the Group has set up provisions for the review and possible redress relating to personal pension policies. These provisions, which have been calculated from data derived from detailed file reviews of specific cases and using a certainty equivalent approach, which give a result very similar to a market consistent valuation, are included in liabilities arising under insurance contracts. The total amount provided in the with-profit funds and non-profit funds in respect of the review and possible redress relating to pension policies, including associated costs, are £409 million (2010: £329 million) and £22 million (2010: £20 million) respectively.
43.5.2 Managing product risk The following sections give an assessment of the risks associated with the Group’s main life assurance products, as shown below, and the ways in which the Group manages those risks.
Non-profit funds: Deferred annuities – with guarantees 75 – – – Deferred annuities – without guarantees 643 6 – – Immediate annuities 11,351 – 1,195 –
With-profit funds: Pensions: Deferred annuities – with guarantees 8,660 73 469 – Deferred annuities – without guarantees 1,593 107 – – Immediate annuities 4,450 – 705 – Unitised with-profit 1,291 9,143 102 –
Life: Immediate annuities 95 – 9 – Unitised with-profit 965 936 38 – Life with-profit 7,209 – 2 –
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.
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.
The Group has commitments under non-cancellable operating leases as set out below: £m 2010 £m
To subscribe to private equity funds and other unlisted assets 356 409 To purchase, construct or develop investment property 61 80 For repairs, maintenance or enhancements of investment property 1 2 To acquire property, plant and equipment – 2 46. Related party transactions The Group has related party transactions with its pension schemes and its key management personnel.
Transactions with pension schemes During the year the Group entered into the following transactions with its pension schemes: Transactions £m
Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report.
IFRS financial statements 47. Contingent liabilities During the year, the FSA completed its review of the categorisation of working capital to owners’ funds relating to a transaction in 2006 by London Life Limited. The FSA concluded that no changes to the categorisation were required.
In the normal course of business the Group is exposed to certain legal issues, which involve litigation and arbitration, and as at the period end, the Group has an immaterial contingent liability in this regard.
NP Life Holdings Limited (holding company) UK ‘A’ ordinary shares of £1 and ‘B’
‘A’ ordinary shares of £1 ‘B’ ordinary shares of £1 and
Preference shares of £1 PGH (LCA) Limited (finance company) UK Ordinary shares of £1 PGH (LCB) Limited (finance company) UK Ordinary shares of £1
PGH (LC1) Limited (finance company) UK Ordinary shares of £1 and
PGH (MC1) Limited (finance company) UK Ordinary shares of £1 and
Country of incorporation and principal place of operation Class of shares held (wholly-owned unless otherwise indicated)
(finance company) UK Ordinary shares of £0.05 Pearl Group Holdings (No. 2) Limited
49. Events after the reporting period On 22 March 2012 the Board recommended a final dividend of £0.21 per share (2010: £0.21 per share) for the year ended 31 December 2011. Payment of the final dividend is subject to compliance with the processes set out in the Group’s main credit facilities and shareholder approval at the AGM. The cost of this dividend has not been recognised as a liability in the financial statements for 2011 and will be charged to the statement of changes in equity in 2012.
R Sandler C Bannister A Lyons I Ashken R P Azria D Barnes C Clarke I Cormack T Cross Brown M Dale I Hudson H Osmond D Woods
The analysis of the asset portfolio provided below comprises the assets held by the Group’s life companies including stock lending collateral. It excludes other Group assets such as cash held in the holding and service companies and Ignis; the assets held by the non-controlling interest in collective investment schemes and UKCPT; and is net of derivative liabilities.
Unit-linked2 £m Total3 £m 1 Includes assets where shareholders of the life companies bear the investment risk.
4 Includes repurchase loans of £3,003 million, policy loans of £15 million, other loans of £41 million, net derivatives of £1,797 million and other investments of £960 million.
31 December 2010 comparatives have not been provided. It was considered more relevant to instead provide an update on the exposures at 30 June 2011, as detailed in the Group's 2011 Interim Report.
Unit-linked £m Total £m 1 Includes debt issued by governments; public and statutory bodies; government backed institutions and supranationals.
Sovereign and supranational debt represented 48% of the debt portfolio in respect of shareholder exposure, or £7.2 billion, at 31 December 2011. The vast majority of the life companies’ exposure to sovereign and supranational debt holdings is to UK gilts.
Other – non-Eurozone – 4 20 – 24 Other – Eurozone – – – – –
Participating non-supported £m Unit-linked £m Total £m 97% of rated securities were investment grade at 31 December 2011 (96%: 30 June 2011). The percentage of rated securities that were investment grade in relation to the shareholder and policyholder exposures were 95% and 99% respectively (94% and 99% respectively: 30 June 2011).
The Group’s primary measure of long-term shareholder value is MCEV. MCEV remained resilient in the period, growing by £14 million despite difficult market conditions.
INDEPENDENT AUDITOR’S REPORT TO THE DIRECTORS OF PHOENIX GROUP HOLDINGS ON THE CONSOLIDATED PHOENIX GROUP MARKET CONSISTENT EMBEDDED VALUE (‘MCEV’)
Directors’ responsibilities for the Phoenix Group MCEV supplementary information The Directors are responsible for the preparation of this Phoenix Group MCEV supplementary information in accordance with the basis of preparation set out on pages 179 to 181 and for such internal control as the Directors determine is necessary to enable the preparation of supplementary information that is free from material misstatement, whether due to fraud or error.
Auditor’s responsibility Our responsibility is to express an opinion on the Phoenix Group MCEV supplementary information based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require us to comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Phoenix Group MCEV supplementary information is free from material misstatement.
Opinion In our opinion the Phoenix Group MCEV supplementary information, for the year ended 31 December 2011, has been prepared, in all material respects, in accordance with the basis of preparation set out on pages 179 to 181.
Basis of accounting and restriction on use Without modifying our opinion, we draw attention to pages 179 to 181 of the Phoenix Group MCEV supplementary information, which describe the basis of preparation. The Phoenix Group MCEV supplementary information is prepared to comply with the basis of preparation set out on pages 179 to 181. As a result, the Phoenix Group MCEV supplementary information may not be suitable for another purpose. This report, including the opinion, has been prepared for and only for the Group’s Directors as a body in accordance with our letter of engagement dated 15 June 2011 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other matter Ernst & Young Accountants LLP have reported separately on the IFRS consolidated financial statements of Phoenix Group Holdings for the year ended 31 December 2011. The information contained in the Phoenix Group MCEV supplementary information should be read in conjunction with the IFRS consolidated financial statements.
SUMMARISED CONSOLIDATED INCOME STATEMENT – GROUP MCEV BASIS For the year ended 31 December 2011 £m
Life MCEV operating earnings 556 758 Management services operating profit 17 20 Ignis Asset Management operating profit 46 46 Group costs (84) (70) Group MCEV operating earnings before tax 535 754 Economic variances on life business (426) 101 Economic variances on non-life business 38 (38) Other non-operating variances on life business (12) (54) Non-recurring items on non-life business (9) (75) Finance costs attributable to owners (123) (168) Group MCEV earnings before tax 3 520 Tax on operating earnings (141) (211) Tax on non-operating earnings 169 (54) Total tax 28 (265) Group MCEV earnings after tax 31 255
Group MCEV earnings after tax Basic1 18.0p 170.6p 1 Based on 172 million shares (2010: 149 million) as set out in note 15 of the IFRS consolidated financial statements.
2 Based on 172 million shares (2010: 149 million), allowing for warrants in issue as set out in note 15 of the IFRS consolidated financial statements.
Other comprehensive income Actuarial gains on defined benefit pension scheme (net of tax)1
RECONCILIATION OF MOVEMENT IN EQUITY – GROUP MCEV BASIS For the year ended 31 December 2011 £m £m
1 Comprises the Group holding companies that do not form part of the Phoenix Life and Ignis Asset Management divisions.
2 Includes a re-allocation of a £250 million loan asset from Covered business to Other Group companies. This does not affect the closing Group MCEV or MCEV earnings.
Group net assets attributable to owners of the parent as reported under IFRS 1,652 1,580 Goodwill and other intangibles in accordance with IFRS removed (net of tax) (440) (391) Value of in-force business in accordance with IFRS removed (net of tax) (1,289) (1,345) Adjustments to IFRS reserving (47) (138) Tax adjustments 8 (90) Revalue listed debt to market value 161 94 Eliminate value of contingent loan asset1 (160) (276) Fair value adjustments2 (43) 5 Eliminate pension scheme surpluses3 (net of tax) (380) (112) Other adjustments 27 30 MCEV net worth attributable to owners of the parent (511) (643) MCEV value of in-force business included (net of tax) as set out in note 2 2,629 2,747 Closing Group MCEV 2,118 2,104 1 Removal of value attributed to contingent loans issued by holding companies to long-term funds as their expected repayments are captured within the MCEV
2 Investments carried at amortised cost under IFRS are revalued at market value.
3 The pension scheme surpluses removed are the economic surpluses of the Pearl Group Staff Pension Scheme and PGL Pension Scheme net of tax, as described in note 32 to the IFRS consolidated financial statements.
1. Basis of preparation Overview The supplementary information on pages 175 to 187 has been prepared on a Market Consistent Embedded Value (‘MCEV’) basis except for the items described further below.
– the asset management and management service companies’ values are calculated on an IFRS basis. 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 holding companies at their IFRS net asset value.
On 23 March 2011, HMRC issued a technical note on ’Solvency II and the Taxation of Insurance Companies’, outlining changes to the taxation of UK insurance companies with effect from 2013. The Group has been actively involved in consulting with HMRC and HM Treasury on the detail of the new rules, with the aim of ensuring that the Group’s policyholders and shareholders are, as far as possible, not adversely affected by the changes.
1. Basis of preparation (continued) b) Value of in-force business (‘VIF’) The value of in-force covered business consists of the following components: – present value of future profits; – time value of financial options and guarantees; and
The projection is based on actively reviewed best estimate non-economic assumptions. Best estimate assumptions make appropriate allowance for expected future experience where there is sufficient evidence to justify; for example in allowing for future mortality improvements on annuity business.
The TVFOGs allow for the impact of management actions, consistent with those permitted by the Principles and Practices of Financial Management. The modelling of management actions vary for each of the funds but typically include management of bonus rates and policy enhancements, charges to asset share to cover increases to the cost of guarantees and alterations to investment strategy.
Frictional cost of capital (‘COC’) Cost of capital is defined as the difference between the market value of shareholder-owned assets backing required capital and the present value of future releases of those assets allowing for future investment returns on that capital, investment expenses and taxes.
For with-profit business the CNHR would increase the TVFOGs by £46 million (2010: £64 million).
The National Provident Life Limited recourse bonds are backed by surpluses that are expected to emerge on blocks of its unit linked and unitised with-profit 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-profit business is expected to be payable to bondholders; therefore, no additional value accrues to the embedded value.
Allowance has also been made for the tax relief arising from interest payments made on the debt of the holding companies. The value of the tax relief is determined by offsetting the tax payable on profits emerging from covered business against the tax relief afforded by interest payments on the debt. Interest payments are projected assuming that current levels of debt are reduced and then refinanced to maintain a long-term level of debt that the Directors consider to be supported by the projected embedded value of the Group’s businesses.
f) Participating business Allowance is made for future bonus rates on a basis consistent with the projection assumptions and established company practice.
New business value 7 6 13 Expected existing business contribution (reference rate)1 65 115 180 Expected existing business contribution (in excess of reference rate)2 33 41 74 Transfer from VIF to net worth 212 (212) –
2 Expected existing business contribution (in excess of reference rate) represents the additional expected return above the risk-free rate arising from long-term risk premiums on equities, property and corporate bonds.
Total £m 6. 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: Term Gilt yield
The life companies’ projected investment expenses are based on the fees agreed with Ignis Asset Management, (or external fund managers, where appropriate), allowing for current and projected future asset mixes.
Listed debt and non-controlling interests Perpetual Reset Capital Securities 444 256 444 304
Unlisted debt has been included at face value: 2011 Face value £m
(2) 1% decrease in risk-free rates 153 183 (3) 1% increase in risk-free rates (157) (167) (4) 10% decrease in equity market values (75) (105) (5) 10% increase in equity market values 71 102 (6) 10% decrease in property market values (72) (77) (7) 10% increase in property market values 72 76 (8) 100bps increase in credit spreads1 (241) (267) (9) 100bps decrease in credit spreads 277 250 (10) 25% increase in equity/property implied volatilities (20) (35) (11) 25% increase in swaption implied volatilities (11) (23) (12) 25% decrease in lapse rates and paid-up rates (43) (21) (13) 5% decrease in annuitant mortality (203) (166) (14) 5% decrease in non-annuitant mortality 27 35 (15) Required capital equal to the minimum regulatory capital2 32 31 (16) Swap curve as reference rate, retaining appropriate liquidity premiums (50) (272) 1 44bps is assumed to relate to default risk.
2 Minimum regulatory capital is defined as the greater of Pillar 1 and Pillar 2 capital requirements without any allowance for the Group’s capital management policy.
Annual General Meeting Our Annual General Meeting will be held on 3 May 2012 at 1pm.
Range of shareholdings No. of shareholders % No. of shares %
Shareholder services Managing your shareholding Our registrar, Computershare, maintains the Company’s Register of Members. Shareholders may request a hard copy of this Annual Report from our registrar and if you have any further queries in respect of your shareholding, please contact them directly using the contact details set out below.
Registrar details Computershare Investor Services (Jersey) Limited Queensway House Hilgrove Street St Helier Jersey JE1 1ES
Shareholder helpline number +44 (0) 870 707 4040 Fax number +44 (0) 870 873 5851 Shareholder helpline e-mail address info@computershare.co.je
Scrip dividend alternative The Company will be offering a scrip dividend alternative in relation to the recommended final dividend. Shareholders will be sent an information booklet which provide details of the terms of the scrip dividend alternative on or around 2 April 2012. The information booklet will also be made available on the Group’s website within the investor relations section.
Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free reports about the Company.
If you receive any unsolicited investment advice: – Make sure you get the correct name of the person and organisation
Ordinary shares – 2011 final dividend Scrip mandate forms issued 2 April 2012 Ex-dividend date 4 April 2012 Scrip calculation period 4–12 April 2012 Record date 10 April 2012 Scrip election date 25 April 2012 Payment date for the recommended final dividend 8 May 2012
Forward-looking statements The 2011 Annual Report and Accounts contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements about the Group’s current plans, goals and expectations relating to future financial conditions, performance, results, strategy and/or objectives.
– Market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally
As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements within the 2011 Annual Report and Accounts. The Group undertakes no obligation to update any of the forward-looking statements contained within the 2011 Annual Report and Accounts or any other forward-looking statements it may make.
CNHR Cost of residual non-hedgeable risk – The expected cost of non-hedgeable risks that can have an asymmetric impact on shareholder value to the extent these risks have not already been reflected in the PFVP or TVFOG. These can include both financial risks and non-financial risks such as mortality, persistency and expense risk
Assumptions related to future interest rates, inflation, market value movements and tax
Current period differences between the actual experience incurred and the assumptions used in the calculation of embedded value or IFRS insurance liabilities
The UK’s independent regulator responsible for promoting confidence in corporate governance and reporting
GCRR Group Capital Resource Requirement – In accordance with the UK’s capital adequacy regime for insurance groups, it is the sum of the individual capital resource requirements for each of the regulated undertakings in the insurance group
Gearing Net shareholder debt as a percentage of the sum of Group MCEV, net shareholder debt and the PVFP of Ignis
Group AUM Group assets under management – This represents life company assets (excluding collateral on stock lending arrangements), Holding Company cash and third party assets managed by Ignis
ICA Individual Capital Assessment – A life company’s assessment of its capital requirements to ensure that assets exceed liabilities 99.5% of the time over a 1-year period or (in other words) to be able to withstand a one in 200 year event
IGD surplus An FSA regulatory measure which calculates surplus capital at a group level. IGD surplus is defined as Group Capital Resources less the Group Capital Resource Requirement
IPO Initial Public Offering LDI Liability Driven Investment – Refers to investing in assets which move in line with the value of liabilities. Ignis LDI strategies typically involve purchasing a mix of government bonds and other instruments which have similar sensitivity to interest rates and inflation as the liabilities, to protect against changes in the deficit between asset and liability values
Longevity risk The risk of financial or reputational losses arising from lower than expected number of deaths experienced on annuity products or greater than expected improvements in annuitant mortality
Morbidity risk The risk of financial or reputational losses arising from higher than expected number of inceptions on critical illness or income protection policies and lower than expected termination rates on income protection policies
Mortality risk The risk of financial or reputational losses arising from higher than expected death claims on assurance products
MSA Management Services Agreement – Contracts that exists between either Phoenix Life and management services companies or between management services companies and their outsourced partners
Assumptions related to future levels of mortality, morbidity, persistency and expenses
Part VII transfer The transfer of insurance policies under Part VII of FSMA 2000. The insurers involved can be in the same corporate group or in different groups. Transfers require the consent of the High Court, which will consider the views of the FSA and of an Independent Expert
These are policies for which the premiums are paid into a separate fund and the policyholder has an entitlement to share in the profits of that fund
Public warrant Warrants of the Company currently listed on the London Stock Exchange PVFP Present Value of Future Profits – The present value of profits attributable to shareholders arising from the in-force business RCR Resilience Capital Requirement – Additional amounts of capital required to be held by certain life companies for regulatory purposes as a result of two stress tests under Pillar 1 Scrip issue The issue of new shares to existing shareholders in lieu of a cash dividend Solvency II A fundamental review of the capital adequacy regime for the European insurance industry.
Solvency II aims to establish a set of EU-wide capital requirements and risk management standards that will replace the current Solvency I requirements
UEL Useful economic life – The period over which future economic benefits are expected to be derived from an asset
UKLA UK Listing Authority – The FSA acting as the competent authority for listing, and which maintains the official list
For mobile phone users we also have a useful mini-site at which contains links to our latest news items, share price, financial calendar and contact details.
Paper information This annual report is printed on Hello Silk which contains material sourced from responsibly managed forests and is certified in accordance with the FSC (Forest Stewardship Council). Both the paper mill and printer involved in the production of this report, support the growth of responsible forest management and are both accredited to ISO 14001.
Ignis Asset Management Targets superior investment performance, client service and operational efficiency